“There are two avenues by which undue influence can be established: first, by adducing evidence of actual undue influence, and second, by establishing that a presumption of undue influence applies (Goodman Estate, at paras. 24-27; Bank of Montreal, at para. 6; Thorsteinson Estate v. Olson, 2016 SKCA 134 (Sask. C.A.), at para. 35). Actual undue influence is established where one party induces the other to enter into the transaction by dominating their will through the exercise of a pervasive and unconscientious influence on them, whether through manipulation, coercion, fraud or outright or subtle abuse of power (Allcard; Goodman Estate, at para. 41; Kavanagh v. Lajoie, 2014 ONCA 187 (Ont. C.A.), at paras. 18-19; Hilmoe v. Hilmoe, 2017 CarswellSask 537 (Sask. Q.B.), at para. 60, aff’d 2018 SKCA 92 (Sask. C.A.), at para. 65, leave to appeal to the S.C.C. refused 2019 CarswellSask 265 (S.C.C.); Morreale v. Romanino, 2017 ONCA 359 (Ont. C.A.), at para. 21). In Allcard, Lindley L.J. described cases of actual undue influence as involving “some unfair and improper conduct, some coercion from outside, some overreaching, some form or cheating, and generally, though not always, some personal advantage obtained” by one party over the other (at pp. 98-99; see also Goodman Estate, at para. 27; Blanchette v. Blanchette, 1984 CarswellSask 54 (Sask. Q.B.), at para. 12; Freake, at para. 40). In situations of actual undue influence, the onus is on the party seeking to set aside the impugned transaction to prove affirmatively that they entered into it as a result of undue influence exerted intentionally by the other party expressly for the purpose of securing some advantage (Allcard, at p. 181; Goodman Estate, at para. 26-27; Vout v. Hay, [1995] 2 S.C.R. 876 (S.C.C.), at para. 28; Bank of Montreal, at para. 6; Kavanagh, at para. 19). The justification for setting aside a transaction induced by actual undue influence is that no person should be permitted to retain any benefit arising from their own fraud or wrongful act (Allcard, at p. 171).
The second class of undue influence cases involves transactions with respect to which the court will apply an evidentiary presumption that undue influence was exerted. If the criteria giving rise to such a presumption are satisfied, then the onus shifts to the party seeking to uphold the transaction to rebut the presumption by proving that the other party entered the transaction as a result of “their own full, free and informed thought” (Zamet v. Hyman, [1961] 1 W.L.R. 1442, [1961] 3 All E.R. 933 (Eng. C.A.), at p. 938; Goodman Estate, at para. 46; Bank of Montreal, at para. 6; Foley v. McIntyre, 2015 ONCA 382 (Ont. C.A.), at para. 28). The classification of a case as one of presumed undue influence is therefore extremely important from an onus of proof perspective. While cases of actual undue influence depend on proof of an intentional and unconscientious exertion of influence, cases of presumed undue influence do not depend on evidence of reprehensible conduct or a finding of a specific act of coercion or domination (Morreale, at para. 21). Presumed undue influence may arise where the party seeking to uphold the transaction had the sincere belief that they were acting honestly and in the interests of the other party (Ogilvie v. Ogilvie Estate, 1998 CarswellBC 717 (B.C. C.A.), at para. 14). In cases of presumed undue influence, the court’s intervention is justified on public policy grounds, to prevent the influence existing in certain types of relationships from being abused (Allcard, at p. 171; Ogilvie, at para. 14).
A presumption of undue influence will be triggered in relation to a transaction if the following criteria are satisfied:
First, the relationship between the parties around the time of the transaction must have been such that the party seeking to uphold the transaction had a dominating influence over the other; and
Second, in cases of classic contracts involving consideration as opposed to gifts or bequests, the party seeking to avoid the contract must show that the agreement worked unfairness either in the sense that they were unduly disadvantaged by it or that the party seeking to uphold the arrangement unduly benefitted from it (McKay v. Clow, [1941] S.C.R. 643(S.C.C.), at para. 84; Goodman Estate, per Wilson, J. at paras. 40-45; Williams v. Downey-Waterbury, 1994 CarswellMan 182(Man. C.A.), leave to appeal to S.C.C. refused, [1995] S.C.C.A. No. 217 (S.C.C.); Bank of Montreal v. Courtney, 2005 NSCA 153 (N.S. C.A.), at para. 29).
