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CREDIT LYONNAIS BANK NEDERLAND NV v BURCH [1997] 1 All ER 144

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CREDIT LYONNAIS BANK NEDERLAND NV v BURCH [1997] 1 All ER 144 ...

COURT OF APPEAL

CREDIT LYONNAIS BANK NEDERLAND NV v BURCH [1997] 1

    All ER 144

20 June 1996

    Full text

NOURSE LJ:

    This is a case in which it is sought to set aside a mortgage of residential property given as security for another’s debt on the ground that it was

    procured by the undue influence of the debtor over the mortgagor of which the mortgagee had notice. Thus, although the relationship between the debtor and the mortgagor was not that of persons living together but employer and employee, it may broadly be said to fall under Barclays Bank plc v O’Brien [1993] 4 All ER 417, [1994] 1 AC 180 …

    … In 1982 the defendant, Helen Burch, then aged 18, began to work for companies controlled by an Italian national called Andrea Pelosi. He was ten years older than she and she trusted him. She knew him to be a successful businessman and visited his substantial house in Gerrards Cross and his large villa in Italy. Her links with him were close. In addition to working for him during the day, she did baby-sitting at his home in the evenings and visited the family at weekends and for holidays in Italy. By the summer of 1990 Miss Burch was working for a company called A P International Travel Ltd (API), which carried on Mr Pelosi’s tour operating

    business. It was a very demanding job and she was deeply involved in it. At that time, she had almost no life apart from her work and was often there until 10 pm.

    … In about June 1990, API being in financial difficulties, Mr Pelosi asked Miss Burch to put up her property as collateral security for its overdraft with the plaintiff, Credit Lyonnais Bank Nederland NV (the bank). She agreed to do so.

    

    API’s financial difficulties were not resolved and in due course it went into liquidation …

    

On 21 April 1994 the bank issued proceedings for possession and payment

    against Miss Burch …

    

    … [T]he recorder found without hesitation that there existed between Mr

    Pelosi and Miss Burch such a relationship of trust and confidence as to

    raise a presumption of undue influence…As between Miss Burch and the

    bank, he found that the bank knew that she was only an employee of API

    and, further, that the transaction was manifestly to her disadvantage. It

    knew that Mr Pelosi was putting forward, as the provider of collateral

    security for a possible debt of ?270,000, an employee of his company who

    had no interest in it as shareholder or director. He held that that was notice

    of facts which put the bank on inquiry. I respectfully agree.

Applying Barclays Bank plc v O’Brien [1993] 4 All ER 417, [1994] 1 AC

    180, the recorder then considered whether the bank had taken reasonable

    steps to satisfy itself that Miss Burch’s agreement to stand surety had been

    properly obtained. He answered that question in the negative…[H]e said:

    ‘What the defendant was not told was that the guarantee would cover the borrowing of the company, whatever facilities might later be given it, and,

    more important, she was not told what the proposed facilities were. It

    would have been very simple to inform the solicitors and ask them to pass

    onto the defendant that the company’s facility was ?250,000 and that this

    was to be increased to ?270,000. Those figures would have been required

    by any competent adviser advising the defendant about the wisdom of the

    transaction and without them it was impossible for her to give an informed

    consent to the transaction.’

In that passage the recorder identified … the truly astonishing feature of

    this case. Under the terms of the legal charge, Miss Burch was required …

    to guarantee without limit repayment of all API’s borrowings from the bank, present and future and of whatever kind, together with interest,

    commission, charges, legal and other costs, charges and expenses. All that

    was required … be it remembered, of someone who was a mere employee

    of API, to whom the only detriment in API’s collapse would have been the

    loss of her job …

    

    Since it was so manifestly disadvantageous to Miss Burch, the bank could

    not be said to have taken reasonable steps to avoid being fixed with

    constructive notice of Mr Pelosi’s undue influence over her when neither

    the potential extent of her liability had been explained to her nor had she

    received independent advice.

