Lloyds Bank v Bundy

Lloyds Bank v Bundy
Citation	Lloyds Bank v Bundy, [1975] QB 326, [1974] 3 All ER 757
Appellant	Herbert Bundy
Respondent	Lloyds Bank
Year	1975
Court	Court of Appeal of England and Wales
Judges	Lord Denning MR, Lord Cairns LJ, and Sir Eric Sachs JA
Country	United Kingdom
Area of law	Unconscionability
Issue	What is unconscionability?

Facts

Herbert James Bundy owned a house, which was the extent of his estate. His son operated a business that did not do very well, and he asked his father to give him collateral for taking out loans from Lloyds. The father signed the original collateral for a smaller amount of money after considering it overnight and talking to his lawyer. Later on, the son needed more collateral, and the only way that Bundy could provide it was by using the house as collateral. When the lawyers from the bank came over with his son they explained that this was the only thing that he could do to help his son, and Bundy signed the document. Five months later the bank foreclosed on the son's assets, and as he was bankrupt they seized the house. Bundy refused to leave the house, and the bank sued to have him evicted.

Issue

1. What is unconscionability？
2. Is the contract void for unconscionability?

Decision

Appeal allowed.

Reasons

Denning, writing for a unanimous (in the result) court, states that in the vast majority of cases a customer who signs a bank charge cannot get out of it. However, there is an exception to this rule when the parties have not met on equal terms – when one is very strong in bargaining power and the other is very weak it is a matter of fairness that the stronger party should not be able to push the weaker one to the wall. There are five historical categories of unconscionability:

1. Duress of goods – the owner is in a weak position because he is in urgent need of goods and the stronger demands more than is justly due.
2. Unconscionable transaction – a man is in need of special care and protection, yet a stronger party exploits his weakness and his property is taken for grossly under value.
3. Undue influence:
   1. the stronger party is guilty of fraud to gain the advantage of the weaker; or
   2. the stronger has taken advantage of their relationship of the weaker to gain an advantage for himself.
4. Undue pressure – the stronger party forces the weaker to enter into an unfair agreement by threatening them.
5. Salvage agreements – when a ship is sinking and requires assistance, the rescuers cannot take advantage of the sinking ship's urgent position to demand ridiculous fees.

He says that all of these categories share the scenario of inequality in bargaining power. The law relieves the party who, without independent advice, enters into a contract upon terms which are very unfair or transfers of property for a consideration that is grossly inadequate when his bargaining power is seriously impaired by the reason of his own desires.

In the case at bar, the consideration from the bank was grossly inadequate – they benefitted greatly, but they gave Bundy nothing in return as his son's business was failing anyway. Bundy had trusted the bank, and they took advantage of him. Bundy's relationship with his son and desire for him to succeed had a strong influence on him and negated his bargaining power. Further, Denning says that this case simply falls under the older title of an unconscionable transaction because the bank exploited the obvious weakness of Bundy. The bank should not have swept up his only asset without telling him to seek independent legal advice first.

Ratio

A contract is voidable for unconscionability if:

1. the terms were very unfair or consideration inadequate;
2. bargaining power was impaired by necessity, ignorance or infirmity;
3. undue pressure or influence was used, not necessarily consciously; and
4. there was an absence of independent advice.