Privy Council Considers Presumption Of Undue Influence In Context Of Bank's Security Rights

• Published date: 27 May 2022
• Subject Matter: Finance and Banking, Corporate/Commercial Law, Charges, Mortgages, Indemnities, Financial Services, Corporate and Company Law, Shareholders
• Law Firm: Herbert Smith Freehills
• Author: Ceri Morgan, Nihar Lovell and Catherine Bagge

The Board of the Privy Council has dismissed a claim of undue influence against a bank in relation to a mortgage deed entered into as security for a loan made by the bank: Nature Resorts Ltd v First Citizens Bank Ltd (Trinidad and Tobago) [2022] UKPC 10.

This decision will be of broader interest to financial institutions faced with claims seeking to void financial contracts on the grounds of undue influence. It provides a useful application of the test for undue influence set out in Royal Bank of Scotland plc v Etridge (No 2) [2001] UKHL 44 [2002]. As a reminder, Etridge established that there are two requirements for establishing the (rebuttable) presumption of undue influence. First, there must be a relationship of influence. The second requirement is that the transaction must not be readily explicable on ordinary motives, If those two requirements are satisfied, so that there is a presumption of undue influence, the burden of proof shifts and it is for the party seeking to uphold the transaction to rebut the presumption by showing that the other party was not acting under undue influence (i.e. that the other party exercised free and independent judgment) when entering into the transaction.

In the present case, the Board concluded that the Trinidad & Tobago Court of Appeal was entitled to reach the view that it had that, in relation to the deed of mortgage, the customer was not acting under the undue influence of the bank's lawyer - on the facts, he was exercising a free and independent judgment, which rebutted the presumption of undue influence that the Court of Appeal established existed. However, the Board expressed concerns with the approach taken by the Court of Appeal in establishing that there was a presumption of influence which the Bank needed to rebut. The Court of Appeal had found that the transaction was not readily explicable as the company had not derived any benefit from it. The Board noted that viewing the company as distinct from its sole shareholder (who had derived a benefit) was the incorrect approach to have taken.

We consider the decision in more detail below.

Background

The claimant company, with a sole shareholder, owned land in Tobago purchased in 2000 for the purpose of developing an eco-resort. The land was bought with the assistance of silent investors. In 2008, the shareholder agreed to sell 75% of the shares in the company to two individuals. To facilitate their purchase of the shares, the two individuals applied to the...