Bank of Montreal v. Duguid

Bank of Montreal v. Duguid Collection Decisions of the Court of Appeal Date 2000-04-20 Docket numbers C27635 Judges McMurtry, Roy; Osborne, Coulter Arthur Anthony; Feldman, Kathryn N. Subject Civil Decision Content DATE: 20000420 DOCKET: C27635 COURT OF APPEAL FOR ONTARIO McMURTRY C.J.O., OSBORNE and FELDMAN JJ.A. BETWEEN: ) ) Joshua J. Siegel BANK OF MONTREAL ) for the appellant ) Appellant ) ) - and - ) Geoffrey T. Mullin ) for the respondent CAROL DUGUID ) ) Respondent ) ) Heard: November 30, 1998 ) On appeal from the judgment of Day J. dated May 30, 1997 OSBORNE A.C.J.O.: OVERVIEW [1] I have had the advantage of reading the reasons of Feldman J.A., who would dismiss the Bank?s appeal but not for the reasons of the trial judge. I agree with Feldman J.A. that the Bank, in these circumstances, was not required to tell its customers (specifically, Mrs. Duguid, a co-signer) of its views on the quality of the investment. I also agree that the Bank?s failure to follow its internal policies (specifically, advising Mrs. Duguid to get independent legal or financial advice) is not a basis upon which to dismiss the Bank?s action on the note. I cannot, however, agree with my colleague?s conclusions on the issue of presumed undue influence. [2] Mrs. Duguid alleges that the guarantee was procured by the undue influence of her husband; however, she does not seek any relief as against her husband, who is now bankrupt. Rather, she now seeks to set aside the transaction as against a third party, the Bank. The question then is in what circumstances a party can set aside a transaction on the ground of undue influence as against a third party to the alleged wrongdoing. [3] In my view, the relationship between Mr. and Mrs. Duguid in respect of their financial affairs was not a relationship that would trigger a presumption of undue influence when Mrs. Duguid, at her husband?s request, co-signed a promissory note (prepared by the Bank). In any case, having regard to the trial evidence, it seems to me that if a presumption of undue influence was established, the presumption was rebutted. Thus, I think that the Bank?s appeal should be allowed. ANALYSIS [4] As a general proposition, a party may set aside a transaction where that party was induced to enter into the transaction by another?s undue influence. Thus, where a husband induces his wife to enter into a transaction by means of undue influence, the wife will be entitled to set aside the transaction as against her husband. [5] As Feldman J.A. has noted, the House of Lords reviewed the doctrine of undue influence in Barclays Bank plc v. O?Brien, [1993] 4 All E.R. 417. The facts of O?Brien are somewhat similar to the facts of this case. Mr. O?Brien was a shareholder in a company with an unsecured overdraft. He sought an increase to the company?s overdraft limit to be secured by a second charge over the matrimonial home owned jointly by him and his wife. The Bank agreed to grant the increase and prepared the necessary documents, which Mr. O?Brien signed. The following day, Mr. O?Brien brought his wife to the Bank so that she could sign. No one explained the transaction or the documents to her or suggested that she receive independent legal advice. Mrs. O?Brien simply signed the documents. Eventually the company failed, and the Bank sought to realize on its security. [6] Mrs. O?Brien defended the Bank?s action on the ground that she had been induced to sign the agreement by her husband?s undue influence. The trial judge found that there was no undue influence, and ruled in favour of the Bank. The Court of Appeal granted the wife?s appeal, finding that married women providing security for their husbands? debts constituted a specially protected class, requiring the Bank to ensure that the wife received independent legal advice. The House of Lords dismissed the Bank?s appeal. While undue influence was not an issue directly before the House of Lords, Lord Browne-Wilkinson reviewed the law regarding undue influence, and noted that there were two different categories of undue influence ? actual and presumed. He set out the following classification: Class 1: actual undue influence. In these cases it is necessary for the claimant to prove affirmatively that the wrongdoer exerted undue influence on the complainant to enter into the particular transaction which is impugned. Class 2: presumed undue influence. In these cases the complainant only has to show, in the first instance, that there was a relationship of trust and confidence of such a nature that it is fair to presume that the wrongdoer abused that relationship in procuring the complainant to enter into the impugned transaction. ? [O]nce a confidential relationship has been proved, the burden shifts to the wrongdoer to prove that the complainant entered into the impugned transaction freely, for example by showing that the complainant had independent advice. Such a confidential relationship may be established in two ways, viz: Class 2A: Certain relationships (for example solicitor and client, medical advisor and patient) as a matter of law raise the presumption that undue influence has been exercised. Class 2B: Even if there is no relationship falling within class 2A, if the complainant proves the de facto existence of a relationship under which the complainant generally reposed trust and confidence in the wrongdoer, the existence of such a relationship raises the presumption of undue influence. In a class 2B case therefore, ? the complainant will succeed in setting aside the impugned transaction merely by proof that the complainant reposed trust and confidence in the wrongdoer ? . [7] Lord Browne-Wilkinson then considered whether the specific relationship of husband and wife, without more, gave rise to a class 2A presumption of undue influence. He found that it did not. However, noting the continued existence of relationships where the wife is still subjected to, and yields to, influence by her husband, he concluded at p. 424 that: ? in any particular case a wife may well be able to demonstrate that de facto she did leave decisions on financial affairs to her husband thereby bringing herself within class 2B ? Thus, in those cases which still occur where the wife relies in all financial matters on her husband and simply does what he suggests, a presumption of undue influence within class 2B can be established solely from proof of such trust and influence without proof of actual undue influence. In my view, it is clear from O?Brien that a wife seeking to set aside a transaction on account of undue influence may raise a class 2B presumption of undue influence by demonstrating that her relationship with her husband was one in which she relied on her husband so that it would be reasonable to presume that the transaction in question was procured by the undue influence of her husband. In O?Brien, Lord Browne-Wilkinson rejected at p. 428 a ?special equity? theory based on the fact of marriage (or cohabitation) that would allow wives to set aside a transaction where they acted as surety for their husbands? debts: ? Should wives (and perhaps others) be accorded special rights in relation to surety transactions by the recognition of a special equity applicable only to such persons engaged in such transactions? Or should they enjoy only the same protection as they would enjoy in relation to their other dealings? In my judgment, the special equity theory should be rejected. ? [T]o require the creditor to prove knowledge and understanding by the wife in all cases is to reintroduce by the back door either a presumption of undue influence of class 2A (which has been decisively