England and Wales Court of Appeal (Civil Division) Decisions

IN THE SUPREME COURT OF JUDICATURE
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE CHANCERY DIVISION
(Mr Justice Patten)

		Royal Courts of Justice Strand London WC2
		Thursday, 31st January 2002

Thursday, 31st January 2002

J U D G M E N T
1. LORD JUSTICE MUMMERY: This is an appeal, with the permission of a single Lord Justice, from an order made by Patten J on 8th March 2001.
2. The only issue on the appeal concerns the scope and application of the doctrine of abuse of confidence to dealings between a solicitor and his client. The case raises an issue of some importance.

Outline facts

3. Mr Andrew Johnson is a solicitor and a partner in the firm of Churchers. One of the clients of Mr Johnson and his firm was Mr Gordon O'Shea, a business man and property developer.
4. Mr O'Shea's £100 company, Dufose Developments Ltd ("Dufose"), was also a client and held a lease of a property known as The Old Theatre, 43 South Street, Chichester, West Sussex (which I shall refer to as "the lease"). The freehold owner of the property was a Mrs Mary Lewis and the lease granted by her dated 17th December 1982 was for a term of 21 years from 25th March 1982 at an annual rent of £8,000, subject to upwards only reviews, the first in 1986 and then every three years thereafter. Mr O'Shea joined in the lease as a surety.
5. In 1986 the lease was used as security for a loan of £50,000 made to Dufose. The loan was arranged by Mr Johnson. The source of the loan was private lending clients of Churchers. In fact, from about 1980 onwards Churchers had arranged a number of secured loans to Mr O'Shea's companies in this way.
6. A legal charge dated 14th February 1986 was granted by Dufose to four named partners in Churchers in their capacity as trustees for a number of named investors. The loan was repayable on demand. The interest rate was 16% per annum, but was variable by the mortgagees on at least one month's notice. A service charge of 1.5% on the advance was levied by Churchers on the private lending clients, but that arrangement was not disclosed to Mr O'Shea or to Dufose at the time of the legal charge. Most important of all for this case, Mr O'Shea was a party to the legal charge as a surety.
7. On 10th January 1990 the lease was assigned by Dufose to the trustees of Mr O'Shea's pension scheme, which had been established by an interim trust deed of 30th September 1983 and is now administered in accordance with the terms of the definitive trust deed dated 8th February 1984, as amended. The trustees of the scheme are Mr O'Shea, Mr Johnson and EBS Pensioner Trustees Ltd, which was joined as a party to these proceedings, but has taken no part either in the trial of the action or in this appeal. Their only concern is in relation to certain costs which have been incurred by them in relation to the earlier part of the proceedings.
8. In the licence to assign dated 31st October 1989 the trustees of the scheme jointly and severally covenanted with the landlord to pay the rent and to perform and observe the covenants and conditions of the lease. The lease is thus held on trust for the scheme, though subject to sub-leases and subject, of course, to the 1986 legal charge.
9. The deed of assignment to the trustees contained a covenant by them to indemnify Dufose in respect of its liabilities under the 1986 charge. Mr O'Shea also executed a deed of indemnity in favour of the trustees of the scheme in respect of their liabilities under the legal charge and under the lease now vested in them.
10. Following the economic recession and collapse in property values at the end of the 1980s, Dufose had financial difficulties. It became insolvent and was struck off the Register of Companies for failure to file annual returns and accounts. It has, therefore, been dissolved.
11. On 30th April 1991 Churchers called in the loan. Repayments of interest were not made under the legal charge. Arrears of rent also built up under the lease. Mr Johnson was threatened with legal proceedings for the arrears of rent. He settled them from sources other than the assets of the pension scheme.

The Proceedings

12. On 5th August 1999, Mr Johnson issued proceedings against EBS Pensioner Trustees Ltd and Mr O'Shea. In them he alleged that he had resigned as a trustee of the scheme on or about 15th June 1994 and that, pursuant to the covenants in the licence, he had been required to discharge arrears of rent and other sums payable under the lease. He had requested reimbursement by EBS and Mr O'Shea, but without success. He claimed reimbursement from them, with interest, as fellow trustees. He also claimed an indemnity out of the assets of the pension scheme, and an equitable lien over those assets as security for the indemnity.
13. In his defence and counterclaim, Mr O'Shea contended that Mr Johnson was still a trustee of the scheme. He alleged that the sums claimed by Mr Johnson had been paid by him as a mortgagee of the lease in order to protect the security of the legal charge. He contended that the sums claimed by Mr Johnson were irrecoverable, as he, Mr O'Shea, was entitled to have the legal charge and surety set aside for abuse of confidence. That contention was elaborated in a counterclaim made by Mr O'Shea against Mr Johnson and in a Part 20 claim made by him against Churchers.
14. In summary, the relief claimed by Mr O'Shea was that:

(1) the surety covenant and the legal charge were void;

2)the indemnity claimed by Mr Johnson from the trustees was invalid; and

3) the court should make an order that Mr Johnson and Churchers indemnify the pension scheme in respect of all the claims against the trustees under the lease which were made by the landlord.

15. Damages or equitable compensation were also claimed.
16. Those claims were made on this basis. Mr O'Shea contended that Churchers, acting by Mr Johnson, had acted for and advised both Mr O'Shea and Dufose. There was therefore a solicitor and client relationship, which he alleged, first, was one of presumed undue influence and, second, was a relationship in which trust and confidence were reposed in Mr Johnson and Churchers, who owed him corresponding fiduciary duties. In particular, there was a duty to advise him and Dufose to take independent legal advice about the prudence of entering into the legal charge and surety, as to which, he said, no advice had been given. It was also alleged that, by reason of the fiduciary relationship, there was an obligation on Mr Johnson and Churchers to make full and frank disclosure concerning the transaction, including the source of the funds, the rate of interest and, most important of all, any commission or profit received by the solicitors. It was alleged that they had in fact profited under the legal charge and received commissions or other profits, which had not been disclosed.
17. Claims for breach of duty were also made in respect of the transactions in 1990, the licence to assign, the assignment of the lease and the indemnity given by Mr O'Shea. In relation to these claims, reliance was placed upon the alleged conflict of duty and interest, which entitled Mr O'Shea to have the transactions set aside or, alternatively, entitled him to equitable compensation and to an indemnity.

