Archive for the ‘presumed undue influence’ Category

Undue influence: presumption of undue influence where lender’s lawyer fails to properly advise borrower for whom it also acts

April 8, 2022

Introduction

In Nature Resorts Ltd v First Citizens Bank Ltd ([2022] UKPC 10) Nature Resorts Ltd (‘NRL’) owned the Culloden Estate (‘the Estate’) in Tobago. It was accepted that Mr. Dankou was the sole shareholder and ‘controlling mind and will’ of NRL so that Mr Dankou and NRL could be treated as one and the same for the purposes of the case except where Mr. Dankou was clearly acting in a personal capacity ([2]).

Mr. Dankou’s intention was to develop the Estate as an eco-resort and he secured investment from ‘silent investors’. He was, however, unable to secure all the finance needed for the development.

Mr. Dankou agreed to sell 75% of his shares in NRL to Simon Paler and Christopher James. Messrs. Paler and James borrowed part of the purchase price from First Citizens Bank Ltd (‘the Bank’). The Bank insisted that NRL grant it a charge over the Estate as security for the loan. Part of the purchase price payable to Mr. Dankou was left outstanding and Messrs. Paler and James provided a promissory note in respect of this sum.

Mr. Wheeler was the lawyer who acted for all parties in relation to the above transactions.

Messrs. Paley and James did not make any loan repayments. The Bank decided to exercise its power of sale under the charge over the Estate.

NRL argued that the charge was voidable because of the undue influence exerted by Mr. Wheeler over Mr. Dankou / NRL. This argument failed both in the High Court and the Court of Appeal of Trinidad and Tobago. NRL appealed to the Privy Council. Lord Briggs and Lord Burrows gave a joint judgment with which the other members agreed (on the undue influence question).

What is undue influence?

The Privy Council accepted that the law of Trinidad and Tobago concerning undue influence was the same as the English law ([1]). Undue influence was explained in these terms:

‘undue influence is concerned with a situation where, by reason of the relationship between them, one party (B) has such influence over the other (A) that A does not exercise a free judgment, independent of B, in relation to the making of a transaction between A and B (or, in a three-party situation, between A and a third party, C)’ ([10]).

In Pesticcio v Huet ([2004] EWCA Civ 372) Mummery LJ explained:

‘Although undue influence is sometimes described as an ‘equitable wrong’ or even as a species of equitable fraud, the basis of the court’s intervention is not the commission of a dishonest or wrongful act by the defendant, but that, as a matter of public policy, the presumed influence arising from the relationship of trust and confidence should not operate to the disadvantage of the victim, if the transaction is not satisfactorily explained by ordinary motives … A transaction may be set aside by the court, even though the actions and conduct of the person who benefits from it could not be criticised as wrongful. ([Pesticcio v Huet at [20]].

Presumed undue influence

The party seeking to rely on undue influence must prove their claim on the balance of probabilities. They can, however, try to raise a presumption of undue influence and the burden would then pass to the other party to show that the decision to enter into the transaction was the result of a free and informed decision. Mr. Dankou argued that there was a presumption of undue influence in the present case.

Following the decision in Royal Bank of Scotland plc v Etridge (No 2) ([2001] UKHL 44) the presumption of undue influence is said to arise where:

The Privy Council’s judgment explained:

‘The underlying idea behind the test is that the nature and / or contents of the transaction must make one conclude, in the context of the relationship of influence, that, absent evidence to the contrary, undue influence has been exercised.’ ([12])

Mr. Dankou argued that the relationship between himself / NRL and Mr. Wheeler was one of influence and that Mr. Dankou / NRL did not benefit from the grant of the charge to the Bank so that the transaction was not readily explicable on ordinary motives.

The High Court decided that neither requirement of the presumption of undue influence was satisfied. The Privy Council preferred not to comment on the view that there was no relationship of trust and influence between Mr. Wheeler, on the one hand, and Mr. Dankou / NRL on the other. The Privy Council thought that this raised, ‘difficult questions as to the operation of the so-called irrebuttable legal presumption that the relationship is one of influence’ on which they were not addressed ([29]).

The Privy Council, nevertheless, agreed that there was no presumption of undue influence in this case. The transaction was readily explicable on ordinary motives; the commercial interests of Mr. Dankou / NRL were furthered. The High Court found that the sale of the shares enabled Mr Dankou to pay money to his silent investors and also enabled various debts of the company to be paid off. The Court of Appeal disagreed with this and thought that there was a presumption of undue influence.

The Privy Council sided with the High Court in this regard:

‘The deed of mortgage opened the money-box from which Mr Dankou received payment for his shares. Without it, the sale would have fallen through. Although the Court of Appeal was careful to say, at para 53, that it was NRL that derived no benefit from the mortgage, the Board considers it unrealistic to ignore the benefit to Mr Dankou when considering whether the mortgage was readily explicable. It was the benefit to Mr Dankou, as the sole shareholder in NRL at the time when the transaction was entered into, that rendered the transaction readily explicable. In the Board’s view the Court of Appeal was wrong to ignore this bigger picture and therefore wrong to take the view that the deed of mortgage was not readily explicable.’ ([28])

The presumption of undue influence where the same lawyer acts for borrower and lender

As we have seen, the Court of Appeal thought that a presumption of undue influence was raised in this case. The Privy Council disagreed and expressed concerns about the implications of the Court of Appeal’s reasoning. It was worried that it would mean that parties would be able to raise a presumption of undue influence, arising out of the advice of their lawyers, whenever a transaction worked out badly. If the same lawyer advised both sides then any party for whom the transaction worked out badly might be offered an unjustified escape route on the basis that the lawyer was the agent of the other party (so that any undue influence of the lawyer could be attributed to the client):

‘[26] The Board has concerns that the reasoning of the Court of Appeal may lead to the view that, in many situations where a solicitor (or attorney) is providing professional advice to a client, and the client then enters into a disadvantageous commercial transaction with a third party, the client would be able to invoke the law on undue influence (including the law of agency) to set aside the transaction. There are many instances where, for example, the solicitor is acting for both a purchaser of land and a lender of the money for the purchase where that relationship should not operate to give rise to a presumption of undue influence for either client to be used against the other. This is so where the solicitor does not obtain any personal benefit (beyond his normal fees) from the transaction.

