Lloyds Bank Ltd v Bundy (1974)

This is the case in which Lord Denning tried to gather the scattered doctrines that relieve a weak party from a hard bargain — duress of goods, the expectant heir, undue influence, undue pressure, salvage agreements — under one principle: inequality of bargaining power. That speech is the starting point for any discussion of unfair bargains.

But read the whole judgment. Only Lord Denning rested his decision on that general principle. Sir Eric Sachs and Cairns LJ decided the case on the narrower, established ground of undue influence arising from a relationship of confidence between banker and customer, and Sir Eric Sachs expressly declined to give an opinion on Lord Denning's wider principle. An examiner will reward you for knowing the difference.

Herbert Bundy, an elderly farmer, owned Yew Tree Farm at Broadchalke — his only asset, worth about £10,000. He and his only son Michael were long-standing customers of the Salisbury branch of Lloyds Bank, as was the son's company, M.J.B. Plant Hire Ltd.

As the company ran into difficulties, the father guaranteed its overdraft and charged the farm to the bank. On an earlier occasion the assistant manager left the papers with him overnight, and he took advice from his solicitor, who told him that £5,000 was the utmost he could sink in his son's affairs. Following that advice the father signed; by then the farm was charged for £7,500.

The company's position grew worse. On 17 December 1969 a new assistant manager, Mr Head, who had never met the father, came to the farm with the son, bringing a guarantee and charge already filled in. The bank would let the company continue up to its existing £10,000 overdraft but required the father to guarantee £11,000 and to increase the charge to £11,000 — more than the farm was worth. The father said Michael was his only son and he was 100% behind him. He signed there and then. Mr Head did not leave the forms with him, and the father had no independent advice.

Mr Head said in evidence: "I would think the defendant relied on me implicitly to advise him about the transaction as bank manager." The father said: "I always thought Mr. Head was genuine. I have always trusted him....No discussion how business was doing that I can remember. I simply sat back and did what they said."

Five months later a receiving order was made against the son; the company ceased to trade. The bank sought to sell the farm and sued the father for possession. The county court judge, though sorry for him, found nothing "which takes this out of the vast range of commercial transactions" and ordered possession. The father appealed.

1. Was the relationship between the bank and Mr Bundy one of confidence, giving rise to a duty of "fiduciary care"?
2. If so, was that duty broken, so that the guarantee and charge of 17 December 1969 could be set aside for undue influence?
3. (Raised by Lord Denning alone) Is there a general principle allowing relief where a contract results from inequality of bargaining power?

The appeal was allowed unanimously. The guarantee and legal charge of 17 December 1969 were set aside and ordered to be delivered up for cancellation; judgment was entered for Mr Bundy. Leave to appeal to the House of Lords was refused.

Lord Denning MR — inequality of bargaining power

He began with the general rule: "No bargain will be upset which is the result of the ordinary interplay of forces." But there were exceptions, "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." He reviewed five categories and concluded:

"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 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."

He added that "undue" does not require wrongdoing, and that "I do not mean to suggest that every transaction is saved by independent advice. But the absence of it may be fatal."

Applying it, he found: the consideration from the bank was grossly inadequate — "All that the company gained was a short respite from impending doom"; the relationship between bank and father was one of trust and confidence; and the father's affection for his son, and the conflict of interest the bank failed to recognise, made independent advice essential. In the alternative, the case fell within the second class of undue influence in Allcard v Skinner: "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."

Sir Eric Sachs — undue influence of the second class

Sir Eric Sachs decided the case on the only defence argued in the Court of Appeal: undue influence. He explained that the county court judge had wrongly treated undue influence as requiring domination, where a person acts as a "mere puppet". In the second class of cases the court acts "on the ground of public policy and to prevent the relations which existed between the parties and the influence arising therefrom being abused." Once the special relationship exists, "no benefit can be retained from the transaction unless it has been positively established that the duty of fiduciary care has been entirely fulfilled."

Such a relationship can exist between banker and customer, but not in the normal guarantee case; the onus is on the customer. Cases of this kind "tend to arise where someone relies on the guidance or advice of another, where the other is aware of that reliance and where the person upon whom reliance is placed obtains, or may well obtain, a benefit from the transaction or has some other interest in it being concluded", together with an element of "confidentiality". All of that was established here.

On breach: the situation "cried aloud Mr. Bundy's need for careful independent advice", yet none was suggested. "The breach of the duty to take fiduciary care is manifest." It was no answer that Mr Bundy would have signed anyway: "there is normally no room for debate on the issue as to what would have happened had the care been taken."

On Lord Denning's wider principle he said: "I do not venture to express an opinion", though he had some sympathy with it.

Cairns LJ

Cairns LJ had some doubt whether a special relationship was established, but for Sir Eric Sachs's reasons concluded that "in the very unusual circumstances of this case there was such a duty. Because it was not fulfilled, the guarantee can be avoided on the ground of undue influence."

The ratio shared by the whole court is the narrower one: a bank that advises a customer on the wisdom of a transaction from which the bank benefits, knowing the customer relies on that advice, may stand in a relationship of confidence giving rise to a duty of fiduciary care. Where that duty exists and the bank fails to ensure the customer forms an independent and informed judgment — typically by insisting on independent advice — the transaction may be set aside for undue influence of the second class in Allcard v Skinner, without proof of domination or wrongful intent.

Lord Denning's principle of inequality of bargaining power is his own reasoning; the other two members of the court did not adopt it.

• Direct question: Explain the doctrine of inequality of bargaining power as stated in Lloyds Bank v Bundy. Is it part of the ratio? Quote Lord Denning's "single thread" passage, then show that the majority decided on undue influence alone.
• Problem question: an elderly guarantor signs a bank charge over his only asset, on the bank officer's advice, without independent advice. Apply Sir Eric Sachs's elements — reliance, the bank's knowledge of it, the bank's interest, confidentiality — then breach of the duty of fiduciary care.
• Indian link: use Lord Denning's principle alongside Central Inland Water Transport Corporation v Brojo Nath Ganguly (1986), which draws on the idea of unequal bargaining power, and s. 16 of the Indian Contract Act on undue influence.
• Point worth marks: the difference between the first class of undue influence (domination, wrongful act) and the second (a relationship of confidence, where the court acts on public policy). Bundy is the leading illustration of the second.