The Judgment

18. The judge gave judgment for Mr Johnson against Mr O'Shea, ordering him to pay the sum of £16,406.73 plus interest. He also directed that the trustees of the pension scheme should make certain payments to Mr Johnson out of the assets of the pension scheme, and made a declaration that, until the sums directed to be paid were paid to him, Mr Johnson should have a first charge or lien on the assets of the pension scheme in respect of the sums.
19. The judge directed that an account be taken of the service charge of 1.5% received or receivable by Churchers in respect of the legal charge and the interest payable thereon. That account is relevant to the next order made by the judge, which was judgment in favour of Churchers against Mr O'Shea on Churchers' Part 20 claim, which they had made in response to Mr O'Shea's claim in the sum of £50,000, being the amount of the loan, plus an almost equivalent amount of interest, subject, however, to a set-off (in the absence of agreement as to the amount) of the amount found due to Mr O'Shea on the taking of the account.
20. Finally, the judge dismissed Mr O'Shea's Part 20 claims to set aside the surety covenant, to set aside the deed of indemnity and for compensation of breach of fiduciary duty. There are orders in relation to costs. The judge refused permission to Mr O'Shea to appeal.
21. In his judgment the judge made the following findings which were relevant to the dispute about the surety covenant. He found that the requirement that Mr O'Shea should stand as surety was an obvious commercial requirement and that Mr O'Shea fully understood the reason for it. Mr O'Shea was told that the monies would be provided by private clients to Churchers, though he was not told the identity of those clients and never succeeded, despite attempts, to find out who they were. He was aware that Churchers could vary the rate of interest. He was aware that, as trustees, they were under a duty to obtain a profitable return for their clients. He was aware that the loan was repayable on demand. However, until the commencement of the proceedings, he was not aware of the 1.5% service charge levied by Churchers on their lending clients.
22. As to the claims, the judge dealt first with undue influence. He said there was none, having heard evidence given by Mr Johnson and Mr O'Shea on that issue. He said that Mr O'Shea was not under any undue or improper influence or pressure when deciding to enter into the surety covenant. The judge commented that the failure to disclose the service charge arrangements did not convert the case into one of undue influence. I say no more about that, because there was no appeal against the rejection of the undue influence claim. I therefore turn to the claim of abuse of confidence.
23. The case advanced by Mr O'Shea was that Mr Johnson was placed in a position of conflict when he agreed to act for Dufose and Mr O'Shea, taking the 1986 charge whilst continuing to act as one of the named mortgagees and acting for himself as such. The judge said that the measure of conflict which was relied on depended on the terms of the relevant retainer and the scope of the fiduciary duties flowing from it.
24. The judge held that the only breach of fiduciary duty relevant to the issue of the surety was non-disclosure of the 1.5% service charge at the time of the execution of the legal charge. He said that the failure to disclose that did not arise out of a preference of Mr Johnson's interests or those of private lenders over the interests of Mr O'Shea. He also said that the service charge did not play any part or have any influence upon the circumstances in which Mr O'Shea came to enter into the surety covenant.
25. On his analysis the judge held that the real source of the obligation to disclose the service charge was the principle that a fiduciary is not permitted to make a profit out of the trust without the consent of his principal. He specifically held that Mr O'Shea would still have proceeded with the 1986 legal charge and surety had he been made aware of the existence of the service charge. In respect of the breach of duty in not disclosing it, he said that the proper remedy would be an account of the service charge received, which could then be set off against the liability under the security covenant, and, as already indicated, that was the order he made. He held that the claim for rescission of the surety covenant was precluded by, among other things, the impossibility of making counter-restitution.
26. In respect of the claims made about the 1990 assignment and deed of indemnity, the judge held that there was no breach of a fiduciary duty. He found that Mr Johnson was not aware of the financial difficulties of Mr O'Shea and Dufose in the period up to 10th January 1990, the date of the deed of indemnity. He held that Mr Johnson did not allow or encourage Mr O'Shea and Dufose to go ahead with the assignment of the lease, so as to provide better security for his private lending clients. The judge rejected Mr O'Shea's case that Mr Johnson was guilty of an act of conscious disloyalty in breach of fiduciary duty in acting in the personal interests of lending clients by transferring the lease and legal charge to the scheme so as to obtain better security for the pension trustees' covenant. The judge held that assignment was not procured for that purpose.

