England and Wales Court of Appeal (Civil Division) Decisions

IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT
CHANCERY DIVISION
MR JUSTICE NEUBERGER

		Royal Courts of Justice Strand, London, WC2A 2LL
		1st April 2004

Lord Justice Mummery :

Introduction

1. In Hammond v. Osborn [2002] EWCA 885 Sir Martin Nourse, who has great experience of this branch of the law, said

"1. The striking feature of this appeal has been the revelation of continuing misconceptions as to the circumstances in which gifts or other transactions will be set aside on the ground of presumed undue influence, a class of case in which, as Cotton LJ observed in Allcard v. Skinner (1887) 36 Ch D 145,171:

"the court interferes, not on the ground that any wrongful act has in fact been committed by the donee, but on the ground of public policy, and to prevent the relations which exist between the parties and the influence arising therefrom being abused,"

2. The striking feature of this appeal is that fundamental misconceptions persist, even though the doctrine is over 200 years old and its basis and scope were examined by the House of Lords in depth (in 374 paragraphs) less than 3 years ago in the well known case of Royal Bank of Scotland Plc v. Etridge (No 2) [2002] 2 AC 773.The continuing confusions matter. Aspects of the instant case demonstrate the need for a wider understanding, both in and outside the legal profession, of the circumstances in which the court will intervene to protect the dependant and the vulnerable in dealings with their property.
3. In the traditional categories of relationship there is an irrebuttable presumption of undue influence by one person over another: see Etridge at paragraph 18. This is not one of those cases. Undue influence can also occur in matrimonial relationships. It featured in the line of cases from Barclay's Bank v. O'Brien [1994] 1 AC 180 to Etridge. This is not a matrimonial case, but, like Etridge, it is concerned with the rebuttable presumption of undue influence arising from circumstances in which there is "trust and confidence, reliance, dependance or vulnerability on the one hand and ascendancy, domination or control on the other": Etridge at paragraph 11. The operation of the "rebuttable evidential presumption of undue influence" was described by Lord Nicholls in Etridge as follows:

"13. Whether a transaction was brought about by the exercise of undue influence is a question of fact. Here, as elsewhere, the general principle is that he who asserts a wrong has been committed must prove it. The burden of proving an allegation of undue influence rests upon the person who claims to have been wronged. This is the general rule. The evidence required to discharge the burden of proof depends on the nature of the alleged undue influence, the personality of the parties, their relationship, the extent to which the transaction cannot readily be accounted for by the ordinary motives of ordinary persons in that relationship, and all the circumstances of the case.

14. Proof that the complainant placed trust and confidence in the other party in relation to the management of the complainant's financial affairs, coupled with a transaction which calls for explanation, will normally be sufficient, failing satisfactory evidence to the contrary, to discharge the burden of proof. On proof of these two matters the stage is set for the court to infer that, in the absence of a satisfactory explanation, the transaction can only have been procured by undue influence. In other words, proof of these two facts is prima facie evidence that the defendant abused the influence he acquired in the parties' relationship. He preferred his own interests. He did not behave fairly to the other. So the evidential burden shifts to him. It is for him to produce evidence to counter the inference which otherwise should be drawn."

4. The transaction here, as in the majority of undue influence cases, relates to the disposition of a house. The O'Brien and Etridge jurisprudence is an outcrop of joint ownership of the matrimonial home, which is now the norm, and the increasing use of the home as an investment, including use as security for bank loans to finance small businesses and other ventures. The instant case is evidence of another social trend. With the increase in home ownership and the rising value of residential property more people have more property to dispose of in their lifetime and on death and more people expect to benefit substantially from inheritance. As people live longer, the inheritors have to wait longer. There is, however, the unwelcome prospect that the longer the wait, the greater the risk that even a modest estate will be seriously diminished by the high cost of care in the old age or infirmity of the home owner, and by the impact of inheritance tax on death. The elderly and infirm in need of full time residential care are vulnerable to suggestions that they should dispose of the home to which they are unlikely to return. In my view, these social trends are already leading to a renewed interest in the law governing the validity of life time dispositions of houses, both in and outside the family circle, by the elderly and the infirm. The transfer of a house is a substantial transaction. A house is the most valuable asset that most people own. If a transfer is made by one person on the dependant side of a relationship of trust and confidence to a person in whom trust has been placed, it must be shown by the trusted party that the disposition was made in the independent exercise of free will after full and informed consideration. The court may grant relief to the transferor, even though the transfer was not made as the result of any specific reprehensible conduct on the part of the trusted transferee.