Full text

NOURSE LJ:

    This is a case in which it is sought to set aside a mortgage of residential property given as security for another’s debt on the ground that it was procured by the undue influence of the debtor over the mortgagor of which the mortgagee had notice. Thus, although the relationship between the debtor and the mortgagor was not that of persons living together but employer and employee, it may broadly be said to fall under Barclays Bank plc v O’Brien [1993] 4 All ER 417, [1994] 1 AC 180. At the same time, the terms of the mortgage were so harsh and unconscionable as to make it hardly necessary for a court of equity to rely on that decision as a basis for avoiding the transaction.

    It is convenient to start by stating those of the facts, as agreed or found by Mr Recorder Harrod in the court below, which are no longer in dispute. I can do so mainly in the recorder’s own words. In 1982 the defendant, Helen Burch, then aged 18, began to work for companies controlled by an Italian national called Andrea Pelosi. He was ten years older than she and she trusted him. She knew him to be a successful businessman and visited his substantial house in Gerrards Cross and his large villa in Italy. Her links with him were close. In addition to working for him during the day, she did baby-sitting at his home in the evenings and visited the family at weekends and for holidays in Italy. By the summer of 1990 Miss Burch was working for a company called A P International Travel Ltd (API), which carried on Mr Pelosi’s tour operating business. It was a very demanding job and she was deeply involved in it. At that time, she had almost no life apart from her work and was often there until 10 pm.

    In 1985 Miss Burch, with the assistance of a mortgage from the Halifax Building Society, had acquired a lease for 125 years from 25 March 1970 at an annual ground rent of ?25 rising to ?45, of a second floor one-bedroomed flat and garage at 8 Cornerways, Sudbury Court Road, Wembley, Middlesex. In about June 1990, API being in financial difficulties, Mr Pelosi asked Miss Burch to put up her property as collateral security for its overdraft with the plaintiff, Credit Lyonnais Bank Nederland NV (the bank). She agreed to do so.

    In evidence before the recorder was an internal memorandum of the bank from Mr David Herod, the manager of its London office, to Mr D Jones, in which it was stated that API required a facility of ?270,000 as opposed to the ?250,000 they were then working to. Mr Herod added that the bank was offered additional security in the form of a charge on Miss Burch’s property, which was valued at ?100,000 but was subject to a first mortgage of ?30,000.

    On 5 July 1990 the bank wrote to Messrs Belmont & Lowe, solicitors, informing them that Miss Burch had agreed to grant a second legal charge over the property to secure the borrowing of API and asking them to act for it on its behalf in connection with the transaction. Enclosed with the letter was the bank’s standard form of third party legal mortgage. The letter stated:

‘Miss Burch should, of course, be advised to take independent legal

    advice.’

    On 9 July Belmont & Lowe replied, accepting the instructions. The recorder thought that they had probably been suggested by Mr Pelosi to the bank because they had offices in London EC1, close to his own place of business.

    Also on 9 July Mr Martyn Whaley, a partner in Belmont & Lowe, wrote to Miss Burch at 8 Cornerways, informing her that they had been instructed by the bank in relation to the second legal charge over her home. He said:

‘Strictly speaking our instructions are to act for the bank. We must advise

    you that you should take separate legal advice upon the documentation you will be asked to sign and the underlying reasons behind the request and of course the potential risks you may face … Finally although I am acting for the bank I feel I must mention to you the fact that the document that you are being asked to sign is unlimited both in amount and in time. Is this actually what has been agreed?’

    On 16 July Mr Whaley telephoned Miss Burch and told her that he was unable to proceed until he received the title deeds from the Halifax Building Society. On the same day he wrote to her, referring to that conversation and his letter of 9 July. He said:

‘Could I please ask you to let me have written confirmation that

    notwithstanding what I have said in my letter of 9th July you still wish to

    proceed in this matter and that you will be taking separate legal advice on

    the documentation involved. I do not want to labour the point but you

    should be aware that the document you are being asked to sign is unlimited

    both in time and in amount and there is no provision or agreement so far as

    I am aware relating to you being released by the bank at any time in the

    near future. I look forward to hearing from you.’

