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Equity - Undue Influence (includes 'Independent Legal Advice'). Rose-Terra Investments Inc. v. Chetti
In Rose-Terra Investments Inc. v. Chetti (Ont CA, 2024) the Ontario Court of Appeal considers 'undue influence', here in a spousal context where the role of 'independent legal advice' was considered:[16] There is no categorical presumption that a spousal relationship gives rise to an actual or constructive presumption of undue influence or to a concomitant duty on the part of an innocent third party to ensure that the spouse’s agreement to the transaction has been properly obtained: Bank of Montreal v. Duguid (2000), 2000 CanLII 5710 (ON CA), 47 O.R. (3d) 737 (C.A.), at paras. 14-16. Rather, it is an evidentiary presumption that arises depending on the nature of the relationship and the transaction in issue: JGB Collateral v. Rochon, 2020 ONCA 464, 151 O.R. (3d) 601, at paras. 8-9. Specifically, as this court instructed in Duguid, at para. 16, constructive notice of undue influence “may be established by a close relationship between the parties ... coupled with a manifestly disadvantageous transaction” (emphasis added). It is an analytical error for the court to consider only the spousal relationship without also taking into account the nature of the impugned transaction: JGB Collateral, at para. 21.
[17] Where constructive notice of a presumption of undue influence is established, a duty to inquire may arise as to whether agreement to the transaction was properly obtained: Gold v. Rosenberg, 1997 CanLII 333 (SCC), [1997] 3 S.C.R. 767, at para. 78. While legal advice may go a long way to rebutting the presumption of undue influence, independent legal advice is not, however, a rigid requirement to rebut the presumption of undue influence: Duguid, at paras. 25-27, citing with approval, Laird v. Mulholland, [1998] O.J. No. 855 (Gen. Div.), at para. 37, per Lax J. The presumption of undue influence can be rebutted in the absence of independent legal advice: JGB Collateral, at para. 33. As Iacobucci J. (dissenting, but not on this point) framed the issue in Gold, at para. 65: “The question ... is whether the [third party] made sufficient inquiry or, alternatively, whether it received assurances which would have satisfied a reasonable person.” Each case turns on its own facts and the court must examine the evidence it has to decide if the presumption of undue influence has been rebutted. For example, as this court noted with approval in Duguid, at para. 25, quoting M.P. Furmston et al., Cheshire, Fifoot & Furmston’s Law of Contracts, 13th ed. (London: Butterworths, 1996), at p. 329: “[I]f evidence is given of circumstances sufficient to show that the contract was the act of a free and independent mind, the transaction will be valid even though no external advice was given.”
[18] The motion judge’s decision correctly follows those governing principles. I reject the appellant’s suggestion that the motion judge’s approach was too narrow and that he should have considered the propriety of the underlying mortgage transaction during his assessment of whether the settlement was a manifestly disadvantageous transaction.
[19] The validity of the mortgage transaction was not before the motion judge. While she impugns the minutes of settlement as having been signed under duress, the appellant did not plead in her amended amended statement of defence that the mortgage was the product of undue influence or duress. Nor was there any other basis to challenge the validity of the mortgage transaction, given the motion judge’s finding that she was advised by her litigation counsel on December 4, 2018, of the risks arising from the transfer of title to the property from her husband to her, namely, that the property was “subject to two executions and a mortgage to which [she] confirm[s] she had no knowledge”, and that “[t]he letter [from litigation counsel] confirmed that she accepted those risks”. As a result, the only transaction in issue before the motion judge was the minutes of settlement, and he properly limited his analysis to whether the minutes of settlement represented a manifestly disadvantageous transaction.
[20] The motion judge concluded that the respondent was a third party without knowledge of the appellant’s allegations of undue influence and duress at the time the parties entered into the minutes of settlement. Importantly, he found that the settlement was of significant and material benefit to the appellant and that she was not a stranger to this transaction, but a litigation participant represented by experienced counsel. As a result, there was no need for the respondent to look behind the assurances that her litigation counsel had made about her understanding and signing of the minutes of settlement of her own free will and without any duress or undue influence. Those factual findings were open to the motion judge on the record and contain no error.
