Chapter 3 – Incapacity and contracts and gifts during lifetime

Contents

3. 1. Introduction

3. 2. The starting points

3. 3. Determining capacity3. 3. 1. The test for capacity3. 3. 2. How do doctors and psychologists determine capacity?3. 3. 3. Implied obligation of an incapable person to pay for necessaries3. 3. 4. Entitlement to payment for services rendered - quantum meruit3. 3. 5. “Escaping” from obligations under contracts and similar transactionson the grounds of incapacity to enter them

3. 4. Capacity to execute deeds

3. 5. Setting aside lifetime gifts on grounds of undue influence orunconscionability where gift-maker has “special disadvantage”3. 5. 1 Undue influence3. 5. 2. Unconscionability3. 5. 3. Undue influence and unconscionability – similar but different – bothmay be available in a particular case

3. 6. Liability of lawyers and others who fail to protect the interests of theirclients

3. 1. IntroductionIn this chapter we will deal with capacity to enter contracts and similartransactions and the issues arising when an incapable adult appears to enter intoa contract. The law has had to respond to the need to ensure that incapablepeople are provided with necessary goods and services and that those whoprovide those goods and services are fairly compensated on the one hand and,on the other hand, the need for mechanisms by which incapable people canavoid being liable for the consequences of contracts or other similartransactions they have apparently entered when they have no capacity tounderstand what they have undertaken.

The chapter also considers the law relevant to the recovery of gifts given,during their lifetime, by elderly, frail or physically, sensorily or intellectuallylimited or disabled people on the grounds of incapacity, undue influence orunconscionability.

3. 2. The starting points

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If a person enters into a transaction or executes a document at a time when theylack the mental capacity to understand the nature or effect of the document, thetransaction entered into or document executed is not effective at law. However,all persons who have reached the age of majority (18 years) are presumed tohave the capacity to enter into contracts and other transactions and to executedocuments that have legal effect. The onus of proving that they lack legalcapacity lies with the person alleging the lack of capacity. These starting pointshave been long established in the common law.1 However, there needs to beand are a number of exceptions to those basic and sometimes conflicting rules.

3. 3. Determining capacity3. 3. 1. The test for capacityThe test for capacity is not a fixed standard of capacity to be applied to alltransactions. The current and long established law on this matter was set out byDixon CJ, Kitto and Taylor JJ in the 1954 case, Gibbons v Wright.2 They said:

The law does not prescribe any fixed standard of sanity as requisite forthe validity of all transactions. It requires, in relation to each particularmatter or piece of business transacted, that each party shall have suchsoundness of mind as to be capable of understanding the general natureof what he is doing by his participation.... [O]ne test of the requisitecapacity … [is] whether the person concerned was capable ofunderstanding what he did by executing the deed, when its generalpurport was explained to him. The principle...appears to us to be that themental capacity required by the law in respect of any instrument isrelative to the particular transaction which is being effected by means ofthe instrument, and may be described as the capacity to understand thenature of that transaction when it is explained.3

What the judges considered it was necessary for the two sisters to understand inthat case, if the matter had been explained to them, was complicated andsomewhat abstract. They had to be able to appreciate that:

[B]y executing the mortgages and the memorandum of transfer theywould be altering the character of their interests in the propertiesconcerned, so that instead of the last survivor of the three joint tenantsbecoming entitled to the whole, each of them would be entitled to a one-third share which would pass to her estate if she still owned it at herdeath.4

1 Gibbons v Wright [1954] HCA 17, 91 CLR 423, 441; Imperial Loan Company, Limited v Stone[1892] 1 QB 599, 602-3; Re Cumming (1852) 42 ER 660, 668; Masterman-Lister v Brutton & Co[2002] EWCA Civ 1889 [17] and Dalle-Molle by His Next Friend Public Trustee V Manos [2004]SASC 102 [16]-[19], 88 SASR 193.2 [1954] HCA 17, 91 CLR 423.3 Ibid. 437-438.4 Ibid. 438-439.

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The judges considered that they would not have been found to have understoodthese matters, so that the transactions they had entered into were merelyvoidable. However, a transaction that was voidable by reason of the incapacityof a party is valid unless and until it is avoided by that party or therepresentative of that party (including an administrator). The judges pointed outthat it was not open to others, particularly those claiming adversely to theincapable party to get out of the transaction. 5

The judges noted an important exception to the rule that transactions enteredinto by incapable persons were voidable only. Where the property and affairsof a person are placed under the under management by a tribunal or courtbecause of that person’s incapacity to manage their property and affairs, thecontrol, custody and power of disposition of that property passes to theadministrator and any dealing or disposition of that property by the person isvoid and of no effect. This is because their capacity to manage their affairs issuspended by the administration order.6 This exception is dealt with further in3. 3. 5. 3. below.

