Lloyds Bank Ltd v Bundy [1974] 3 All ER 757, [1974] 3 A PDF

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Lloyds Bank Ltd v Bundy...

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Lloyds Bank Ltd v Bundy Overview | [1975] QB 326, | [1974] 3 All ER 757, | [1974] 3 WLR 501, [1974] 2 Lloyd's Rep 366, | 9 LDAB 365, 118 Sol Jo 714

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Lloyds Bank Ltd v Bundy [1974] 3 All ER 757 COURT OF APPEAL, CIVIL DIVISION LORD DENNING MR, CAIRNS LJ AND SIR ERIC SACHS 8, 9, 30 JULY 1974

Equity — Undue influence — Relationship of parties — Trust and confidence — Presumption of undue influence — Banker and customer — Bank seeking to protect interest at expense of customer — Customer relying on bank's advice — Fiduciary duty of bank — Duty to advise customer to obtain independent advice — Company formed by customer's son — Company in financial difficulties — Bank requiring customer to execute charge on house and guarantee as condition of continuing overdraft facilities for company — House customer's sole asset — Charge for full value of house — Bank failing to advise customer to obtain independent advice on company's affairs — Whether charge and guarantee liable to be set aside.

The defendant was an elderly farmer who was not well versed in business affairs. His home was a farmhouse which had belonged to his family for several generations. It was his only asset. The defendant and his son were both customers at the same branch of the plaintiff bank. The son formed a plant-hire company which also banked at the same branch. The company ran into difficulties and in September 1966 the defendant, who had great faith in his son, guaranteed the company's overdraft for £1,500 and charged his house to the bank to secure that

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sum. The company ran into further difficulties and the assistant bank manager suggested that the defendant should sign a further guarantee for £5,000 and execute a further charge for £6,000. The defendant's solicitor advised him that, since the house was worth only £10,000, that was the most that he should commit to his son's business. Accordingly, in May 1969, the defendant executed the further guarantee and charge. Thereafter the company's affairs went from bad to worse. A new assistant manager joined the bank and told the son that the situation could not continue. The son suggested that the company's difficulties were only temporary and that the defendant would provide further money. Accordingly, in December 1969, the assistant manager, with the son, went to see the defendant at his home. The assistant manager took with him a form of guarantee and a form of charge, already filled in with the defendant's name, for signature. At a meeting at which the son and hs wife were present, the assistant manager told the defendant that the bank would only continue to support the company if the defendant increased the guarantee and charge up to a figure of £11,000. The assistant manager told the defendant what the company's position was, but did not explain the company's accounts very fully. The son said that the company's difficulties were due to a number of bad debts, although the assistant manager was not satisfied that that was the case. The assistant manager did not appreciate that there was a conflict of interest but he realised that the defendant relied on him implicitly to advise him about the transaction 'as bank manager'. He knew that the defendant had no assets other than the

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house. The defendant said that he was willing to back his son. The assistant manager thereupon produced the documents and the defendant signed them. In May 1970 a receiving order was made against the son and the bank stopped

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overdraft facilities for the company. The bank proceeded to enforce the charge and guarantee against the defendant. They entered into an agreement to sell the defendant's house and brought an action for possession against the defendant.

Held – The relationship between the bank and the defendant was one of trust and confidence. In consequence of that relationship the defendant, in coming to a decision on the proposed transaction, was liable to be influenced by the bank's proposals. Since the bank was seeking to obtain a benefit from the defendant, there was a conflict of interest between them. In those circumstances the confidential relationship imposed on the bank a duty of fiduciary care, ie a duty to ensure that the defendant formed an independent and informed judgment on the proposed transaction before committing himself. In the circumstances it was the duty of the bank to advise the defendant to obtain independent, informed advice whether there was any prospect of the company's affairs becoming viable. Since the bank had failed to do that, they were in breach of their fiduciary duty to the defendant and could not therefore be allowed to retain the benefit of the transaction. Accordingly the guarantee and charge would be set aside and the action for possession dismissed (see p 765 g to j to p 766 f, p 767 c to f, p 768 c and e to g, p 769 f and h, p 770 b f h and j and p 771 c e and f, post).

Dicta of Lord Chelmsford LC in Tate v Williamson (1866) 2 Ch App at 62, of Cotton LJ in Allcard v Skinner [1886–90] All ER Rep at 93, and of Evershed MR in Tufton v Sperni [1952] 2 TLR at 522 and in Zamet v Hyman [1961] 3 All ER at 938 applied.

