National Westminster Bank plc v Morgan


[1985] 2 WLR 588

House of Lords


Mr Morgan's business was in financial trouble and as a result he fell into arrears with his mortgage repayments to the Abbey National Building Society who took proceedings for possession of his house. His bank, National Westminster Bank, offered to help him out of his financial difficulties by offering him a £14,500 bridging loan subject to a legal charge on his and his wife's house. Mr Morgan signed the charge but in order to get his wife's signature Barrow, the assistant bank manager, called on Mrs Morgan at the house. Mrs Morgan was concerned that the document which she was being asked to sign might enable the husband to borrow from the bank for business purposes. She wanted the charge confined to paying off the Abbey National and to the provision of bridging finance for about five weeks. She told Barrow that she had no confidence in her husband's business ability and did not want the mortgage to cover his business liabilities. Mr Barrow advised her that the cover was so limited. She expressed her gratitude to the bank for saving their home and she signed the document. Mr Morgan failed to repay the loan and the bank took proceedings for possession of the house. Mrs Morgan claimed that the charge should be set aside on the grounds of undue influence.


Lord Scarman


Such was the interview in which it is said that Mr Barrow crossed the line which divides a normal business relationship from one of undue influence. I am bound to say that the facts appear to me to be a far cry from a relationship of undue influence or from a transaction in which an unfair advantage was obtained by one party over the other. The trial judge clearly so thought: for he stated his reasons for rejecting Mrs Morgan's case with admirable brevity. He made abundantly clear his view that the relationship between Mr Barrow and Mrs Morgan never went beyond that of a banker and customer, that Mrs Morgan had made up her own mind that she was ready to give the charge, and that the one piece of advice (as to the legal effect of the charge) which Mr Barrow did give, though erroneous as to the terms of the charge, correctly represented his intention and that of the bank...


The Court of Appeal disagreed. The two Lords Justices who constituted the court, Dunn and Slade LJJ (surely it should have been a court of three?) put an interpretation upon the facts very different from that of the judge: they also differed from him on the law.


As to the facts, I am far from being persuaded that the trial judge fell into error when he concluded that the relationship between the bank and Mrs Morgan never went beyond the normal business relationship of banker and customer. Both Lord Justices saw the relationship between the bank and Mrs Morgan as one of confidence in which she was relying on the bank manager's advice. Each recognised the personal honesty, integrity, and good faith of Mr Barrow. Each took the view that the confidentiality of the relationship was such as to impose upon him a 'fiduciary duty of care.' It was his duty, in their view, to ensure that Mrs Morgan had the opportunity to make an independent and informed decision: but he failed to give her any such opportunity. They, therefore, concluded that it was a case for the presumption of undue influence.


My Lords, I believe that the Lords Justices were led into a misinterpretation of the facts by their use, as is all too frequent in this branch of the law, of words and phrases such as 'confidence', 'confidentiality,' 'fiduciary duty.' There are plenty of confidential relationships which do not give rise to the presumption of undue influence (a notable example is that of husband and wife, Bank of Montreal v Stuart; and there are plenty of non-confidential relationships in which one person relies upon the advice of another, eg many contracts for the sale of goods. Nor am I persuaded that the charge, limited as it was by Mr Barrow's declaration to securing the loan to pay off the Abbey National debt and interest during the bridging period, was disadvantageous to Mrs Morgan. It meant for her the rescue of her home upon the terms sought by her - a short-term loan at a commercial rate of interest. The Court of Appeal has not, therefore, persuaded me that the judge's understanding of the facts was incorrect.


But, further, the view of the law expressed by the Court of Appeal was, as I shall endeavour to show, mistaken. Dunn LJ, while accepting that in all the reported cases to which the court was referred the transactions were disadvantageous to the person influenced, took the view that in cases where public policy requires the court to apply the presumption of undue influence there is no need to prove a disadvantageous transaction. Slade LJ also clearly held that it was not necessary to prove a disadvantageous transaction where the relationship of influence was proved to exist. Basing himself on the judgement of Cotton LJ in Allcard v Skinner...


Like Dunn LJ, I know of no reported authority where the transaction set aside was not to the manifest disadvantage of the person influenced. It would not always be a gift: it can be a 'hard and inequitable' agreement (Ormes v Beadel); or a transaction 'immoderate and irrational' (Bank of Montreal v Stuart) or 'unconscionable' in that it was a sale at an undervalue (Poosathurai v Kannappa Chettiar). Whatever the legal character of the transaction, the authorities show that it must constitute a disadvantage sufficiently serious to require evidence to rebut the presumption that in the circumstances of the relationship between the parties it was procured by the exercise of undue influence. In my judgement, therefore, the Court of Appeal erred in law in holding that the presumption of undue influence can arise from the evidence of the relationship of the parties without also evidence that the transaction itself was wrongful in that it constituted an advantage taken of the person subjected to the influence which, failing proof to the contrary, was explicable only on the basis that undue influence had been exercised to procure it.


The principle justifying the court in setting aside a transaction for undue influence can now be seen to have been established by Lindley LJ in Allcard v Skinner. It is not a vague 'public policy' but specifically the victimisation of one party by the other. It was stated by Lindley LJ in a famous passage:


'The principle must be examined. What then is the principle? Is it that it is right and expedient to save persons from the consequences of their own folly? or is it that it is right and expedient to save them from being victimised by other people? In my opinion the doctrine of undue influence is founded upon the second of these two principles. Courts of equity have never set aside gifts on the ground of the folly, imprudence, or want of foresight on the part of donors. The courts have always repudiated any such jurisdiction. Huguenin v Baseley is itself a clear authority to this effect. It would obviously be to encourage folly, recklessness, extravagance and vice if persons could get back property which they foolishly made away with, whether by giving it to charitable institutions or by bestowing it on less worthy objects. On the other hand, to protect people from being forced, tricked or misled in any way by others into parting with their property is one of the most legitimate objects of all laws; and all equitable doctrine of undue influence has grown out of and been developed by the necessity of grappling with insidious forms of spiritual tyranny and with the infinite varieties of fraud.'...


Subsequent authority supports the view of the law as expressed by Lindley LJ in Allcard v Skinner. The need to show that the transaction is wrongful in the sense explained by Lindley LJ before the court will set aside a transaction whether relying on evidence or the presumption of the exercise of undue influence has been asserted in two Privy Council cases...


The wrongfulness of the transaction must, therefore, be shown: it must be one in which an unfair advantage has been taken of another. The doctrine is not limited to transactions of gift. A commercial relationship can become a relationship in which one party assumes a role of dominating influence over the other. In Poosathurai's case, the Board recognised that a sale at an undervalue could be a transaction which a court could set aside as unconscionable if it was shown or could be presumed to have been procured by the exercise of undue influence. Similarly a relationship of banker and customer may become one in which the banker acquires a dominating influence. If he does and a manifestly disadvantageous transaction is proved, there would then be room for the court to presume that it resulted from the exercise of undue influence.