6.11 Third party as agent

In certain situations, a contractual party may be bound against the other contractual party by the actions of a third person. That would be the case where it is held that the third person acted as an agent. For example, if B, upon A’s instructions, talks C into undertaking to be a guarantor for a loan granted by A in favour of B, it could be argued that B acted as A’s agent, and A would thereby be bound by B’s conduct. This is uncontroversial but does not appear to be a very common scenario.

In Barclays Bank plc v O’Brien,^[1] a husband deceived his wife into signing documents which purported to make her guarantor for liabilities up to £154,000. The wife mistakenly thought that her liability was limited to £60,000, and for three weeks only. This guarantee was to secure an overdraft extended to a company in which the husband was involved. The bank executed the documents without having properly informed the wife of the nature of them, despite the instructions of a bank manager. When liability arose, the wife argued that, due to her husband’s misrepresentations, the bank was not entitled to enforce the mortgage. The House of Lords held that the bank had constructive notice of the situation; given that the wife had agreed to a mortgage not in her interest, it should have taken steps to ensure there was no wrong committed by the husband.^[2] The appeal was allowed and the mortgage set aside.

The principle in Barclays Bank Plc v O’Brien^[3] was followed where a wife is unduly influenced, by her husband, into entering a transaction with a third party that is manifestly disadvantageous to her, the wife has an equity as against the husband to set aside the transaction. Further, that right is transferrable to the third party if the party had constructive knowledge of the undue influence, as discussed below in Barclays Bank v O’Brien.^[4] The third party may enforce the transaction if it was not aware of, or put on notice of, the undue influence, and providing the husband was not acting as agent for the other party to the transaction.  In CIBC Mortgages v Pitt,^[5] the plaintiff company loaned £150,000 jointly to a husband and wife, secured against the matrimonial home.  The wife had not read the documents; the husband bought shares with the money and was later unable to pay the installments, after the 1987 stock market crash.  In dismissing an appeal by the wife, the House of Lords held that the plaintiff was able to enforce the charge against the home.

A similar result was obtained in the case of Barclays Bank Plc v Thomson.^[6]  In that case, the wife contended that Barclays Bank in fact had constructive knowledge of her husband’s misrepresentations and undue influence, which had led to her signing over a charge to the matrimonial home in favour of the bank.  T also submitted that the solicitor giving advice about the nature of the charge was acting as agent for the bank and not for her.  The Court of Appeal, however, found in favour of the bank, who were able to produce a certificate manifesting that the wife had been given independent advice by the solicitor.  Further, what was fatal to the wife’s application was that she had failed to challenge the original judgment [a possession order against the matrimonial home] within a reasonable time.