Per Lord Denning MR. The cases, other than cases of fraud, misrepresentation or mistake, in which the courts will set aside a contract or transfer of property are based on a single principle which rests on inequality of bargaining power. By virtue of that principle English law gives relief to one who, without independent advice,

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enters into a contract on terms which are very unfair or transfers property for a consideration which is grossly inadequate where his bargaining power is grievously impaired by reason of his own needs or desires, or by his own ignorance or infirmity, coupled with undue influences or pressures brought to bear on him, not necessarily wrongfully, by or for the benefit of the other (see p 763 c and d and p 765 d and e, post).

Notes

For undue influence in relation to transactions inter vivos, see 8 Halsbury's Laws (3rd Edn) 86, para 147, 17 ibid 672–681, paras 1297–1312, and for cases on the subject, see 12 Digest (Reissue) 125–142, 687–820.

Cases referred to in judgments

Akerblom v Price(1881) 7 QBD 129, 50 LJQB 629, 44 LT 837, 4 Asp MLC 441, CA, 42 Digest (Repl) 968, 7564.

Allcard v Skinner(1887) 36 Ch D 145, [1886–90] All ER Rep 90, 56 LJCh 1052, 57 LT 61, CA, 12 Digest (Reissue) 126, 689.

Astley v Reynolds (1731) 2 Stra 915, 2 Barn KB 40, 93 ER 939, 12 Digest (Reissue) 687, 4951.

Bank of Montreal v Stuart[1911] AC 120, 80 LJPC 75, 103 LT 641, PC, 26 Digest (Repl) 227, 1760.

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Cartwright v Rowley (1799) 2 Esp 723, 170 ER 509, 12 Digest (Reissue) 684, 4934.

Craig (decd), Re, Meneces v Middleton[1970] 2 All ER 390, [1971] Ch 95, [1970] 2 WLR 1219, 12 Digest (Reissue) 126, 691.

D & C Builders Ltd v Rees[1965] 3 All ER 837, [1966] 2 QB 617, [1966] 2 WLR 288, CA, 12 Digest (Reissue) 553, 3852.

Evans v Llewellin (1787) 1 Cox Eq Cas 333, 2 Bro CC 150, 29 ER 1191, 24 Digest (Repl) 1131, 135.

Fry v Lane, Re Fry, Whittet v Bush(1888) 40 Ch D 312, [1886–90] All ER Rep 1084, 58 LJCh 113, 60 LT 12, 12 Digest (Reissue) 140, 772.

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Green v Duckett(1883) 11 QBD 275, 52 LJQB 435, 48 LT 677, 42 JP 487, DC, 18 Digest (Repl) 444, 1876.

Knupp v Bell (1968) 67 DLR (2d) 256.

Maskell v Horner[1915] 3 KB 106, [1914–15] All ER Rep 595, 84 LJKB 1752, 113 LT 126, 79 JP 406, 13 LGR 808, CA, 12 Digest (Reissue) 688, 4960.

Morley v Loughnan[1893] 1 Ch 736, 62 LJCh 515, 68 LT 619, 3 R 592, 12 Digest (Reissue) 134, 728.

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Morrison v Coast Finance Ltd (1965) 55 DLR (2d) 710.

Ormes v Beadel (1860) 2 Giff 166, 66 ER 70; rvsd on other grounds (1860) 2 De G F & J 333, 30 LJCh 1, 3 LT 344, 6 Jur NS 1103, 45 ER 649, LC, 12 Digest (Reissue) 125, 686.

Parker v Bristol and Exeter Railway Co(1851) 6 Exch 702, 155 ER 726, 12 Digest (Reissue) 122, 664.

Pigot's Case (1614) 11 Co Rep 26b, [1558–1774] All ER Rep 50, 77 ER 1177, sub nom Winchcombe v Pigot 2 Bulst 246, sub nom Winscombe v Piggot 1 Roll Rep 39, sub nom Anon Moore KB 835, 12 Digest (Reissue) 446, 3218.

Port Caledonia, The, and The Anna[1903] P 184, 72 LJP 60, 89 LT 216, 9 Asp MLC 479, 42 Digest (Repl) 1005, 7998.

Steele v Williams(1853) 8 Exch 625, 22 LJEx 225, 21 LTOS 106, 17 JP 378, 12 Jur 464, 1 CLR 258, 155 ER 1502, 12 Digest (Reissue) 689, 4969.

