Lloyds Bank Ltd v Bundy

Ordinary bank guarantees and charges are not generally reopened merely because the bargain is harsh. Relief may be granted where a bank-customer relationship has developed into a special relationship of confidence, the customer relies on the bank’s advice, and the bank has an interest in the transaction. In the second class of undue influence cases, proof of fraud, wrongdoing or domination of the customer’s will is unnecessary. The bank may have to insist on independent advice and ensure an independent and informed judgment, particularly where its interests conflict with the customer’s. Failure to fulfil that duty may make the transaction voidable. The Master of the Rolls also proposed inequality of bargaining power as a unifying principle, but that wider formulation was not necessary to the common decision.

Lloyds Bank sought possession of Yew Tree Farm after Herbert Bundy granted a guarantee and further legal charge securing his son’s company’s overdraft. The charge covered substantially the whole value of Bundy’s only asset. Salisbury County Court entered judgment for the bank on 6 June 1973. Bundy appealed, arguing principally that the transaction had been procured by undue influence and that the circumstances made it unfair to enforce it.

The central issue was whether the bank’s longstanding relationship with Bundy, its advice about the company’s affairs, its conflict of interest and its failure to recommend independent advice created a duty which had not been fulfilled.

Appeal allowed unanimously. The County Court judgment was set aside. Judgment was entered for Bundy, and the guarantee and legal charge dated 17 December 1969 were set aside.

1. Common basis. Sachs LJ’s reasoning, with which Cairns LJ agreed, established the decisive basis. The transaction fell within the second class of undue influence described in Allcard v Skinner (1887) 36 Ch. D. That class does not require proof of a wrongful act or domination of the influenced person’s will. Once a special relationship of confidence is shown, a benefit cannot be retained unless the duty of fiduciary care has been fulfilled or the transaction was truly for the influenced person’s benefit.
2. Special relationship and duty. Whether such a relationship exists depends on the facts. It may arise between banker and customer where the customer relies on the bank’s advice, the bank knows of that reliance, the bank has an interest in the transaction, and the relationship has the additional quality of confidentiality. Fiduciary care may require independent advice and an independent and informed judgment. The formulation in Zomet v Hyman (1961) 1 W.L.R. 1442 was applied. Ordinary explanations of a guarantee’s legal effect and sums involved do not necessarily create the duty.
3. Application. Bundy trusted the bank and relied on its advice. The bank knew that the company’s difficulties were serious, that its interests conflicted with Bundy’s, and that the charge might deprive him of his only asset. The bank advised on the wisdom of the transaction but did not insist that Bundy obtain independent advice. That was a breach of fiduciary care.
4. Counterfactual argument. The bank could not avoid relief by arguing that Bundy would have signed regardless. Public policy normally leaves no room for debate about what would have happened if the required care had been taken.
5. Wider reasoning. Denning MR proposed inequality of bargaining power as a principle unifying several categories of relief, but Sachs LJ declined to express an opinion on those wider areas. The narrow common basis was second-class undue influence.

The appeal was allowed with costs. The documents were to be delivered up for cancellation. Leave to appeal to the House of Lords was refused.

• Court of Appeal: Appeal allowed; the County Court judgment was set aside and judgment entered for the defendant. The guarantee and charge were set aside: [1974] EWCA Civ 8.
• Salisbury County Court: On 6 June 1973, His Honour Judge McLellan gave judgment for Lloyds Bank and ordered Bundy to give up possession of Yew Tree Farm.