Credit Lyonnais Bank Nederland NV v Burch [1996] EWCA Civ 1292; [1997] 1 All ER 144; [1997] 1 FLR 11
UNDUE INFLUENCE – BREACH OF CONTRACT – CONSTRUCTIVE NOTICE – DEBT
Facts
The defendant had worked for a businessman (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 bank’s 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. It involved a personal guarantee as well as a charge on her home, exposing her to liability beyond the value of the flat. Having discussed the arrangement with Pelosi, Burch was unaware of the extent of the borrowing, but Pelosi assured her that his own properties could be sold to repay the debts and that her mortgage would not be called upon.
Law Teacher writing support
Writing a law essay?
We choose a writer who is an expert in your area of law and qualified to at least the academic level you select. Most of our writers hold a master’s degree or PhD, have teaching experience, or both.
Send us your question and, if you wish, any marking criteria. We’ll write an essay to your instructions.
She signed the charge on 20 July 1990, and the transaction was completed on 3 August 1990. Mr Pelosi’s business subsequently went into liquidation. In April 1994 the bank formally demanded £60,249.12 from Burch.
Issues
Burch raised the defence of undue influence – stating that Mr Pelosi had induced her to enter into the agreement, and the bank was on notice of the undue influence and should therefore be unable to enforce the charge against her.
Decision/Outcome
The court held that the bank did in fact have constructive notice of the undue influence 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 a relationship of trust and confidence, but did not automatically give rise to a presumption of undue influence.
- Burch had no financial interest in the company as a shareholder or director. No sexual or emotional tie had to be proved. The extremely onerous transaction, entered into at Pelosi’s request and after discussion with him, supported the inference of a relationship of trust and confidence which he had improperly exploited. Mere disadvantage, by itself, was not sufficient.
- The information supplied was insufficient to escape constructive notice. Being told that the guarantee was unlimited did not enable Burch to assess its significance without knowing the company’s existing borrowings and the proposed facility. The overdraft limit was being increased from £250,000 to £270,000, while she was giving an unlimited guarantee.
- Merely urging Burch to obtain independent legal advice did not protect the bank. Millett LJ considered that her employer-arranged refusal of advice should have confirmed its suspicions, rather than allayed them. He also emphasised that the presence or absence of advice was not a mechanical test: even advice would not necessarily have been sufficient for a transaction of this extreme kind.
The Court of Appeal dismissed the bank’s appeal, leaving in place the order setting aside the legal charge.