rejected) or the Romilly heresy (which has long been treated as bad law). [Emphasis added.] Lord Browne-Wilkinson concluded that it was ?not necessary to have recourse to a special equity theory for the proper protection of the legitimate interests of wives,? since the combination of the class 2B presumption and the doctrine of constructive notice provided ample protection for such interests. [8] A similar approach was employed by the Supreme Court of Canada in Geffen v. Goodman Estate, [1991] 2 S.C.R. 353, a case decided before Pitt and O?Brien. In Geffen, the testatrix left $1000 to each of her three sons, with the residue to her daughter for life and remainder to her grandchildren. The daughter had a history of mental illness. The brothers were concerned that their sister might make an unwise disposition of the house because of her condition, and this concern was shared by the daughter. Thus, she and her brothers met with a solicitor to discuss their concerns. After the daughter met the solicitor on her own on several occasions, she decided to settle the house in a trust for herself for life, with the remainder to her children and her nephews and nieces. After the daughter died, her executor brought an application to set the trust aside for undue influence. The trial judge held that there had been no undue influence, or in the alternative, that any presumption of undue influence had been rebutted by the independent legal advice. On appeal, the majority of the Alberta Court of Appeal held that the presumption of undue influence had not been rebutted. On further appeal, the Supreme Court of Canada allowed the appeal and upheld the trust. Wilson J., dissenting but writing for the majority on this point, set out the proper approach at p. 378: What then must a plaintiff establish in order to trigger a presumption of undue influence? In my view, the inquiry should begin with an examination of the relationship between the parties. The first question to be addressed in all cases is whether the potential for domination inheres in the nature of the relationship itself. ? . Having established the requisite type of relationship to support the presumption, the next phase of inquiry involves an examination of the nature of the transaction. ? . It is clear that the approach set out by Wilson J. is substantially the same as the approach set out in O?Brien: where a claimant relies upon a presumption of undue influence, the court must look to the nature of the relationship and determine whether the potential for domination exists as a matter of fact or whether it may be presumed. [9] The principles of undue influence outlined in O?Brien were affirmed by the Supreme Court of Canada in Gold v. Rosenberg, [1997] 3 S.C.R. 767. Gold v. Rosenberg did not concern undue influence or the presumption of undue influence; nor did the Supreme Court of Canada consider Lord Browne-Wilkinson?s statement on that issue. In Gold v. Rosenberg, a testator left his estate to his son, Rosenberg, and grandson, Gold, as executors and equal beneficiaries. The assets of the estate were held by two companies. Both Rosenberg and Gold were directors of the companies; however, only Rosenberg was involved in the estate?s business. Rosenberg arranged a bank loan to a business of his own, secured by a guarantee from one of the estate companies, and supported by a mortgage over the estate company?s assets. Gold signed a directors? resolution authorizing the guarantee, and the law firm acting for both parties gave an opinion that the guarantee was valid. Subsequently, Gold brought an action against Rosenberg, the bank, and the law firm, alleging that he had been misled. The trial judge held the bank and law firm liable, finding that the bank had knowingly assisted in a breach of trust. An appeal by the bank was allowed by this court, and a further appeal to the Supreme Court of Canada was dismissed. Sopinka J. referred to O?Brien when he considered the bank?s duty to enquire. He said, at pp. 799-801: In certain circumstances, a third party in the position of the bank will not have discharged its duty to inquire unless the guarantor has been advised to obtain independent legal advice. In certain cases, the law imposes on a creditor a duty to inquire when the transaction is clearly detrimental to the person offering security and the relationship between that person and the principal debtor is particularly close. In such circumstances, the law presumes undue influence on the part of the principal debtor. The clearest type of relationship giving rise to this presumption is that of husband and wife. Iacobucci J. cites Barclays Bank plc v. O'Brien, [1993] 4 All E.R. 417 (H.L.), in which the House of Lords extended this presumption to include cohabitees. Lord Browne-Wilkinson held that when a creditor is approached by cohabitees, one the principal debtor and the other the surety, and the proposed transaction is clearly to the disadvantage of the surety, it will be under a duty to inquire. A creditor can discharge this duty by explaining to the surety in a meeting not attended by the principal debtor the amount of her potential liability and the risks involved and advising her to take independent advice: Barclays, supra, at pp. 431-32. ? When setting out the strict requirements of a separate meeting with the surety, however, Lord Browne-Wilkinson spoke of ?the emotional pressure of cohabitation? (p. 431). Elsewhere, he spoke of how ?the sexual and emotional ties between the [married] parties provide a ready weapon for undue influence? (p. 424). When a bank is presented with such a relationship, it should recognize the risk of undue influence (assuming that the transaction is on its face detrimental to the party offering security). But by the same logic, a relationship that is more distant will raise less suspicion of undue influence, even if the transaction is apparently unfavourable to the guarantor. Consequently, less may be required to satisfy an honest and reasonable person that the surety or guarantor is aware of the legal implications of the proposed transaction. [10] While Sopinka J.?s statement that the law presumes undue influence ?when the transaction is clearly detrimental to the person offering security and the relationship between that person and the principal debtor is particularly close? might seem to establish a different test from the one set out in Geffen and O?Brien, it should be viewed in its context. Furthermore, had Sopinka J. intended to depart from, or change, the law pertaining to undue influence as set out in Geffen, supra, it seems to me that he would have stated his intention to do so. [11] The issues in Gold v. Rosenberg were whether the Bank had notice of Rosenberg?s wrongdoing such that Gold could set aside the transaction, and the Bank?s duty to inquire. As I have noted, Gold v. Rosenberg was not a case where the presence of undue influence was an issue. In Gold, Sopinka J. referred to O?Brien for the proposition that, in certain circumstances, a third party will owe a duty to inquire whether a guarantor had received independent legal advice. It should be noted that in the end Sopinka J. concluded that the respondent bank did not owe Gold a duty to advise him to obtain legal advice. In reaching this conclusion, he noted that Gold had ?three years of university education in which he had taken courses in business, economics and accounting,? and had some business experience. Whether the Bank owed a duty to inquire in this case is one of the issues that arises in this appeal, and it is to this issue that I now turn. [12] The duty to inquire about the prospect of undue influence in the context of the