The Appeal

5. This is an appeal, brought with the permission of Neuberger J, from an order made by him on 11 April 2003. He declared that a Deed of Gift of freehold property at 155 Railway Street, Splott, Cardiff (the House) dated 3 February 1998 made by Bernard Pesticcio (Bernard), the respondent to this appeal, in favour of his sister Mrs Maureen Niersmans (Maureen), the appellant, was procured by undue influence and is void as against her. He rejected claims that the transferee of the House from Maureen or that the transferee's mortgagee were affected by notice of the undue influence. There is no appeal from that part of the decision
6. The final form of remedy has not yet been decided. There will be questions of the means by which restitution can be achieved and the quantum of compensation. The judge made an interim order that, until the determination of tracing proceedings or further order, the property purchased by Maureen and her husband after the disposition of the House by Maureen be charged with the sum of £50,000 and interest. He also made an interim order prohibiting them from charging, selling, leasing or otherwise dealing with the new property, without the prior written consent of Bernard's solicitors,

The Grounds of Appeal

7. The only area of controversy on the appeal is whether the judge correctly stated and applied the law concerning the rebuttable presumption of undue influence in a case where, as here, a solicitor had been instructed to act for the donor in the impugned transaction and in related transactions (an enduring power of attorney and a will). It was argued by Mr Bryan Thomas, on behalf of Maureen, that Miss Dawn Tindall had been instructed to act as solicitor for Bernard in relation to the Deed of Gift; that there was no presumption against a gift to Maureen; that, unless there were exceptional circumstances, undue influence on the part of Maureen could not be established; and that Bernard's wishes, which were effected by the Deed of Gift, should be respected. The judge, he submitted, had overstated the burden on Maureen.
8. Mr Thomas emphasised three points: (a) the presence and role of Miss Tindall, as Bernard's solicitor as proof of his independence and his free will in the transaction; (b) the judge's finding that Bernard had the requisite mental capacity to make the gift; and (c) the burden of proof on Bernard, as claimant. Mr Thomas asked a series of questions. What more could Maureen have possibly done to ensure that Bernard was not affected by any presumed vitiating influence? What further evidence was required to make the explanation of Bernard's wish to benefit her a satisfactory explanation of the gift and rebut the presumption of undue influence? How was it fair and reasonable to place on Maureen the burden of proving a negative, that is that the gift was not made as a result of undue influence by her? What had Maureen done wrong? Mr Thomas submitted that the judge had overstated the force of the presumption and the weight of the evidential burden on her. It was a sufficient and reasonable explanation of the gift that Bernard understood and exercised his own mind to give his house to her. If, he contended, the advice or conduct of Miss Tindall was open to criticism, as the judge held it was, the proper remedy was for Bernard to bring an action for professional negligence against Miss Tindall, rather than pursue the present action against Maureen to set aside a gift, which he understood he was making and which he wanted to make in her favour.
9. The appeal is not concerned with other issues in the action, which the judge decided against Bernard. He rejected the plea that Bernard had insufficient capacity to execute the 1998 Deed. As indicated earlier, he also rejected the claims that the purchaser of the House from Maureen (Mr Alan Huet) and his mortgagee (Abbey National Plc) had notice of Maureen's undue influence over Bernard.