The Appellant's Submissions

27. Mr Darton appeared for Mr O'Shea. He said that the judge ought to have dismissed the claim against Mr O'Shea on the surety and also the claim against the assets of the pension fund. In summary, his case was that Mr Johnson and Churchers were not entitled to make Mr O'Shea liable under the surety covenant, that being a direct contractual relationship between solicitor and client which attracted the doctrine of abuse of confidence. There was a breach of the duties owed by the solicitors to Mr O'Shea and to Dufose in failing to disclose the service charge or the profit made by them from their fiduciary position, as well as in failing to advise them about the transaction. He submitted that the non-disclosure was material and had the effect of invalidating the surety contract. In consequence, the surety contract should have been rescinded by the judge or, if the judge had not rescinded it, the court should not have allowed the solicitors, who were in breach of duty, to enforce it against him.
28. A large part of the submissions by Mr Darton and those of Mr Behrens in answer on behalf of Mr Johnson and Churchers concerned the scope and underlying lying policies of the doctrine of abuse of confidence. This arises out of the judge's decision, which I shall refer to in more detail later, that the doctrine did not apply to the transaction in this case.
29. Mr Darton submitted that the doctrine of abuse of confidence was a draconian one. It has been developed in equity for the protection of a class of persons who are vulnerable, namely clients of solicitors. It had to be a strict doctrine in order to secure high standards of compliance by solicitors in dealing with their clients. He criticised the judge's conclusion that the doctrine was confined to transactions between solicitor and client under which property passes. He said that there was no authority for so confining the scope of the doctrine, and he submitted that the doctrine applied to a case where the solicitor entered into a transaction as a trustee, as in the case of Moody v Cox [1917] 2 Ch 71. He submitted that it also applied to cases where solicitors acted as intermediaries, that is as solicitor for both lender and borrower, putting one in touch with the other. There was scope for abuse of confidence in relation to such a transaction in the process of negotiating. He said that the capacity in which the solicitor contracts with the client is irrelevant. What matters is the confidentiality of the relationship between the client and the solicitor, which gives rise to the strict duty. Solicitors, he said, should not be involved in commercial dealings of any kind with their clients. The rule was a salutary one, which constituted a deterrent, and the rationale of the doctrine made it applicable for commercial dealings generally.
30. Turning to the facts of this case, he said that there had been a breach of the duty owed by the solicitors in failing to disclose the service charge, in not giving advice as to the need to seek independent advice and in not giving advice on the commercial prudence of the transactions or conflict of interest situations. He said it was irrelevant that the breach of duty was not the consequence of conscious wrongdoing.
31. As to the materiality of the non-disclosure of the service charge, he said it was something that should have been disclosed. The effect of it not being disclosed was to render the surety invalid. The fact that, if the service charge had been disclosed, Mr O'Shea would still have entered into the surety did not effect the materiality of non-disclosure. Materiality in relation to claims for rescission was not, he submitted, to be confused with causation, which was relevant to damages or equitable compensation. A strict doctrine entitling a surety not to have the contract enforced against him should be upheld. It was only through the action to have the security set aside by invoking the doctrine that Mr O'Shea had discovered the existence of the secret profit at all.
32. Mr Darton also criticised the judge's approach to the remedy of rescission, submitting that the court's intervention was not in fact required. Rescission could be effected by a party's own unilateral act. The role of the court would simply be to adjudicate on the facts and the right of the party to rescind and, in this case, the court should simply have taken the step of dismissing the solicitors' claims on the basis that they had abused confidence. He submitted that, if he was wrong on that and the intervention of the court was required by making an order for rescission of the surety contract, there was in this case no basis for a discretion to refuse rescission. The impossibility of counter-restitution in the case of the loan to the company, Dufose, was irrelevant. The relevant transaction here was the surety contract, and that was a separate contract from the loan and the legal charge.
33. In relation to the judge's findings and holdings on the 1990 assignment and deed of indemnity, Mr Darton submitted that Mr Johnson was not entitled to claim indemnity for the rent that was paid, as there had been a breach of duty in relation to the assignment. In breach of duty, he had failed to advise Mr O'Shea about the personal risks to him and the benefits which would accrue to Churchers in acquiring greater security and being able to make the trustees of the pension fund liable on the mortgage. Mr O'Shea had not had any independent advice, nor had Dufose, in relation to the assignment. The claim of Mr Johnson for an indemnity was, Mr Darton submitted, based on the assignment of the lease subject to the legal charge to the trustees of whom Mr O'Shea was one. The breach of duty regarding the assignment led Mr O'Shea to becoming liable to pay the rent personally, direct or via the trustees paying the rent under the lease.

Conclusion

34. I would dismiss this appeal. I shall deal with the main points in turn.

A. Scope of Doctrine of Abuse of Confidence.

35. Patten J held that the doctrine of abuse of confidence has no application to the surety covenant, which Churchers seek to enforce against Mr O'Shea and which Mr O'Shea seeks to rescind on the ground, inter alia, of non-disclosure of the 1.5% service charge. The judge stated that, although abuse of confidence cases are not restricted to purchases by a fiduciary from his principal, they do seem to be confined to cases of sales and purchases or to leases. He added that he had not been referred to any case in which the doctrine of abuse of confidence (as opposed to some other kind of breach of fiduciary duty) had been applied to a loan or other transaction in which property does not pass. He added that this seemed to be consistent with the origin and purpose of the doctrine

"...which is to prevent a fiduciary from abusing his relationship of trust and confidence so as to procure an advantageous transaction at the expense of the principal or beneficiary. The possibility of abuse in such cases was considered to be sufficiently obvious to support a rule of public policy that required the necessary advice and disclosure to be made and might be infringed by material non-disclosure even if it was inadvertent rather than deliberate: see Mothew per Millett LJ at page 18D. But the strictness of this rule (which operates as an exception to the general principle that breaches of fiduciary duty must involve conscious disloyalty rather than negligence) requires it to be confined to the transactions for which the courts of equity created it."

36. I have reached a different conclusion, although, as I shall state later, Churchers are entitled to hold Mr O'Shea liable on the surety covenant.
37. I shall start, as Patten J did, with the judgment of Millett LJ in Bristol and West Building Society v Mothew [1998] Ch 1. In Mothew the Court of Appeal rejected an attempt to rely on breach of trust and breach of fiduciary duty in respect of the application of mortgage monies. The defendant's solicitor, who acted for both borrower and lender in the mortgage transaction, had, as a result of an oversight rather than of deliberate non-disclosure or concealment or any conscious intention to mislead, provided the plaintiff building society with incorrect information. In a judgment widely regarded as a masterly survey of the modern law of fiduciary duties and with which Otton and Staughton LJJ agreed, Millett LJ expressly left out of account the case of the fiduciary dealing with his principal. The key passage on this point is in parenthesis at page 18 D-E. I shall read the entire passage in view of its importance to this case:

"(In this survey I have left out of account the situation where the fiduciary deals with his principal. In such a case he must prove affirmatively that the transaction is fair and that in the course of the negotiations he made full disclosure of all facts material to the transaction. Even inadvertent failure to disclose will entitle the principal to rescind the transaction. The rule is the same whether the fiduciary is acting on his own behalf or on behalf of another. The principle need not be further considered because it does not arise in the present case. The mortgage advance was negotiated directly between the society and the purchasers. The defendant had nothing the do with the negotiations. He was instructed by the society to carry out on its behalf a transaction which had already been agreed.)"

