Lloyds Bank Ltd v Bundy

Facts

Herbert James Bundy was a farmer. His son, Michael, owned a business that was in financial trouble. Mr Bundy had already guaranteed the business with a £7,500 charge over his only asset, his farmhouse, to Lloyds Bank. Michael's company got into further financial difficulty. Bundy then increased his exposure to £11,000 after the assistant manager of Lloyds failed to notify him of the company's true financial condition. Lloyds foreclosed on the house when the money was not paid, and Bundy had a heart attack in the witness box. The question was whether the contract leading to the repossession of the house was voidable for some iniquitous pressure.

Judgment

Lord Denning MR held that the contract was voidable owing to the unequal bargaining position in which Mr Bundy had found himself vis a vis the bank. He held that undue influence was a category of a wider class where the balance of power between the parties was such as to merit the interference of the court. It was apparent that Mr Bundy had, without independent advice entered the contract and it was very unfair and pressures were brought to bear by the bank.

Sachs LJ held that a presumption of undue influence had not been rebutted, because Herbert was not independently advised. He had placed himself in the hands of the bank. He noted the claimant's concession that ‘in the normal course of transactions by which a customer guarantees a third party's obligations, the relationship does not arise.’

When ‘the existence of a special relationship has been established, then any possible use of the relevant influence is, irrespective of the intentions of the person possessing it, regarded in relation to the transaction under consideration as an abuse – unless and until the duty of fiduciary care has been shown to be fulfilled or the transaction is shown to be truly for the benefit of the person influenced.’

No ‘advice to get an independent opinion was given; on the contrary, Mr Head chose to give his own views on the company's affairs and to take this course…’ So ‘the breach of the duty to take fiduciary care is manifest’. And although the counsel for the bank ‘urged in somewhat doom-laden terms’ that banking practice would be seriously affected was dismissed. He declined to express an opinion on Lord Denning's dicta.

Cairns LJ concurred.

Significance

As summarised by Beale, Bishop and Furmston Lord Denning MR envisaged four requirements. These were that a contract would be voidable if (1) the terms were very unfair or consideration inadequate (2) bargaining power was impaired by necessity, ignorance or infirmity (3) undue pressure or influence was used, not necessarily consciously, but by the pressurer, and (4) there was an absence of independent advice usually fatal. These requirements have not always been seen in a good light by the courts; in Pao On v Lau Yiu Long Lord Scarman said that agreements were not voidable simply because "they had been procured by an unfair use of a dominant bargaining position", and in National Westminster Bank plc v Morgan [1985] 1 All ER 821 Scarman directly refused to enforce Denning's principles, also asking if there was any need to them due to the statutory protection given to contractual parties by the Consumer Credit Act 1974.

Lord Denning MR also wanted to apply the principle where (1) a contract was renegotiated, D&C Builders v Rees (2) a tort claim was settled, Arrale v Costain Civil Engineering Ltd [1976] 1 Lloyd's Rep 98 (3) an exemption clause in a cleaning contract was in standard form, Levison v Patent Steam Carpet Cleaning Co Ltd [1978] QB 69; and the only limit was when the bargain was ‘the result of the ordinary interplay of forces’ (Bundy at 336).