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
- Whether the employer-employee relationship and the nature of the transaction raised a presumption of undue influence.
- Whether the bank, as a third party, had constructive notice of possible undue influence.
- 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.