With respect to the first criterion for triggering a presumption of undue influence, the courts have emphasized that the relationships giving rise to the presumption are not limited to fixed categories (Goodman Estate; Bank of Montreal v. Courtney, at para. 30). However, there are two broad classifications of relationships which support a presumption of undue influence, as follows:
Category A:
First, there are several relationships which equity has clearly recognized as a matter of law as typically supporting a presumption that undue influence has been exercised. These include the relationship between solicitor and client, parent and child, guardian and ward, spiritual adviser and follower, medical advisor and patient, and “other relationships of dependency which defy easy categorization” (Goodman Estate, at para. 43; see also Bank of Montreal, at para. 6; Lloyd’s Bank v. Bundy (1974), [1975] Q.B. 326 (Eng. C.A.)). In Morreale, at para. 23, the Ontario Court of Appeal emphasized that even with these types of relationships that are typically recognized as satisfying the test, it is not enough to simply show that such a relationship exists; the party seeking to uphold the transaction must still establish that there is a potential in the relationship for one person to dominate the will of another.
Category B:
The second class of cases encompasses relationships in which the potential for domination is found by the court to exist as a matter of fact (Bank of Montreal, at para. 6). In these cases, the court must carefully assess the nature and dynamics of the particular relationship in question to determine whether they give rise to a potential for domination by one party over the other (Goodman Estate, at para. 43; Hilmoe, at para. 65).
The relationship between spouses does not fall within Category A, and thus does not in and of itself automatically generate a presumption of undue influence in law (Williams; Steeves v. Steeves, 1997 CarswellNB 352 (N.B. C.A.), at para. 11; Bank of Montreal, at para. 7; Freake, at para. 41; Bank of Montreal v. Courtney, at para. 30; Hilmoe, at para. 65). This principle extends to the context of the negotiation of a separation agreement between spouses (Freake, at para. 41). Accordingly, the presumption of undue influence will only arise in relation to transactions between spouses if the party seeking to set aside the agreement establishes that the potential for domination was inherent in the parties’ relationship, having regard for the specific dynamics of their situation and interactions (Bank of Montreal, at para. 16; Steeves, at para. 11; Hilmoe, at para. 65; Freake, at para. 41). The courts have held that a presumption of undue influence can arise in relation to a transaction involving spouses where one spouse typically relies on the other to make all financial decisions and generally reposes complete trust and confidence in them (Barclays Bank PLC v. O’Brien (1993), [1994] 1 A.C. 180, [1993] 4 All E.R. 417 (U.K. H.L.), at paras. 16 and 17; Bank of Montreal; Debora v. Debora, 2004 CarswellOnt 4987 (Ont. S.C.J.), aff’d on other grounds 2006 CarswellOnt 7633 (Ont. C.A.)). By contrast, the presumption of undue influence has not been triggered in cases where the spouse seeking to avoid the transaction has not demonstrated a tendency to consistently bow to their spouse’s decisions and to indiscriminately defer to their judgment (Bank of Montreal; Bank of Montreal v. Courtney). The courts have also held that the presumption can arise as between spouses where there is a history of domination by one of them coupled with evidence that the other is suffering from a fragile emotional or psychological state (Mundinger; Campbell, at para. 82). Similarly, the presumption may arise where one spouse is in a physically or emotionally vulnerable state and is dependent on the other spouse around the time of the transaction (Hilmoe, at para. 66).
If the presumption of undue influence is not triggered in regard to a transaction between spouses, the spouse seeking to set aside the transaction can nonetheless seek to do so on the basis of actual undue influence, which they will have the onus of affirmatively proving (MacKenzie v. Royal Bank, [1934] A.C. 468 (Jud. Com. of Privy Coun.), at para. 5; Williams, at para. 20; Bank of Montreal, at para. 16; Hilmoe, at para. 67).