circumstances in which a third party will be subject to a complainant's equity to set aside a transaction procured by undue influence was central to the House of Lords? decision in CIBC Mortgages plc v. Pitt, [1993] 4 All E.R. 433, a companion decision to O'Brien. In Pitt, the Bank agreed to grant a loan to Mr. Pitt on the security of the matrimonial home. Both Mr. and Mrs. Pitt signed the loan agreement; however, Mrs. Pitt did not read the documents before signing or receive any independent legal advice, nor did any Bank employee suggest that she do so. When Mr. Pitt was unable to keep up the mortgage payments, the Bank sought possession of the house. Mrs. Pitt defended the application on the grounds that she had been induced to sign the agreement by misrepresentation and undue influence on the part of her husband. The trial judge allowed the Bank's application, and Mrs. Pitt's appeal was dismissed. On further appeal, the House of Lords found that there was actual undue influence; however, the Bank was not affected by it as there was nothing to put the Bank on inquiry. In determining what would put the Bank on inquiry, Lord Browne-Wilkinson found that a complainant will be able to set aside a transaction where he or she can establish either (a) that the wrongdoer acted as a third party's agent in procuring the transaction, or (b) that the third party had actual or constructive notice of the wrongdoing. [13] As noted by Feldman J.A., the cases in which the wrongdoer will be found to have acted as the third party's agent will arise rarely. It is not argued in this case that the Bank had actual notice of the alleged undue influence. Therefore, it is necessary to consider when a third party, such as the Bank, will have constructive notice of a party's equity to set aside a transaction. [14] The House of Lords considered this question in O'Brien. Lord Browne-Wilkinson stated at p. 429 that: ? a creditor is put on inquiry when a wife offers to stand surety for her husband?s debt by the combination of two factors: (a) the transaction is on its face not to the financial advantage of the wife; and (b) there is a substantial risk in transactions of that kind that, in procuring the wife to act as surety, the husband has committed a legal or equitable wrong that entitles the wife to set aside the transaction. In such circumstances, the creditor will be put on inquiry and will be taken to have constructive notice of the complainant?s rights unless the creditor has taken reasonable steps to satisfy himself that the complainant?s agreement was properly obtained. [15] Lord Browne-Wilkinson?s statement regarding constructive notice was accepted by the Supreme Court of Canada in Gold v. Rosenberg. In the course of his majority reasons, Sopinka J. commented generally on the duty owed by the Bank to Gold. He cited O?Brien at p. 800 for the proposition that ?when a creditor is approached by cohabitees, one the principal debtor and the other the surety, and the proposed transaction is clearly to the disadvantage of the surety, it will be under a duty to inquire.? In such circumstances, a creditor is required to explain to the surety in the absence of the principal debtor the amount of the sureties and the risks involved, and to advise the surety to obtain independent advice. However, a transaction is not automatically vitiated merely by the failure of a creditor to satisfy these requirements. The surety must establish her legal entitlement to set aside the transaction. If she is successful, the creditor?s failure to satisfy its duty to inquire will prevent the creditor from avoiding the rights of the surety. [16] The case law, then, establishes that a wife may set aside a transaction where she can establish that the transaction was actually procured by undue influence (class 1 ? actual undue influence) or where she can raise a presumption of undue influence by demonstrating that de facto she left decisions on financial affairs to her husband (class 2B ? presumed undue influence). A third party, such as a bank, will be bound by the wife?s equity to set aside the transaction where it has constructive notice of the wrongdoing, that is of undue influence or the real prospect of undue influence. Constructive notice may be established by a close relationship between the parties ? such as husband and wife ? coupled with a manifestly disadvantageous transaction. However, it must be noted that the mere fact of a close relationship does not give rise to a presumption of undue influence. Rather, a spouse must establish in each case that the relationship was on in which he or she ?generally reposed trust and confidence in the wrongdoer?.1 [17] Applying these principles to this case, it is clear that the Bank is fixed with constructive notice of any wrongdoing between the parties. The existence of a marital relationship is marked by the characteristics of trust and confidence, which create an increased risk of undue influence. Further, as found by the trial judge, the transaction was to the material disadvantage of Mrs. Duguid. Accordingly, the Bank was subject to a duty to inquire. The Bank?s failure to discharge the duty to inquire (to determine if there was undue influence) by advising Mrs. Duguid to obtain independent legal advice precludes the Bank from setting aside the finding of constructive notice of the potential for undue influence. [18] However, the transaction is not vitiated by the mere fact that the Bank had constructive notice of Mrs. Duguid?s rights, if any, and failed to take reasonable steps to ensure that her consent was voluntary and informed. Rather, these facts only mean that Mrs. Duguid may set aside the transaction as against the Bank if, and only if, the transaction was procured by undue influence. Since there is no evidence of actual undue influence, the issue is whether there is a basis in the evidence to presume undue influence. [19] I am unable to agree with my colleague?s conclusion that the transaction was procured by undue influence. Feldman J.A. states in her reasons, correctly in my view, that ?this is not a situation where the wife put her trust and confidence in the husband for financial matters in the classic sense ??. Feldman J.A. presumes undue influence on the basis that Mrs. Duguid?s concerns about her relationship with her husband provided ?a ready weapon? for undue influence. I see a number of problems with this approach. First, Mrs. Duguid must establish that she did in fact repose trust and confidence in her husband. This burden may be met by showing that she left decisions on financial affairs to him. In my opinion, there is little or no evidence that Mrs. Duguid reposed trust and confidence in her husband. Indeed, as I have said, in respect of her financial affairs Feldman J.A. finds that this was not a situation where the ?classic? requirements for presuming undue influence were made out. [20] In my opinion, there is ample evidence that Mrs. Duguid did not repose trust and confidence in her husband in the manner required for a presumption of undue influence. In the circumstances, I will limit my references to the evidence to highlight that part of it that is, in my view, of significance on the presumed undue influence issue. [21] This was a tax-driven real estate investment by Mr. Duguid, a school principal and another school principal. Mrs. Duguid, was a real estate agent. A short time before she signed the promissory note, the Bank took the position that the income and net worth of Mr. Duguid and his associate were not sufficient. As a result of the Bank?s position, Mr. Duguid asked Mrs. Duguid to send an income and net worth statement to the Bank and she