Legal Blog

Undue Influence (3)

Do not be misled by the title; we have discussed, directly or indirectly, the concept of undue influence at least five times and probably more over the years. Undue influence is typically raised as a defence to a creditor’s action, usually on a guarantee, in which the guarantor claims that she (the person is usually a wife) was unduly influenced by a debtor (usually the husband, on his own behalf or on behalf of his corporation) and therefore should not be bound by her covenant to guarantee the debt. Sometimes the defence works; usually, it does not. The defence was raised in JGB Collateral v. Rochon, a 2020 decision of the Ontario Court of Appeal, and initially was successful.

Guarantee

Husband owned more than 50% of the outstanding shares of a Florida corporation. Husband and wife each guaranteed a loan to that corporation. As security for her guarantee, wife granted a mortgage over a property (the “Property“) that she owned in Ontario. The Property had been in wife’s family for generations. Husband had previously purchased it from the family and then given it to wife.

After the loan went into default, the lender commenced an action against husband and wife in New York and obtained a judgment against each of them. The New York court held that the guarantee was enforceable.

The lender then commenced an action in Ontario seeking possession and sale of the Property. In her defence, wife argued, for the first time, that the lender ought not to be able to enforce its security against the Property because she entered the transaction only after being unduly influenced by husband.

After receiving wife’s defence, lender brought a motion for summary judgment.

Motion

Although the undue influence defence was not raised in the New York action, the motion judge held that, regardless of the New York result, he could apply the law of Ontario to determine whether there was undue influence and whether that undue influence would result in an injustice to wife if the mortgage were enforced.

Wife testified that she signed the loan documents based on a request from her husband. She did not have the documents explained to her before she signed. She left all financial and legal matters to husband and had always signed whatever documents he gave to her without reading them. The motion judge noted that there was a presumption of undue influence flowing generally from a reposed trust and confidence in husband and that the lender had to disprove undue influence by, for example showing that wife had obtained independent legal advice. This means legal advice from a lawyer independent from the transaction parties.

Since no independent legal advice had been given to wife, the motion judge held that, on a balance of probabilities, wife had proven that she was subject to husband’s undue influence at the time of the mortgage transaction and that the lender had unreasonably failed to take adequate steps to satisfy itself that wife understood the nature, import, and legal effect of her agreement to the mortgage terms.

The lender appealed to the Court of Appeal.

Presumption

The Court noted that the presumption of undue influence arises if the nature of the relationship between the debtor and the guarantor, coupled with the nature and ingredients of the impugned transaction, justified, without any other evidence, an inference that the transaction was the result of the undue influence of one party over the other. It is an evidentiary presumption.

This is what happens when a presumption arises:

• The lender is put on notice and enquiry. In order to protect itself from a claim of undue influence, the lender must take reasonable steps to try to ensure that the proposed guarantor understands the transaction and is entering into it voluntarily. The best way to do this is to either ensure or encourage the guarantor to obtain independent legal advice and a full explanation of the transaction.
• If the lender does not take reasonable steps to do this, the evidential onus shifts to the lender to put forth sufficient evidence to rebut the presumption.
• The judge must then decide, on a totality of all the evidence, whether the guarantor has proven the allegation of undue influence.

Errors

The motion judge made a number of errors.

The first error was the finding that the relationship between the parties justified the presumption of undue influence. From a business point of view, the loan transaction was of benefit to wife. The corporation was in many respects a family business. Both wife’s son and daughter held positions in it. Wife was a limited partner of, and owned a 20% interest in, a partnership that owned approximately 35% of the common shares of the corporation. Further, the Court noted that husband had purchased the Property for wife presumably from the fruits of husband’s business activities. The Court held that there should not have been a presumption of undue influence under the circumstances.

The second error was in holding that, even if the presumption arose, the lender did not attempt to ensure that wife entered into the transaction freely. The judge elevated the duty of the lender from simply taking reasonable steps to try to ensure that wife understood the transaction into a requirement that the lender obtain a written certificate from an independent lawyer stating that the lawyer had provided independent legal advice. In this case, the lender had taken reasonable steps. The lender’s lawyer had testified that he enquired of the lawyers who were representing both husband and wife jointly whether they had explained everything in the guarantee to wife and the lawyers confirmed that they had done so. One of those lawyers was wife’s daughter.

The third, and we feel the most important error, was the failure of the motion judge to consider whether, on the evidence (even with the presumption), there had actually been undue influence. Had husband coerced wife to sign the documents? Wife admitted that she signed the loan documents of her own free will and that husband did not force, or even threaten, her to do so. She may have complied with husband’s request without question, but wilful blindness is not proof of undue influence.

Disposition

Each one of the motion judge’s errors was fatal to wife’s defence of undue influence. In summary:

• There was no presumption of undue influence because wife benefited from the loan transaction.
• Even if there were a presumption, the lender rebutted it by showing that it had obtained information from the lawyers representing both husband and wife confirming that wife understood the transaction. ILA may be sufficient, but is not necessary, to rebut the presumption.
• And even if the lender had not done so, wife’s evidence demonstrated that she had not actually been unduly influenced. Husband did not dominate her; he merely requested her co-operation and she complied.

The Court granted summary judgment. Wife will lose the Property.

 

Image courtesy of Tumisu.

Written by Jonathan Speigel, the founding partner of Speigel Nichols Fox LLP, leads the litigation and construction practices.