Lloyds Bank Ltd v Bundy

The general rule

Now let me say at once that in the vast majority of cases a customer who signs a bank guarantee or a charge cannot get out of it. No bargain will be upset which is the result of the ordinary interplay of forces. There are many hard cases which are caught by this rule. Take the case of a poor man who is homeless. He agrees to pay a high rent to a landlord just to get a roof over his head. The common law will not interfere. It is left to Parliament. Next take the case of a borrower in urgent need of money. He borrows it from the bank at high interest and it is guaranteed by a friend. The guarantor gives his bond and gets nothing in return. The common law will not interfere. Parliament has intervened to prevent moneylenders charging excessive interest. But it has never interfered with banks.

Yet there are exceptions to this general rule. There are cases in our books in which the courts will set aside a contract, or a transfer of property, when the parties have not met on equal terms - when the one is so strong in bargaining power and the other so weak - that, as a matter of common fairness, it is not right that the strong should be allowed to push the weak to the wall. Hitherto those exceptional cases have been treated each as a separate category in itself. But I think the time has come when we should seek to find a principle to unite them. I put on one side contracts or transactions which are voidable for fraud or misrepresentation or mistake. All those are governed by settled principles. I go only to those where there has been inequality of bargaining power, such as to merit the intervention of the court.

The categories

The first category is that of "duress of goods." A typical case is when a man is in a strong bargaining position by being in possession of the goods of another by virtue of a legal right, such as by way of pawn or pledge or taken in distress. The owner is in a weak position because he is in urgent need of the goods. The stronger demands of the weaker more than is justly due: and he pays it in order to get the goods. Such a transaction is voidable. He can recover the excess: see Astley v Reynolds (1731) 2 Stra. 915 and Green v Duckett (1883) 11 Q.B.D. 275 . To which may be added the cases of "colore officii," where a man is in a strong bargaining position by virtue of his official position or public profession. He relies upon it so as to gain from the weaker - who is urgently in need - more than is justly due: see Pigott's case cited by Lord Kenyon C.J. in Cartwright v Rowley (1799) 2 Esp. 723 , 723-724; Parker v Bristol and Exeter Railway Co (1851) 6 Exch. 702 and Steele v Williams (1853) 8 Exch. 625 . In such cases the stronger may make his claim in good faith honestly believing that he is entitled to make his demand. He may not be guilty of any fraud or misrepresentation. The inequality of bargaining power - the strength of the one versus the urgent need of the other - renders the transaction voidable and the money paid to be recovered back: see Maskell v Horner [1915] 3 KB 106.

The second category is that of the "unconscionable transaction." A man is so placed as to be in need of special care and protection and yet his weakness is exploited by another far stronger than himself so as to get his property at a gross undervalue. The typical case is that of the "expectant heir." But it applies to all cases where a man comes into property, or is expected to come into it - and then being in urgent need - another gives him ready cash for it, greatly below its true worth, and so gets the property transferred to him: see Evans v Llewellin (1787) 1 Cox 333 . Even though there be no evidence of fraud or misrepresentation, nevertheless the transaction will be set aside: see Fry v Lane (1888) 40 Ch.D. 312 , 322 where Kay J. said:

"The result of the decisions is that where a purchase is made from a poor and ignorant man at a considerable undervalue, the vendor having no independent advice, a court of equity will set aside the transaction."

This second category is said to extend to all cases where an unfair advantage has been gained by an unconscientious use of power by a stronger party against a weaker: see the cases cited in Halsbury's Laws of England, 3rd ed., vol. 17 (1956), p. 682 and, in Canada, Morrison v Coast Finance Ltd (1965) 55 D.L.R. (2d) 710 and Knupp v Bell (1968) 67 D.L.R. (2d) 256 . The third category is that of "undue influence" usually so called. These are divided into two classes as stated by Cotton L.J. in Allcard v Skinner (1887) 36 Ch.D. 145 , 171. The first are those where the stronger has been guilty of some fraud or wrongful act - expressly so as to gain some gift or advantage from the weaker. The second are those where the stronger has not been guilty of any wrongful act, but has, through the relationship which existed between him and the weaker, gained some gift or advantage for himself. Sometimes the relationship is such as to raise a presumption of undue influence, such as parent over child, solicitor over client, doctor over patient, spiritual adviser over follower. At other times a relationship of confidence must be proved to exist. But to all of them the general principle obtains which was stated by Lord Chelmsford L.C. in Tate v Williamson (1866) 2 Ch.App. 55 , 61:

"Wherever two persons stand in such a relation that, while it continues, confidence is necessarily reposed by one, and the influence which naturally grows out of that confidence is possessed by the other, and this confidence is abused, or the influence is exerted to obtain an advantage at the expense of the confiding party, the person so availing himself of his position will not be permitted to retain the advantage, although the transaction could not have been impeached if no such confidential relation had existed."

Such a case was Tufton v Sperni [1952] 2 T.L.R. 516 .