38. Millett LJ clearly recognised in that passage that there is an important distinction between (a) a solicitor acting for a client in respect of a transaction in circumstances where breach of fiduciary duty may result from his also acting as solicitor for another party to the transaction with conflicting or potentially conflicting interests, and there has been no informed consent from both sides; and (b) a solicitor who personally deals with or enters into a transaction, either on his own behalf or on behalf of another, with a client, or even a former client, lacking independent advice.
39. The remainder of Millett LJ's judgment in Mothew was not concerned with a case falling within (b). The mortgage advance in that case was negotiated directly between the lending client and the borrowing client, and the solicitor had nothing to do with the negotiations for the mortgage. Millett LJ's analysis of the authorities, in particular the case of Moody v Cox [1917] 2 Ch 71, at pages 19 G-H and 21 D-E of the report in Mothew, has to be read in that context.
40. In my judgment, the judge's findings of fact clearly demonstrate that this is a case falling within (b). It is covered by the doctrine of abuse of confidence, as applied in cases such as Moody v Cox and Demerara Bauxite v Hubbard [1923] AC 673 and as summarised in the passage already cited from Mothew.
41. It was argued by Mr Behrens, on behalf of Churchers, that, properly analysed, this is in fact a case of a person acting as a solicitor to principals, that is lending clients and borrowing clients. On the authority of Mothew he said the solicitor in that situation is only liable for breach of fiduciary duty, if his conduct, for example non-disclosure, is tainted by conscious wrongdoing or disloyalty; and Patten J found that there was none.
42. This submission fails on the facts. The negotiations for the 1986 legal charge were conducted between Mr Johnson and Mr O'Shea. The legal charge containing the surety covenant by Mr O'Shea was executed in favour of four named partners in Churchers, acting as trustees for named investors. Mr O'Shea had no direct contact at any time with the named investors nor with any of the replacement investing private clients, whose identity never became known to Mr O'Shea.
43. As is apparent from the passage cited in Mothew, the doctrine of abuse of confidence applies to dealings by a solicitor with his client, even where the solicitor is not acting on his own behalf. This was established by this court in Moody v Cox, in which a contract for the purchase of a public house was negotiated with, and entered into by, a client with a solicitor and his managing clerk selling as trustees. The client obtained from the court an order of equitable rescission setting aside the contract on the ground of non-disclosure of material facts. Undisclosed valuations, which had been obtained by the solicitor, showed that the pub was worth less than the price which the client had agreed to pay for it. Lord Cozens-Hardy MR enunciated the principle as follows:

"Now what is the duty of a solicitor standing in this fiduciary position towards his client? If he, the solicitor, desires to buy or sell the property - I care not which way it is - the obligation would be just the same in their nature whether it were a sale to the client or a sale to the solicitor. I know of no better authority to settle the principles applicable to the case than Lord Eldon's judgment in Gibson v Jeyes, where he says this: `If he' (the solicitor) `will mix with the character of attorney that of vendor, he shall, if the propriety of the contract comes in question, manifest, that he has given her all that reasonable advice against himself, that he would have given her against a third person.' There is another passage: `But, from the general danger the Court must hold, that if the attorney does mix himself with the character of vendor he must shew to demonstration, for that must not be left in doubt, that no industry he was bound to exert would have got a better bargain.'

The relief in a case of this kind does not depend upon undue influence. That is not the ground on which I base my judgment. There may be cases in which undue influence is proved as a fact, but the principle to decide this case upon, in my view, is this: An attorney selling to a client or buying from a client is bound to disclose everything that is material, or may be material, to the judgment of his client before the transaction is completed."

44. It was also argued in that case that it did not fall within the doctrine, because the solicitors were not dealing with their own property, and that their interest did not conflict with their client's, because they owed a duty to the beneficiaries of the trust to get as much as they could for the property, and they had obtained the undisclosed valuations in their character as trustees for the beneficiaries.
45. In rejecting that submission Lord Cozens-Hardy said this. He described the submission, which I have summarised, as a mistaken view, and continued:

"A man may have a duty on one side and an interest on the other. A solicitor who puts himself in that position takes upon himself a grievous responsibility. A solicitor may have a duty on one side and a duty on the other, namely, a duty to his client as solicitor on the one side and a duty to his beneficiaries on the other; but if he chooses to put himself in that position it does not lie in his mouth to say to the client `I have not discharged that which the law says is my duty towards you, my client, because I owe a duty to the beneficiaries on the other side.' The answer is that if a solicitor involves himself in that dilemma it is his own fault. He ought before putting himself in that position to inform the client of his conflicting duties, and either obtain from that client an agreement that he should not perform his full duties of disclosure or say - which would be much better - `I cannot accept this business.' I think it would be the worst thing to say that a solicitor can escape from the obligations, imposed upon him as a solicitor, of disclosure if he can prove that it is not a case of duty on one side and of interest on the other, but a case of duty on both sides and therefore impossible to perform. I do not desire to draw any distinction between the simple case where he has one client who is selling his own property to him and a case like the present, where he has a client and as trustee is selling to that client. I think, therefore, on this ground the argument of the appellants cannot prevail."

46. Warrington LJ agreed with the judgment of the MR. I refer in particular to the passages in his judgment at pp 83 and 85. Scrutton LJ also agreed. He said this at p 88-89:

"If a man who is in the position of solicitor to a client so that the client has presumably confidence in him, and the solicitor has presumably influence over a client, desires to contract with his client, he must make a full disclosure of every material fact that he knows, and must take upon himself the burden of satisfying the Court that the contract is one of full advantage to his client."

