Lloyds Bank v Bundy [1975] QB 326

Key points

  • Lord Denning laid down a now-defunct doctrine of inequality of bargaining power, which subsumes duress, undue influence and unconscionable bargain, but was later rejected by the House of Lords in National Westminster v Morgan

Facts

  • Bundy (D) was an elderly and infirm farmer who gave a personal guarantee and a charge over his home to Lloyds Bank (C) in order to secure the overdraft of his son’s company
  • The bank manager who obtained the transaction from D admitted that he knew that C was implicitly relying on him for advice
  • D and his son have had a long-term relationship with the bank as customers as well as with the bank manager
  • When the son’s company ran into trouble, C sought to enforce the charge and guarantee; D argued undue influence in defence

Held (Court of Appeal)

  • The majority, led by Sir Eric Sachs, held that the guarantee and charge were set aside on the orthodox ground of undue influence
  • Lord Denning MR decided the case on the ground of a doctrine of inequality of bargaining power

Lord Denning MR

  • Referring to the doctrines of duress, unconscionable bargain, undue influence and salvage agreements, he held: ‘Gathering all together, I would suggest that through all these instances there runs a single thread. They rest on “inequality of bargaining power.”’
  • He continued: ‘By virtue of it, the English law gives relief to one who, without independent advice, enters into a contract on terms which are very unfair or transfers property for a consideration which is grossly inadequate, when his bargaining power is grievously impaired by reason of his own needs or desires, or by his own ignorance or infirmity, coupled with undue influences or pressures brought to bear on him by or for the benefit of the other’: p. 339C

Sir Eric Sachs

  • A special relationship of trust and confidence does not ordinarily arise in the normal case where a bank obtains a guarantee, but when the bank, as in the present case, goes further and advices on more general matters germane to the wisdom of the transaction, that indicates that it may be ‘crossing the line into the area of confidentiality’: p. 347
  • In the present case there was a relationship of trust and confidence between D and C which gave rise to a presumption of undue influence being exercised, given the bank manager’s knowledge of D’s reliance on his advice and the long relationship between C and D

Commentary

Summary of the doctrine

  • Lord Denning’s doctrine of inequality of bargaining power combines the features of separate doctrines of equity that set aside contracts into one general doctrine
  • Under the doctrine, a contract is set aside whenever:
    1. there is an inequality of bargain power between the parties
    2. the terms are unfair; and
    3. the weaker party did not receive independent advice

Later treatment

Evaluation of advantages and disadvantages

  • A general doctrine offers some advantages, such as the fact that it removes some of technical distinctions between established doctrines
  • However, its three requirements do not entirely make sense, as pointed out by Dillon LJ in Alec Lobb v Total Oil
    1. It is not clear why the availability of independent advice should invariably prevent the contract from setting aside, especially where the weaker party had no practical choice other than to enter into the contract regardless of any advice given – this was pointed on in
    2. They do not take into account the whether the conduct of the stronger party is unconscionable and whether the inequality of bargaining power was actually exploited,
  • Furthermore, a general doctrine would have a wide and uncertain scope that can undermine the need for certainty in contracts, a piecemeal approach through disparate doctrines and parliamentary legislation might be more appropriate, as Lord Scarman argued in National Westminster v Morgan