Since Gibbons v Wright the High Court has developed the concept of “non estfactum” by which persons with certain kinds of incapacities can be freed theirobligations under a contract on the grounds that they brought “no consentingmind” to the contract when they signed it.7

3. 3. 2. How do doctors and psychologists determine capacity?When determining capacity to understand a transaction, the general principle or‘formula’ of decision-maker versus task must be applied. That is, the assessormust take into account both the abilities of the decision-maker and the demandsof the decision-making task. The nature and effect of some transactions aresimple and require less cognitive ability to understand, while others havecomplex and far reaching consequences. Complex decisions require a fairlyhigh level of cognitive functioning to assimilate all of the relevant informationand to form a clear and consistent decision. Accordingly, contractual capacityrelates to the specific contract, not to contracts in general. 8

Property sales or gifts are probably the most common transaction in whichassessors are asked to assess the capacity of the person making the transaction.These are also two of the most common situations in which older, cognitivelyimpaired people are exploited, by virtue of their inability to understand thenature and effect of what they are doing. Yet requests for contemporaneousassessments of capacity to enter into contracts are rare. This is due to the

5 Ibid. 439.6 Ibid. 438-439. Re Walker [1905] 1 Ch 160; Re Marshall [1920] 1 Ch 284 and David by her tutor theProtective Commissioner v David (1993) 30 NSWLR 417, 437-440. See also Protected Estates Act1983 (NSW) s23A(1).7 Petelin v Cullen (1975) 132 CLR 355.8 British Medical Association and The Law Society, Assessment of Mental Capacity – Guidance fordoctors and lawyers, London, BMJ Books, 2nd. ed. 2004, p. 84

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common law presumption that a contracting party has the requisite mentalcapacity to enter into the contract and the onus of proving that this is not thecase and that the contract should be voided lies with the person that alleges theincapacity.9

Consequently, requests for assessment usually come some time after thetransaction has been made, often because an advocate for the impaired personbecomes aware that the transaction has taken place and challenges the validityof the contract. In such cases, the assessor is asked to perform a retrospectiveassessment based on the person’s likely functioning at the time the transactionwas made.

When asked to assess such a person, as with other types of capacity, it isusually helpful to perform a general mental status and cognitive examinationfirst to gain an estimate of the person’s general cognitive abilities, the severityof any cognitive decline and their functioning in specific frontal cognitiveabilities such as judgment, reasoning and insight. It is then important to assessthe person’s understanding of the nature and effect of what they are doing. It isthe understanding of the effect of a transaction which has the broadestinterpretation and probably requires a fairly high level of cognitive function,particularly frontal lobe functions of planning, judgment, reasoning andworking memory. Darzins and others have outlined some of the cognitive andfunctional tasks involved which include: weighing risks and benefits inchoosing purchases and investments, remembering assets, debts andobligations, detecting and avoiding fraud and performing calculationsnecessary to carry out the transaction.10

Using the example of property transaction suggested above, it is helpful to askthe following questions:

1. Does the person have an understanding in general terms of the value ofthe property they are selling or giving away?

2. Do they have an understanding of the risks, benefits and consequencesof selling or gifting their property in terms of their lifestyle andaccommodation e.g. if they reside in the property do they understandthat they will have to leave and find alternative accommodation?

3. Do they have an understanding or can they comprehend adviceregarding the financial implication of what they are doing, both in termsof their future needs and their estate?

4. Can they understand the document/s they are being asked to sign?

As always, the person needs to articulate their understanding in their ownwords, not just give affirmative answers to closed questions.