47. I quote from a further passage on page 91, where Scrutton LJ dealt with the argument about the capacity in which the solicitors contracted:

"But it is said that he [that is the solicitor] could not disclose that information consistently with his duty to his other clients, the cestui que trust. It may be that a solicitor who tries to act for both parties puts himself in such a position that he must be liable to one or the other, whatever he does. The case has been put of a solicitor acting for vendor and purchaser who knows of a flaw in the title by reason of his acting for the vendor, and who, if he discloses that flaw in the title which he knows as acting for the vendor, may be liable to an action by his vendor, and who, if he does not disclose the flaw in the title, may be liable to an action by the purchaser for not doing his duty as solicitor for him. It will be his fault for mixing himself up with a transaction in which he has two entirely inconsistent interests, and solicitors who try to act for both vendors and purchasers must appreciate that they run a very serious risk of liability to one or the other owing to the duties and obligations which such curious relation puts upon them."

48. Although the facts in that case were concerned with the sale of property, the fundamental principles of fair dealing applicable to transactions between solicitor and client, even where the solicitor is not acting on his own behalf, are so broadly based and so widely expressed as to be capable of application to other kinds of dealing, such as the surety covenant in this case.
49. The same principle that was applied in Moody v Cox was applied by the Privy Council in the case of Demerara. In that case the formal relationship of solicitor and client had terminated prior to the transaction with the client, who had no independent advice in respect of the grant of an option to purchase to the solicitor. The solicitor knew that there were two competitors, who wished to obtain an option in the properties, and that the prospect of the price to be obtained depended on the extent to which they were prepared to out-bid one another. Lord Parmoor said at p 681-682:

"On the other hand, it is no answer that he had underrated the fair sum to be inserted in the option, since Mrs. Hubbard [that is the client] was entitled to know fully all the factors, which in such a case would be of importance to her in coming to a conclusion what the sum should be. The conclusion is that Mrs. Hubbard did accept less then a fair sum in the option from a person who stood to her in a confidential position, and whose offer she might not have accepted, had all the relevant facts been placed before her.

If these findings are accepted, the appellant company cannot succeed in their action to enforce on Mrs. Hubbard the terms of the option made between her and Humphrys [that is the solicitor], unless it can be shown that she had competent independent advice. The principle has long been established that, in the absence of competent independent advice, a transaction of the character involved in this appeal, between persons in the relationship of solicitor and client, or in a confidential relationship of a similar character, cannot be upheld, unless the person claiming to enforce the contract can prove, affirmatively, that the person standing in such a confidential position has disclosed, without reservation, all the information in his possession, and can further show that the transaction was, in itself, a fair one, having regard to all the circumstances. In order that these conditions may be fulfilled it is incumbent to prove that the person who holds the confidential relationship advised his client as diligently as he should have done had the transaction been one between his client and a stranger, and that the transaction was as advantageous to the client, as it would have been, if he had been endeavouring to sell the property to a stranger. This principle is one of wide application, and must not be regarded as a technical rule of English law. An apt illustration of its application to Scotch law is to be found in the case of Gillespie & Sons v Gardner, to which their Lordships were referred during the argument, and which states that a bargain between a law agent and his client cannot be supported unless the law agent can show that the bargain was fair, and entered into without concealment of any kind."

50. Having regard to these authorities, I would hold, contrary to the ruling of Patten J, that the rule of fair dealing is capable of applying to a case in which there has been no passing of property.
51. I would add, for completeness, that, since the relevant transaction in 1986, the Law Society's Practice Rules have progressively prohibited solicitors from acting for both lender and borrower on the grant of a private mortgage of land at arms length, a private mortgage being any mortgage other than one provided by an institution which provides mortgages on standard terms in the normal course of its activities. We were helpfully referred by Mr Behrens to the rules as they stood in August 1990 and to subsequent amendments which were made to those rules in May 1998 and in 1999. The current 1999 Rules deal with this question under the heading: "Solicitor acting for lender and borrower" in Practice Rule 6(3).

B Non-disclosure of material facts

52. I agree with Patten J that Churchers ought to have disclosed the service charge and sought the consent of Mr O'Shea to it. That is a consequence of the duty of a fiduciary not to make a profit out of his trust without the permission of his principal. I also agree with the judge that the proper remedy in equity for that breach of duty is not rescission of the surety contract, but an account of the service charge received and the setting of the sum taken on the account against Mr O'Shea's liability under the surety covenant.
53. Mr Darton submitted that, as Churchers had failed to make full disclosure of the service charge, the fair dealing doctrine entitled Mr O'Shea to rescind the surety contract. He cited passages from the judgments of Evans and Hobhouse LJJ in Swindle v Harrison [1997] 4 All ER 705 at 718F-G and 720G-721C which, he submitted, treated non-disclosure of a profit made by a solicitor as material and as a breach of duty entitling the client to claim rescission of a loan transaction. In that case the claim was in fact for equitable compensation, and not rescission. It also seems to me, from another passage in the judgment of Hobhouse LJ, that he regarded the non-disclosure of the fiduciary's profit as giving rise to an obligation to an account, which was not sought, rather than as a basis for awarding equitable compensation for breach of fiduciary duty: see 726G-727A.
54. According to the fair dealing principle summarised in Mothew, the doctrine applies where a solicitor fails to make full disclosure to the client "of all facts material to the transaction". Even inadvertent failure to disclose material facts entitles the principal to rescind the transaction. On the facts found by Patten J, however, the service charge was not, in my judgment, a fact material to the transaction. This is so whether the surety on its own is regarded as the relevant transaction or, more realistically, whether the whole loan and security arrangement is regarded as a transaction of which the surety forms only a part. The judge found as a fact, which was not appealed, that, had disclosure of the service charge been given, it would have made no difference to Mr O'Shea's desire to proceed. He might possibly have sought a reduction in the rate of interest, but the judge found that, if that had been refused, Mr O'Shea would still have gone ahead. As the judge said in paragraph 45 of the transcript:

"Mr O'Shea ... would still have proceeded with the 1986 transaction had he been made aware of the service charge."

