Lloyds Bank Ltd v Bundy [1974] EWCA Civ 8 (30 July 1974)

An elderly farmer guaranteed his son's company's debts to a bank, using his farmhouse as security. The Court of Appeal set aside the transaction, finding a relationship of confidentiality had been breached, establishing the principle of undue influence through inequality of bargaining power.

Facts

Mr Herbert Bundy, an elderly farmer, was a long-standing customer of Lloyds Bank, as was his son’s plant-hire company. The company fell into severe financial difficulty. Over time, Mr Bundy had provided increasing guarantees for his son’s business overdraft, secured against his sole asset, his farmhouse. Finally, the bank’s assistant manager, Mr Head, visited Mr Bundy at his home. Aware of Mr Bundy’s complete reliance on the bank’s advice and the manifest conflict of interest, Mr Head presented a final, larger guarantee and a charge on the farmhouse. Mr Bundy was told that this was the only way to help his son, and he signed the documents without the benefit of independent advice. When the son’s company failed, the bank sought to enforce the charge and take possession of Mr Bundy’s house.

Issues

The central legal issues before the Court of Appeal were:

1. Whether the relationship between Mr Bundy and Lloyds Bank was one of trust and confidence, going beyond the normal banker-customer relationship.
2. Whether the circumstances surrounding the signing of the final guarantee and charge gave rise to a presumption of undue influence.
3. If so, whether the bank had breached its fiduciary duty to Mr Bundy by failing to ensure he received independent advice.
4. Whether the transaction should be set aside on the broader ground of being an unconscionable bargain resulting from inequality of bargaining power.

Judgment

The Court of Appeal unanimously allowed the appeal, setting aside the guarantee and charge. However, the judges provided different reasoning for their conclusion.

Sir Eric Sachs

Sir Eric Sachs based his judgment on the established doctrine of undue influence arising from a special relationship. He found that the relationship between Mr Bundy and the bank was not ordinary; it was one of confidence. The bank knew Mr Bundy relied on its advice and that there was a clear conflict of interest. This gave rise to a fiduciary duty. He stated a key principle:

Once a confidential relationship has been established the burden of proof is on the person who has taken the benefit to show that the transaction was righteous, ‘that the donor was acting independently of any influence from the donee and with the full appreciation of what he was doing.’

He concluded that the bank had failed to discharge this burden because it had not insisted that Mr Bundy obtain independent legal advice. The transaction was manifestly disadvantageous to Mr Bundy and the bank’s failure to protect him was a breach of its duty.

Cairns L.J.

Cairns L.J. agreed with the reasoning of Sir Eric Sachs. He found that the facts demonstrated a relationship of confidence and that the presumption of undue influence had arisen. The bank had not rebutted this presumption, as it was incumbent upon it to show that Mr Bundy had formed an independent and informed judgment, which was impossible without separate advice.

Lord Denning M.R.

Lord Denning M.R. agreed with the other judges on the traditional grounds of a confidential relationship. However, he also took the opportunity to propose a broader, unifying legal principle. He argued that cases of duress, unconscionable bargains, undue influence, and salvage agreements were all underpinned by a single thread: ‘inequality of bargaining power’. He articulated this general principle as follows:

Gathering all together, I would suggest that through all these instances there runs a single thread. They rest on ‘inequality of bargaining power’. By virtue of it, the English law gives relief to one who, without independent advice, enters into a contract on terms which are very unfair or transfers property for a consideration which is grossly inadequate, when 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 by or for the benefit of the other.

Applying this principle, he found that Mr Bundy’s bargaining power was grievously impaired, the bank exerted undue pressure from its position of trust, and the consideration (saving his son’s business) was grossly inadequate compared to the risk to his sole asset. This inequality meant the transaction could be set aside.

Implications

The decision was a landmark in the law of undue influence, particularly concerning the duties of banks towards their customers. It firmly established that a banker-customer relationship could evolve into one of trust and confidence, creating a fiduciary duty to ensure the customer receives independent advice in transactions with a manifest disadvantage and a conflict of interest. While Lord Denning’s general principle of ‘inequality of bargaining power’ was influential, it was subsequently viewed with caution and not fully adopted by the House of Lords in later cases like National Westminster Bank plc v Morgan, which preferred the established categories of undue influence. Nonetheless, Lloyds Bank v Bundy remains a pivotal authority on presumed undue influence in commercial and financial contexts.

Verdict: The appeal was allowed. The guarantee and the charge on Mr Bundy’s house were set aside.

Source: Lloyds Bank Ltd v Bundy [1974] EWCA Civ 8 (30 July 1974)