National Westminster Bank Plc v Morgan [1985] UKHL 2 (07 March 1985)

Mrs Morgan co-signed a mortgage over her home to secure her husband's business loan, advised by the bank manager. She later claimed undue influence. The House of Lords ruled that to set aside a transaction for presumed undue influence, a 'manifest disadvantage' must be proven.

Facts

Mr and Mrs Morgan were the joint owners of their matrimonial home. Mr Morgan’s business encountered financial difficulties, and a previous lender was seeking possession of the house. To prevent this, National Westminster Bank Plc agreed to provide a short-term bridging loan, conditional upon a legal charge over the home. Mrs Morgan was hesitant to sign. The bank manager visited Mrs Morgan at home for a very brief meeting to obtain her signature. He incorrectly explained that the charge only secured the amount of the bridging loan and did not cover Mr Morgan’s business liabilities, when in fact it secured all of Mr Morgan’s business indebtedness. He did not advise her to seek independent legal advice. When Mr Morgan failed to repay the loan, the bank sought possession of the home. Mrs Morgan defended the action, pleading that her signature was obtained by the bank’s undue influence.

Issues

The primary legal issue was whether the relationship between Mrs Morgan and the bank manager was one of trust and confidence, giving rise to a presumption of undue influence. A further critical question was whether, for a presumption of undue influence to arise, the complainant must prove not only a relationship of trust and confidence but also that the transaction was to their ‘manifest disadvantage’.

Judgment

The House of Lords unanimously allowed the bank’s appeal, restoring its order for possession. Lord Scarman delivered the leading judgment, providing a significant analysis of the doctrine of undue influence.

Lord Scarman’s Speech

Lord Scarman clarified the two classes of undue influence: Class 1, which requires proof of actual coercion or pressure, and Class 2, which involves a presumption of undue influence arising from a pre-existing relationship. He found that the relationship between the bank and Mrs Morgan was not one that automatically fell into the established categories of influence (Class 2A), but that the facts could establish a confidential relationship (Class 2B). However, he fundamentally disagreed with the Court of Appeal’s view that a confidential relationship alone was sufficient to raise the presumption of undue influence. He established that an additional element was required: the transaction must be shown to be to the manifest disadvantage of the person who claims to have been influenced. A transaction that is, on its face, of benefit to the complainant (in this case, by preventing the repossession of her home) could not be said to be manifestly disadvantageous.

I would therefore hold that a complainant who proves a confidential relationship but fails to prove that the transaction was of manifest disadvantage to him or her has not established a case of presumed undue influence calling for rebuttal by the party who benefits from it.

Applying this test, Lord Scarman concluded that the transaction was not manifestly disadvantageous to Mrs Morgan. The purpose of the loan was to save her home, which was a clear and direct benefit to her. The bank had not ‘crossed the line’ from being a banker to being a fiduciary adviser, and even if it had, the transaction was not unfair. The manager’s misstatement about the extent of the charge was deemed not to have been a material factor in her decision to sign. Therefore, no presumption of undue influence arose, and the bank was entitled to enforce its security.

Implications

The decision in National Westminster Bank Plc v Morgan was highly significant for establishing the ‘manifest disadvantage’ requirement as a necessary ingredient for a successful plea of presumed undue influence (Class 2). This created a higher hurdle for claimants, particularly in the context of wives guaranteeing their husbands’ business debts. The judgment sought to strike a balance between protecting potentially vulnerable parties and maintaining certainty in commercial and banking transactions. However, the ‘manifest disadvantage’ test proved difficult to apply and was subject to criticism. Its authority has since been superseded. In the landmark case of Royal Bank of Scotland plc v Etridge (No 2) [2001] UKHL 44, the House of Lords replaced the ‘manifest disadvantage’ requirement with a more nuanced test of whether the transaction is one that ‘calls for explanation’.

Verdict: The bank’s appeal was allowed, and the order for possession was restored.

Source: National Westminster Bank Plc v Morgan [1985] UKHL 2 (07 March 1985)