55. In those circumstances I conclude that the undisclosed service charge was not a material fact in the sense discussed in the authorities, that is a fact which is, or may be, material to the judgment of the client before the transaction is completed (see Moody v Cox at 80) or, as described in Demerara at p 681, a factor which would be of importance to the client in coming to a conclusion on, for example, the purchase price. I would reject Mr Darton's submission that this approach confuses materiality with what he describes as the "causative effect" of non-disclosure, relying on the authority of Brickenden [1934] 3 DLR 465, at 469. It is true on the authority of that case that, if there has been non-disclosure of material facts, the fiduciary cannot be heard to maintain that disclosure would not have altered the decision to proceed with the transaction because the client's action would have been solely determined by some other factor. It is, however, in my view, a prior question whether undisclosed facts were material. For the reasons given above, the service charge was not a material fact in this case, though I would emphasise there may be other cases in which, depending on the facts found by the trial judge, non-disclosure of a profit might be material.

C Rescission

56. Mr Darton also criticised the judge's approach to rescission of the surety. The judge held that, if the doctrine of abuse of confidence applied, rescission was not the appropriate remedy. Mr Darton submitted that the right to rescind the transaction was that of Mr O'Shea, not that of the court. He even contended that Mr O'Shea did not need any remedy available to the discretion of the court in order to defeat Churchers' claim on the surety. If the court found that the doctrine applied to the transaction, the court should simply dismiss Churchers' claim on the basis that, having breached the fair dealing rule, they were not entitled to enforce the surety against him. In so far as he needed the remedy of rescission, the court, Mr Darton submitted, had no discretion to withhold it in view of the strictness of the doctrine, its underlying purpose and its application to this case. He repeated his citation to the judge of a passage from the judgment of Roch LJ in TSB Bank Plc v Camfield [1995] 1 WLR 430 at p 438, dealing with the right of a contracting party to rescind for misrepresentation.
57. I have no hesitation in rejecting all of these submissions. The judge rightly held that the right to rescission on the grounds of abuse of confidence or breach of fiduciary duty depends on the exercise of discretion by the court to intervene in the enforcement of legal rights. I also agree with the judge that, if the matter of the service charge was a case of material non-disclosure, the court ought nevertheless to refuse rescission. As Millett LJ said in Dunbar Bank plc v Nadeem [1998] 3 All ER 876 at 884H-J:

"The remedy of rescission is an equitable remedy. It is well established that it is a condition of relief that the party obtaining rescission should make restitutio in integrum or, in modern terminology, counter restitution to the other party. If counter restitution cannot be made the claim to rescission fails: see Erlanger v New Sombrero Phosphate Co (1878) 3 App Cas 1218. I reject Mr Price's submission that, had the cross-appeal not succeeded, Mrs Nadeem would have had an unqualified unconditional right to rescission. She never had any such right. Her right to rescission was conditional on her making counter restitution."

58. Mr O'Shea's claim has to be considered in the light of the failure to make counter restitution in this case. He had accepted, even before the 1986 legal charge was executed, that loans to his company Dufose would require the security of his own personal guarantee. The loans were provided to enable Dufose to continue what was in reality Mr O'Shea's business. Where counter restitution is not given, fairness requires an order for an account of the service charge, rather than rescission of the surety by reason of non-disclosure of the service charge.

D The 1990 Assignment

59. This is not relevant to claims by Churchers to enforce the surety. It is, however, relevant to Mr Johnson's claim in respect of the payments made by him under the lease.
60. Mr Darton attempted, without the assistance of the law relating to the effect of non-disclosure of material facts, to argue that abuse of confidence precluded Mr Johnson from exercising his rights of indemnity in respect of the rents and other payments made by him to the landlord under the lease, and that the deed of indemnity itself should be rescinded for the same reasons as were applicable to the surety covenant. He contended that Mr Johnson had failed in his fiduciary duty to advise Mr O'Shea about the consequences and prudence of the assignment of the lease to the trustees of the pension scheme.
61. In my judgment, Mr Darton was right to be less than enthusiastic on this point. The judge rejected the case founded on fiduciary duty on the basis of his finding of fact, which is not appealed, that Mr Johnson did not allow or encourage Mr O'Shea and Dufose to go ahead with the assignment of the lease for the purpose of providing better security for his private lending clients. There was no conscious act of disloyalty sufficient to ground liability for breach of fiduciary duty on the principles laid down by Millett LJ in Mothew. I would add that the doctrine of abuse of confidence discussed earlier in this judgment does not apply to the assignment or provide any basis for setting the assignment aside. The assignment did not consist of a dealing between the clients, Mr O'Shea and Dufose, and Mr Johnson as their solicitor. The lease was simply assigned by Dufose to the trustees of the pension scheme, and any claim against the trustees could only be made for breach of fiduciary duty in relation to a conflict situation. As to that the judge was, in my judgment, entitled to find that there had been no breach of duty.

E Limitation

62. In the Respondent's Notice the limitation point was raised. It had been argued before the judge, but was not expressly dealt with by him in his judgment. The point concerned a defence of limitation raised by Churchers and Mr Johnson to Mr O'Shea's claim for compensation and for an indemnity in respect of sums which the pension fund is called upon to pay to the landlords under the lease. In my judgment, the point does not arise for decision on this appeal. The judge correctly dismissed Mr O'Shea's claim in the light of his finding that there had been no breach of duty on the part of Mr Johnson or Churchers in relation to the assignment of the lease to the scheme trustees.

F Costs Order

63. It is now agreed by counsel that there was an error in the drafting of the order below in relation to an order for costs made in Mr Johnson's favour, and that it should be amended in the manner marked in red by Mr Behrens on the order.
64. For all those reasons, I would dismiss this appeal.
65. LORD JUSTICE DYSON: I agree that this appeal should be dismissed and gratefully adopt the statement of facts set out by Mummery LJ. I add a few observations of my own on the claim arising under the surety covenant given by O'Shea in 1986.

