(iii) Transaction Requires Explanation

It is not sufficient that the relationship between the parties is such that the claimant can be presumed or proved to have been under the influence of the defendant. The claimant must also show that this influence might have been abused.^[1] This requires the claimant to adduce evidence that the transaction between the parties is such that it cannot reasonably be explained by the relationship.^[2]

The old test to establish this required proof that the transaction was manifestly and unfairly disadvantageous to the claimant.^[3] The new test involves a similar element of disadvantage, but this is judged with regard to any disadvantage arising from the transaction.

This is an objective test,^[4] which is applied by considering whether an ordinary person would not have entered into the transaction unless he or she had been unduly influenced to do so,^{[5] [6] [7] [8] [9]} having regard to such matters as the nature of the relationship between the parties, their respective circumstances and the nature of the transaction.

The operation of the transaction requiring explanation test is illustrated by Royal Bank of Scotland v Etridge (No 2) itself, where the House of Lords recognized that, in the usual case where a wife becomes a surety for her husband’s debts and accepts a charge on her interest in the matrimonial home, this is not necessarily to her disadvantage so as to be explicable only on the basis that the transaction was procured by undue influence. This is because the fortunes of the husband and wife are ordinarily bound up together, so the scheme is for their mutual benefit. Otherwise there is a danger that a wife would become a surety where the scheme is for her benefit, and then, once the couple’s fortunes have changed, she might wish to have the charge set aside to preserve the matrimonial home for the benefit of the family. Something in addition to the transaction being a surety transaction must therefore be established before the transaction can be considered to be disadvantageous, such as the particular terms of the transaction.

Evidence that the transaction requires explanation can take many forms. For example, the claimant may have entered into an agreement with the defendant which was inequitable, irrational or unconscionable, such as a sale at an undervalue.^{98 99} A gift is more likely to be regarded as requiring explanation than a contract, simply because the claimant will not have received any consideration in return. As Lord Scarman recognized in National Westminster Bank plc v Morgan,⁹⁹ ‘gifts are transactions in which the donor by parting with his property accepts a disadvantage or a sacrifice’. This will usually be a matter of degree, since the greater the size of the gift the easier it will be to conclude that there was no good motive for the gift being made.^{100 101} Whether the transaction requires explanation is to be judged by reference to the circumstances which existed at the time it was entered into, without reference to subsequent events.^{1 1} A transaction will not be considered to require explanation if it is beneficial to the claimant, even though part of the transaction was not for the claimant’s benefit.^{[10] [11] [12]} Failure to obtain independent legal advice by the claimant before entering into the transaction might be relevant evidence in favour of the conclusion that an explanation is required.^{103 104}

The facts of Cheese v Thomas¹⁰⁴ illustrate how this requirement of a transaction requiring explanation can be analysed. In this case the claimant’s contribution of ?43,000 to the purchase of a house, which was registered in the name of someone else, was characterized as disadvantageous by the Court of Appeal, even though the claimant had the right to live rent-free in the house for the rest of his life. The disadvantage arose because there were a number of drawbacks to the transaction, including that the claimant had put all his capital into the house, he could not compel the owner to sell the house if he wished to recover his contribution and move elsewhere and he was at risk of losing possession if the owner of the house failed to keep up with mortgage payments to the building society. This case illustrates that all the facts need to be examined and the advantages of the transaction need to be carefully balanced against the disadvantages.

A particularly extreme example of a transaction requiring explanation occurred in Credit Lyonnais Bank Nederland NV v Burch,^[13] where an employee agreed to give a charge over her flat and an unlimited guarantee for all of her employer’s debts. This meant that she had committed herself to a liability which was well beyond her means and she risked the loss of her home and personal bankruptcy for the company which employed her, even though she had no interest in the company either as shareholder or director. Such a transaction was so disadvantageous to the employee that it was characterized as an unconscionable bargain.^[14]

With the rejection of manifest disadvantage as a requirement to establish undue influence,^[15] it might be considered that there is no longer a role for an equivalent requirement when seeking to establish a presumption of undue influence, but this is not correct. The requirement of a transaction requiring explanation is justifiable in this context simply because of the true function of presumed undue influence. Where the defendant has been shown to have actually unduly influenced the claimant, this is sufficient evidence that the claimant was unable to exercise a free choice to enter into a transaction with the defendant or to transfer a benefit. But, to presume undue influence, the fact that the nature of the relationship between the parties is such that the defendant had influence over the claimant is insufficient evidence to justify the inference that the claimant was unable to exercise a free choice by abuse of that influence. Something else needs to be shown before it is appropriate to make such an inference, and that extra element is evidence that the transaction requires explanation. It is this requirement which makes it possible to presume that the influence was unduly asserted.^[16] For, if the claimant has entered into a transaction which requires explanation, this surely suggests that he or she might not have had a free choice to enter into the transaction.

• [1] National Commercial Bank (Jamaica) Ltd v Hew [2003] UKPC 51.
• [2] Royal Bank of Scotland plc v Etridge (No 2) [2001] UKHL 44, [2002] 2 AC 773, 796 (Lord Nicholls);Chater v Mortgage Agency Services Number Two Ltd [2003] EWCA Civ 490, [30] (Scott Baker LJ).
• [3] National Westminster Bank plc v Morgan [1985] AC 686.
• [4] Vale v Armstrong [2004] EWHC 1160; [2004] WTLR 1471, [44] (Evans-Lombe J).
• [5] Turkey v Awadh [2005] EWCA Civ 382, [2005] 2 P and CR 29, [39] (Chadwick LJ).
• [6] National Westminster Bank plc v Morgan [1985] AC 686, 704 (Lord Scarman); Leeder v Stevens [2005]EWCA Civ 50.
• [7] National Westminster Bank plc v Morgan [1985] AC 686, 704 (Lord Scarman).
• [8] BCCI v Aboody [1990] 1 QB 923, 961 (Slade LJ). See also Allcard v Skinner (1887) 36 Ch D 145, 185(Lindley LJ); Royal Bank of Scotland plc v Etridge (No 2) [2001] UKHL 44, [2002] 2 AC 773, 798 (LordNicholls); Hammond v Osborn [2002] EWCA Civ 885 and Goodchild v Bradley [2006] EWCA Civ 1868.
• [9] BCCI v Aboody [1990] 1 QB 923, 964 (Slade LJ).
• [10] Dunbar Bank plc v Nadeem [1998] 3 All ER 876.
• [11] R v Attorney General for England and Wales [2002] UKPC 22.
• [12] [1994] 1 WLR 129. See also Bank of Scotland v Bennett [1997] 1 FLR 801.
• [13] [1997] 1 All ER 144. See also Steeples v Lea [1998] 1 FLR 138.
• [14] Credit Lyonnais Bank Nederland NV v Burch [1997] 1 All ER 144, 151 (Nourse LJ). Cf Millett LJ, ibid,152. On the equitable jurisdiction to relieve against unconscionable bargains, see p 278, below. This jurisdictioncould have been relied on in Burch without any need to rely on undue influence, but since this had not beenpleaded the Court of Appeal was not prepared to base its decision on this basis.
• [15] CIBC Mortgages plc v Pitt [1994] AC 200. See p 262, above.
• [16] BCCI v Aboody [1990] 1 QB 923, 957 (Slade LJ).