The Facts: chronological

10. Mr Pesticcio, who is now 70 years old, has been mentally and physically disadvantaged for most of his life. He had an attack of meningitis in September 1933, when he was only three months old. He was of significantly lower than average intelligence and understanding. He went to a special needs school, suffered from epilepsy, was involved in a number of accidents and was not in employment for most of his adult life. Until about seven years ago he lived in the House, as the family home, with his widowed mother, Mary Pesticcio (Mary), with whom he had an exceptionally close relationship. She was the most influential figure in his life. She had inherited the House from her husband on his death in 1970. In August 1981 she made a gift of the House to Bernard. It was by far his most valuable asset.
11. On 11 May 1997 Bernard was admitted to hospital following a serious fall at home. He was in a coma and suffered brain damage. He stayed in hospital for six months. On discharge from hospital he was transferred to St Albans Nursing Home, Splott, where he still lives. After the accident Mary went to live first with Maureen's daughter Caroline and then, until she returned to the House early in 1998, with Maureen and her husband Leonard, at their house. Maureen and Leonard later lived with Mary at the House. In April 1999 Mary moved into care at St Alban's Nursing Home, where she remained until her death on 19 March 2003 at the age of 95.
12. While Bernard was in hospital he was visited by a solicitor, Miss Dawn Tindall, who had been contacted by Maureen or Caroline in July 1997. Miss Tindall practised from her home in Cardiff under the name "Triangle Legal Services."
13. Miss Tindall had a number of meetings with Bernard. At the request of Maureen she met him at the House in July 1997 in the company of Mary and Maureen. She corresponded with Maureen and Caroline on first name terms. She met Bernard again on 3 October 1997 at the House in the company of Mary, Maureen and Caroline. Bernard was on a home visit from hospital. She took instructions from him in relation to the making of an enduring power of attorney and of a will. On 15 October 1997 Miss Tindall visited Bernard in hospital. On that visit Bernard signed a standard form of enduring power of attorney in favour of Maureen, though it was not completed by Maureen until 23 November 1999. He also executed a will drafted by Miss Tindall and witnessed by her and another person, appointing Maureen and her daughter Caroline as executors. They were residuary beneficiaries of 1/3 each, the other third being divided between Christopher Pesticcio and his children. After a life interest in favour of Mary the House fell into residue. Under the previous 1988 will, which was revoked, Mary was to have a life interest, after which the residue was to be divided equally between Maureen and two of her brothers.
14. Miss Tindall had another meeting with Bernard and Maureen on 8 January 1998. She explained that, if Mary vacated the House, and Bernard remained owner, it would be taken into account as part of his assets by the local authority when considering his ability to pay towards the nursing home fees. It seemed unlikely that Bernard would ever leave the nursing home. According to Miss Tindall, Bernard wanted to give the House to Maureen, so that she could look after Mary, who was keen for him to enter into the Deed of Gift.
15. Miss Tindall drafted a Deed of Gift following the wording of the Deed made by Mary in favour of Bernard in 1981. On 3 February she went to the House, when Bernard was visiting from the nursing home. Miss Tindall spoke to Bernard in the absence of Maureen. Bernard and Maureen then executed the Deed of Gift. Their signatures were witnessed by Miss Tindall.
16. On 14 December 1999 Maureen sold the House to her daughter's boy friend, Alan Huet, for £50,000, of which £47,500 was lent by Abbey National Plc on the security of the House. With the proceeds Maureen and her husband bought a new house, 15 Ash Lane, St Athan.
17. On 11 October 2000 one of Bernard's brothers, Ronald, was appointed receiver of his affairs by the Court of Protection. At the same time he was authorised, as Bernard's litigation friend, to bring proceedings against Maureen and her husband, and against Mr Huet and the Abbey National Plc to set aside the Deed of Gift. The proceedings were issued on 8 May 2001. All the individual parties were publicly funded. The costs must be colossal.

Findings

18. The judge made the following important findings.

(1) By the time of the Deed of Gift Bernard had placed trust and confidence in Maureen. He had put his financial affairs under Maureen's control: he had granted her an enduring power of attorney; she collected his disability and other benefits and she paid his nursing home fees. She had received in her own bank account the proceeds from the surrender of an Allied Dunbar policy to dispose of as Bernard and Mary directed. He had trusted her to care for their mother, Mary, the person who mattered most to him, in the House, but without imposing any legal obligation to do so in the Deed.

(2) There was no satisfactory explanation for the Deed of Gift. The evidential burden was on Maureen to produce a satisfactory explanation. Her explanation was, first, that Bernard wanted to avoid the House being taken into account and possibly sold when the local authority assessed his liability for nursing home fees and, secondly, he wanted to protect his mother. The judge did not regard the explanations as reasonable or satisfactory: as Mary was living in the House at the time it would not be taken into account in assessing his liability to pay fees; if a transfer was made to avoid such liability it could be set aside at the instance of the local authority; the terms of the Deed afforded no protection for Mary's care by Maureen; the gift deprived Bernard of well over 90% of his assets; and, if Bernard had been left with £18,000, it would not have been taken into account in assessing his liability to pay fees.

(3) Bernard did not have independent legal advice on the Deed of Gift from Miss Tindall so as to free him from the presumed undue influence of Maureen. The judge found that Miss Tindall's part in the execution of the Deed of Gift did not provide a satisfactory explanation of the gift, so as to rebut the presumption arising from the relationship of trust and confidence.

