Credit Lyonnais Bank Nederland NV v Burch [1996] EWCA Civ 1292 (20 June 1996)

A junior employee provided an unlimited guarantee over her flat for her employer's business debts. She received no benefit and no independent advice. The court set aside the transaction for undue influence, finding the bank failed its duty of inquiry.

Facts

Miss Andrea Burch, a 21-year-old junior employee, worked for a travel company owned and run by Mr Andrea Pelosi, a man she trusted. At his request, she agreed to provide security for the company’s overdraft with Credit Lyonnais Bank Nederland NV. She executed a legal charge over her flat, securing an unlimited, all-monies guarantee for all the debts of Mr Pelosi’s company. Miss Burch was not a shareholder and received no financial benefit from the transaction. The bank knew of her employment and that she was not a director or shareholder, but its communications only recommended that she take independent legal advice, without ensuring she did so or explaining the unlimited nature of the liability. The company’s debt eventually rose to over £270,000, and the bank sought possession of Miss Burch’s home.

Issues

The primary legal issues before the Court of Appeal were:

1. Whether a relationship of undue influence existed between Mr Pelosi and Miss Burch, capable of being presumed under Class 2(B) (a relationship of trust and confidence).
2. If such a relationship existed, was the bank ‘put on inquiry’ regarding the potential for undue influence?
3. Did the bank take reasonable steps to satisfy itself that Miss Burch had entered into the transaction freely and with full understanding of its implications?
4. Was the transaction so manifestly disadvantageous to Miss Burch that it was unconscionable and could be set aside on that basis?

Judgment

The Court of Appeal unanimously dismissed the bank’s appeal, upholding the trial judge’s decision to set aside the charge. The judges agreed that the transaction was procured by undue influence and that the bank had constructive notice of it.

Presumed Undue Influence

Millett LJ, giving the leading judgment, found that the relationship between Mr Pelosi as an employer and Miss Burch as a young, junior employee was one of trust and confidence, giving rise to a presumption of undue influence (Class 2B). The burden was on the bank to rebut this presumption.

Manifest Disadvantage and Unconscionability

The court found the transaction to be manifestly disadvantageous to Miss Burch. She risked her home and financial future for no personal gain. Millett LJ went further, describing the transaction as so extreme that its nature alone was evidence of victimisation. He stated:

In my judgment the transaction was not merely to the manifest disadvantage of Miss Burch; it was a transaction which, in the words of Lindley L.J. in Allcard v. Skinner (1887) 36 Ch. D. 145 at 185, was so “immoderate and irrational” as to be explicable only on the basis that undue influence had been exercised to procure it.

The Bank’s Duty of Inquiry

The court held that the bank was clearly ‘put on inquiry’. The combination of a non-commercial relationship between the debtor and surety, and a transaction which was on its face not to the financial advantage of the surety, placed a duty on the bank to take reasonable steps. Simply recommending independent advice in a standard letter was deemed insufficient in these extreme circumstances. Millett LJ explained the necessary steps:

In my judgment, a creditor is put on inquiry when it has notice that the surety’s consent may have been procured by the debtor’s undue influence or misrepresentation. … In such a case, the creditor cannot safely accept the surety’s confirmation that he or she wishes the transaction to proceed. It must insist that the surety has independent legal advice.

Given the unlimited nature of the guarantee and the vulnerability of Miss Burch, the bank should have insisted that she receive independent legal advice and refused to proceed without confirmation that she had been properly advised.

Implications

This case is a significant development of the principles established in Barclays Bank plc v O’Brien. It confirms that the doctrine of undue influence can apply to employer-employee relationships where there is de facto trust and confidence. More importantly, it clarifies the extent of a lender’s duty of inquiry. In cases where a transaction is so obviously and severely disadvantageous to the surety, a bank cannot discharge its duty by merely recommending legal advice; it must take more robust steps, such as insisting on it. The decision underscores the court’s role in protecting vulnerable parties from unconscionable bargains, holding that a transaction can be so irrational and disadvantageous that it alone serves as evidence of undue influence, fixing the lender with constructive notice.

Verdict: The bank’s appeal was dismissed; the legal charge and guarantee provided by Miss Burch were set aside.

Source: Credit Lyonnais Bank Nederland NV v Burch [1996] EWCA Civ 1292 (20 June 1996)