Tate v Williamson(1866) 2 Ch App 55, 15 LT 549, LC, 12 Digest (Reissue) 141, 800.

Tufton v Sperni [1952] 2 TLR 516, [1952] WN 439, CA, 25 Digest (Repl) 287, 925.

Williams v Bayley(1866) LR 1 HL 200, [1861–73] All ER Rep 227, 35 LJCh 717, 14 LT 802, 12 Jur NS 875, HL; affg (1865) 4 Giff 638, 12 Digest (Reissue) 118, 641.

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Zamet v Hyman[1961] 3 All ER 933, [1961] 1 WLR 1442, CA, 12 Digest (Reissue) 136, 743.

Appeal

The plaintiffs, Lloyds Bank Ltd ('the bank'), brought an action against the defendant, Herbert James Bundy, in the Salisbury County Court. By their amended particulars of claim the bank alleged that by four legal charges dated respectively 16 October 1958, 19 September 1966, 27 May 1969 and 17 December 1969 and each made between the defendant of the one part and the bank of the other part, the defendant had covenanted with the bank, inter alia, to pay to the bank on demand all money and liabilities whether certain or contingent which at the date of the respective legal charge or at any time thereafter might be due, owing or incurred by the defendant to the bank or for which the defendant might be or become liable to the bank on any current or other account or in any manner whatever together with interest and costs; that by each of the four legal charges the defendant had charged by way of legal mortgage the property known as Yew Tree Farm, Broadchalke, Wiltshire ('the property'), as a continuing security for the payment to the bank of the principal money, liabilities, interest and other money thereby covenanted to be paid by the defendant and that it had been further agreed and declared by the parties that the powers and remedies conferred on mortgagees by the Law of Property Act 1925 should apply to the security with the variation or extension that, on the expiration of one month's written notice to the defendant of their intention to do so, the bank might exercise and put in force all and every of any such powers and remedies as thereby varied or extended; that by two guarantees in writing dated respectively 19 September 1966 and 27 May 1969

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and made between the defendant of the one part and the bank of the other part the defendant had guaranteed, and by a guarantee in writing dated the 17 December 1969 and made between the defendant and Michael James Bundy of the one part and the bank of the other part the defendant and Michael James Bundy had jointly and severally guaranteed, payment on demand on him or them of all money and liability whether certain or contingent then or thereafter due, owing or incurred to the bank by MJB Plant Hire Ltd ('the company') on any current or other account or in any manner whatever together with interest and costs, subject always to

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the amount recoverable under any one guarantee being limited to the amount stated herein, and that it had therein also been provided, inter alia, that any notice or demand thereunder should be deemed to have been sufficiently given if sent by prepaid letter to the guarantor's address in the United Kingdom last known to the bank or stated thereon; that on 8 December 1970 the bank by letter sent by ordinary prepaid postage addressed to the company had called on the company to repay advances made to it by the bank amounting at the close of business on that date to £10,518 45s (£10,518·4370) plus accrued interest amounting to £591 7s 6d (£591·4337); that on 10 December 1970 the bank by demand in writing served on the defendant had required payment of the sum of £11,000, being part of the amount then due from the defendant to the bank under the covenant for payment referred to above, and that the defendant had neglected or refused to make such payment; that by the same demand in writing the bank had given formal notice in accordance with the terms of the four legal charges of their intention at the expiration of one month to exercise the powers and remedies conferred on them as mortgagees by the Law of Property Act 1925, as varied or extended, by sale of the property or otherwise and that the power of sale had arisen; that the bank had

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contracted to sell the property with vacant possession on completion and by notice in writing dated 16 November 1971 the bank had required the defendant to vacate the property by not later than 31 January 1972 but the defendant remained in possession. Accordingly the bank claimed possession of the property. By his amended defence the defendant admitted the bank's allegations so far as they related to the legal charges of 16 October 1958, 19 September 1966, and 27 May 1969 but made no admission as to their effect or as to their continued validity after 17 December 1969. With regard to the legal charge dated 17 December 1961 the defendant admitted that it had been signed by him. The defendant alleged however that that legal charge was not his deed or alternatively that he had been induced to execute the legal charge whilst acting under the influence of the bank's agent, Michael John Head, the manager of their Salisbury branch. The defendant also alleged that the earlier guarantees had been cancelled or superseded by the guarantee dated 17 December 1969. As to the guarantee dated 17 December 1969 the defendant admitted that he had signed the document but said that it was not his deed or alternatively that he had been induced to do so whilst acting under the influence of Mr Head. The defendant counterclaimed, inter alia, for (i) an order setting aside the legal charge and guarantee dated 17 December 1969 or declaring them to be void and for delivery up and cancellation of the documents; and (ii) an injunction restraining the bank from selling or completing any agreement for the sale of the property.

