Lloyds Bank Ltd v Bundy
Encyclopedia
Lloyds Bank Ltd v Bundy [1974] EWCA Civ 8 is a landmark case in English contract law
, on undue influence
. It is remarkable for the judgment of Lord Denning MR who advanced that English law should adopt the approach developing in some American jurisdictions that all impairments of autonomy could be collected under a single principle of "inequality of bargaining power
."
Sir Eric Sachs 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.
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).
American cases
Duress
Undue influence
Unconscionability
English contract law
English contract law is a body of law regulating contracts in England and Wales. With its roots in the lex mercatoria and the activism of the judiciary during the industrial revolution, it shares a heritage with countries across the Commonwealth , and the United States...
, on undue influence
Undue influence
Undue influence is an equitable doctrine that involves one person taking advantage of a position of power over another person. It is where free will to bargain is not possible.-Undue influence in contract law:...
. It is remarkable for the judgment of Lord Denning MR who advanced that English law should adopt the approach developing in some American jurisdictions that all impairments of autonomy could be collected under a single principle of "inequality of bargaining power
Inequality of bargaining power
Inequality of bargaining power is a concept used in social sciences and humanities, particularly law and economics to denote the situation where freedom of contract ceases to be real and markets fail....
."
Facts
Herbert James Bundy was a farmer. His son, Michael, formed a MJB Plant Hire Ltd and it was in financial trouble. Mr Bundy had already guaranteed the business with a £7,500 charge over his only asset to Lloyds. This was his farmhouse at Yew Tree Farm, Broadchalke, Wiltshire. Michael's company got into more trouble still, and needed more money. Herbert's solicitor said not to put on any more money, but they went up to £11,000. The assistant manager of Lloyds, Mr Head explained the company's position to Herbert (i.e. a conflict of interest) but neglected to say the company was in serious trouble. Herbert signed the guarantee and charge form. Lloyds foreclosed on the house when the money was not paid, and Herbert 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 due to the unequal bargaining position in which Mr Bundy had found himself. 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.Sir Eric Sachs 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 LongPao On v Lau Yiu Long
Pao On v Lau Yiu Long [1979] is an contract law appeal case from the Court of Appeal of Hong Kong decided by the Privy Council, concerning duress.-Facts:...
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
Consumer Credit Act 1974
The Consumer Credit Act 1974 is an Act of the Parliament of the United Kingdom that significantly reformed the law relating to consumer credit within the United Kingdom....
.
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).
See also
- Iniquitous pressure in English lawIniquitous pressure in English lawUnconscionability in English law is a field of contract law and the law of trusts, which precludes the enforcement of consent based obligations. "Inequality of bargaining power" is another term used to express essentially the same idea for the same area of law, which can in turn be further broken...
- Backhouse v Backhouse [1978] 1 WLR 243, 251, Balcombe J could not fit in an intelligent woman into the Fry v LaneFry v LaneFry v Lane 40 Ch D 312 is an English contract law case relating to exploitation of weakness, allowing escape from a contract.-Facts:...
criteria but citing Bundy said, obiter dicta, that entering a contract without independent advice because of ‘great emotional strain’ could be another way the law could develop. - Burmah Oil Co Ltd v Governor of the Bank of England (1981) noted 125 Sol Jo 528, the Bank bought Burmah Oil's shares in BP on request from Burmah, who was very financially embarrassed because the share price had fallen and Burmah's borrowings were structured on the basis that BP shares would be higher. It looked like Burmah may collapse, and the Bank did not want BP shares to go foreign. But after, Burmah claimed the Bank to unfair advantage of bargaining power inequality in buying the shares and making a profit. Walton J doubted Lord Denning MR's principle. Note that Burmah was always advised by expert lawyers and merchant bankers and would have got no better price elsewhere (because selling such a large block of shares would depress the price).