The fourth category is that of "undue pressure." The most apposite of that is Williams v Bayley (1866) L.R. 1 H.L. 200 , where a son forged his father's name to a promissory note and, by means of it, raised money from the bank of which they were both customers. The bank said to the father, in effect: "Take your choice - give us security for your son's debt. If you do take that on yourself, then it will all go smoothly: if you do not, we shall be bound to exercise pressure." Thereupon the father charged his property to the bank with payment of the note. The House of Lords held that the charge was invalid because of undue pressure exerted by the bank. Lord Westbury said, at pp. 218-219:

"A contract to give security for the debt of another, which is a contract without consideration, is above all things, a contract that should be based upon the free and voluntary agency of the individual who enters into it."

Other instances of undue pressure are where one party stipulates for an unfair advantage to which the other has no option but to submit. As where an employer - the stronger party - has employed a builder - the weaker party - to do work for him. When the builder asked for payment of sums properly due (so as to pay his workmen) the employer refused to pay unless he was given some added advantage. Stuart V.-C. said: "Where an agreement, hard and inequitable in itself, has been exacted under circumstances of pressure on the part of the person who exacts it, this court will set it aside": see Ormes v Beadel (1860) 2 Giff. 166 , 174 (reversed on another ground, 2 De G.F. & J. 333 ) and D&C Builders Ltd v Rees [1966] 2 QB 617 , 625.

The fifth category is that of salvage agreements. When a vessel is in danger of sinking and seeks help, the rescuer is in a strong bargaining position. The vessel in distress is in urgent need. The parties cannot be truly said to be on equal terms. The Court of Admiralty have always recognised that fact. The "fundamental rule" is

"if the parties have made an agreement, the court will enforce it, unless it be manifestly unfair and unjust; but if it be manifestly unfair and unjust, the court will disregard it and decree what is fair and just."

See Akerblom v Price (1881) 7 Q.B.D. 129 , 133, per Brett LJ, applied in a striking case The Port Caledonia and The Anna [1903] P. 184 , when the rescuer refused to help with a rope unless he was paid £1,000.

The general principles

Gathering all together, I would suggest that through all these instances there runs a single thread. They rest on "inequality of bargaining power." By virtue of it, the English law gives relief to one who, without independent advice, enters into a contract upon terms which are very unfair or transfers property for a consideration which is grossly inadequate, when his bargaining power is grievously impaired by reason of his own needs or desires, or by his own ignorance or infirmity, coupled with undue influences or pressures brought to bear on him by or for the benefit of the other. When I use the word "undue" I do not mean to suggest that the principle depends on proof of any wrongdoing. The one who stipulates for an unfair advantage may be moved solely by his own self-interest, unconscious of the distress he is bringing to the other. I have also avoided any reference to the will of the one being "dominated" or "overcome" by the other. One who is in extreme need may knowingly consent to a most improvident bargain, solely to relieve the straits in which he finds himself. Again, I do not mean to suggest that every transaction is saved by independent advice. But the absence of it may be fatal. With these explanations, I hope this principle will be found to reconcile the cases. Applying it to the present case, I would notice these points:

(1) The consideration moving from the bank was grossly inadequate. The son's company was in serious difficulty. The overdraft was at its limit of £10,000. The bank considered that its existing security was insufficient. In order to get further security, it asked the father to charge the house - his sole asset - to the uttermost. It was worth £10,000. The charge was for £11,000. That was for the benefit of the bank. But not at all for the benefit of the father, or indeed for the company. The bank did not promise to continue the overdraft or to increase it. On the contrary, it required the overdraft to be reduced. All that the company gained was a short respite from impending doom.

(2) The relationship between the bank and the father was one of trust and confidence. The bank knew that the father relied on it implicitly to advise him about the transaction. The father trusted the bank. This gave the bank much influence on the father. Yet the bank failed in that trust. It allowed the father to charge the house to his ruin.

(3) The relationship between the father and the son was one where the father's natural affection had much influence on him. He would naturally desire to accede to his son's request. He trusted his son.

(4) There was a conflict of interest between the bank and the father. Yet the bank did not realise it. Nor did it suggest that the father should get independent advice. If the father had gone to his solicitor - or to any man of business - there is no doubt that any one of them would say: "You must not enter into this transaction. You are giving up your house, your sole remaining asset, for no benefit to you. The company is in such a parlous state that you must not do it."

These considerations seem to me to bring this case within the principles I have stated. But, in case that principle is wrong, I would also say that the case falls within the category of undue influence of the second class stated by Cotton L.J. in Allcard v. Skinner, 36 Ch.D. 145 , 171. I have no doubt that the assistant bank manager acted in the utmost good faith and was straightforward and genuine. Indeed the father said so. But beyond doubt he was acting in the interests of the bank - to get further security for a bad debt. There was such a relationship of trust and confidence between them that the bank ought not to have swept up his sole remaining asset into its hands - for nothing - without his having independent advice. I would therefore allow this appeal.