[27] In the Board’s view, where the other party to the transaction is not the solicitor obtaining some benefit from the client but is rather a third party, an ordinary commercial transaction such as a mortgage, entered into by a person engaged in business, should rarely be regarded as one that is not readily explicable on ordinary motives, merely because it is, or turns out to be, disadvantageous. It is readily explicable that the client will enter into such a transaction without being under the undue influence of the solicitor.’

If there was a presumption of undue influence, was it rebutted?

The Court of Appeal decided that there was a presumption of undue influence but that this presumption was rebutted. The Privy Council decided that the Court of Appeal was justified in deciding that, even if a presumption arose, it was rebutted.

Rebutting the presumption requires the other party to show that the transaction was the result of a free and informed decision. The Privy Council commented:

‘Although neither necessary nor conclusive, the main method of rebuttal is to show that A obtained the fully informed and competent independent advice of a qualified person, most obviously a lawyer.’ ([13])

The Court of Appeal thought that the presumption of undue influence was rebutted; it was satisfied that Mr. Dankou understood what he was doing and the associated risks. The Privy Council agreed: ‘advice from a lawyer is not the only way in which it can be established that free and independent judgment was being exercised.’ ([23]).

The corporate veil

Clearly, the Privy Council’s analysis relies on treating Mr. Dankou and NRL as being one person. The commercial interests of Mr Dankou are treated as being those of the company; Mr. Dankou’s independent judgment is that of the company.

Michael Lower

Family home in joint names and wife’s failure to transfer her interest to her husband in accordance with a consent order

November 4, 2017

In Chu Tsan Leung v Leung Mee Ling Amy ([2017] HKEC 2347) H and W were married. Title to the family home was in joint names. W left the family and in the subsequent matrimonial proceedings agreed to transfer her entire interest in the property to H. This agreement was incorporated in a consent order. W did not execute a deed to give effect to the order.

W was subsequently declared bankrupt. The Trustee in Bankruptcy claimed that W’s interest in the property remained an asset of hers. H sought a declaration that W did not have any beneficial interest in the property.

The Trustees in Bankruptcy argued that the consent order was procured through the exercise of undue influence by H and his solicitors. They argued that there was a presumption of undue influence on the facts of the case. This failed.

The evidence pointed away from the idea that the wife reposed trust and confidence in her husband at the time of signing the consent order. Nor was there anything unconscionable or manifestly disadvantageous to W when the context was properly considered: H, a construction worker, had been left to take care of two young children on his own.

It did not help W’s case for her to argue that she did not have full knowledge and understanding of the documents that she had signed. A person who signs a legal document he or she is bound by the act of signature (Bank of China (Hong Kong) Ltd v Fung Chin Kan and Ming Shiu Chung v Ming Shiu Sum).

H became the sole beneficial owner of the property from the moment of the decree absolute.

H argued, in the alternative, that he had always been the sole beneficial owner of the property since he alone had provided all of the purchase money and mortgage payments. This claim failed. Since title was in joint names, it was for H to show that she had no equitable interest. H was unable to do so.

Michael Lower

 

 

Undue influence: what is the next stage once the presumption of undue influence has arisen?

April 7, 2014

In Hammond v Osborn ( [2002] EWCA Civ 885) O took care of P (an elderly neighbour) out of kindness and compassion. He gave her GBP300,000 (the value of his investments). Part of the money was used to buy a house. Title was in F’s name (O’s son) but he held it on trust for her. The result was that P lost over 90% of his assets and became prospectively liable for a large tax bill which he would not have been able to meet out of his remaining assets. O did not explain this to P, she merely asked him whether he was sure he wanted to make the gift. P later died intestate. The gift to O was challenged by H, the administratrix of P’s estate.

The relationship and the transaction were such as to give rise to the presumption of undue influence. The question was whether the presumption could be rebutted by showing that the transaction was the result of  the exercise of independent exercise of P’s free will. Had the gift been made only after full, free and informed thought about it? ([25]).

P had not received advice as to the nature and effect of the transaction from an independent, qualified person. In fact, he had not received any advice at all, even from O.

‘Even if it is correct to say that Mrs Osborn’s conduct was unimpeachable and that there was nothing sinister in it, that would be no answer to an application of the presumption …  the court does not interfere on the ground that any wrongful act has in fact been committed by the donee but on the ground of public policy, which requires it to be affirmatively established that the donor’s trust and confidence in the donee has not been betrayed or abused.’  (per Sir Martin Nourse at  32).

Ward LJ emphasised that in cases of presumed undue influence, the courts interefere on the grounds of public policy and not because there is any finding that there has been actual undue influence. The next stage of the inquiry, once the presumption has arisen, is to consider whether  the party to whom the burden has shifted can show that the transaction was the result of full, free and informed thought. This will usually be done by showing that the necessary independent advice was given. Here there was a total absence of independent advice ([50]).

A survey of the circumstances in which the decison was made and of its consequences for P did nothing to rebut the presumption of undue influence. The presumption had not been rebutted and the gift was set aside.

Michael Lower