Credit Lyonnais v Burch [1997] 1 All ER 144

Court of Appeal

Basic Facts: D (Burch) was a junior employee at API and had no financial stake in the company. E, her employer, requested D to mortgage her flat as security for an increase in the company’s overdraft. D provided an unlimited guarantee of the company’s debts to C (Credit Lyonnais). The bank did not fully explain the nature of the transaction but advised D to seek independent legal advice. When API went bankrupt, the bank sought to repossess D's flat.

Issue for the Court: Under what circumstances can a claim of undue influence be granted?

Held : The court held that undue influence can be presumed when there is a relationship of trust and influence, and a party’s vulnerability is exploited. The bank’s failure to fully explain the transaction or ensure independent legal advice contributed to this presumption.

• Nourse LJ determined that there was a relationship of trust and influence between D and E, creating a presumption of undue influence. The bank should have been aware of D’s vulnerable position and the manifest disadvantageous nature of the transaction. The bank's failure to provide a clear explanation and independent legal advice constituted a breach of their duty.

• Millett LJ highlighted that the transaction was not only disadvantageous but also raised grave suspicion due to D's vulnerable position. The excessively onerous nature of the transaction justified the inference that E exploited a trust relationship with D.

💡Leveluplaw : This case underscores the importance of transparency and proper advice in transactions involving parties in vulnerable positions, and it highlights the responsibilities of banks in such circumstances.