While giving independent legal advice (ILA) is an important service provided by lawyers, it can also be fraught with risk. The person seeking ILA is your client, and while your services are limited in scope, all of your duties and responsibilities as a lawyer must be met. This is especially important when your ILA client may be elderly, suffering from cognitive or capacity issues or vulnerable to undue influence.
One common scenario involving older adults and ILA are transactions involving “reverse mortgages” which are loans designed specifically for homeowners 55 years of age and older. It allows homeowners to obtain cash, without having to sell their home. However, unlike ordinary mortgages there are no regular or lump sum payments. When the house is sold the loan is repaid with interest. While this loan vehicle can have its advantages when used appropriately, it can also be risky for those older adults with diminished capacity who may be unduly influenced or pressured into accessing the equity in their home for unscrupulous individuals. ILA is required by the financial institution offering the reverse mortgage.
Standard of Care
The standard of care for providing ILA in general has been discussed in a number of cases, including the oft-cited cases of Goodman v. Geffen, [1989] 6 WWR 625 (Alta.C.A.); Tulick v. Ostapowich (1988), 62 Alta. L.R. (2d) 384 (Alta. Q.B.); and Inche Noriah v. Shaik Allie Bin Omar, [1929] AC 127 (PC). In Inche, Lord Hailsham noted:
….Nor are their lordships prepared to lay down what advice must be received in order to satisfy the rule in cases where independent legal advice is relied upon further than to say it must be given with a full knowledge of all relevant circumstances and must be such that a competent and honest advisor would give if acting solely in the interests of the donor.[emphasis added][1]
The Supreme Court of Canada observed that ILA addresses two primary concerns, namely that a person understands a transaction and that a person enters into a transaction freely and voluntarily. In Gold v. Rosenberg [1997] 3 SCR 767 the Court noted that:
Whether or not someone requires independent legal advice will depend on two principal concerns: whether they understand what is proposed to them and whether they are free to decide according to their own will. The first is a function of information and intellect, while the second will depend, among other things, on whether there is undue influence. [emphasis added][2]
To meet the standard of a reasonably competent lawyer providing ILA, a lawyer must give advice with the full knowledge of all relevant circumstances and determine whether the ILA client has capacity to enter into the transaction for which the ILA is being provided advice on, and that there has been no undue influence.
Capacity Concerns
It is always the obligation of the ILA lawyer to interview the client for the purpose of determining the requisite legal or decisional capacity for the task undertaken by the client. If the lawyer is confident that the client meets the requisite standard for capacity, it should be clearly indicated in the file notes. Solicitor notes should be thorough as well as carefully recorded and preserved.
As ILA is usually sought for entering into a contract or transaction such as a mortgage, guarantee or transfer of title, the ILA lawyer should be aware of the required standard or factors to determine requisite decisional capacity to contract.
While there are no statutory criteria for determining the requisite capacity to contract, a cogent approach was set out in the Prince Edward Island, Supreme Court decision of Bank of Nova Scotia v. Kelly (1973), 41 DLR (3d) 273 (PEI SC). Capacity to enter into a contract (including real estate transactions) is defined by the following:
- the ability to understand the nature of the contract; and
- the ability to understand the contract’s specific effect in the circumstances.[3]
In undertaking an analysis of the requisite capacity to contract, the determining factor is the person’s ability to understand the nature and consequences of the contract at hand. A person capable of entering into a contract has the ability not only to understand the nature of the contract but the impact on their interests.
If an ILA lawyer has been asked to provide ILA with respect to a transaction that involves an inter vivos gift, the lawyer should be confident that the requisite capacity to gift is also met. In general the criteria to be applied are the same as that applied to determine the capacity to enter into a contract. However, the determination of the requisite capacity to give a gift changes if the gift is significant in value, in relation to the donor’s assets. In such cases, the applicable capacity criteria applied changes to that required for capacity to make a will, that is, testamentary capacity.