did so. Thus, the Bank?s request that Mrs. Duguid sign the note did not come out of the blue. Finally, this was not the first time that Mr. Duguid and his associate had made an investment of this type. Mrs. Duguid knew that. These and other features of the evidence support the conclusion that she did not repose trust and confidence in her husband when it came to her, or their, financial affairs. [22] Moreover, it is clear from the authorities to which I have referred that the mere fact that a close relationship may give rise to ?ready weapons for undue influence? is not sufficient to establish the presumption. If that was not the case, every close relationship would give rise to a presumption of undue influence. This would have the very result that Lord Browne-Wilkinson cautioned against in O?Brien ? it would reintroduce a class 2A presumption of undue influence for every husband and wife relationship (or any other close relationship, for that matter). [23] There is nothing to suggest that Mr. and Mrs. Duguid had a relationship that would give rise to a finding of presumed undue influence. At trial, Mrs. Duguid testified that she signed the documents because she was not in a stage of her marriage where she would question anything. However, this statement must be viewed in the context of the remainder of her testimony. She testified that she was not aware that her marriage was in a precarious state, and that while she and her husband were ?in a valley at that point in time,? she did not think that the marriage would end. [24] Given that there was no actual undue influence and no basis upon which to presume undue influence, Mrs. Duguid has no equity to set aside the transaction as against the Bank. However, assuming that undue influence can be presumed, the inquiry must continue. The presumption of undue influence may be rebutted. As Wilson J. stated at p. 379 in Geffen, ?[o]nce the plaintiff has established that the circumstances are such as to trigger the application of the presumption ? the onus moves to the defendant to rebut it.? Typically, proof that the complainant received, or was advised to receive, independent legal advice will rebut the presumption: Pitt, supra; O?Brien, supra; Geffen, supra. [25] In my view, evidence that the surety obtained, or was advised to obtain, independent legal advice is not the only way to rebut the presumption of undue influence. While Cheshire, Fifoot and Furmston?s Law of Contract (13th ed.) notes the significance of independent legal advice, the authors state at p. 329 that ?the Privy Council has emphasized that if 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.? Such circumstances might include commercial knowledge, experience, general sophistication or independence. See M.H. Ogilvie, ?No Special Tenderness for Sexually Contracted Debt? Undue Influence and the Lending Banker? (1996) Can. Bus. L.J. 365 at 388. [26] The proposition that a presumption of undue influence may be rebutted was accepted in Laird v. Mulholland, [1998] O.J. No. 855 (Gen. Div.), where Lax J. considered the nature of proof required to rebut the presumption that a transaction was procured by undue influence. Laird v. Mulholland concerned a gift made by the deceased to her attorney. All parties conceded that the presumption of undue influence applied to the gift. The question was whether the presumption could be rebutted. The deceased did not obtain independent legal advice, and the respondents argued that such advice is necessary to rebut the presumption. Lax J. rejected this argument, stating at para. 37: I do not understand the Supreme Court of Canada in [Geffen v.] Goodman Estate to have laid down such an inflexible requirement. ? Obviously, legal advice is desirable in all instances where there is any possibility of influence. In may cases, it will go some distance to rebutting the presumption. However, each case turns on its own facts and the Court must examine the evidence it has to decide if the presumption has been rebutted. [27] In the end, Lax J. found that the presumption was rebutted notwithstanding the absence of independent legal advice. I agree with Lax J.?s conclusion on this issue. [28] Even if undue influence may be presumed, in my view, the presumption is rebutted in the circumstances of this case. Those features of the evidence that demonstrate that Mr. and Mrs. Duguid?s relationship was not one giving rise to a presumption of undue influence also serve to rebut any presumption that might arise. To repeat, Mrs. Duguid was a real estate agent. As such, it is likely that she knew about the risks involved in her husband?s investment, and almost certain that she would have understood the significance of co-signing his promissory note. In addition, I think that it is significant that Mrs. Duguid did not plead, or contend at trial, that her husband procured her signature by exercising actual undue influence. Nor did she defend the Bank?s action on the basis of presumed undue influence. Furthermore, in oral argument of this appeal, Mrs. Duguid did not rely on undue influence, actual or presumed. Undue influence, as a live issue, only arose when the court sought written submissions on that issue. DISPOSITION [29] For these reasons, I would allow the appeal, set aside the judgment of Day J. and in its place grant judgment in favour of the Bank. In light of the Bank?s conduct as referred to by my colleague, I would not grant costs, here or below. Released: April 20, 2000 ?C.A. Osborne A.C.J.O.? ?I agree: R.R. McMurtry C.J.O.? FELDMAN J.A.: (Dissenting) [30] The Bank of Montreal appeals from the judgment of Day J. dismissing its action against Mrs. Duguid to enforce a promissory note which she executed as co-signor of a loan made by the Bank to her husband. Since that time, Mr. and Mrs. Duguid have separated. Mr. Duguid went through bankruptcy without repaying the Bank. The Bank?s appeal seeks judgment against Mrs. Duguid for the amount of $87,243.84 U.S. together with interest from August 21, 1996 at the rate of 1% per cent per annum above the Bank?s prime interest rate per annum in effect from time to time. FACTS AND FINDINGS OF THE TRIAL JUDGE [31] In 1989, Mr. Duguid, a school principal, together with a colleague, applied to the Bank for an investment loan for participation in Mountainside LaCosta Limited Partnership, a tax- driven condominium investment in San Diego, California. The Bank was providing financing on the project to qualified investors based solely on the ability of the investor to repay the loan. Although the Bank had investigated the financial viability of the condominium project, the Bank was not relying on the project?s viability or value and was taking no security on the loans. [32] The Bank was not prepared to extend the investment loan of $76,095.00 U.S. to Mr. Duguid and his associate based only on their combined income and assets. Mr. Duguid therefore asked his wife, a real estate agent, to fax her financial information to the Bank. She did so, following which the Bank was prepared to extend the loan, if Mrs. Duguid was also on the covenant. [33] Although the Bank officer signed the documents executed by the Duguids as witness, and testified that they had attended her office for that purpose, the Duguids both testified that they signed the documents at home in their kitchen, and not in front of the Bank officer. The trial judge accepted and found that the documents were executed by the Duguids in their kitchen at home and that the Bank officer did not witness their signatures. [34] It was the written policy of the Bank for this project, that it suggest to investors that they obtain independent legal or financial