9 Cockerill J., Collier B., Maxwell K. Legal requirements and practices In Ed. Collier B., Coyne C.,Sullivan K. Mental Capacity 2005, Federation Press: Leichardt, p 38.10 Darzins P., Molloy DW, Strang D. Who Can Decide? Memory Australia Press: Adelaide, 2000. p73

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Because contracts can only be voided if it can be proven that the other partywas aware that the impaired person lacked capacity, experts are sometimesasked to comment whether the person’s incapacity should have been obvious tothe other party when the contract was made. This is a very difficult issue.International experience suggests that minimal enquiry of the client’sunderstanding is not unusual amongst lawyers whose often cursory interactionswith clients during the execution of documents may allow them to miss evensevere dementia.11 Even health care professionals dealing with the client maymiss the diagnosis. Studies have shown that family doctors, many of whomrely on passive identification rather than active screening of dementia fordiagnosis, often fail to identify dementia . 12,13. It is thought that somewherebetween 25-90% of cases of dementia are missed in clinical practice.14 Thesame is often true for nursing staff in nursing homes and in hospitals. 15,16,17

One of the reasons lawyers, doctors and nurses alike miss the diagnosis ofdementia is the attribution of observed changes or abnormalities to “normalageing”.18 Ignorance and ageist attitudes still predominate. For example, in onestudy of aged care nurses the word “old” most commonly prompted negativeresponses (e.g. “feeble”, “dependent” “incapable”) or at best, neutral responses(e.g. “glasses”, “walking sticks”, “grey”).19 Thus, even when abnormalities inphysical appearance are observed lawyers may not make links between theseobservations and cognitive impairment or dementia.

3. 3. 3. Implied obligation of an incapable person to pay for necessariesThe common law recognizes that there is an implied obligation on a personwho lacks capacity to consent to a contract to pay for necessaries provided tothem.20 The judges try to avoid calling this implied obligation an impliedcontract because of the incapacity of the receiver of the necessaries to make acontract. Ipp AJA of the New South Wales Court of Appeal noted the

11 Succession of Mary Louise Helen Leda De La Vergne St. Paul No. 2000-CA-0660 Court of AppealFourth Circuit State of Lousiana12 Brodaty H, Howarth GC, Mant A, Kurrle SE. “General practice and dementia. A national survey ofAustralian GPs.” The Medical Journal of Australia 1994; 160(1):10-4.13 Ashford W., Borson S., O’Hara R. et al., Should older adults be screened for dementia? It isimportant to screen for evidence of dementia! Alzheimer’s & dementia. 2007; 3: 75-8014 Freund B. Office –based evaluation of the older driver J American Geriatric Society 2006; 54:1943-415 Sorensen L., Foldspang, A., Gulman, N & Munk-Jorgensen P. “Assessment of dementia in nursinghome residents by nurses and assistants: criteria validity and determinants.” International Journal ofGeriatric Psychiatry, 2001; 16: 615-621.16 McDonald AJ Carpenter GI. The recognition of dementia in “non-EMI” Nursing home residents insouth East England Int J Geriatric Psychiatry 2003; 18(2) ;105-108.17 Maslow K., Mezey M. Recognition of dementia in hospitalized older adults Am J Nursing 2008;08:40-49.

18 Knopman D., Donohue JA., Gutterman EM . Patterns of care in the early stages of Alzheimer’sdisease: impediments to timely diagnosis. J American Geriatric Society 2000; 48: 300-4.19 Peisah C. Caring for the institutionalised elderly: how easy is it? Aust J Public Health. 1991;15(1):37-42.20 Manby v Scott (1659) 82 ER 1000, 1002; In re Rhodes (1890) 44 Ch D 94; McLaughlin v Freehill(1908) 5 CLR 858.

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preference to describe the implied obligation as quasi-contractual orrestitutionary in nature.21

If the necessaries are provided by family members, there is a presumption thatthe services are being provided out of affection without there being acontractual arrangement or an intention to recoup their cost.22 However, thatpresumption is rebuttable and was held to have been rebutted by the evidencein a 2002 case in which a mother took care of her seriously brain damagedadult daughter injured in a horse-riding accident. The daughter was entitled toclaim, on behalf of her mother, the cost of the services she provided to herdaughter on a daily basis and to the interest she did not receive during the timeshe was deprived of the use of the money she spent providing services to herdaughter. In that case there was no dispute that the mother’s services werenecessaries and the evidence showed that the mother had, from an early stage,sought to be compensated. 23

The term “necessaries” has been treated as a broad term by the judges. Itincludes the provision of, at least, meat, drink, apparel, medicine, medicalservices, education and transportation services. In a 1908 case involving a manwho had been declared insane by the Supreme Court of New South Wales whowished to have that order set aside, and consulted a lawyer for that purpose,Griffith CJ of the High Court said:

Now, it is settled that work done for the benefit of an insane person,although he is incompetent technically to make a contract, maynevertheless be regarded as something in the nature of necessaries.Consequently an action will lie against him, as it will in some othercases, for necessaries.24

This broad approach to the term necessaries both raises questions and providesanswers. It raises questions as to whether, in the 21st century, some things thatare used on a daily basis by many people such as mobile phones and televisionsets are necessaries for all people or only some people or not necessaries at all.It provides the answer to the question of the entitlement of service-providersfor compensation they provide to people incapable of entering contracts for theprovision of such services. The provision of services to assist an incapableperson to stay in their own home or the provision of care services to them in anaged care facility creates an obligation in that person to pay for the servicesbeing supplied to them even though they were totally unaware of what washappening. The same applies to an incapable person being provided withservices in a hospital.