On 17 July Mr Whaley wrote to Mr Pelosi, asking for ?50 on account of

    search fees as quickly as possible. On 18 July Mr Pelosi replied, enclosing

    a cheque for ?50 as requested. The letter ended:

‘I would like to thank you for your kind co-operation, and I would be

    grateful if you could do your utmost to expedite the completion of this

    matter.’

That letter was typed or printed on headed writing paper showing Mr

    Pelosi’s business address in London EC1.

Also on 18 July Miss Burch signed a typed or printed letter addressed to

    Mr Whaley, bearing her own address at 8 Cornerways. Although the

    recorder made no finding on the point, this letter appears to have been

    typed or printed on the same instrument as Mr Pelosi’s letter of the same

    date. It reads:

‘Thank you for your letter of 16 July, the contents of which I have noted.

    With reference to your letter of 9 July, I would like to confirm that I am

    fully aware of the implication of offering my property as a collateral for

    the increased overdraft facilities made available by CL Bank Nederland to

    AP International Travel Ltd. I also understand that such guarantee is

    unlimited both in time and amount, and I wish to offer such guarantee on

    this basis. I further understand from your recent conversation with Mr

    Pelosi that there is no objections to myself signing the necessary

    documents prior to the completion of your searches, and to this effect I

    would be grateful if you could call me on Tel 071 278 5319, to arrange a

    suitable time for me to come to your office.’

The recorder found that Miss Burch had discussed Mr Whaley’s letters to

    her of 9 and 16 July with Mr Pelosi and that he either prepared her reply of

    18 July for her or told her the effect of what he wanted her to say.

    On Friday, 20 July Miss Burch went with Mr Pelosi to Belmont & Lowe’s offices nearby and executed the legal charge. On Monday, 23 July Mr Whaley wrote to Miss Burch:

    ‘RE: A P INTERNATIONAL TRAVEL LIMITED I refer to our meeting last week. I have now spoken to CL Bank Nederland in relation to the Charge and they have confirmed what I told you and that is to say that the Charge is both unlimited in time and in amount. The Charge is to back a facility granted to AP International Travel Limited which is reviewed yearly.’

    The transaction was completed on 3 August, the legal charge being dated accordingly. By 10 August Belmont & Lowe’s fees had been duly paid, either by API or by Mr Pelosi himself. On 12 October 1990 Belmont & Lowe wrote to the Halifax Building Society informing them that registration of the legal charge had been completed.

    The legal charge, which was executed in the standard form sent by the bank to Belmont & Lowe on 5 July, was made between Miss Burch as mortgagor of the one part and the bank as mortgagee of the other part. The obligations assumed by Miss Burch were onerous in the extreme. The first part of cl 2 provides:

    ‘[Miss Burch] HEREBY COVENANTS with the Bank to pay satisfy and discharge to the Bank on demand all such sums of money and liabilities whether certain or contingent which are now or at any time hereafter may be due owing or incurred by [API] to the Bank or for which [API] may be or become liable on any current or other áccount or in any manner whatever and whether alone or jointly with any other or others in partnership or otherwise and in whatever names style or firm and whether as principal surety or otherwise anywhere upon any account or in respect of bills of exchange cheques notes or other instruments drawn endorsed or accepted by [API] or for any other reason whatsoever together with interest to the date of repayment commission banking charges legal and other costs charges and expenses …’

    Clause 3 provides for the bank’s costs, charges and expenses to be charged on the mortgaged property. By cl 4 Miss Burch charged the property by way of legal mortgage with the payment to the bank of the principal money, liabilities, interest and other moneys thereby covenanted to be paid by her.

    API’s financial difficulties were not resolved and in due course it went into liquidation. By August 1992 Mr Pelosi’s house in Gerrards Cross had been

    sold and he had gone to live in Italy. From the beginning of June 1993 the bank unsuccessfully pressed him to make firm proposals for the repayment of API’s residual debt, which then stood in the region of ?56,000. On 18

    April 1994 it made a formal demand on Miss Burch under the legal charge in the sum of ?60,249.12. That was followed by a solicitor’s letter on 29 June and a visit by Miss Burch to the bank on 5 July, at which Mr Herod recorded her as remaining very loyal to Mr Pelosi and confident that the bank would be repaid.

