Contract Law

Lloyds Bank Ltd. v. Bundy

[1975] QB 326

Facts

Mr Bundy was an elderly farmer whose principal asset was his farmhouse.
His son operated a business that was in financial difficulty.
Lloyds Bank financed the son’s business.
Bundy had already guaranteed some of the company’s debt and charged his farmhouse as security.
When the company required further borrowing, the bank asked Bundy to increase the guarantee and charge.
The bank manager knew:
that Bundy trusted him;
that Bundy was emotionally committed to helping his son;
that the company was in serious financial danger;
that Bundy risked losing his home.
Bundy received no independent legal advice.
The company failed, and the bank sought possession of the farmhouse.

Whether the increased guarantee and charge had been procured through undue influence.
Whether serious inequality of bargaining power and absence of independent advice justified setting aside the transaction.

A transaction may be set aside where:
one party places trust and confidence in another;
the stronger party is aware of that dependence;
the transaction is manifestly disadvantageous;
the stronger party fails to ensure independent advice.
Lord Denning described a broader principle of inequality of bargaining power, although the other judges decided the case through undue influence and fiduciary responsibility.
A normal bank-customer relationship does not automatically involve undue influence.
The conclusion depends upon the particular relationship and conduct.

Bundy was not acting as an experienced commercial guarantor.
He was risking his home solely to help his son, without receiving a direct financial benefit.
The bank had detailed knowledge that the son’s company was in serious difficulty, but did not clearly disclose the full risk to Bundy.
Bundy relied upon the bank manager’s judgment and believed that the bank would advise him fairly.
This created a special relationship of confidence beyond the ordinary creditor-customer relationship.
The bank faced a conflict:
it wanted additional security for its own exposure;
Bundy needed independent advice about whether giving that security was in his interest.
Instead of directing him to an independent solicitor, the manager encouraged execution of the documents.
The transaction was extremely disadvantageous because Bundy exposed his only significant asset to the debts of a failing company.
The presumption of undue influence was therefore not rebutted.
Lord Denning additionally viewed the case as an example of a broader class of transactions where the stronger party unfairly pushes a vulnerable person into an oppressive bargain.

The Court of Appeal set aside the guarantee and charge.
Use this case for: a bank may be guilty of undue influence where a vulnerable guarantor relies upon it and is not given independent advice about a manifestly disadvantageous transaction.