(4) The judge made a finding that Miss Tindall was friendly with Maureen and her daughter Caroline. He rejected her evidence on some points, such as her evidence that she was consulted by Bernard in 1997 about giving the House to Mary, which was difficult to understand in the light of the will and the Deed of Gift made only 3 months later. In dealing with matters for Bernard, Miss Tindall sent letters in connection with the Deed to Maureen and Caroline, not to Bernard. She made no contemporaneous notes of her attendances on Bernard in 1998. Miss Tindall had not made clear to Bernard what his options were, such as retaining £18,000 of assets without fear of them being taken into account for nursing home fees; she had not advised him of the disadvantage to him and his mother of giving the House to Maureen without imposing any legal obligations on her (e.g. to house Bernard or Mary, if they left the nursing home); she had not explained that he need not follow the wishes of Maureen or of anyone else; she did not really distinguish between Maureen and Caroline, on the one hand, and Bernard, on the other hand.. Although she had considered the question of Bernard's mental capacity, she had not considered, despite her suggestion to the contrary, whether Bernard might be executing the 1998 Deed on the basis of any undue influence.

The Legal Position

19. The judge took the law as stated in two recent cases: Royal Bank of Scotland Plc v. Etridge (No 2) [2002] 2 AC 773 and Hammond v. Osborn [2002] WTLR 1126. Reference to those cases will only be made to the extent necessary to deal with the grounds of appeal argued by Mr Thomas. I can say now that neither of the legal submissions advanced by Mr Thomas at the trial and in this court are supported by the authorities.

No wrongdoing

20. The insistence of Mr Thomas that Maureen had "done nothing wrong" is an instance of the "continuing misconceptions" mentioned by Sir Martin Nourse in Hammond about the circumstances in which gifts will be set aside on the ground of presumed undue influence. 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: Allcard v. Skinner (1887) 36 Ch D 145 at 171. The court scrutinises the circumstances in which the transaction, under which benefits were conferred on the recipient, took place and the nature of the continuing relationship between the parties, rather than any specific act or conduct on the part of the recipient. 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. The presumption arising from the trust and confidence of their relationship made it unnecessary, for example, for Bernard to prove that Maureen actually had influence over him in relation to the gift of the, House, let alone that she in fact exercised undue influence or applied improper pressure to obtain the Deed of Gift. Whether or not Maureen's conduct could be described as "wrongful", the requirement of the doctrine of undue influence is that it must be "affirmatively established that the donor's trust and confidence in the donee has not been betrayed or abused: " see Hammond at paragraph 32. On that point Mr Thomas relied on the part played by Miss Tindall.

Advice of Solicitor

21. It was contended that the judge failed to give any or proper weight to the fact that Bernard had been advised by his own solicitor prior to entering into the Deed and, instead of determining whether there was a satisfactory explanation for the gift other than the abuse of ascendancy, he had required that the transaction should objectively be in the best interests of Bernard. That was a higher burden on the defendant than was imposed by the authorities.
22. Mr Thomas argued that the use of an independent solicitor was compelling evidence that Bernard fully understood his actions and that, where a solicitor had advised the person making the gift, undue influence could not be established, unless there were exceptional circumstances. Neither Bernard nor Maureen could have done anything more. The use of an independent solicitor was a satisfactory explanation of the transaction. It was neither fair nor just to place a burden on Maureen to establish a further reasonable explanation for the gift.
23. In my judgment, the judge correctly directed himself on the law and its application to the facts found by him, against which no appeal has been brought. It is the case, as held in Inche Noriah v. Omar [1929] AC 127 at 135, that the presumption of undue influence may be rebutted by showing that the transaction was entered into "after the nature and effect of the transaction had been fully explained to the donor by some independent qualified person." The participation of a solicitor is not, however, a precaution which is guaranteed to work in every case. It is necessary for the court to be satisfied that the advice and explanation by, for example, a solicitor, was relevant and effective to free the donor from the impairment of the influence on his free will and to give him the necessary independence of judgment and freedom to make choices with a full appreciation of what he was doing. The judge was entitled to find that the role of Miss Tindall was wanting in the respects, which I have referred to above and which are not appealed. Her advice was not such as a competent adviser would give, if acting solely in the interests of Bernard.

Result

24. In my judgment, none of the grounds of appeal has been made out. In a very detailed and careful judgment the judge correctly applied the law of undue influence to the facts found by him and reached an unimpeachable conclusion. I would dismiss the appeal.

Lord Justice Jacob

25. I agree.

Lord Justice Pill

26. I also agree.