The law on testamentary capacity is established in common law. The legal criterion for determining the requisite capacity to make a will was established in the 1800’s by the English case of Banks v. Goodfellow (1870) L.R. 5 Q.B. 549. Testamentary capacity is defined as the:
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Ability to understand the nature and effect of making a will;
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Ability to understand the extent of the property in question; and
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Ability to understand the claims of persons who would normally expect to benefit under a will of the testator.[4]
A testator (or giftor) need not have a detailed understanding of the points listed above. They require a "disposing mind and memory" which is defined as a mind that is “able to comprehend, of its own initiative and volition, the essential elements of will making, property, objects, just claims to consideration, revocation of existing dispositions, and the like.” [5]
In this case, an elderly man with questionable capacity made an inter vivos gift to a long-time friend and neglected to provide for his daughter who had special needs. Mr. Tulick had suffered a stroke and according to medical notes, showed signs of confusion, agitation and partial paralysis plus an earlier history of epilepsy. His doctor noted that he displayed marked emotional instability. Mr. Tulick was confused at times but did have lucid periods. During these lucid periods he would give the impression that he was competent and able to function normally. It was the doctor’s opinion that he would not have had the mental capacity to understand the nature and significance of making a substantial gift of property, or that he had capacity to appoint someone to look after his financial affairs. The Public Guardian and Trustee was appointed as his guardian of property and challenged the gift.
The Court referred to Inche Noriah and noted that “[o]ne of the key tests laid down in the Inche Noriah case is to be satisfied that the adviser has ascertained all of the relevant background and facts before giving the advice”.[7]
The ILA lawyer in this case satisfied himself that Mr. Tulick wanted to make the gift, that he “knew exactly what he was doing and that he had been thinking about this course of action before he had come to [the lawyer’s] office”. The lawyer also questioned Mr. Tulick as to whether anyone was exerting any pressure upon him to transfer the property and was satisfied with the answers that no one, and in particular, not his nephew, was pressuring him. However, the lawyer made no attempt to find out the nature and extent of any assets Mr. Tulick owned, what percentage of his assets he was gifting away, and what effect such a gift might have on his ability to cope with future unexpected contingencies. He also made no attempt to determine how Mr. Tulick’s daughter might be affected.
The Court could not find that the lawyer “met the required tests of an independent adviser in that he did not make a full and complete inquiry into all of the relevant facts”. The Court did “not consider that [the lawyer’s] conduct of the matter amounted to negligence in his role of a solicitor but, . . .Tulick did not receive independent advice from [the lawyer]”.[8]
With respect to the issue of capacity, the Court noted that the doctor could not state from personal observation or the use of hospital records that Mr. Tulick was not capable to gift on the day he entered into the transaction. What the Court had was evidence in the testimony of the lawyer and the nephew as to his capacity to gift that day.[9] While the lawyer had not provided proper ILA, the Court concluded that Mr. Tulick had the requisite capacity to make the gift.
Undue Influence
The doctrine of undue influence is used by courts to set aside certain transactions, where through exertion of the influence of the mind of the donor, the mind falls short of being wholly independent. Lawyers, including ILA lawyers, when taking instructions, must be satisfied that clients are able to freely apply their minds to make decisions about related transactions.
Undue influence in the inter vivos gift context is usually divided into two classes: 1) direct or actual undue influence, and 2) presumed undue influence or undue influence by relationship.[10]
It has been held, in the context of gifts, where the potential for domination exists in the relationship, a presumption of undue influence is found and the onus shifts to the recipient of the gift to rebut the presumption with evidence of intention: that the transaction was made as a result of the donor’s “full, free and informed thought.”[11] Whether ILA has been received is one factor in determining whether the presumption of undue influence has been rebutted.
Cowper-Smith v. Morgan[12]
Elizabeth Cowper-Smith had three children and before her death she transferred her major assets (her house and investments) into joint names with her daughter. Her two sons alleged (among other things) that the transfer of the property and investments into joint names was the result of undue influence by the daughter.
The drafting lawyer met with both the mother and the daughter regarding the transfer, with the daughter present “for much of the meeting”. Subsequently, the daughter called the drafting lawyer with revised instructions from the mother. The drafting lawyer then met with the mother alone, where the mother advised that she wanted everything to go to her daughter. While the drafting lawyer was satisfied that the instructions and wishes were the mother’s and not the daughters, she arranged to have the mother meet with another lawyer for ILA. The ILA lawyer did not recall meeting with the mother but gave evidence on his usual practice, stating that if he had been concerned that the mother was being unduly influenced he would not have signed the documents. However, the ILA lawyer did not ask about the mother’s assets or if she understood the financial implications of the transfers.