advice. Again, the Bank officer who purported to witness the signatures of the Duguids also testified that she would have advised them to obtain the independent advice, although she had no specific recollection of the closing. Having rejected her evidence, the trial judge found that the Bank did not suggest to Mr. or Mrs. Duguid that either of them obtain independent legal or financial advice. [35] The trial judge found that the Bank had concerns about the investment arising from the investigation of the financial viability of the project which it had undertaken for the purpose of deciding whether to extend loans to investors. The Bank nonetheless proceeded to grant financing to qualified investors because it wanted to retain the goodwill of the project promoters for future business. However, the Bank made no disclosure to Mrs. Duguid of any of its information or concerns. [36] It was pointed out by counsel for the appellant that in making his findings, the trial judge erred by referring to an internal document of the Bank which related to a proposal by four specific investors, not including Mr. Duguid. However, it is clear from all of the evidence including other memoranda filed as exhibits, that the Bank considered the project to be a highly speculative investment and noted the high vacancy rate. [37] The trial judge found that the Bank?s knowledge of the problems with the project made it aware that the transaction was disadvantageous to Mr. and Mrs. Duguid. He held that the Bank therefore had a minimum obligation to impart its information about the project to the co-signor, Mrs. Duguid, as it was requiring her to underwrite the risk. He also held that the Bank had a further minimum obligation, because of its specific policy for this investment, to insist that Mrs. Duguid obtain independent legal or financial advice. Because the Bank did neither, the trial judge dismissed its action. [38] With respect to the trial judge, I do not agree with these legal conclusions. First, unless it is established that the Bank owes a fiduciary duty to the customer, it has no obligation to provide the customer with either its information or its concerns about the viability of the investment for which the funds are borrowed: Bertolo v. Bank of Montreal (1986), 57 O.R. (2d) 577 at 583-4 (C.A.); Bossé v. Mastercraft Group Inc. (1994), 3 C.C.L.S. 264 at 285 (Ont. Gen. Div.)2. Second, the fact that a bank does not comply with its own internal lending practices does not, by itself, render its loan unenforceable or give the borrower a right of recourse: Bossé, supra, at 2833. UNDUE INFLUENCE AND INDEPENDENT LEGAL ADVICE [39] However, that does not end the matter. The trial judge indicated at the opening of his reasons for judgment that Mrs. Duguid was defending the action ?on the basis that she did not receive and was entitled to independent legal advice and/or independent financial advice?. He stated that the Bank relied on the decision of this court in Bank of Montreal v. Featherstone (1989), 68 O.R. (2d) 541 at 547 where the court states: In the absence of any evidence of undue influence, fraud or misrepresentation or any evidence supporting a defence of non est factum, the failure of the bank to ensure that the spouse obtained independent legal advice before signing the guarantee may not be fatal to the claim of the bank. [40] This remains an accurate statement of the law. However, since Featherstone, in two seminal decisions, Barclays Bank plc v. O?Brien, [1993] 4 All E.R. 417, together with a companion decision, CIBC Mortgages plc v. Pitt, [1993] 4 All E.R. 433, the House of Lords has elucidated and clarified the concept of undue influence within certain defined relationships such as marriage and or other co-habitation relationships, as well as the circumstances where lenders must address the issue of independent legal advice in the context of loans to be guaranteed or co- signed by people in such relationships. Furthermore, in its decision in Gold v. Rosenberg, [1997] 3 S.C.R. 767, the Supreme Court of Canada adopted the principles articulated by the House of Lords. The result is that there is now a clear procedure which lenders may follow to protect themselves when making a loan to one co-habitee which is to be co-signed or guaranteed by the other, where the lender has constructive notice of actual or presumed undue influence by one over the other. [41] In Barclays Bank, the bank agreed to increase the overdraft limit for Mr. O?Brien?s business on the basis of his guarantee secured by a second mortgage on the matrimonial home. Although the bank branch was supposed to ensure that the parties understood what they were signing and to suggest that they speak to their solicitors, in fact no explanation was given to Mrs. O?Brien and she signed the documents without reading them or seeking legal advice. Eventually, the bank called on the husband?s guarantee and sought to enforce its security on the home. Mrs. O?Brien defended the action on the basis that she was induced to enter the transaction by her husband?s undue influence and misrepresentation as to the extent of the liability. [42] In approaching the issues raised by this case, Lord Browne- Wilkinson first recognized the competing policy considerations involved. On one side he noted the recognition by society of equality of the sexes and the concomitant equality of partners within a marriage or co-habitation relationship, as well as the prevalence of joint ownership of the matrimonial home and the need to be able to obtain a loan based on the security of that home without the bank being unwilling to risk lending on that security because of the spectre of the defence of undue influence. On the other side, he noted that despite society?s recognition of equality of the sexes, there are still many marriages where the wife is willing to follow the husband?s advice and where wives are subjected to and yield to undue influence by their husbands. In those circumstances, Lord Browne- Wilkinson concluded at p. 422 that, ?Such wives can reasonably look to the law for some protection when their husbands have abused the trust and confidence reposed in them.? Significantly, Lord Browne-Wilkinson concluded the judgment at p.431 by extending the same protection of the law to all co-habitees: I have hitherto dealt only with the position where a wife stands surety for her husband?s debts. But in my judgment the same principles are applicable to all other cases where there is an emotional relationship between co-habitees. The ?tenderness? shown by the law to married women is not based on the marriage ceremony but reflects the underlying risk of one cohabitee exploiting the emotional involvement and trust of the other. Now that unmarried cohabitation, whether heterosexual or homosexual is widespread in our society, the law should recognise this. Legal wives are not the only group which are now exposed to the emotional pressure of co-habitation. Therefore if, but only if, the creditor is aware that the surety is co-habiting with the principal debtor, in my judgment the same principles should apply to them as apply to husband and wife. [43] Lord Browne-Wilkinson set out the law of undue influence, first, as between the parties in the relationship, and then, as it affects a third party in the transaction who was not involved in the undue influence which induced it. He began at p. 423 with the following basic proposition: A person who has been induced to enter into a transaction by the undue influence of another (the wrongdoer) is entitled to set that transaction aside as against the wrongdoer. Such undue influence is either actual or presumed. [44] In the case