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

Mrs Morgan signed a legal charge over the family home to secure a bridging loan from the bank to pay off a building society mortgage. She claimed the charge was procured by undue influence. The House of Lords held that no undue influence existed as the transaction was not manifestly disadvantageous to her and the bank manager had not crossed the line into a relationship of dominating influence.

Facts

Mr and Mrs Morgan jointly owned a dwelling-house in Taunton, which was subject to two mortgages. When they fell into arrears, the Abbey National Building Society obtained a possession order. To save their home, the Morgans sought a bridging loan from National Westminster Bank to pay off the Abbey National debt. The bank agreed, requiring Mrs Morgan to sign a legal charge securing the loan. Mr Barrow, the bank manager, visited the home to obtain Mrs Morgan’s signature. During a brief conversation lasting approximately five minutes, Mrs Morgan expressed concern that the charge might cover her husband’s business liabilities. Mr Barrow assured her the charge was limited to paying off the Abbey National debt and bridging finance, though the written terms of the charge were in fact unlimited. Mrs Morgan signed the charge. When the Morgans later defaulted, the bank sought possession. Mrs Morgan defended on the ground of undue influence.

Prior History

The deputy judge in Bridgwater County Court rejected the defence of undue influence and granted the bank’s possession order. The Court of Appeal reversed this decision, holding that undue influence had been established. The bank appealed to the House of Lords.

Issues

The principal issue was whether Mrs Morgan had established a case of undue influence such that the legal charge should be set aside. This required consideration of: (1) whether a relationship of undue influence existed between the bank and Mrs Morgan; and (2) whether proof of manifest disadvantage was required to establish undue influence.

Judgment

The House of Lords unanimously allowed the bank’s appeal and restored the county court’s possession order.

The Relationship

Lord Scarman, delivering the leading judgment, found that the relationship between the bank and Mrs Morgan never went beyond the normal business relationship of banker and customer. The trial judge’s finding that Mr Barrow did not cross the line from ordinary banking business into a relationship of dominating influence was correct.

Manifest Disadvantage

Lord Scarman held that for the presumption of undue influence to arise, the transaction must be manifestly disadvantageous to the person influenced. He stated:

“Whatever the legal character of the transaction, the authorities show that it must constitute a disadvantage sufficiently serious to require evidence to rebut the presumption that in the circumstances of the relationship between the parties it was procured by the exercise of undue influence.”

Lord Scarman relied upon the judgment of Lindley LJ in Allcard v Skinner (1887) 36 ChD 145, quoting:

“Courts of equity have never set aside gifts on the ground of the folly, imprudence, or want of foresight on the part of donors. The courts have always repudiated any such jurisdiction… On the other hand, to protect people from being forced, tricked or misled in any way by others into parting with their property is one of the most legitimate objects of all laws; and the equitable doctrine of undue influence has grown out of and been developed by the necessity of grappling with insidious forms of spiritual tyranny and with the infinite varieties of fraud.”

His Lordship also cited Lord Shaw of Dunfermline in Poosathurai v Kannappa Chettiar (1919) LR 47 IA 1:

“It must be established that the person in a position of domination has used that position to obtain unfair advantage for himself, and so to cause injury to the person relying upon his authority or aid.”

Application to the Facts

The transaction provided Mrs Morgan with what she desperately needed: rescue of her home. The disadvantage of the unlimited written terms was described by the trial judge as “essentially theoretical” since the bank adhered to its stated intention of limiting the security to the bridging finance. The transaction was not manifestly disadvantageous.

Rejection of Inequality of Bargaining Power

Lord Scarman declined to follow Lord Denning MR’s suggestion in Lloyd’s Bank Ltd v Bundy [1975] QB 326 that undue influence could be subsumed under a general principle of inequality of bargaining power, stating:

“The doctrine of undue influence has been sufficiently developed not to need the support of a principle which by its formulation in the language of the law of contract is not appropriate to cover transactions of gift where there is no bargain.”

Implications

This decision established that for the doctrine of undue influence to apply, the transaction must be shown to be manifestly disadvantageous to the party seeking relief. The normal relationship of banker and customer does not give rise to a presumption of undue influence, and a bank may explain the nature of a proposed transaction without thereby exercising undue influence. The case clarified that undue influence requires victimisation of one party by another, not merely inequality of bargaining power or imprudent decision-making. The judgment emphasised that courts must conduct a meticulous examination of the facts in each case rather than applying rigid definitions.

Verdict: Appeal allowed. The Court of Appeal's decision was set aside and the county court's possession order was restored. Mrs Morgan was required to give possession of the house within 28 days. No order as to costs save for legal aid taxation of the respondent's costs.

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