Credit Lyonnais Bank Nederland NV v Burch  1 All ER 144
UNDUE INFLUENCE – BREACH OF CONTRACT – CONSTRUCTIVE NOTICE – DEBT
The defendant had worked for a business man (Pelosi) since the age of 18, working for a range of Pelosi’s businesses. In 1985 (aged 21) the defendant purchased a flat. In 1990 Mr Pelosi’s business was facing financial difficulties, and he asked the defendant to offer up her flat as financial security against an overdraft facility for the business. In July of that year, the banks solicitors wrote to the defendant, advising Burch that she should take independent legal advice before putting her property up as security for the debt. The bank also notified the defendant that the guarantee was unlimited in both time and financial amount. Having discussed the arrangement with Pelosi, Burch was unaware of the extent of the borrowing, but was assured that her mortgage would not be called upon, and that his own properties which were also used as security would be looked to first.
A charge was executed over the defendant’s property in August 1990. In 1994 Mr Pelosi’s business went into liquidation and the bank formally demanded $60,249.12 from Burch.
Burch raised the defence of undue influence – stating that Mr Pelosi had induced her to enter into the agreement, and the bank had full knowledge/notice of this undue influence which should set aside the banks right to enforce the debt recovery against Burch.
The court held that the bank did in fact have constructive notice of the relationship between the parties and had not done enough to allay concerns of undue influence. The court affirmed the following:
- An employer/employee relationship was capable of developing into such a relationship for undue influence
- There was no benefit to Burch in the agreement, as such no evidence was required of sexual or emotional tie between the parties to induce undue influence. The lack of benefit to one party was evidence enough.
- The bank could not consider the information they had supplied Burch with as sufficient to escape constructive notice, as the information was not full and complete as such to allow her to understand the gravity of the company borrowing.
- The bank had not made all reasonable steps to allay themselves of the concerns regarding undue influence. The fact that, on advice from the bank, the defendant did not seek independent advice should have been taken as confirmation of undue influence.