England and Wales Court of Appeal (Civil Division) Decisions

IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE WILLESDEN COUNTY COURT
(Mr. Recorder Harrod)

		Royal Courts of Justice Strand, London WC2
		Thursday, 20th June 1996

Thursday, 20th June 1996

LORD JUSTICE NOURSE:

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 [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 learned 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 AP 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 o'clock at night.

In 1985 Miss Burch, with the assistance of a mortgage from the Halifax Building Society, had acquired a lease for 125 years from 25th 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 5th July the Bank wrote to 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 9th 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 9th 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 16th 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 9th 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 17th July Mr Whaley wrote to Mr Pelosi, asking for £50 on account of search fees as quickly as possible. On 18th 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 18th 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 9th and 16th July with Mr Pelosi and that he either prepared her reply of 18th July for her or told her the effect of what he wanted her to say.

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

"RE: AP 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 3rd August, the legal charge being dated accordingly. By 10th August Belmont & Lowe's fees had been duly paid, either by API or by Mr Pelosi himself. On 12th 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 5th 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 clause 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 account 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 clause 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 18th 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 29th June and a visit by Miss Burch to the Bank on 5th 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 was made.

On 21st 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 25th 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 12th 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 26th 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 one hundred per cent 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 enquiry. I respectfully agree.

Applying Barclays Bank v. O'Brien, 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 on to 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 (1888) 40 ChD 312, where sales of reversionary interests at considerable undervalues by poor and ignorant persons were set aside, Kay J, having reviewed the earlier authorities, said, at p.322:

"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's words will be found in Earl of Aylesford v. Morris (1873) 8 Ch.App. 484, 491. The decision of Megarry J in Cresswell v. Potter [1978] 1 WLR 255, where he suggested that the modern equivalent of "poor and ignorant" might be "less highly educated members of the lower income group", 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 WLR 243, 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 [1975] QB 326, 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 clause 2 of the draft legal charge, was to enquire as to the extent of API's current borrowings and the current limit and, on receiving the answers, to advise Miss Burch that she should not on any account enter into a transaction in that form.

In her valiant argument on behalf of the Bank Miss Purkis, in addition to disputing the recorder's decision in regard to the matters already discussed, attacked his finding that there existed between Mr Pelosi and Miss Burch such a relationship of trust and confidence as to raise a presumption of undue influence. There was ample evidence on which that finding could be made. Indeed, the recorder's findings as to how Miss Burch's letter of 18th July came to be written suggest that this could have been treated as a case of actual undue influence. In any event, that part of his decision is as unassailable as any other. This is as clear a case for the setting aside of a transaction as against a mortgagee as it is possible to think of. The appeal is hopeless and must be dismissed.

LORD JUSTICE MILLETT:

This transaction cannot possibly stand.

This is sufficiently demonstrated by a recital of the principal facts. Mr. Pelosi was the alter ego of his company. The company ran a small business and had an overdraft facility with its bank. The overdraft was operating within an agreed limit of £250,000. Mr. Pelosi asked the bank to increase the limit of the facility to £270,000. The bank agreed but required additional security to be provided. So far the story is familiar, even commonplace. What follows, I hope, is not.

Mr. Pelosi provided the bank with an unlimited all moneys guarantee given by the Respondent at his request. She was a junior employee of the company employed at a modest wage. She was not a director of the company or shareholder in it. Her guarantee was supported by a second charge on her home, a small flat of suitably modest value which was valued at £100,000 and was subject to a mortgage of £30,000. She understood that the guarantee and charge were unlimited in time and amount, but she had not taken independent legal advice.

No court of equity could allow such a transaction to stand. The facts which I have recited are sufficient to entitle the Respondent to have the transaction set aside as against Mr. Pelosi and the Company. Every one of those facts was known to the bank when it accepted the security. The bank must accordingly be taken to have had notice of the Respondent's equity, and must submit to the transaction being set aside against it also.

An eighteenth century Lord Chancellor would have contented himself with saying as much. It is an extreme case. The transaction was not merely to the manifest disadvantage of the Respondent; it was one which, in the traditional phrase, "shocks the conscience of the court." The Respondent committed herself to a personal liability far beyond her slender means, risking the loss of her home and personal bankruptcy, and obtained nothing in return beyond a relatively small and possibly temporary increase in the overdraft facility available to her employer, a company in which she had no financial interest. The transaction gives rise to grave suspicion. It cries aloud for an explanation.