The scope of the principle of abuse of confidence

66. As Lord Browne-Wilkinson said in CICB Mortgagees Plc v Pitt [1994] 1 AC 200, 209E, this principle requires:

"...those in a fiduciary position who enter into transactions with those to whom they owe fiduciary duties to establish affirmatively that the transaction was a fair one: see for example Demerara Bauxite Co. Ltd v Hubbard [1923] AC 673; Moody v Cox [1917] 2 Ch 71 and the discussion in the Aboody case [1990] 1 QB 923, 962-964. The abuse of confidence principle is founded on considerations of general public policy, viz, that in order to protect those to whom fiduciaries owe duties as a class from exploitation by fiduciaries as a class, the law imposes a heavy duty on fiduciaries to show the righteousness of the transactions they enter into with those to whom they owe such duties."

67. Patten J held that the principle has no application to the transaction under consideration in the present case, since it only applies to transactions under which property passes. He considered that it was only in such cases that the possibility of abuse was sufficiently obvious to support a rule of public policy that required necessary advice and disclosure to be made by the fiduciary. It is true that no case has been cited to us in which the principle of abuse of confidence has been applied to a transaction in which property did not pass. But that is an insecure basis for confining the application of the principle to such cases. I cannot agree that it is only in transactions where property passes that there is a sufficient risk of abuse to justify the rule. There is the possibility of abuse in any transaction where a solicitor deals with his principal, whether the solicitor is acting on his own behalf or on behalf of another. Millett LJ summarised the principle in Bristol and West Building Society v Mothew [1998] Ch 1, 18D-E in the passage which Mummery LJ has already cited. If the terms of the transaction have been agreed before the fiduciary becomes involved, there is no scope for the application of the principle. But if the fiduciary is involved in dealing with this clients, then it does apply. In my judgment, the doctrine of abuse of confidence does apply to a loan and legal charge negotiated by the borrower's solicitor on behalf of lenders. Mr Behrens was unable to advance any reason why it should not in principle apply to such a transaction.

Was there a breach?

68. The next question is whether there has been any breach of the doctrine on the facts of this case. It is well established that, where it applies, the fiduciary is (a) bound to disclose to his client everything that is or may be material before the transaction is completed, and (b) must prove that the transaction was a fair one having regard to all the circumstances: see Lord Parmoor in Demerara Bauxite Co v Louisa Hubbard [1923] AC 673, 681, and Moody v Cox and Hatt [1917] 2 Ch 71, 80-1 (Lord Cozens-Hardy MR) and 88-89 (Scrutton LJ).
69. Leaving aside the question of the secret 1.5% service charge, Mr Darton has not pointed to any provision in the transaction that was not fair in the circumstances of this case. The judge found that by 1986 Mr O'Shea was an astute business man who had gained considerable experience in the world of property dealing. He would not have dealt with Churchers if it had not been in his commercial interests to do so. The judge did not make a specific finding that the transaction was fair, but such a finding is implicit in his detailed findings of fact. Mr Darton submits, however, that, by failing to disclose the 1.5% service charge, Mr Johnson failed to disclose a material fact, and that he thereby abused the confidence reposed in him by Mr O'Shea. This submission raises the question of what disclosure is required of a fiduciary who deals with his principal. Mr Darton submits that the fiduciary is obliged to disclose all facts which his principal is entitled to know in connection with the transaction, whether or not disclosure would in the event have affected the principal's decision to proceed with the transaction on the same or different terms. To judge materiality by considering what course the principal would have taken if disclosure had been made is, he submits, to indulge in impermissible speculation.
70. In Moody v Cox, Lord Cozens-Hardy MR said that the duty was to disclose "everything that is material, or may be material, to the judgment of his client before the transaction is completed". In other words, there must be disclosure of everything that would or might influence the principal in his decision whether to proceed with the transaction at all, or to proceed with the transaction on the terms being offered by the other contracting party. At paragraph 45 of his judgment, the judge upheld the complaint of Mr O'Shea that the non-disclosure deprived him of the opportunity of negotiating a lower rate of interest, and that Mr Johnson and Churchers were in breach of their duty to disclose and seek the consent of Mr O'Shea to the 1.5% service charge.
71. In my judgment, the non-disclosure was not immaterial. In this one respect only, I find myself disagreeing with Mummery LJ. Mr O'Shea was entitled to know of the secret service charge, because it was something that was material to his decision whether to proceed with the transaction on the terms that were being offered to him. Mr O'Shea might or might not have succeeded in persuading the lenders to accept a reduced rate. The judge made no finding on this, nor in my judgment was he required to do so. The essential point is that Mr O'Shea was deprived of the opportunity of seeking to negotiate a different deal from the one that, being ignorant of the service charge, he was content to accept. He was reasonably entitled to say that he would have wanted to know about the service charge, because it was material to the question whether he was willing to accept the terms on offer without further negotiations.
72. I do not consider that the fact that, if there had been disclosure of the service charge, Mr O'Shea would have proceeded with the transaction even if he could not negotiate an improvement in the terms on offer is determinative of the materiality of the non-disclosure. I find support for this view in Brickenden v London Loan and Savings Co [1934] 3 DLR 465, 469, where Lord Thankerton said:

"When a party, holding a fiduciary relationship, commits a breach of his duty by non-disclosure of material facts, which his constituent is entitled to know in connection with the transaction he cannot be heard to maintain that disclosure would not have altered the decision to proceed with the transaction because the constituent's action would be solely determined by some other factor, such as the valuation by another party of the property proposed to be mortgaged. Once the Court has determined that the non-disclosed facts were material, speculation as to what course the constituent, on disclosure, would have take is not relevant."