    In early September she went to Italy to see what could be done. She came back with a letter from Mr Pelosi to Mr Herod brimming with charm and airy promises and a cheque for ?700. The bank required Mr Pelosi thereafter to make monthly payments of ?750, but none were made.

    On 21 April 1994 the bank issued proceedings for possession and payment against Miss Burch in the Willesden County Court. By that time it had closed its London office and was acting through the agency of Hampshire Trust plc. On 25 September 1995 Miss Burch put in a defence and counterclaim, in which she alleged that she was induced to enter into the legal charge as a result of a misrepresentation made by Mr Pelosi, further or alternatively, by the undue influence he had exerted over her. She further alleged that the bank, further or alternatively, its agents, Belmont & Lowe, were on notice, actual or constructive, of the misrepresentation and undue influence. She denied the bank’s right to possession of the property

    and counterclaimed for a declaration that the legal charge was unenforceable against her.

    The action came for trial before Mr Recorder Harrod on 12 November 1995. On the following day he gave judgment for Miss Burch and made an order dismissing the bank’s application and setting the legal charge aside. He gave Miss Burch her costs on scale 2 and granted the bank leave to appeal to this court.

    The recorder heard evidence from Miss Burch and Mr Whaley. Neither Mr Herod nor any other officer or employee of the bank gave evidence. Indeed, the two affidavits put in on behalf of the bank were sworn by an employee of Hampshire Trust plc, who had no first hand knowledge of the events of June and July 1990 and gave no second hand evidence of them either.

    When tendered for cross-examination he merely confirmed that he had no first hand knowledge. Mr Pelosi did not give evidence.

    The recorder found that Mr Pelosi had explained to Miss Burch before 26 June 1990 that API was in financial difficulties, that it needed to extend its overdraft with the bank by ?20,000 and that, if he could not provide collateral security for the extension, API would fail and Miss Burch would be out of a job. He was, however, satisfied that Mr Pelosi did not tell Miss Burch the extent of API’s borrowing. In other words, he did not tell her that the current borrowings were at least ?163,000, that the limit already stood at ?250,000 and that the proposal was to extend it to ?270,000. The recorder also found that, in order to reassure Miss Burch, Mr Pelosi told her that his own house in England and his villa in Italy could be sold to pay off all the debts but that the bank would not lend up to 100% of their value. He told Miss Burch that in consequence, her mortgage would not be called on.

    Having made those findings, the recorder rejected the case based on misrepresentation. It has not been sought to revive it in this court. Turning to the case based on undue influence, the recorder found without hesitation that there existed between Mr Pelosi and Miss Burch such a relationship of trust and confidence as to raise a presumption of undue influence. He said that if she had been seeking to set aside the legal charge as against API, she would certainly have succeeded. As between Miss Burch and the bank, he found that the bank knew that she was only an employee of API and, further, that the transaction was manifestly to her disadvantage. It knew that Mr Pelosi was putting forward, as the provider of collateral security for a possible debt of ?270,000, an employee of his company who had no interest in it as shareholder or director. He held that that was notice of facts which put the bank on inquiry. I respectfully agree.

Applying Barclays Bank plc v O’Brien [1993] 4 All ER 417, [1994] 1 AC

    180, the recorder then considered whether the bank had taken reasonable steps to satisfy itself that Miss Burch’s agreement to stand surety had been properly obtained. He answered that question in the negative. Having observed that Miss Burch had been told repeatedly that the mortgage was unlimited in time and amount, he said:

    ‘Was this enough? I do not think so. What the defendant was not told was that the guarantee would cover the borrowing of the company, whatever facilities might later be given it, and, more important, she was not told

    what the proposed facilities were. It would have been very simple to inform the solicitors and ask them to pass onto the defendant that the company’s facility was ?250,000 and that this was to be increased to

    ?270,000. Those figures would have been required by any competent adviser advising the defendant about the wisdom of the transaction and without them it was impossible for her to give an informed consent to the transaction.’

