- May 25, 2022
- By Beth Holden
- 0 comments
The Privy Council reigns-in a potentially inadvertent widening of solicitor’s duties
The Privy Council in Nature Resorts Ltd v First Citizens Bank  UKPC 10 censors the suggestion that solicitors exert undue influence where a commercial transaction might later turn out to their client’s disadvantage.
The PC heard two appeals from the Court of Appeal of Trinidad and Tobago; first from Nature Resorts Ltd (NRL) as to whether the Court of Appeal was entitled to decide that the First Citizens Bank had rebutted the presumption of undue influence, and secondly the bank’s cross appeal of whether the presumption of undue influence had indeed been invoked.
The facts of the case were that NLR owned the Calloden Estate comprising an idyllic area of 148 acres in Tobago. The sole shareholder of NRL was Mr Dankou who intended to develop the estate into an eco-resort. Mr Dankou struggled to find the investment needed for development and after a few years his silent investors were becoming restive. Mr Dankou subsequently entered into a transaction with a Mr Paler and Mr James to sell 75% of his shareholding in NRL to them in exchange for an immediate payment of $1,500,000 and a further $975,000 secured by a promissory note. Messrs Paler and James funded the share purchase with a loan from First Citizens Bank of $1,925,000. The Bank required security for the loan over the entire estate and over the shares transferred to Messrs Pale and James.
The 3 parties attended the offices of Lex Caribbean to execute and sign the legal documents, which the Bank had instructed Mr Wheeler, a solicitor, of that firm to draw up. The deed of mortgage was duly executed, being signed by Mr Dankou in his capacity as director of NRL, and the other documents prepared by Mr Wheeler (the two share transfers, the charge over the shares, and the promissory note) were also signed by Mr Dankou (in his personal capacity) and by Messrs Paler and James. Messrs Paler and James did not repay any of the US$1,925,000 loaned to them by the Bank. The Bank therefore decided to exercise its power of sale under the mortgage and on 8 July 2011 it entered into an agreement with the highest bidder for the sale of the Estate. That sale has not been completed because of the proceedings in this case.
Doctrine of undue influence
NRL submitted that the deed of mortgage with the Bank was voidable because of undue influence exercised over Mr Dankou (and therefore NRL) by Mr Wheeler. In reaching its decision, the PC considered the relevant English doctrine of undue influence in the leading House of Lords case of Royal Bank of Scotland plc v Etridge (No 2)  UKHL 44. The Etridge test is well known, but bears repeating for the purposes of this article. 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). The PC was at pains to point out that Etridge is concerned with a single concept of undue influence, and it denounced the tendency of practitioners to divide undue influence in to two categories of presumed and actual undue influence (which the PC said was an erroneous interpretation of the Allcard v Skinner decision). The PC emphasised that the correct analysis of the two categories is that they refer to different ways of proving undue influence; where presumed undue influence relies on an evidential presumption, and actual undue influence relies on direct proof of A’s conduct.
The PC rehearsed from Etridge at paragraphs 12 and 13 that there are two requirements for establishing the (rebuttable) presumption of undue influence. First, there must be a relationship of influence. This may be established on the facts. But in respect of some relationships there is what is commonly referred to as an irrebuttable legal presumption (but is more appropriately referred to as a legal rule) that the relationship is one of influence (but note not undue influence). Examples of such relationships are doctor and patient (Mitchell v Homfray (1881) 8 QBD 587), spiritual adviser and follower (Allcard v Skinner), parent and young child (Lancashire Loans Ltd v Black  1 KB 380) and, of direct relevance to the facts of this case, solicitor and client (Wright v Carter  1 Ch 27). The second requirement is that the transaction must not be readily explicable on ordinary motives. The House of Lords preferred this test, which uses the words of Lindley LJ in Allcard v Skinner, to a test of whether the transaction was manifestly disadvantageous which had been put forward by Lord Scarman in National Westminster Bank plc v Morgan  AC 686, 703-707. 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. If those two requirements are satisfied, so that there is a presumption of undue influence, the burden of proof shifts and it is for the party seeking to uphold the transaction to rebut the presumption by showing that A was not acting under undue influence (ie that A exercised free and independent judgment) when entering into the transaction.
The PC reminded us at paragraph 14 that in a three-party situation, where there is undue influence by B over A such that A enters into a transaction with C, the transaction will be voidable by A provided that C had notice of the undue influence or that B was acting as C’s agent in procuring the transaction. Finally, that it is not necessary to classify undue influence as a civil wrong, but that as a matter of public policy the presumed influence arising from the relationship of trust and confidence should not operate to disadvantage the victim.
First instance finding
This case concerned a three party situation, where it was being submitted by NRL at first instance that Mr Wheeler, the solicitor, held an irrebuttable position of influence over NRL/Mr Dankou. The first instance Judge in the High Court rejected NRL’s case and held that Mr Wheeler was not in a relationship of influence with Mr Dankou/NRL because he was acting on instructions from the bank, and Mr Wheeler was also a director of NRL – he was not acting as Mr Dankou’s/NRL’s lawyer. The first instance Judge also found that there was no evidence that NRL/Mr Dankou reposed trust and confidence in Mr Wheeler, or that Mr Wheeler had gained any benefit from the mortgage deed, which was not to NRL’s or Mr Dankou’s manifest disadvantage and was readily explicable. Accordingly, on the first instance Judge’s analysis, the first requirement of Etridge had not been made out as NRL had not proved that there was a presumption of undue influence, and so it was not necessary to consider whether it was rebutted.
Court of Appeal decision
The CA disagreed with the first instance Judge and found that there was a rebuttable presumption of indue influence. The CA held that NRL and Mr Dankou were clients of Mr Wheeler and so there was an irrebuttable presumption of influence. The CA found that the second limb of Etridge was satisfied because the mortgage deed which risked the whole estate being sold, on its face called for an explanation thereby invoking the presumption of undue influence. However, the CA found that the presumption could be rebutted because Mr Dankou was an educated businessman who would have fully understood the risks involved in entering into the mortgage as security for the loan to Messrs Paler and James.
Privy Council’s decision
The PC agreed with the CA appeal that the presumption of undue influence (assuming it was established) was rebutted on its facts. The Board referred to the evidence heard by the first instance Judge around Mr Dankou’s commercial experience and expertise, which the PC found sufficiently rendered him free from external influence in this commercial context.
The Board then went on to express concerns about the CA’s finding that there was a rebuttable presumption of undue influence exerted by Mr Wheeler, even though it was not strictly relevant to the PC’s overall conclusion. At paragraph 26 the Board states that it has concerns that the reasoning of the Court of Appeal may lead to the view that, in many situations where a solicitor 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.
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.
It is helpful that the PC has censored the CA’s analysis which might otherwise have thrown the door open to any number of claims to avoid transactions facilitated by solicitors in the normal course of their business, not to mention their attendant professional negligence claims. It would be worrying if a solicitor had to satisfy themselves that a transaction was ostensibly advantageous to their client so as to avoid an allegation of undue influence if the transaction later turned out to be disadvantageous. Such a scenario would be entirely at odds with the SAAMCO principles in professional negligence claims and would vastly widen the scope of solicitors’ duties. The PC saw the undesirable side-effects of the CA’s analysis and helpfully battened down the hatches.* Disclaimer: The information on the Anthony Gold website is for general information only and reflects the position at the date of publication. It does not constitute legal advice and should not be treated as such. It is provided without any representations or warranties, express or implied.*
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