American cases
- Williams v. Walker-Thomas Furniture Co.Williams v. Walker-Thomas Furniture Co.Williams v. Walker-Thomas Furniture Co., 350 F.2d 445 , was a court opinion, written by Judge J. Skelly Wright, that had a definitive discussion of unconscionability as a defense to enforcement of contracts in American contract law. As a staple of first-year law school contract law courses, it has...
, 350 F.2d 445 (D.C. Cir. 1965). - Laters v Min Ltd 412 Mass 64, 587 NE 2d 231 (1992)
Duress
- Barton v ArmstrongBarton v ArmstrongBarton v Armstrong [1973] is an English contract law case relating to duress. It held that a person who agrees to a contract under physical duress may avoid the contract, even if the duress was not the main reason for agreeing to the bargain.-Facts:...
[1976] AC 104 - D & C Builders Ltd v Rees [1966] 2 QB 617
- North Ocean Shipping Co Ltd v Hyundai Construction Co LtdNorth Ocean Shipping Co Ltd v Hyundai Construction Co LtdNorth Ocean Shipping Co Ltd v Hyundai Construction Co Ltd [1979] QB 705 is an English contract law case relating to duress.-Facts:Hyundai were shipbuilders. The price of ships was payable in five instalments, and the builders had agreed to a reverse letter of credit, for repayment of instalments in...
[1979] QB 705 - Pao On v Lau Yiu LongPao On v Lau Yiu LongPao On v Lau Yiu Long [1979] is an contract law appeal case from the Court of Appeal of Hong Kong decided by the Privy Council, concerning duress.-Facts:...
[1980] AC 614 - Universe Tankships Inc of Monrovia v International Transport Workers' FederationUniverse Tankships Inc of Monrovia v International Transport Workers' FederationUniverse Tankships Inc of Monrovia v International Transport Workers’ Federation [1982] 2 All ER 67 is an English contract law case relating to duress.-Facts:...
[1982] 2 All ER 67 - CTN Cash and Carry Ltd v Gallaher LtdCTN Cash and Carry Ltd v Gallaher LtdCTN Cash and Carry Ltd v Gallaher Ltd [1993] is an English contract law case relating to duress. It raised the question whether an act could be considered to be economic duress if the act would in any event be lawful.-Facts:...
[1994] 4 All ER 714
Undue influence
- BCCI v Aboody [1992] 4 All ER 955
- CIBC Mortgages plc v Pitt [1993] 4 All ER 433
- Barclays Bank plc v O'BrienBarclays Bank plc v O'BrienBarclays Bank plc v O’Brien [1993] is an English contract law case relating to undue influence. It set out the basic categories of undue influence as,* actual undue influence* presumed undue influence from a special relationship...
[1993] 4 All ER 417 - Royal Bank of Scotland v Etridge (No 2) [2001] UKHL 41
- Tate v WilliamsonTate v WilliamsonTate v Williamson LR 2 Ch App 55 is an English contract law case relating to undue influence.-Facts:The defendant became the financial adviser to an Oxford University undergraduate who sold him his estate for half its value and then drank himself to death, aged 24...
(1886) LR 2 Ch App 55
Unconscionability
- Earl of Chesterfield v Janssen (1751) 2 Ves Sen 125, equity intervenes to relieve against unconscionable bargains
- Earl of Aylesford v Morris (1873) LR 8 Ch App 484
- Fry v LaneFry v LaneFry v Lane 40 Ch D 312 is an English contract law case relating to exploitation of weakness, allowing escape from a contract.-Facts:...
(1888) 40 Ch D 312 - Cresswell v PotterCresswell v PotterCresswell v Potter [1978] 1 WLR 255 is an English contract law case relating to exploitation of weakness allowing escape from a contract.-Facts:...
[1978] 1 WLR 255 - The MedinaThe MedinaThe Medina 2 PD 5 is an English contract law case, regarding the voidability of an agreement and a restitutionary award where the court finds that agreement is procured under extortionate circumstances.-Facts:...
(1876) 2 PD 5 - Alec Lobb Garages Ltd v Total Oil (GB) Ltd [1985] 1 WLR 173