Credit Lyonnais Bank Nederland NV v Burch [1997] 1 All ER 14...

Facts

• Ms. Burch was a junior employee at a small company.
• She provided a personal guarantee and a second charge over her flat as security for her employer’s business overdraft.
• The liability assumed was disproportionate to her financial means and employee status.
• Upon the company’s default, the bank sought to enforce the guarantee.
• The transaction was strikingly prejudicial to Ms. Burch given her role and resources.

Issues

1. Whether the employer-employee relationship and the nature of the transaction raised a presumption of undue influence.
2. Whether the bank, as a third party, had constructive notice of possible undue influence.
3. Whether the bank took sufficient steps to rebut the presumption, particularly by ensuring independent legal advice was obtained.

Decision

• The Court of Appeal found the transaction was so manifestly disadvantageous that it called for explanation.
• The relationship of trust, reliance, and subordination between Ms. Burch and her employer established a presumption of undue influence.
• The bank had constructive notice of the risk of undue influence due to the employment relationship and the transaction’s nature.
• The bank failed to ensure Ms. Burch received independent legal advice, and did not rebut the presumption of undue influence.
• The guarantee and charge were set aside and held unenforceable.

Legal Principles

• The doctrine of undue influence protects vulnerable parties where consent to a transaction is improperly obtained due to domination by another.
• A relationship of trust and confidence, coupled with a manifestly disadvantageous transaction, can give rise to a presumption of undue influence.
• A third party, such as a bank, with constructive notice of such circumstances has a duty to ensure the potentially influenced party receives informed, independent legal advice.
• Manifest disadvantage, while not a strict requirement in every undue influence case, strongly reinforces the presumption, especially in non-domestic relationships.
• Independent legal advice is essential to rebut the presumption; mere superficial confirmation of understanding is inadequate.
• The case clarifies and distinguishes the application of undue influence principles from authorities such as National Westminster Bank plc v Morgan and Barclays Bank plc v O'Brien.

Conclusion

Credit Lyonnais Bank Nederland NV v Burch confirms that when an employer-employee relationship combined with a manifestly disadvantageous transaction raises a presumption of undue influence, third parties like banks must ensure informed, independent legal advice is provided or risk the transaction being set aside.