of actual undue influence, the claimant must prove affirmatively that the wrongdoer exerted undue influence to induce the transaction. In the case of presumed undue influence, the claimant must show only that there existed a relationship of trust and confidence such that it is fair to presume that the wrongdoer abused that relationship to procure the transaction. The onus then shifts to the wrongdoer to prove that the complainant in fact entered into the transaction freely. One way to rebut the presumption is to demonstrate that the complainant received independent legal advice. [45] Presumed undue influence may arise in two classes of relationships. The first, class 2(A), are relationships which, in and of themselves raise a presumption, such as solicitor and client or medical adviser and patient. In those the onus is immediately on the wrongdoer to disprove undue influence. The second, class 2(B), are relationships where the complainant can show that de facto, she reposed trust and confidence in the wrongdoer. Once that is shown, then the onus shifts to the wrongdoer to disprove undue influence. Lord Browne-Wilkinson pointed out that in the cases of Howes v. Bishop, [1909] 2 K.B. 390 (C.A.) and Bank of Montreal v. Stuart, [1911] A.C. 120 (P.C.), it was established that the relationship of husband and wife did not, as a matter of law, raise a presumption of undue influence within the first category (class 2(A)). However, he noted that in any particular case, it is open to a wife (and ultimately to any co-habitee), to demonstrate that de facto she did leave decisions on financial matters to her husband and reposed trust and confidence in him (class 2(B)), so that undue influence is presumed without proof of actual undue influence. [46] He then explained his approval of this legal result in the following way at p. 424: In my judgment this special tenderness of treatment afforded to wives by the courts is properly attributable to two factors. First, many cases may well fall into the Class 2B category of undue influence because the wife demonstrates that she placed trust and confidence in her husband in relation to her financial affairs and therefore raises a presumption of undue influence. Second, the sexual and emotional ties between the parties provide a ready weapon for undue influence: a wife?s true wishes can easily be overborne because of her fear of destroying or damaging the wider relationship between her and her husband if she opposes his wishes. For myself, I accept that the risk of undue influence affecting a voluntary disposition by a wife in favour of a husband is greater than in the ordinary run of cases where no sexual or emotional ties affect the free exercise of the individual?s will. [Emphasis added] [47] I pause here to note that Ontario cases often state baldly that there is no presumption of undue influence in a transaction between husband and wife, and therefore the onus of proving undue influence is on the person who seeks to set aside the transaction, and they refer as authority back to the 1917 decision of this court in Hutchinson v. Standard Bank of Canada, 39 O.L.R. 286. However, that proposition of law was taken at the time from the Howes and Stuart cases which held only that there was no automatic class 2(A) presumption arising from the relationship of husband and wife alone.4 As Lord Browne-Wilkinson pointed out in Barclays Bank, those cases did not deal with class 2(B) presumed undue influence where the impugned transaction was disadvantageous to the wife and she showed that she reposed trust and confidence in her husband regarding financial matters. [48] In Barclays Bank, Lord Browne-Wilkinson then discussed the effect on a creditor bank of undue influence between a husband and wife, and in particular, under what circumstances a wife may be able to set aside her guarantee, grant of security or covenant given to a bank. [49] The court set out two circumstances. The first is where the husband is the agent of the bank. Such cases are rare, but where that is the case, the bank is fixed with the wrongdoing of its agent. [50] The other is where the bank has either actual or constructive notice of the undue influence, and therefore of the wife?s equity to set aside the transaction. The bank will be put on constructive notice of the risk of undue influence when a wife agrees to guarantee or co-sign for her husband?s debts where there is the combination of two factors: 1) the transaction on its face, is not to the financial advantage of the wife; and 2) ?there is a substantial risk in transactions of that kind that, in procuring the wife to act as surety, the husband has committed a legal or equitable wrong that entitles the wife to set aside the transaction.? (p. 429) [51] When the bank sees those two circumstances, it will be fixed with constructive notice of any undue influence by the husband, whether actual or presumed, which may have existed, unless it takes reasonable steps to satisfy itself that the wife?s participation in the transaction was properly obtained. Otherwise the bank will retain constructive notice of the wife?s rights and will take subject to them. Lord Browne-Wilkinson then set out a suggested procedure which a bank may follow which he referred to as ?reasonable steps? to protect itself from being fixed with constructive notice: the bank must 1) meet with the wife privately, 2) tell her of the extent of her liability, 3) warn her of the risk, and 4) urge her to obtain independent legal advice. Furthermore, where the bank has specific information which may make undue influence not only possible, but probable, in those circumstances it must go further and insist that she obtain independent legal advice. [52] Lord Browne-Wilkinson recognized that his formulation of the constructive notice doctrine, that is, requiring no actual knowledge by the bank in any particular case of the circumstances which would raise the 2(B) presumption, but only a recognition of the risk or possibility of undue influence because of the relationship and the disadvantageous transaction, is an extension of the law of constructive notice. However, he was satisfied that knowledge of the possibility of influence is enough to put a third party on inquiry. [53] In my view, this reasoning and result accord with common sense and commercial reality. They result in a rule which applies in easily identifiable circumstances, and which is not onerous for the bank. It obviates any need for a bank, when extending a loan to one co-habitee but guaranteed or secured by both, to have to make personal inquiries as to the nature of the relationship between the parties or the extent of the literacy or sophistication of the party who is guaranteeing or co-signing the loan. Nor is the bank required (in the case where it has no specific knowledge) to ensure that that party actually obtains the independent advice, but only to urge the party to do so. Unless the bank learns of anything more which would again put it on notice, it can proceed to lend and rely on the covenant or security it receives, if it has taken the reasonable steps set out above. [54] And of what benefit are these reasonable steps on the part of the bank to the party who is co-signing or guaranteeing the loan? If there is pressure from the relationship partner to sign, whether subtle or not, the fact that the guarantor or co-signor is called to a meeting without the principal debtor, at the behest of the bank, and is told that she or he should obtain independent advice, may give that party the ability and excuse to seek and even rely and act on that advice, without appearing to betray the partner who is exerting