Credit Lyonnais Bank Nederland NV v Burch [1997]

Credit Lyonnais Bank Nederland NV v Burch [1997] 1 All ER 144 is an English contract law case that dealt with undue influence.

The defendant had been employed by a businessman, Mr Pelosi, since the age of 18, working for various businesses under Pelosi's ownership. In 1985, at the age of 21, the defendant purchased a flat. In 1990, facing financial difficulties, Mr Pelosi requested the defendant to offer her flat as security against an overdraft facility for his business. The bank's solicitors advised the defendant to seek independent legal advice before agreeing to this arrangement, highlighting the unlimited nature of the guarantee.

Despite the warning, the defendant, after discussions with Pelosi, agreed to the arrangement, unaware of the extent of borrowing. She was assured that her mortgage would not be invoked, and Pelosi's properties would be looked to first as security. A charge was executed over the defendant's property in August 1990. In 1994, Pelosi's business went into liquidation, and the bank demanded $60,249.12 from the defendant.

The defendant raised the defence of undue influence, claiming that Pelosi had induced her to enter the agreement, and the bank had constructive notice of this undue influence, rendering their right to enforce the debt recovery against her void.

The court held that the bank did have constructive notice of the relationship between the parties and had not done enough to alleviate concerns of undue influence. The key determinations were:
  1. An employer/employee relationship could develop into a relationship for undue influence.
  2. Lack of benefit to the defendant in the agreement was evidence enough, and sexual or emotional ties were not required to establish undue influence.
  3. The information supplied by the bank was not sufficient to escape constructive notice, as it did not allow the defendant to comprehend the gravity of the company's borrowing.
  4. The bank had not taken all reasonable steps to address concerns about undue influence. The defendant not seeking independent advice, based on the bank's advice, should have raised confirmation of undue influence.

This case emphasises the court's scrutiny of contracts involving power imbalances, especially in relationships where one party holds significant influence over the other. The duty to protect the vulnerable party is underscored, and constructive notice becomes crucial in determining the enforceability of such contracts.
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