The Respondent did not seek to have the transaction set aside as a harsh and unconscionable bargain. To do so she would have had to show not only that the terms of the transaction were harsh or oppressive, but that "one of the parties to it has imposed the objectionable terms in a morally reprehensible manner, that is to say, in a way which affects his conscience": Multi-Service Bookbinding Ltd. v. Monden [1979] Ch. 84, 110 per Browne-Wilkinson J; and see Alec Lobb Ltd. v. Total Oil [1983] 1 WLR 87 at pp. 94-5 where I pointed out that there must be some impropriety, both in the conduct of the stronger party and in the terms of the transaction itself, but added that "the former may often be inferred from the latter in the absence of an innocent explanation."

In the present case the bank did not obtain the guarantee directly from the Respondent. It was provided to the bank by Mr. Pelosi, who obtained it from the Respondent by the exercise of undue influence. In such a context the two equitable jurisdictions (to set aside harsh and unconscionable bargains and to set aside transactions obtained by undue influence) have many similarities. In either case it is necessary to show that the conscience of the party who seeks to uphold the transaction was affected by notice, actual or constructive, of the impropriety by which it was obtained by the intermediary, and in either case the court may in a proper case infer the presence of the impropriety from the terms of the transaction itself.

In saying this I do not dissent from the observations of Sir John Salmond in Brusewitz v Brown [1923] NZLR 1106 at p. 1109-10 where he said:

"The mere fact that a transaction is based on an inadequate consideration or is otherwise improvident, unreasonable or unjust is not in itself any ground on which the Court can set it aside as invalid. Nor is such a circumstance in itself even a sufficient ground for a presumption that the transaction was the result of fraud, misrepresentation, mistake or undue influence, so as to place the burden of supporting the transaction upon the person who profits by it. The law in general leaves every man at liberty to make such bargains as he pleases, and to dispose of his own property as he chooses. However improvident, unreasonable, or unjust such bargains or dispositions may be, they are binding on every party to them unless he can prove affirmatively the existence of one of the recognised invalidating circumstances, such as fraud or undue influence."

But Sir John proceeded to describe an important exception:

"Where there is not merely an absence or inadequacy of consideration for the transfer of property, but there also exists between the grantor and the grantee some special relation of confidence, control, domination, influence or other form of superiority, such as to render reasonable a presumption that the transaction was procured by the grantee by some unconscientious use of his power over the grantor, the law will make that presumption.... The commonest and most important instances of this presumption are those cases in which the relation between the parties is some recognised legal relationship of confidence, such as that existing between solicitor and client and between trustee and beneficiary. The rule, however, is not limited to any exclusive and defined list of recognised legal relations. It is quite general in its application. The question in each case is...did there exist between [the parties] such a relation of superiority on the one side and inferiority on the other (whatever the source or nature of that superiority or inferiority may be), and therefore such an opportunity and temptation for the unconscientious abuse of the power and influence so possessed by the superior party, as to justify the legal presumption

that such an abuse actually took place and that the transaction was procured thereby?"

This is an early description of the threefold classification adopted by the Court of Appeal in Bank of Credit Commerce International SA v Aboody [1900] 1 QB 923, 953, which was approved by the House of Lords in Barclays Bank plc v O'Brien [1994] 1 AC 180,189. This classifies cases of undue influence in three categories: Class 1 where the complainant proves affirmatively that she was induced to enter into the transaction by the exercise of undue influence upon her; Class 2A where she need prove, in the first instance, only the existence of a relationship between her and the wrongdoer of a kind which is sufficient in law to give rise to a rebuttable presumption that any transaction between them which is favourable to the wrongdoer has been obtained by the exercise of undue influence; and Class 2B where she must prove the existence in fact of a relationship between her and the wrongdoer which, although not of a kind which falls within Class 2A, was one under which the complainant was accustomed to repose trust and confidence in the wrongdoer, in which case the same rebuttable presumption arises. The difference between Class 2A and Class 2B is that in the former case there is an irrebuttable presumption of law that the relationship is one of trust and confidence; in the latter this must be proved as a fact. (I refer throughout for convenience to the complainant as a woman and the wrongdoer as a man, because that is the present case; but it is not of course always the case.)

