Etridge Guidelines

The Etridge Guidelines were established in Royal Bank of Scotland v Etridge (No. 2) [2001] to protect vulnerable parties, particularly in non-commercial transactions where undue influence may be a concern. These guidelines set out clear steps that financial institutions and solicitors must follow when providing independent legal advice to clients involved in mortgage and lending transactions, particularly where one party might be at risk of losing her home or being financially burdened.

Royal Bank of Scotland v Etridge (No 2) [2001]
On October 11, 2001, the House of Lords delivered a landmark judgment in the case of Royal Bank of Scotland v Etridge (No. 2) [2001] alongside seven other related cases, establishing a set of clear guidelines aimed at resolving ambiguities that had persisted since the decision in Barclays Bank Plc v O'Brien. The Etridge decision clarified the responsibilities of banks and solicitors when a spouse, typically a wife, offers to act as a surety for her husband's debts. Since then, these guidelines have become influential in financial transactions, particularly lending and borrowing, involving non-commercial relationships.

One of the key issues addressed by the House of Lords was the bank's duty to ensure that a spouse, often a wife, is fully aware of the implications of standing surety for her husband's debts. The court established that a bank is put on inquiry whenever a wife offers such a guarantee, even in cases where both spouses are involved in a business, such as when a wife stands surety for a company where she and her husband are shareholders. This remains true even if the wife holds an official position, such as director or secretary, within the company.

The primary concern is to protect the wife from being unduly influenced or misled into agreeing to the financial commitment. Although the bank must take steps to ensure the wife understands the practical consequences of the transaction, the House of Lords made it clear that it is not necessary for the bank to hold a private meeting with her. Instead, the bank can fulfill its duty by receiving confirmation from an independent solicitor that the wife has been properly advised.

Guidelines for Solicitors
The Etridge decision also provided essential guidance for solicitors who are tasked with advising spouses in these situations. While a solicitor is not required to act exclusively for the wife, he must ensure that acting for both parties does not create a conflict of interest and that the advice given is in the best interest of the wife.  It is crucial that the solicitor takes proper steps to ensure that the wife understands the nature of the transaction and the potential risks involved in acting as a surety:

1. Nature of the documents and risks involved: When advising a client in a transaction, such as a joint mortgage, occupier waiver, or mortgage guarantee, the solicitor must explain the nature of the legal documents. This includes making the client aware of the risk that she could lose her home if the mortgage is not paid, and even face bankruptcy. The solicitor must also ensure the client understands the gravity of these risks in relation to the terms, amount, and purpose of the mortgage.
2. Seriousness of the financial implications: The solicitor should help the client understand the financial implications of the mortgage, focusing on whether the client appreciates the value of the property being charged and whether she have any other assets that could be used to repay the loan if issues arise. It is vital for the solicitor to provide advice in a way that highlights the seriousness of the commitment, considering the client's circumstances and potential risks.
3. Potential changes to loan terms: Another critical point of advice is the possibility that the lender may alter the terms of the loan, including increasing the amount borrowed, without the client's consent. The solicitor should inform the client that she may still be liable for any increased loan amount, even if she has not been not consulted about the change.
4. Confirming Independent legal advice to the lender: The solicitor should ask the client for permission to write to the bank confirming that she has explained the nature of the documents and the practical implications. This is an important step, as it provides the lender with proof that the client received independent legal advice.
5. Face-to-face meeting and non-technical language: It is essential that the independent legal advice is provided during a face-to-face meeting with the client, away from the borrower, to ensure that the client is receiving clear and unbiased advice. The solicitor should use simple, non-technical language to ensure that the client fully understands the risks and obligations associated with the transaction.
6. Potential negotiation with the bank: The solicitor should also inform the client that she has the option to negotiate with the bank on certain terms of the transaction. For instance, the client may want to negotiate a limit on the amount borrowed. The solicitor must discuss whether the client is comfortable with the terms or would like to propose changes.
7. Ensuring the client's free will: The solicitor must verify that the client is not acting under any undue influence. The decision to sign and consent to the mortgage or guarantee must be entirely up to the client. The solicitor should make it clear that the client is under no obligation to proceed and must ensure that the client has not been pressured into the transaction by any party.

Furthermore, the House of Lords decided that banks are entitled to rely on the solicitor's confirmation that the wife has been advised appropriately. Unless the bank is aware of circumstances suggesting otherwise, it is not required to question the advice the solicitor has given.

Guidelines for Banks
Moving forward, banks must adhere to a set of specific steps when dealing with cases where a spouse is offering to act as surety. These steps are designed to protect both the bank and the surety, typically the wife, from entering into an agreement without full awareness of its implications:

1. Direct communication with the wife: The bank must communicate directly with the wife, informing her that it requires written confirmation from a solicitor that the transaction's nature, effect, and practical implications have been fully explained to her. The wife should be offered the option of a different solicitor if she prefers not to use the same solicitor acting for her husband.
2. Provision of financial information: With the husband's consent, the bank must provide the wife's solicitor with the necessary financial information, such as the terms of the loan and the written application for the loan. This enables the solicitor to explain the full scope of the husband's financial position to the wife, ensuring she has all relevant facts before agreeing to the transaction.
3. Alerting the solicitor to concerns: If the bank has reason to believe that the wife is not entering into the agreement of her own free will or has been misled, it must inform her solicitor. This ensures that any undue influence or coercion can be addressed before the transaction proceeds.
4. Written confirmation from the solicitor: Before finalising the agreement, the bank must obtain written confirmation from the wife's solicitor that she has been properly advised on the nature and implications of the transaction.

While the Etridge guidelines arose from cases involving wives standing surety for their husbands' debts, the House of Lords made clear that these principles apply to all cases where security is taken and the relationship between the surety and debtor is non-commercial. This broad application ensures that the protections extend beyond the traditional spousal relationship and encompass any similar situations, such as civil participation and cohabitation, where one party may be at risk of undue influence or lack of understanding.

In conclusion, the Etridge decision was a pivotal moment in clarifying the responsibilities of banks and solicitors when handling surety agreements involving spouses. The Etridge guidelines, were established by the House of Lords to ensure that parties entering into such agreements do so with full knowledge and free will, thereby providing protection against undue influence and safeguarding the integrity of these financial transactions.