On 6 June 1973 his Honour Judge McLellan gave judgment for the bank, ordering the defendant to give possession of the property within four months, and dismissed the counterclaim. The defendant appealed on the grounds, inter alia, that the judge's finding that there was no duty on the bank, through their branch manager, Mr Head, to ensure that the defendant received independent advice before executing the legal charge and joint guarantee was against he weight of the

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evidence; and that on the evidence, and in particular the statement of Mr Head that he believed that the defendant was relying on him to advise him concerning the transaction, the judge ought to have held (a) that there was a relationship of confidence between them giving rise to a fiduciary duty on the part of the bank through Mr Head not merely to explain the effect of the joint guarantee and legal charge to the defendant but to ensure that he was advised whether or not they were reasonable and proper transactions for him to enter into; (b) that Mr Head had not given such advice; (c) further or alternatively, that in view of the commercial importance to the bank of obtaining security from the defendant to cover the existing debts of the company they were not in a position, through Mr Head, to give such advice themselves and ought therefore to have ensured that such advice was given by an independent source, and (d) that accordingly the bank had failed to discharge their fiduciary duty and the joint guarantee

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and legal charge ought to be set aside or declared void. The facts are set out in the judgment of Lord Denning MR.

Leolin Price QC and George Shillingford for the defendant.

John M Rankin QC and Neil Butter for the bank.

Cur adv vult

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30 July 1974. The following judgments were delivered.

LORD DENNING MR.

Broadchalke is one of the most pleasing villages in England. Old Herbert Bundy was a farmer there. His home was at Yew Tree Farm. It went back for 300 years. His family had been there for generations. It was his only asset. But he did a very foolish thing. He mortgaged it to the bank. Up to the very hilt. Not to borrow money for himself, but for the sake of his son. Now the bank have come down on him. They have foreclosed. They want to get him out of Yew Tree Farm and to sell it. They have brought this action against him for possession. Going out means ruin for him. He was granted legal aid. His lawyers put in defence. They said that when he executed the charge to the bank he did know what he was doing; or at any rate the circumstances were such that he ought not to be bound by it. At the trial his plight was plain. The judge was sorry for him. He said he was a 'poor old gentleman'. He was so obviously incapacitated that the judge admitted his proof in evidence. He had a heart attack in the witness box. Yet the judge felt he could do nothing for him. There is nothing, he said, 'which takes this out of the vast range of commercial transactions'. He ordered Herbert Bundy to give up possession of Yew Tree Farm to the bank.

Now there is an appeal to this court. The ground is that the circumstances were so exceptional that Herbert Bundy should not be held bound.

1. The events before December 1969

Herbert Bundy had only one son, Michael Bundy. He had great faith in him. They were both customers of Lloyds Bank at the Salisbury branch. They had been

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customers for many years. The son formed a company called MJB Plant Hire Ltd. It hired out earth-moving machinery and so forth. The company banked at Lloyds too at the same branch.

In 1961 the son's company was in difficulties. The father on 19 September 1966 guaranteed the company's overdraft for £1,500 and charged Yew Tree Farm to the bank to secure the £1,500. Afterwards the son's company got further into difficulties. The overdraft ran into thousands. In May 1967 the assistant bank manager, Mr Bennett, told the son the bank must have further security. The son said his father would give it. So Mr Bennett and the son went together to see the father. Mr Bennett produced the papers. He suggested that the father should sign a further guarantee for £5,000 and to execute a further charge for £6,000. The father said that he would help his son as far as he possibly could. Mr Bennett did not ask the father to sign the papers there and then. He left them with the father so that he could consider them overnight and take advice on them. The father showed them to his solicitor, Mr Trethowan, who lived in the same village. The solicitor told the father the £5,000 was the utmost that he could sink in his son's affairs. The house was worth about £10,000 and this was half his assets. On that advice the father on 27 May 1969 did execute the further guarantee and the charge, and Mr Bennett witnessed it. So at the end of May 1967 the father had charged the house to secure £7,500.

2. The events of December 1969

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