    In that passage the recorder identified, although without pejorative comment, the truly astonishing feature of this case. Under the terms of the legal charge, Miss Burch was required not simply to pledge her home as security for the ?20,000 extension; she was required to pledge it without limit. Worse than that, she was required to enter into a personal covenant guaranteeing not simply repayment of the additional ?20,000, nor even repayment up to the new limit of ?270,000; she was required to guarantee without limit repayment of all API’s borrowings from the bank, present

    and future and of whatever kind, together with interest, commission, charges, legal and other costs, charges and expenses. All that was required as the price of extending the limit by no more than ?20,000 and, be it remembered, of someone who was a mere employee of API, to whom the only detriment in API’s collapse would have been the loss of her job. It could not have helped the bank to say that it used its standard form. A mortgagee who uses such a form without regard to its impact on the individual case acts at his peril.

    On that state of facts it must, I think, have been very well arguable that Miss Burch could, directly against the bank, have had the legal charge set aside as an unconscionable bargain. Equity’s jurisdiction to relieve against

    such transactions, although more rarely exercised in modern times, is at least as venerable as its jurisdiction to relieve against those procured by undue influence. In Fry v Lane, re Fry, Whittet v Bush (1889) 40 Ch D 312 at 322, [188690] All ER Rep 1084 at 1089, where sales of reversionary

    interests at considerable undervalues by poor and ignorant persons were set aside, Kay J, having reviewed the earlier authorities, said:

‘The result of the decisions is that where a purchase is made from a poor

    and ignorant man at a considerable undervalue, the vendor having no independent advice, a Court of Equity will set aside the transaction. This will be done even in the case of property in possession, and a fortiori if the interest be reversionary. The circumstances of poverty and ignorance of the vendor, and absence of independent advice, throw upon the purchaser,

when the transaction is impeached, the onus of proving, in Lord Selborne’s

    words, that the purchase was ‘fair, just, and reasonable’.’

Lord Selborne LC’s words will be found in Earl of Aylesford v Morris

    (1873) LR 8 Ch App 484 at 491, [186173] All ER Rep 300 at 303. The

    decision of Megarry J in Cresswell v Potter [1978] 1 WLR 255 at 257

    where he suggested that the modern equivalent of ‘poor and ignorant’

    might be ‘a member of the lower income group … less highly educated’,

    demonstrates that the jurisdiction is in good heart and capable of

    adaptation to different transactions entered into in changing circumstances.

    See also the interesting judgment of Balcombe J in Backhouse v

    Backhouse [1978] 1 All ER 1158 at 11656, [1978] 1 WLR 243 at 250

    252, where he suggested that these cases may come under the general

    heading which Lord Denning MR referred to in Lloyds Bank Ltd v Bundy

    [1974] 3 All ER 757 at 765, [1975] QB 326 at 339 as ‘inequality of

    bargaining power’.

A case based on an unconscionable bargain not having been made below, a

    decision of this court cannot be rested on that ground. But the

    unconscionability of the transaction remains of direct materiality to the

    case based on undue influence. Since it was so manifestly disadvantageous

    to Miss Burch, the bank could not be said to have taken reasonable steps to

    avoid being fixed with constructive notice of Mr Pelosi’s undue influence

    over her when neither the potential extent of her liability had been

    explained to her nor had she received independent advice.

As to the first of those requirements, I agree with the recorder that it was

    not enough for Miss Burch to be told repeatedly that the mortgage was

    unlimited in time and amount. She could not assess the significance of that

    without being told of the extent of API’s current borrowings and the

    current limit. She might have thought that the limit was only being

    extended from ?10,000 to ?30,000. Had she known that API’s failure

    could have exposed her, on the figures then current, to the loss of her home

    and a personal debt of ?200,000 on top, her reaction would have been very

    different.

As to the second requirement, it 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. That is because the first thing an

    independent solicitor would have done, on looking at cl 2 of the draft legal

    charge, was to inquire as to the extent of API’s current borrowings and the

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