Undue influence: not enough to urge surety to take legal advice

In Credit Lyonnais Bank Nederland NV v Burch ([1997] CLC 95) Miss B was a junior employee of Mr P’s business. He wanted to extend the limit of the business’ overdraft facility and persuaded Miss B to sign an unlimited guarantee of the business’ liability. Although the bank’s solicitor urged her to take independent legal advice she did not and no effort was made to ensure that she did. It was found as a fact that the relationship between Mr P and Miss B was one of trust and confidence (they were employer – employee on friendly terms, there was no suggestion of a sexual relationship).

The bank attempted to enforce its security but was met with a successful undue influence defence. The bank knew that the transaction was to Miss B’s disadvantage (so much so that the inference that the relationship of trust and confidence was easy to draw). It knew that she was a fairly junior employee. It was on notice (see Millett LJ at pp. 104 – 105).

Simply suggesting to Miss B that she take independent legal advice, far from being sufficient to protect its security, emphasised the fact that it knew that such advice was necessary in the circumstances.

On the relevance of the suggestion that she should take independent legal advice (and the fact that she did not do so), Nourse LJ commented:

‘[I]t was not enough for Miss Burch to be advised to take independent legal advice. It was at the least necessary that she should receive such advice.’ (at p. 101).

Advising Miss B as to the financial background to the transaction was vital:

‘She could not assess the significance [of being informed that her liability under the charge was to be unlimited in time and amount] without being told of the extent of API’s current borrowings and the current limit.’ (Nourse LJ at p. 101).

Millett LJ also expressed the view that if a bank knew that no competent solicitor could advise his client to enter into a given transaction then the fact that some advice was given will not be enough to protect the bank against an undue influence defence:

‘I do not, therefore, accept that a bank, in circumstances where it ought to appreciate the possibility that undue influence has been exercised, can escape the consequences by putting forward an unnecessarily, onerous form of guarantee and relying on the failure of the guarantor’s solicitor to advise her of the possibility of offering a guarantee on less onerous terms and more appropriate to the situation.’ (Millett LJ at p. 106)

Michael Lower

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