21 Northern Rivers Charity Racing Association v Lloyd [2002] NSWCA 129 [16].22 Ibid. [23]-[26]. See also, In re Rhodes (1890) 44 Ch D 94 and Balfour v Balfour [1919] 2 KB 571.23 Northern Rivers Charity Racing Association v Lloyd [2002] NSWCA 129.24 Mc Laughlin v Freehill [1908] HCA 15, 5 CLR 858, 861. See also Stedman v Hart (1854) 69 ER258.

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However, despite 1903 authority to the contrary, it is unlikely that State orTerritory instrumentalities would succeed in seeking payment for servicesprovided to those admitted to State run psychiatric facilities, particularlyinvoluntary patients.25 In a 1961 case Sholl J of the Supreme Court of Victoriadismissed a claim brought under the common law and the Victorian mentalhealth legislation by the State of Victoria for reimbursement of the moneyspent on the maintenance of a patient 1924 to 1948 because the legislation didnot show an intention to create an obligation to pay and because of thecompulsory detention element of the legislation and its analogy with the prisonsystem.26

There has been some statutory codification of the common law in this area, butit is arguable that the common law in relation to necessaries operates morebroadly than envisaged in the sale of goods legislation and remains in fulleffect as implied by the recent case law.27

In New South Wales, the Sale of Goods Act 1925 (NSW) provides that thecapacity to buy and sell is regulated by the general law (the common law)concerning capacity to contract and to transfer and acquire property. However,where necessaries are sold and delivered to a person who, by reason of mentalincapacity or drunkenness, is incompetent to contract, that person must pay areasonable price for those necessaries. The term “necessaries” is defined tomean goods suitable to the condition in life of the person, and to the person’sactual requirements at the time of the sale and delivery.28 Legislation in all theother States and the two Territories is in the same terms or to the same effect.29

3. 3. 4. Entitlement to payment for services rendered - quantum meruitAnother approach that may be available where a person provides personalservices to an incapable person or carries out work on their behalf or for theirbenefit where it is clear that work is not to be gratuitous, is that the person whocarries out the work is entitled to payment on the basis of quantum meruit andbe paid a reasonable sum given the nature of the services provided or workdone.30

3. 3. 5. “Escaping” from obligations under contracts and similar transactionson the grounds of incapacity to enter themWhere adults who are incapable of understanding the nature of the transactionthey are entering, and it is in their interests to cease to be bound by or to haveany of the benefits of the contract, they have at least two options available to

25 In re Brooks (1904) WN (NSW) 4.26 Victoria v Public Trustee [1961] VR 81, 92.27 Northern Rivers Charity Racing Association v Lloyd [2002] NSWCA 129.28 Sale of Goods Act 1925 (NSW) s 7.29 Sale of Goods Act 1896 (Qld) s 5; Sale of Goods Act 1895 (SA) s 2; Sale of Goods Act 1896 (Tas) s7; Goods Act 1958 (Vic) s 7; Sale of Goods Act 1985 (WA) s 2; Sale of Goods Act 1954 (Tas) s 7 andSale of Goods Act 1972 (NT) s 7.30 Way v Latilla [1937] 3 All ER 759 and Kellar v Williams [2004] UKPC 30.

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them if an informal exit from the contract cannot be arranged for them bynegotiation. These are to take court action to have the contact declared void andto raise the defence of “non est factum” in any action to against them to havethe contract carried out.

In Queensland the Supreme Court is empowered by the Powers of Attorney Act1998 (Qld) to make a declaration about a person’s capacity. Any declaration itmakes about whether a person has capacity to enter a contract is binding in asubsequent proceeding in which the validity of the contract is in issue.31 TheQueensland Civil and Administrative Tribunal also has power to make adeclaration about a person’s capacity to make a contract. Such a declaration isevidence of a person’s capacity in any proceedings in which the validity of thecontract is an issue.32

3. 3. 5. 1. Taking action to have a contract declared voidAs the High Court noted in Gibbons v Wright, the common law developed overtime to establish the principle that where a person who lacks the capacity tomake a contract goes through the process of making one, but then seeks to befreed from their obligations under the contract, the contract is treated as beingvoidable by them and not void.