The Court found that the relationship between the mother and daughter “was one in which there was a potential for domination” and one which gave rise to a presumption of undue influence.
The daughter argued that the presumption could be rebutted as her mother had ILA. However the evidence did not satisfy the Court on a balance of probability that the transfer of the property and investments into joint names was the result of the mother’s “full, free and informed thought”. The ILA lawyer was not aware of the extent of the mother’s assets and did not discuss the financial implication of placing all of her assets jointly with her daughter. Furthermore, the ILA lawyer did not ask the mother about other family members who might have benefited if the transaction did not take place and the ILA lawyer did not discuss with the mother the wisdom of the proposed transaction or other options where she could achieve her objective with less risk.
The Court concluded that the transfers completed were as a result of undue influence and were ordered to be set aside.[13]
On appeal to the British Columbia Court of Appeal, in upholding the lower Court’s finding that the presumption of undue influence was not rebutted by the ILA provided (or otherwise), the Court of Appeal noted that:
Assessing the adequacy of the legal advice given is a fact-specific inquiry. It does not reduce to any precise test. In some circumstances, it may require advice on only the nature and consequences of the transaction. However, where concerns or allegations of undue influence arise, generally there will be a need to give “informed advice” on the merits of the transaction. See Cope at paras. 213-215, citing J.B. v. L.B., 1989 ABCA 241 at paras. 22-23, Coomber v. Coomber, [1911] 1 Ch. [723] and Wright v. Carter (1902), [1903] 1 Ch. 27 (C.A.) at 57-58.[14] [emphasis added]
The Court agreed that the ILA lawyer in this case did not give the type of “informed advice” that is required when there is a concern about undue influence, namely that “[the mother] should have carefully considered proceeding with this course of action, which in the absence of any rationale reasons, might be found after her death not to be just and fair to the respondents”.[15]
Despite the Court of Appeal agreeing with the trial judge with respect to the undue influence ruling, the appeal was allowed in part with respect to a claim for proprietary estoppel.
Conclusion
In providing ILA a lawyer must meet the standard of a competent lawyer and ensure that the client understands the nature and effect of the transaction and its consequences and is entering the transaction freely and on their own volition. Providing ILA is not without its risks. Meeting the client alone, having full knowledge of all of the relevant circumstances, taking thorough notes, and being cognizant of any capacity or undue influence concerns will go a long way in showing that an ILA lawyer was satisfied, or took the proper steps to determine, that the client had the capacity to enter into the transaction and was doing so free of any undue influence. ILA is not required in every circumstance, the jurisprudence confirms this and guidance gleaned suggests it is case specific.
About the author
Kimberly Whaley, WEL Partners
*Publication of full article pending
[1] Inche Noriah v. Shaik Allie Bin Omar, [1929] AC 127 (PC) at p.614
[2] Gold v. Rosenberg [1997] 3 SCR 767 at para.85
[3] Bank of Nova Scotia v. Kelly (1973), 41 DLR (3d) 273 (PEI SC)
[4] Banks v. Goodfellow (1870) L.R. 5 Q.B. 549 at p.566-7, Leger et al. v. Poirier, [1944] S.C.R. 152 at page 153
[5] Leger et al. v. Poirier, [1944] S.C.R. 152 at page 153
[6] 1988 CanLII 3537 (AB QB) (“Tulick”)
[10] Allcard v. Skinner (1887), 36 Ch. D. 145 at 171. Note also that there is a distinction between presumption of undue influence and doctrine of undue influence. Presumption is an evidentiary tool. Doctrine is a substantive challenge originating in courts of equity.
[11] Fountain Estate v Dorland, 2012 CarswellBC 1180, 2012 BCSC 615 at para 64 citing in part Goodman Estate v Geffen, [1991] 2 SCR 353 (SCC) at para 45.
[12] 2015 BCSC 1170, varied 2016 BCCA 200 (“Cowper-Smith”)
[13] Cowper-Smith v. Morgan 2015 BCSC 1170 at para. 105.
[14] Cowper-Smith v. Morgan 2016 BCCA 200 at para. 53
[15] Cowper-Smith v. Morgan 2016 BCCA 200 at para. 65