73. There is further support in Swindle v Harrison [1997] 4 All ER 705. That was not a rescission case. It was a case about equitable compensation. The plaintiff solicitor, who was acting for Mrs Harrison, lent her the sum of £75,000 to finance the purchase of a hotel that she had intended to run as a restaurant. The loan was secured by a charge on the hotel. The solicitor failed to disclose inter alia that his firm was making a profit on the loan. The restaurant business failed and the solicitor started proceedings, claiming possession of the hotel. Mrs Harrison counterclaimed for compensation for breach of fiduciary duty. The judge found that if the solicitor had disclosed the hidden profit, it would have made no difference: Mr Harrison would have proceeded since, realistically, she had no choice. Evans LJ considered that the facts that were not disclosed were material. At page 718F he said:

"Their breach of duty consisted in failing to disclose material facts to the second defendant, as the judge held, and it can be assumed that she would be entitled to claim rescission of the loan agreement, if rescission was possible, and that she is now entitled to recover damages, or compensation, for the consequences of that breach."

74. Hobhouse LJ was of the same opinion as to materiality. At page 721A he said:

"Thus, although there were breaches of both classes of obligation, the breaches are ones which might well not (and in the event did not) have any impact on the event that followed although they were material to a fully informed decision by Mrs Harrison whether or not to accept the offer of the loan by Mr Swindle's firm."

75. In Swindle, there was no finding that Mrs Harrison would even have attempted to negotiate an improvement in the terms on offer if she had known of the hidden profit. On the basis of the findings of Patten J, the case for materiality of the non-disclosure here is stronger than it was in Swindle. I would hold that there was non-disclosure of a material fact in the present case, sufficient to engage the doctrine of abuse of confidence.

Rescission

76. The next question is whether, once he found that there was a breach of the duty to disclose, the judge was obliged to hold that Mr Johnson was not entitled to enforce the surety covenant. Mr Darton submits that Mr O'Shea did not need to obtain an order rescinding the surety covenant: the abuse of confidence simply disentitled Mr Johnson as a matter of law from enforcing the covenant. Alternatively, if an order of rescission was required, the court either had no discretion to refuse it in a case of an abuse of confidence, or, if it had a discretion, it was obliged to make an order in such a case.
77. I cannot accept Mr Darton's submission that a contract entered into following an abuse of confidence is unenforceable simply because it is "tainted" (to use Mr Darton's word) by the abuse. Such a contract is not illegal, nor is it analogous to an illegal contract. Until it has been set aside, it remains in being for the benefit of, and is enforceable by, both parties.
78. In relation to rescission, in my view the judge was right to say (paragraph 46) that, whatever the position in relation to a claim to rescind based on misrepresentation, the right to rescission on grounds of undue influence, abuse of confidence or breach of fiduciary duty depends on the exercise of the discretion by the court to intervene in the enforcement of legal rights. I refer to the passage in the judgment of Millett LJ in Dunbar Bank Plc v Nadeem [1998] 3 All ER 876, 884 H-J which Mummery LJ has already cited.
79. When exercising its equitable jurisdiction, the court considers what fairness requires not only when addressing the question of the precise form of relief, but also when considering whether the remedy should be granted at all. As Sir Donald Nicholls V-C said in Cheese v Thomas [1994] 1 WLR 129, 137C:

"It is important not to lose site of the very foundation of the jurisdiction being invoked. As Lord Scarman observed in the Morgan case [1985] AC 686, a court in the exercise if this jurisdiction is a court of conscience. He noted, at p. 709:

`There is no precisely defined law setting limits to the equitable jurisdiction of a court to relieve against undue influence ... Definition is a poor instrument when used to determine whether a transaction is or is not unconscionable: this is a question which depends upon the particular facts of the case.'

As with the jurisdiction to grant relief, so with the precise form of the relief to be granted, equity as a court of conscience will look at all the circumstances and do what fairness requires. Lord Wright adverted to this in Spence v Crawford [1939] 3 All ER 271, which was a misrepresentation case. He said regarding rescission and restitution, at page 288:

`The remedy is equitable. Its application is discretionary, and, where the remedy is applied, must be moulded in accordance with the exigencies of the particular case.'"

80. In my judgment, the judge was entitled in the present case to hold that fairness required an order for an account of the service charge, but not rescission of the surety covenant. The transaction was fair. Mr O'Shea was an experienced business man who, the judge found at paragraph 19, "remained focused throughout on competitive rates on interest and would not have dealt with Churchers if it was not in his commercial interests to do so". He held (paragraph 27) that if the service charge had been disclosed to Mr O'Shea, it is possible that he would have sought a reduction in the rate of interest, but if this had been refused, he would still have gone ahead. There is no challenge to any of these findings. In these circumstances, the breach of duty by Mr Johnson was marginal.
81. The judge was also entitled to take into account (as he did at paragraph 47) the fact that Mr O'Shea had already stood surety under an earlier charge in 1984, and had accepted that loans to his companies would require the security of his own guarantee. The loans were provided to Dufose to enable it to continue what was in reality Mr O'Shea's own business.
82. Above all, if the surety covenant were set aside, Mr O'Shea would be released from substantial contractual obligations from which he had derived very considerable benefit which would not be restored to the lenders. Fairness and justice do not require such an outcome. Once Mr Darton's submission that the judge had no discretion is rejected, he has to show that the judge exercised his discretion wrongly. In my judgment, this he has failed to do.
83. MR JUSTICE DOUGLAS BROWN: I am also of the view that this appeal should be dismissed and, save in one respect, for the reasons given by Mummery LJ. However, I have come to the same conclusion as Dyson LJ on the question of materiality. I adopt his reasoning and the citations of authority supporting it. Disclosure should have made of the annual service charge of 1.5% payable by Churchers' clients. It should have been disclosed to allow Mr O'Shea the opportunity of deciding whether to proceed or not or, more realistically, of negotiating a lesser rate of interest. The necessity of disclosure is not in dispute. If not material, it is not easy to see why it should be disclosed.
84. As to the extent of the principle of abuse of confidence, the consequences of non-disclosure, I am in agreement with Mummery and Dyson LJJ. The judge plainly had a discretion based on his findings as to the appropriate remedy. If he did not have, Mr Darton's contention that the surety was unenforceable would have produced an unjust and inequitable solution on facts found by the judge.
Order: Appeal dismissed with costs assessed on an indemnity basis. Permission to appeal to the House of Lords refused.