the pressure. Of course, the independent advice provides the guarantor or co-signor with specific information about the obligation which she or he may or may not have already had or understood. [55] In the companion case to Barclays Bank, the court made it clear that a precondition to the application of the constructive notice doctrine is the existence of a manifestly disadvantageous transaction for one of the parties in the relationship. There is therefore no constructive notice to the bank of any risk of undue influence where a loan is made to a husband and wife (or other parties in a relevant relationship) for their joint benefit, because in that circumstance, there is no apparent financial disadvantage for the co-signor: CIBC Mortgages plc v. Pitt, supra. Again this makes commercial sense. Where parties are jointly seeking a loan such as a mortgage to purchase a home, there should be no impediment to obtaining the funds from the lender on the security of the home, and no hesitation on the part of the lender as to the enforceability of such a loan against both parties. [56] In applying these principles to the facts in the Barclays Bank case, the House of Lords held that because the Bank failed to take the reasonable steps, i.e. to meet with Mrs. O?Brien, to explain the extent of her liability and risk and to urge her to obtain independent legal advice before pledging security on her home in respect of the line of credit for her husband?s business, the Bank was fixed with constructive notice of her husband?s wrongful misrepresentation to her of the amount at risk. As a result, Mrs. O?Brien was entitled to set aside the mortgage as against the bank. [57] This newly articulated approach to the role of and need for independent legal advice was recognized in 1997 as the law in this country by the Supreme Court of Canada in Gold v. Rosenberg, supra. In that case, Sopinka J., speaking for the majority, set out the law in the following way at p. 799-801: In certain circumstances, a third party in the position of the bank will not have discharged its duty to inquire unless the guarantor has been advised to obtain independent legal advice. In certain cases, the law imposes on a creditor a duty to inquire when the transaction is clearly detrimental to the person offering security and the relationship between that person and the principal debtor is particularly close. In such circumstances, the law presumes undue influence on the part of the principal debtor. The clearest type of relationship giving rise to this presumption is that of husband and wife. Iacobucci J. cites Barclays Bank plc v. O?Brien, [1993] 4 All E.R. 417, in which the House of Lords extended this presumption to include cohabitees. Lord Browne-Wilkinson held that when a creditor is approached by cohabitees, one the principal debtor and the other the surety, and the proposed transaction is clearly to the disadvantage of the surety, it will be under a duty to inquire. A creditor can discharge this duty by explaining to the surety in a meeting not attended by the principal debtor the amount of her potential liability and the risks involved and advising her to take independent advice: Barclays, supra, at pp. 431-32. At one point in his reasons, Lord Browne-Wilkinson appeared to extend the duty beyond cohabiting couples when he characterized the kinds of relationships that will trigger the duty to inquire as follows, at p. 431: [I]n a case where the creditor is aware that the surety reposes trust and confidence in the principal debtor in relation to his financial affairs, the creditor is put on inquiry in just the same way as it is in relation to husband and wife. When setting out the strict requirements of a separate meeting with the surety, however, Lord Browne-Wilkinson spoke of ?the emotional pressure of cohabitation? (p. 431). Elsewhere, he spoke of how ?the sexual and emotional ties between the [married] parties provide a ready weapon for undue influence? (p. 424). When a bank is presented with such a relationship, it should recognize the risk of undue influence (assuming that the transaction is on its face detrimental to the party offering security). But by the same logic, a relationship that is more distant will raise less suspicion of undue influence, even if the transaction is apparently unfavourable to the guarantor. Consequently, less may be required to satisfy an honest and reasonable person that the surety or guarantor is aware of the legal implications of the proposed transaction. [58] To be clear, a bank is fixed with constructive notice of the risk of undue influence where 1) the transaction is not financially advantageous to the guarantor or co-signor, and 2) the parties are in a relationship which raises the suspicion of undue influence, such as husband and wife or other co-habitees, unless the bank takes reasonable steps to satisfy itself that the co-signature is given freely. However, the surety obligation remains valid and enforceable by the bank even where it did not take the reasonable steps to provide information and advice to the surety, where there was no undue influence, whether actual or presumed, no misrepresentation or other legal wrong by the principal debtor. In other words, the mere failure by the bank to take those steps does not vitiate the guarantee or co-signature on the covenant. That is the result, however, where it transpires that the transaction as between the husband and wife (or other relevant parties) is tainted by undue influence, whether actual or presumed, by misrepresentation or by other legal wrong. APPLICATION OF THE LAW TO THIS CASE [59] Turning to the case before this court, the first issue is, was the Bank on constructive notice of the possibility of undue influence by Mr. Duguid? It is clear that the transaction was not financially advantageous for Mrs. Duguid. Not only was the Bank aware that there were problems with the viability of the underlying security and therefore its potential to generate income, but also, the Bank knew that Mr. Duguid was not financially able to carry the loan from his own income and assets. Furthermore, the investment belonged to the husband. He would obtain the tax advantage and any increase in the value of the underlying realty. The fact that the loan was not to the financial advantage of Mrs. Duguid, together with the husband and wife relationship, put the Bank on notice of the risk of undue influence. However, the Bank did not take the reasonable steps (or do anything at all) to satisfy itself that Mrs. Duguid?s participation was properly obtained. [60] Although these events occurred before the decision in Barclays Bank, there is no hardship on the Bank in this case because it intended to advise Mrs. Duguid to obtain independent legal advice in accordance with its written policy for this project loan. Ironically, the Bank believed that it had advised Mrs. Duguid to obtain independent legal advice because of the signature of the Bank officer who purported to witness the documents. The trial judge found that it had not. The Bank is therefore fixed with constructive notice of any undue influence, whether actual or presumed, or misrepresentation by the husband. [61] The next issue is, was there evidence led at trial of a relationship between Mr. and Mrs. Duguid giving rise to a presumption of undue influence? In my view, there is substantial evidence of presumed undue influence by Mr. Duguid. [62] It is clear from the course of the analysis of presumed undue influence by Lord Browne-Wilkinson that he recognized two aspects of the relationship between co-habitees which raise the risk of undue influence. The first is the concept of