In the present case the only relationship between Mr. Pelosi (and his company) on the one hand and the Respondent on the other which has been proved (and of which the bank had any knowledge) was that of employer and junior employee. That is not a relationship within Class 2A. At the same time, it is clearly one which is capable of developing into a relationship of trust and confidence with the attendant risk of abuse, particularly in the case of a small business where the parties are accustomed to work closely together.

Accordingly, it was for the Respondent to prove that the relationship between her and Mr. Pelosi had developed into a relationship of trust and confidence. Whether it had done so or not was a question of fact. While she had to prove this affirmatively, she did not have to prove it as a primary fact by direct evidence. It was sufficient for her to prove facts from which the existence of a relationship of trust and confidence could be inferred. In the present case the excessively onerous nature of the transaction into which she was persuaded to enter, coupled with the fact that she did so at the request of and after discussion with Mr. Pelosi, is in my judgment quite enough to justify the inference, which is really irresistible, that the relationship of employer and employee had ripened into something more and that there had come into existence between them a relationship of trust and confidence which he improperly exploited for his own benefit.

I do not accept the bank's submission that this conclusion is inconsistent with the authorities. I repeat that the mere fact that a transaction is improvident or manifestly disadvantageous to one party is not sufficient by itself to give rise to a presumption that it has been obtained by the exercise of undue influence; but where it is obtained by a party between whom and the complainant there is a relationship like that of employer and junior employee which is easily capable of developing into a relationship of trust and confidence, the nature of the transaction may be sufficient to justify the inference that such a development has taken place; and where the transaction is so extravagantly improvident that it is virtually inexplicable on any other basis, the inference will be readily drawn.

The bank submitted that in the absence of evidence that there was a sexual or emotional tie between Mr. Pelosi and the Respondent the facts were insufficient to justify the Judge's finding that there was a relationship of confidence between them; and that, in the absence of evidence that the bank was aware of such a tie between Mr. Pelosi and the Respondent, the facts known to the bank were insufficient to fix it with notice of the existence of a relationship of trust and confidence between them. I do not accept this. The presence of a sexual or emotional tie would at least make the transaction explicable. A wife might well consider (and be properly advised) that it was in her interest to provide a (suitably limited) guarantee of her husband's business borrowings and to charge it on her interest in the matrimonial home, even if she had no legal interest in the company which owned the business. Her livelihood and that of her family would no doubt depend on the success of the business; and a refusal to entertain her husband's importunity might put at risk the marital relationship as well as the continued prosperity of herself and her family. Similar considerations would no doubt influence a cohabitee and her adviser.

But the Respondent had no such incentive to induce her to enter into the transaction. No competent solicitor could possibly have advised her to enter into it. He would be bound to warn her against it in the strongest possible terms, and to have refrained from acting for her further if she had persisted in it against his advice: see Powell v Powell, [1900] 1 Ch.243,247.

The bank had actual notice of the facts from which the existence of a relationship of trust and confidence between Mr.Pelosi and the Respondent could be inferred. It knew that they were respectively employer and junior employee working in a small business, and should have "appreciated that the possibility of influence existed": see Avon Finance Co. Ltd. v Bridger [1985] 2 All ER 281 at p. 288 per Brandon LJ. It also knew that the Respondent was neither a shareholder nor a director of the company and, so far as it knew, had no incentive to enter into the transaction which was entirely for his benefit and to her detriment. This was sufficient to put the bank on inquiry. It probably appreciated this, or it would not have encouraged the Respondent to take legal advice.

The bank submitted that it had discharged its duty to the Respondent by urging her to obtain independent legal advice. This does not accurately reflect the legal position. The bank owed no duty to the Respondent. If it urged the Respondent to take independent legal advice, this was for its own protection. If it had not had cause to suspect that the Respondent's agreement to enter into the transaction might have been improperly obtained, it would have had no need to encourage her to take legal advice. Since it did have cause to suspect it, it could not avoid the consequences unless two conditions were satisfied: (i) it must have taken reasonable steps to allay any such suspicion; and (ii) the result of the steps which it took must be such as would reasonably allay any such suspicion.

The bank urged the Respondent to obtain independent legal advice. In a letter obviously written at the instance of Mr. Pelosi and after consultation with him, she declined to do so. The bank had taken all reasonable steps open to it to allay any suspicion it might have had that the Respondent's agreement to the transaction had been procured by the exercise of undue influence on the part of Mr. Pelosi. But what followed could not reasonably have allayed any such suspicion; on the contrary it should have confirmed it.