[21] I am also not persuaded that the motion judge erred in finding that there was no genuine issue for trial regarding the appellant’s allegation that the legal advice received from her own litigation counsel was insufficient and that the respondent was required to insist that she receive independent legal advice from another lawyer. The motion judge’s determination of this issue was based on his factual findings that the appellant was not a stranger to the transaction and was represented by counsel, that the settlement provided her with material benefits, and that the respondent had no knowledge of any allegation of undue influence or duress.
[22] The appellant was a participating, named litigant in both applications that culminated in the settlement reached by the parties. The appellant’s and her husband’s interests were aligned in their application and in their response to the respondent’s application, so there was no need for separate counsel to advise her on the settlement.
[23] As a result, there was no need for any inquiry by the respondent as to whether the appellant had received independent legal advice. The respondent was entitled to rely on the assurance given by the appellant’s counsel that he had discussed the settlement of the litigation with the appellant, independently of her husband, and that she had entered into the minutes of settlement of her own free will and without undue influence or duress. . JGB Collateral v. Rochon
In JGB Collateral v. Rochon (Ont CA, 2020) the Court of Appeal considers the 'presumption of undue influence' when a spousal couple put up their real property to guarantee the debts of their corporation:Presumed undue influence
[7] The doctrine of undue influence and its evidentiary companion, the presumption of undue influence, is set out in Geffen v. Goodman Estate, 1991 CanLII 69 (SCC), [1991] 2 S.C.R. 353; Bank of Montreal v. Duguid (2000), 2000 CanLII 5710 (ON CA), 185 D.L.R. (4th) 458 (Ont. C.A.), leave to appeal allowed, [2000] S.C.C.A. No 298, appeal discontinued August 2, 2001; and CIBC Mortgage Corp. v. Rowatt (2002), 2002 CanLII 45110 (ON CA), 220 D.L.R. (4th) 139 (Ont. C.A.), leave to appeal refused, [2002] S.C.C.A. No. 526. Rowatt draws heavily on the House of Lords’ decision in Royal Bank of Scotland v. Etridge (No. 2), [2001] 4 All E.R. 449., which clarified and modified Barclays Bank plc v. O’Brien, [1993] 4 All E.R. 417 (H.L.).
[8] To summarize, the presumption of undue influence is a rebuttable evidential presumption.
[9] It arises if the nature of the relationship between the debtor and the surety coupled with the nature of the transaction between them justifies, without any other evidence, an inference that the transaction was the result of the undue influence of one party over the other: Geffen, at p. 378; Rowatt, at para. 20.
[10] When the presumption arises, there are two results.
[11] First, a lender is put on notice and inquiry. In order to protect itself from a claim that the guarantee provided to it was obtained by undue influence by the benefitting spouse or party, the lender must take reasonable steps to try to ensure that the proposed guarantor understands the transaction and is entering into it voluntarily by encouraging the guarantor to seek and obtain independent legal advice and a full explanation of the transaction: Rowatt, at para. 16; Bank of Montreal, at paras. 17-18.
[12] Second, if the lender has not taken the reasonable steps and the guarantor seeks to avoid liability on the guarantee or security by claiming that it was obtained by undue influence, the evidential onus is on the lender to adduce sufficient evidence to rebut the presumption: Rowatt, at para. 20.
[13] The judge must decide on the totality of the evidence whether the allegation of undue influence has been proved. The nature and ingredients of the impugned transaction between the benefitting spouse or party and the other party are essential factors in deciding both whether the evidential presumption has arisen and whether the lender has rebutted it. If the judge concludes that there was no undue influence, the presumption is rebutted and does not apply: Rowatt, at para. 20.
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