trust and confidence in financial matters which one of the parties, traditionally a wife, may repose in the other, therefore leaving the financial decisions to the other. The second is the pressure or tension within the relationship created by the sexual and emotional ties. Such pressure can take many forms, including creating a fear in one partner that failure to co-operate in financial matters will damage the relationship, obliging that partner to bow to the will of the other and to sign whatever is requested. [63] In fact, these two aspects of the marriage and co-habitation relationships are related, as both arise from the classic underlying basis of the relationship, love and affection together with emotional and sometimes financial dependence. [64] It is important, I believe, to examine the first aspect closely in that context because I perceive that there may exist a misconception of the basis for the belief that traditionally wives often deferred to their husbands on family financial matters. It is certainly an out-dated notion in today?s society that women cannot or do not understand financial matters, and more specifically, that they do not understand that when they sign a document, they are committing themselves to its contents. [65] Therefore, if a wife is asked by her husband to sign a note or guarantee to the bank for his loan, and she does so because she has always reposed trust and confidence in him, she agrees to sign because she has confidence that her husband would not be asking her unless he believed that in the end it would not be detrimental to her and he would ultimately protect her. That is the trust and confidence she reposes in him arising out of their relationship. She knows that he will not get the money he needs unless she signs, but believes that he would not be asking her to take a risk now unless he was convinced there really was no risk for her. [66] Furthermore, in the context of the relationship, a co- habitee may well feel that it would be perceived as a breach of that trust for her to question whether it would be in her best interests to sign or for her to suggest that she should independently see a lawyer. In other words, the ?trust and confidence in financial matters? aspect of the relationship is an example or manifestation of the sexual and emotional ties within a marriage or cohabitation relationship while the relationship remains strong. The second aspect recognized by Lord Browne- Wilkinson, sexual and emotional pressure to go along with the other party?s wishes, is also based on the emotional bond of the relationship, but may be more likely to arise when the relationship is undergoing strain and may be in peril. [67] Clearly this was not a situation where Mrs. Duguid put her trust and confidence in her husband for financial matters in the classic sense. However, it is the second type of situation described by Lord Browne-Wilkinson at p. 424 and referred to by Sopinka J. at p. 800 where the sexual and emotional ties ?provide a ready weapon for undue influence?: the wife feared destroying or damaging the relationship between herself and her husband if she opposed his wishes. The marriage was foundering, and the husband knew it, yet he asked his wife to co-sign for his loan. [68] The trial judge found that Mrs. Duguid signed the loan documents at the request of her husband and while she was alone with him in their kitchen. At the time, their marriage was ?at a low ebb?, and she just signed the documentation without giving consideration to its contents in order to maintain some level of tranquility?. In her evidence, Mrs. Duguid testified that her husband said she had to sign the promissory note, she signed it, and went out the door. She said that at that time there were problems in her marriage, that her marriage was not going well and therefore she was ?walking on eggshells?. She testified that she signed because she was not ?making waves? at that time. She said that she was not in a stage of her 22-year marriage where she would question anything. Mr. Duguid, who testified on behalf of the Bank, acknowledged that there were difficulties in the marriage at the time they signed the promissory note. [69] Mr. Duguid also testified that he induced his wife to co- sign for the loan by telling her that he hoped the investment would make enough to help finance their sons? education. However, he did not put the investment into joint names nor secure it in any way for the benefit of their three sons. It was listed as his asset in his later bankruptcy. Counsel for the Bank submitted that Mr. Duguid?s stated intention to use the profits from the investment for their sons? education showed that the transaction was not disadvantageous to Mrs. Duguid. Of course his statement to her turned out to be false: because the investment belonged solely to Mr. Duguid, had there been any profits, they would have belonged only to him to be used at his sole discretion. Whether or not this amounted to a misrepresentation in law, had Mrs. Duguid had independent advice, one of the issues she could have discussed with a lawyer was how to ensure that the profits would be legally secured for their sons? education. [70] The fact that Mrs. Duguid was a real estate agent neither negates nor rebuts the presumption of undue influence by her husband arising out of their relationship. It does not speak to the circumstances under which she signed the note, her fear regarding the status of her relationship with her husband at that time and his knowledge that there were difficulties in the marriage when he asked her to sign the note. Furthermore, there was no evidence of her level of legal knowledge including whether her obligation on the note would survive their separation or divorce, the consequences if her husband were to become bankrupt, or the non-binding nature of his representation that the profits from the investment would be used for their sons? education. These are matters about which a lawyer could give accurate information and independent, objective advice. CONCLUSION [71] As in Barclays Bank, the Bank of Montreal in this case was on constructive notice of the possibility of undue influence and consequently of Mrs. Duguid?s equity to set aside the transaction. The Bank remained on notice because it failed to take reasonable steps at the time to satisfy itself that she was entering into the obligation freely. As Mrs. Duguid established presumed undue influence arising out of the circumstances of the marital relationship when she signed the note (class 2(B)), the onus was therefore on the Bank seeking to uphold the transaction to rebut the presumption of undue influence by proving that Mrs. Duguid co-signed the loan freely, for example, by showing that she received independent legal advice. That onus was not met. The Bank therefore cannot enforce the promissory note against Mrs. Duguid. [72] Accordingly, I would dismiss the appeal with costs. "K. Feldman J.A." _______________________________ 1 These principles were recently applied by Crane J. in Canadian Imperial Bank of Commerce v. Finlan, [1999] O.J. No. 54 (Gen. Div.). Finlan concerned an action under a guarantee by a bank against a husband and wife. 2 Reported under the name Avco Financial Services Realty Ltd. v. Bhabha. 3 Both of these issues were abandoned on appeal. The decision was affirmed on appeal: (1995), 123 D.L.R. (4th) 161; leave to appeal to the Supreme Court of Canada refused: (1995), 126 D.L.R. (4th) vii (note) (S.C.C.). 4 Those cases did not refer to the class of relationship as 2(A), but to the list of relationships, such as solicitor and client, which raise a presumption of undue influence.