That is sufficient to dispose of this appeal, but I should not be taken to accept that it would necessarily have made any difference even if the Respondent had entered into the transaction after taking independent legal advice. Such advice is neither always necessary nor always sufficient. It is not a panacea. The result does not depend mechanically on the presence or absence of legal advice. I think that there has been some misunderstanding of the role which the obtaining of independent legal advice plays in these cases.

It is first necessary to consider the position as between the complainant and the alleged wrongdoer. The alleged wrongdoer may seek to rebut the presumption that the transaction was obtained by undue influence by showing that the complainant had the benefit of independent legal advice before entering into it. It is well established that in such a case the court will examine the advice which was actually given. It is not sufficient that the solicitor has satisfied himself that the complainant understands the legal effect of the transaction and intends to enter into it. That may be a protection against mistake or misrepresentation: it is no protection against undue influence. As Lord Eldon said in Huguenin v Baseley (1807),14 Ves. 273: "the question is not whether she knew what she was doing, had done or was proposing to do, but how the intention was produced."

Accordingly, the presumption cannot be rebutted by evidence that the complainant understood what she was doing and intended to do it. The alleged wrongdoer can rebut the presumption only by showing that the complainant was either free from any undue influence on his part or had been placed, by the receipt of independent advice, in an equivalent position. That involves showing that she was advised as to the propriety of the transaction by an adviser fully informed of all the material facts: see Powell v Powell (supra); Brusewitz v Brown (supra); Permanent Trustee Co. of New South Wales Ltd. v Bridgewater [1936] 3 All ER 501,507; Bester v Perpetual Trustee Co. Ltd. [1970] 3 NSWR 30.

Some of those cases were concerned with the equity to set aside a harsh and unconscionable bargain rather than one obtained by the exercise of undue influence, but the role of the independent adviser, while not identical, is not dissimilar. The solicitor may not be concerned to protect the complainant against herself, but he is concerned to protect her from the influence of the wrongdoer. The cases show that it is not sufficient that she should have received independent advice unless she has acted on that advice; if this were not so, the same influence that produced her desire to enter into the transaction would cause her

to disregard any advice not to do so. They also show that the solicitor must not be content to satisfy himself that his client understands the transaction and wishes to carry it out. His duty is to satisfy himself that the transaction is one which his client could sensibly enter into if free from improper influence; and if he is not so satisfied to advise her not to enter into it, and to refuse to act further for her if she persists. He must advise his client that she is under no obligation to enter into the transaction at all and, if she still wishes to do so, that she is not necessarily bound to accept the terms of any document which has been put before her but (where this is appropriate) that he should ascertain on her behalf whether less onerous terms might be obtained.

It is next necessary to consider the position of

the third party who has been put on enquiry of the possible existence of some impropriety and who wishes to avoid being fixed with constructive notice. One means of doing so is to ensure that the complainant obtains competent and independent legal advice before entering into the transaction. If she does so, and enters into the transaction nonetheless, the third party will usually escape the consequences of notice. This is because he is normally entitled to assume that the solicitor has discharged his duty and that the complainant has followed his advice. But he cannot make any such assumption if he knows or ought to know that it is false.

In the present case the bank did not have actual notice of the exercise of undue influence, or even of the existence of a relationship of trust and confidence between the Respondent and Mr. Pelosi. It did not know for a fact that the Respondent had no incentive to enter into the transaction. For all the bank knew, for example, the parties might be intending to set up home together and live off the profits of the company's business. It did not, therefore, know (as was the case) that no competent solicitor could possibly advise the Respondent to guarantee the company's overdraft.

But it must have known that no competent solicitor could advise her to enter into a guarantee in the terms she did. He would be bound to enquire, of the bank if necessary, of the reason why it required additional security. Having discovered that it was to enable the limit of the company's overdraft to be increased from £250,000 to £270,000, he would be bound to advise the Respondent that an unlimited guarantee was unnecessary and inappropriate for this purpose, and that, if she felt that she must accommodate Mr. Pelosi's wishes, she should offer a limited guarantee with a limit of £20,000 or ( better still) a guarantee of the company's liability in excess of £250,000 with a maximum of £270,000. The terms of the Respondent's letters indicate that if she had been given appropriate advice of the alternatives which were legally available, she would have chosen one which was less onerous to her while still meeting the bank's ostensible requirements.

