Credit Lyonnais Bank Nederland NV v Burch

A bank may be fixed with constructive notice of undue influence when it takes security from a junior employee for an employer’s debts and the transaction is manifestly disadvantageous. Employer and employee is not automatically a relationship giving rise to a presumption, but trust and confidence may be inferred from the parties’ dealings and the extraordinary terms of the transaction. A recommendation to obtain independent legal advice does not by itself protect the bank. The bank must take reasonable steps to allay its suspicion, and those steps must reasonably achieve that result. Advice must be genuinely independent, fully informed, and directed to the propriety of the transaction and any less onerous alternatives. The charge was set aside and the appeal dismissed.

Helen Burch, a junior employee of API, gave the Bank an unlimited guarantee of API’s present and future liabilities, secured by a charge over her home. The security was requested by API’s controller, Andrea Pelosi, for a modest increase in API’s overdraft facility. The Bank knew that Burch was an employee, had no shareholding or directorship, and was receiving no evident benefit. Its solicitors advised her to obtain independent legal advice, but she did not do so and signed the charge after discussing the matter with Pelosi.

API later went into liquidation. The Bank sought possession and payment in the Willesden County Court. Mr Recorder Harrod found a relationship of trust and confidence, undue influence, and notice sufficient to put the Bank on inquiry. He set aside the charge. The appeal concerned whether the relationship and notice findings were justified and whether the Bank had taken reasonable protective steps.

The appeal was unanimously dismissed with costs. The legal charge was set aside against the Bank, and the respondent’s costs were subject to legal aid taxation.

1. Relationship of trust and confidence. Applying the principles in Barclays Bank plc v O’Brien [1994] 1 AC 180, the court accepted that an employer and junior employee relationship is not automatically within Class 2A. It may nevertheless develop into a relationship of trust and confidence within Class 2B. That development may be inferred from the parties’ dealings and the nature of the transaction. An extravagantly improvident transaction requested by the employer could make the inference compelling. No sexual or emotional relationship was required.
2. Notice. The Bank knew that Burch was a junior employee with no financial interest in API and that she was charging her home to secure the company’s substantial borrowing. Those facts were sufficient to put it on inquiry, consistently with Avon Finance Co. Ltd. v Bridger [1985] 2 All ER 281.
3. Protective steps and legal advice. A bank owes no duty to the complainant merely because it recommends independent advice; the recommendation is for the bank’s protection. It avoids constructive notice only if it takes reasonable steps to allay its suspicion and the result reasonably allays it. Advice must address the propriety of the transaction, be based on all material facts, and consider less onerous alternatives. It is not enough that the complainant understands the document or intends to sign it. Millett LJ emphasised that independent advice is neither always necessary nor always sufficient. The Bank could not rely on advice that was declined in circumstances which confirmed, rather than dispelled, its suspicions. See also Powell v Powell [1900] 1 Ch.243.
4. Unconscionability. The court could not rest its decision on unconscionable bargain because that case had not been made below. The extreme and one-sided terms nevertheless materially reinforced the conclusion that the Bank had not taken adequate steps in relation to undue influence.

• Court of Appeal (Civil Division): On appeal from the Willesden County Court, the court dismissed the Bank’s appeal and ordered costs, in [1996] EWCA Civ 1292.
• Willesden County Court: Mr Recorder Harrod gave judgment for Helen Burch, dismissed the Bank’s possession claim, and set aside the legal charge.