Many cases in this area are concerned with husbands who seek a bank loan for one reason or another (more often than not its because they claim their business needs it, and subsequently goes bankrupt after the loan was taken), and as security they ask their wives to sign over their interest to the mortgagee (bank) as security for the loan. Therefore, when things go wrong, the mortgagee (bank) can claim the house.
Undue Influence is an equitable concept, and was developed to protect those who had entered into a transaction because of the inappropriate use of influence by a person whom they trusted.
The leading authority is Royal Bank of Scotland v Etridge . In this case, following a flood of claims in the late 20th century, the House of Lords gave a clear statement of steps that a third party (the mortgagee/bank), should take in order to protect itself from being affected by claims of UI.
This approach was taken as its quite obvious that when a wife signs over her interest in her house for her husbands sake, there is no benefit in it for her. The husband and the mortgagee are aware of this, and thus the bank/mortgagee should be the ones to ensure the wife does not enter into the contract without knowing its implications, and by doing so, will protect itself if it seems that there is a risk of UI.
Some of the steps include:
- Mortgagee/bank should ensure the person who may have been influenced (in my example, the wife), is given the chance of having independent legal advice about the transaction and that he/she has had the implications explained before deciding to proceed.
- The bank should ensure the legal advice is independent from the person who benefits from the transaction (the husband in this case) - e.g. a separate firm of solicitors should be the ones to explain it.
There are many more steps, and this is UI only briefly, and this is mainly with regards to mortgages in Land Law. UI can cover many more situations not mentioned here. (Judith-Anne MacKenzie and Mary Phillips, Textbook on Land Law, 13th edition, 2010, Oxford University Press.)