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.

In the present case the bank accepted an unlimited guarantee of her employer's indebtedness obtained by the employer from a junior employee with no incentive to give it; and who had, at the instance of her employer, declined to obtain legal advice, was known to be concerned at the unlimited nature of the obligation which she was undertaking, and was almost certainly unaware of the alternatives open to her. In my opinion the transaction must be set aside and the appeal must be dismissed.

LORD JUSTICE SWINTON THOMAS:

I have had the advantage of reading the judgment of Nourse, L.J. I agree with it and gratefully adopt his recitation of the material facts.

In considering the issues as to whether there was a relationship of trust and confidence giving rise to a presumption of undue influence between Miss Burch and Mr. Pelosi, whether the Bank had express or constructive notice of that relationship, and whether the Bank had discharged its duty towards Miss Burch, it is necessary to consider the material facts in the round. In my judgment the important facts were these:

(1) Miss Burch was a young woman in her twenties.

(2) She was an employee of the company A.P.I. (There was no suggestion of any emotional relationship between her and Mr. Pelosi).

(3) She was a relevantly junior employee, a Booking Clerk, earning £12,000 to £14,000 per annum.

(4) She lived in a flat valued at £100,000 with a mortgage of £30,000, and consequently an equity of £70,000.

(5) She was being asked to enter into a charge whereby she made herself liable to discharge the liability of the Company to the Bank in the sum of £270,000, and mortgaged her home to the Bank.

(6) At the time that she entered into the charge, the indebtedness of the Company to the Bank was at least £163,000 and was likely to rise to £270,000 as the Company required an increase in their Bank overdraft facility from £250,000 to £270,000.

(7) Miss Burch was not at any time told of the company's current indebtedness to the Bank, or the extent of the overdraft facility being granted.

I have no hesitation in upholding the Recorder's finding that there was, on the facts of this case, a relationship of trust and confidence as between Mr. Pelosi and Miss Burch giving rise to a presumption of undue influence, and there was no evidence to rebut that presumption. I accept the submission made by Miss Purkis on behalf of the Bank that the Courts must be cautious in their application of the principles set out by Lord Browne-Wilkinson in his speech in Barclays Bank v. O'Brien [1994] 1 AC 180. If they are not, then Banks, in their turn, will become over-cautious in granting overdraft facilities to the detriment of their customers. Certainly, in many cases, no presumption will arise in the case of an employer/employee relationship. However in this case the facts speak for themselves, and, in my judgment any neutral bystander, looking at the facts without evidence in rebuttal, would have no difficulty in drawing the overwhelming inference that there was undue influence by Mr. Pelosi on his young employee.

As to notice, Mr. Herod, the Manager of the relevant Branch of the Bank, who arranged the overdraft facilities knew all the facts set out above except, perhaps, (3). Even as to those facts, he certainly would have known that Miss Burch was a relatively junior employee, and that she could not have been earning a very large salary. On the basis of those facts, it would have been well open to the Recorder to find that Mr. Herod had actual knowledge of the relationship of trust and confidence. I would have thought that it would cause a Bank Manager to raise his eyebrows more than a little when he was engaged in entering into a contract with a young employee which involved guaranteeing her employer's indebtedness in the sum of £270,000, and mortgaging her home to the Bank. Be that as it may, there can be no doubt that the facts known to Mr. Herod were amply sufficient to put him on inquiry as to whether or not there was a relationship of trust and confidence, as in Avon Finance Company Ltd. v. Bridger [1985] 2 All E.R. 281.

The third issue is whether the Bank discharged its duty to Miss Burch. It is true that the Bank by letters dated 9th and 16th July, 1990, advised Miss Burch that the charge was unlimited in time and amount and advised her that she should take independent legal advice. What the Bank failed to tell her, and undoubtedly should have told her, was the extent of the company's present indebtedness and, even more important, that she was exposing herself to a potential liability of £270,000 which would, of course, involve the loss of her home. Furthermore, I have no doubt that in these circumstances they should have insisted that she took independent legal advice before entering into the charge. If she had taken advice, an independent Solicitor would certainly have advised her as strongly as he could that she should in no circumstances enter into the mortgage.

For these reasons, and for the reasons given by Nourse, L.J. and Millett, L.J., I too would dismiss this appeal.

Order: appeal dismissed with costs; legal aid taxation of the respondent's costs.