Re-visiting Undue Influence

• Published date: 30 May 2022
• Subject Matter: Finance and Banking, Real Estate and Construction, Charges, Mortgages, Indemnities, Financial Services, Real Estate
• Law Firm: Gatehouse Chambers
• Author: Ms Priya Gopal

This article examines the recent decision in Nature Resorts Ltd v First Citizens Bank Ltd [2022] UKPC 10 where the Privy Council considered the application of the undue influence doctrine in the context of a mortgage over commercial property.

Background

The Culloden Estate ("the Estate") is an area of land occupying circa 148 acres in Tobago. The Estate is owned by Nature Resorts Limited ("NRL"). NRL's sole shareholder was Patrick Dankou ("Mr Dankou") who incorporated NRL for the purpose of buying the Estate and developing it as an eco-resort.

On 8 January 2008, a Mr Simon Paler ("Mr Paler") and Mr Christopher James ("Mr James") signed a share purchase agreement pursuant to which they agreed to purchase 75% of the NRL shares held by Mr Dankou for US$2.75m. US$275,000 was paid on the signing of the agreement and the balance was payable by 14 March 2008.

Mr Paler and Mr James applied to the First Citizens Bank Ltd ("the Bank") for a loan to facilitate the purchase. However, the Bank was only willing to lend US$1.925m to be secured by a mortgage over the Estate and a charge over the shares to be acquired.

Mr Richard Wheeler ("Mr Wheeler"), a partner in the firm Lex Caribbean, was instructed by the Bank to prepare the security documents. Messrs Dankou, Paler and James also instructed Mr Wheeler to: (a) draw up the share transfers transferring the NRL shares to Mr Paler and Mr James; and (b) prepare a promissory note pursuant to which Messrs Paler and James promised to pay Mr Dankou US$975,000.

The documents were executed and signed at the offices of Lex Caribbean.

Messrs Paler and James defaulted on the loan and the Bank sought to exercise its power of sale under the mortgage.

NRL pursued its claim as follows:

• The Deed of Mortgage was voidable on the basis of undue influence exercised by Mr Wheeler over NRL/Mr Dankou. This argument failed at first instance and in the Court of Appeal;
• The Deed of Mortgage was voidable as a consequence of misrepresentations made by Mr Wheeler to Mr Dankou. This argument was dismissed at first instance and there was no appeal against that decision.

The appeal to the Privy Council therefore concerned:

• The claim in respect of undue influence; and
• Whether there was an argument that the Deed of Mortgage contravened sections 56-57, Trinidad and Tobago Companies Act ("the Act") on financial assistance.

In the High Court, Pemberton J concluded that the presumption of undue influence did not arise on the facts. She noted (inter...