Turning to the second criterion for establishing a presumption of undue influence, I note that in Thorsteinson, at para. 37, the Saskatchewan Court of Appeal held that the Supreme Court of Canada decision in Goodman Estate raised uncertainty as to whether the requirement of a manifest disadvantage to the aggrieved party or an undue advantage to the party seeking to uphold the transaction is necessary to trigger the presumption of undue influence in cases involving classic contracts involving consideration. In my view, this is clearly a requirement before the presumption will arise in contract cases. I note that Wilson J. (Cory J. concurring) concluded in Goodman Estate, at para. 44 that this criterion is justified in the case of contracts, as compared to gifts or bequests, on the ground that “a court of equity, even while tempering the harshness of the common law, must accord some degree of deference to the principle of freedom of contract and the inviolability of bargains.” Laforest J. (MacLachlan J. concurring) emphasized that a finding of manifest disadvantage to the party seeking to avoid the contract, or undue advantage by the other party, is not required to support a finding of actual undue influence. He concluded that it was unnecessary to address whether this is an essential criterion to raise the presumption of undue influence in contracts, since the case under consideration involved a bequest rather than a contract involving consideration. However, he did comment as follows on this issue at para. 84:
It may well be appropriate to require a showing of undue disadvantage or benefit before a presumption of undue influence will be applied. Given that the effect of the presumption of undue influence is to shift the burden of proof to the defendant, it may not be unreasonable to require that there be some showing of undue disadvantage or benefit in a commercial transaction before the presumption will arise. It is a substantially different question, however, whether undue influence itself must always involve undue disadvantage or benefit.
Laforest J.’s last comment in this paragraph relates, in my view, to cases of actual undue influence rather than presumed undue influence in contract situations. This conclusion finds support in the Supreme Court of Canada’s decision in McKay, where Crocket J. explicitly accepted the criterion of an undue advantage to the party seeking to uphold the transaction as a well-established requirement for raising a presumption of undue influence in cases involving contracts for consideration in McKay, where Crocket J. stated as follows at para. 39 (emphasis added):
As regards that vital question, the established rule of equity is that, whenever it appears that any party to a transaction, from which he or she derives some large or immoderate benefit, occupies such a position in relation to his or her supposed benefactor as to give the recipient a dominating influence over the latter, that benefit is presumed to have been obtained by the exercise of some undue influence on the part of the recipient. In all such cases, whatever be the nature of the transaction, whether a gift inter vivos or a contract alleged to have been made for a good and sufficient consideration, the onus of proof lies on the party who seeks to support it.
As the foregoing discussion illustrates, the law respecting undue influence is technical and convoluted. By way of overview, a general roadmap for determining whether a contract should be set aside on the ground of undue influence is as follows:
First, determine whether the agreement attracts a presumption of undue influence. In addressing this question, the court must first ascertain whether the relationship between the parties has the necessary hallmarks for the activation of the presumption, either as a matter of law (a “category A” case) or as a matter of fact (a “category B” case). If it does not, the case is not one of presumed undue influence, and proceed to question 3.
If the parties’ relationship meets the criteria for invoking the presumption of undue influence, determine whether the transaction involves manifest disadvantage to the party seeking to set it aside or undue advantage to the other party. If the answer is yes, then the presumption of undue influence is triggered. The agreement may be set aside, unless the party seeking to uphold it rebuts the presumption of undue influence by satisfying the court that the aggrieved party executed it through their own full, free and informed thought.
If the presumption of undue influence is not triggered, consider whether the case involves actual undue influence. The question to determine in this regard is whether the party seeking to set aside the contract has affirmatively established that the other party intentionally induced them into executing the agreement by dominating their will through the exercise of a pervasive and unconscientious influence on them, whether through manipulation, coercion, fraud, abuse of power or other unscrupulous means.
The factors that may impact the court’s determination of whether undue influence has been proven will ultimately depend on the particular circumstances and dynamics of each case under consideration. Evidence that the party seeking to set aside the arrangement obtained independent advice is a relevant factor in determining whether actual undue influence occurred or in rebutting the presumption of undue influence (Goodman Estate, at para. 46; Bank of Montreal, at para. 24; Freake, at para. 42), but it is not determinative (Bank of Montreal, at paras. 26-27; Morreale, at para. 33). The presumption of undue influence may be rebutted by evidence that the party seeking to uphold the transaction did not actually deploy any influence in relation to the transaction (Goodman Estate, at para. 46). In addition, in considering whether the presumption of undue influence has been rebutted, the magnitude of the disadvantage or benefit arising from the arrangement is “cogent evidence going to the issue of whether influence was exercised” (Goodman Estate, at para. 46).
As in the case of duress, the right to rescind a contract on the basis of undue influence may be lost if the aggrieved party subsequently affirms the contract (Allcard; Puopolo, at para. 19). Affirmation of the contract cannot occur unless the aggrieved party has full knowledge of the facts and the equitable rights arising out of those facts, and until the undue influence has ceased (Allcard).”