Dunbar Bank Plc v Nadeem & Anor

In a class 2 case of presumed undue influence, the claimant must establish manifest disadvantage before an equitable transaction can be set aside. That question is assessed by analysing the transaction as intended to operate, rather than treating an inaccurately completed standard-form charge as conclusive. A short-term bridging facility intended to be repaid from sale or re-mortgage may therefore confer a substantial beneficial interest despite a charge expressed in wider terms. Actual undue influence is different: manifest disadvantage is not required, and coercion, pressure or concealment are not necessary elements. If rescission is available, counter-restitution requires restoration of the benefit obtained, but not a monetary condition unrelated to that benefit.

The Bank advanced £260,000 to a husband and wife to acquire a longer lease of their matrimonial home and regularise the husband's bank interest arrears. The wife signed the facility letter and an all-moneys legal charge, later challenging the charge for undue influence.

The Deputy High Court Judge found presumed undue influence, held that the Bank had constructive notice, and ordered the charge set aside against the wife if she repaid £105,000 plus interest. Possession was ordered in default. The wife appealed against the condition. The Bank cross-appealed against the finding that the charge should be set aside. The central questions were whether the transaction was manifestly disadvantageous and, if rescission were available, what counter-restitution could properly be required.

The Court unanimously allowed the Bank's cross-appeal and dismissed the wife's appeal. It set aside the Deputy Judge's order, dismissed the counterclaim and ordered possession within 56 days.

1. Presumed undue influence. The wife's case was a class 2 case under the categorisation in Barclays Bank Plc v O'Brien [1994] AC 180. Manifest disadvantage was therefore required, in accordance with National Bank Plc v Morgan [1985] AC 686 and BCCI v Aboody [1992] 4 All E R 433. The Court held that it was not established.
2. True nature of the transaction. Millett LJ held that the all-moneys charge was a mistaken use of a standard form. The facility was intended as short-term bridging finance, to be repaid from a sale or re-mortgage. The Bank's conduct was inconsistent with an intention to enforce the charge in its apparent wider terms. On the transaction's true substance, the wife acquired a beneficial half-interest in the equity of redemption, estimated at £140,000. The transaction was therefore not manifestly disadvantageous. Morritt LJ and Potter LJ agreed with the result.
3. Actual influence. Millett LJ observed that actual undue influence does not require manifest disadvantage, coercion, pressure or deliberate concealment. The issue did not require determination because the Bank's cross-appeal succeeded and the Judge had found no unfair advantage.
4. Counter-restitution. The observations on the wife's appeal were obiter. Rescission is conditional on counter-restitution. The transaction must be analysed carefully, and the benefit to be restored is the benefit actually obtained. Following Erlanger v New Sombrero Phosphate Co (1878) 3 App Cas 1218, Newbigging v Adam (1886) 34 Ch D 582 and Cheese v Thomas [1994] 1 AER 35, Millett LJ and Morritt LJ treated the relevant benefit as the beneficial interest in the lease or equity of redemption, not a proportion of the joint advance. The monetary condition imposed below was therefore wrong in principle. Millett LJ considered that counter-restitution would be automatic because the wife could not retain priority over the Bank's charge. Morritt LJ took the alternative view that the subsequent National Westminster charge prevented restoration of an unencumbered interest and made rescission unavailable. Potter LJ agreed with the transaction analysis but expressed no view on the priority issue.

• Court of Appeal (Civil Division): The Bank's cross-appeal was allowed and the wife's appeal was dismissed. The order was set aside, the counterclaim dismissed, and possession ordered within 56 days. Leave to appeal was refused.
• High Court, Chancery Division: On 7 November 1996, Mr R Englehart QC, sitting as a Deputy High Court Judge, ordered the legal charge set aside against the wife conditional on repayment of £142,791.05, with possession ordered in default.