This case obviously worried banks generally, as a large part of their
business involves loans such as this. Further advice was therefore
welcomed when the following case was considered by the House of Lords.
The House of Lords took the opportunity of stating two elements which
they felt must be present for a presumption of undue influence to be
established in these cases:
- there must be a fiduciary relationship where one party exercises dominance
158 Contract law
Lloyds Bank v Bundy (1975)
Sir Eric Sachs said in this case that there comes a point in the
relationship between the banker and client when the bank may ‘be
crossing the line into the area of confidentiality, so that the court may
then have to examine all the facts including, of course, the history
leading up to the transaction.’
In this case a bank manager had been in the habit of visiting an
elderly farmer both socially and to advise on his financial
arrangements. The farmer had requested a loan to finance his son’s
business, and the manager had agreed that the bank could arrange this,
using the farm as security. When the son’s business failed, the bank
recalled the loan. When the farm was to be taken in repayment, Mr
Bundy claimed undue influence. It was held that as Mr Bundy trusted
the manager and relied on his advice, the bank in this situation was in
a fiduciary relationship with Mr Bundy, and this raised a presumption
of undue influence. The bank had not rebutted this presumption, so the
loan was set aside. It was said that the bank could have rebutted the
presumption of undue influence by ensuring that Mr Bundy had
received independent advice concerning the loan.National Westminster Bank v Morgan (1985)
Mr and Mrs Morgan wished to borrow money from the bank to settle
other loans and to support a failing business. Against the bank’s advice
they went ahead with the loan, using their house as security. As in Mr
Bundy’s case, when the business failed, the bank tried to recall the loan,
and wished to sell the house to settle the unpaid amount. The Morgans
claimed undue influence, relying on Lloyds Bank v Bundy, but on this
occasion the court held that the couple had not ‘crossed the line’ into a
fiduciary relationship. It was said that Mr and Mrs Morgan were
independent people who could well make their own decisions, and
were not influenced by the bank in obtaining the loan. If anything, they
went against the advice of the manager.