This means that they will be bound by the contract until a court or tribunal withpower to do so declares the contract to be void. It is the incapable person, orothers authorised to act on their behalf, who may seek to have the contractdeclared void, and not the other parties to the contract or third parties.However, the incapable person will not be able to have the contract declaredvoid if:

1. it is a contract for necessaries as perceived in relation to the personchallenging the contract;

2. if the other part to the contract believed that the person with whom theywere dealing was not incapable.

Consequently, in order to succeed in avoiding a fair contract on the ground ofincapacity, the incapable person must be able to prove:

1. their mental incapacity, and2. that their mental incapacity was known to the other contracting party.33

These requirements also apply if incapacity to make a contract is raised as adefence.34

31 Powers of Attorney Act 1998 (Qld) ss 111 and 112.32 Guardianship and Administration Act 2000 (Qld) s 147.33 Gibbons v Wright [1954] HCA 17, 91 CLR 423, 441; Imperial Loan Company, Limited v Stone[1892] 1 QB 599, 602-3; Molton v Camroux (1848) 154 ER 548, affirmed 154 ER 1107; Bevan vM’Donnell (18540 156 ER 131; Drew v Nunn (1879) 4 QBD 661and Dalle-Molle by His Next FriendPublic Trustee v Manos [2004] SASC 102 [16]-[19], 88 SASR 193.34 Gibbons v Wright [1954] HCA 17, 91 CLR 423 and Imperial Loan Company, Limited v Stone [1892]1 QB 599.

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3. 3. 5. 2. The defence of non est factumA second defence emerged in Australia in 1975 when a unanimous High Courtallowed the extension of the defence of non est factum to cases in which adefendant has actually signed the instrument on which they are being sued. TheCourt noted that the principle was not easy to formulate because it must.accommodate two policy considerations which pull in opposite directions. Thefirst principle is the injustice of holding a person to a bargain to which theyhave not brought a consenting mind. The second is the necessity of holding aperson who signs a document to that document, particularly so as to protectinnocent persons who rely on that signature when there is no reason to doubt itsvalidity. The High Court also noted that the principle must necessarily be keptwithin narrow limits, but that:

1. it was available to those who are unable to read owing to blindness orilliteracy and who must rely on others for advice as to what they aresigning,

2. it was also available to those who through no fault of their own areunable to have any understanding of the purport of a particulardocument,

3. to make out the defence a defendant must show that they signed thedocument in the belief that it was radically different from what it was infact,

4. at least as against innocent persons, their failure to read and understandit was not due to carelessness on their part, and

5. there is a heavy onus on a defendant who seeks to establish thedefence.35

The case in which the principle was adopted involved a man who spoke littleEnglish and who could not read English and who though that the document hewas signing was his receipt acknowledging money loaned to him when it wasan extension of an option to buy his land. However, it has been applied in acase in which the defendant was a 75-year-old woman who had suffered astroke, was confused and unable to maintain a train of thought and who hadsigned, when asked to sign, a mortgage and guarantee as part of a complexfinancial transaction.36 The trial judge doubted, after she gave evidence, thatthe woman had anything more than a transient appreciation of those questionsshe answered or had any real understanding of her involvement in theproceedings.37

The principle has also been applied in a case in which a man, who had a wholeof life intellectual disability and who was functionally illiterate but could signhis name, mortgaged the property in which he lived, which he had inherited

35Petelin v Cullen [1975] HCA 24 [10]-[12], 132 CLR 355.36 PT Limited v Maradona Pty Ltd (1992) 25 NSWLR 643 [73].37 Ibid.

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from his mother, at the behest of his son so that his son could buy a business.The trial judge considered that the man was in no real sense a participant in thisscheme but rather a hapless victim of his son's manipulation and that the manin fact had no positive belief at all about the nature and effect of the documentshe was signing.38 The trial judge set the mortgage aside so that it no longerencumbered the man’s property. However, the trial judge ordered the man torepay the loan money because to retain the money would have unjustlyenriched him.39

The New South Wales Court of Appeal upheld the trial judge’s findings aboutnon est factum, but ordered that the man only had to restore to the lender onlythe approximately $25,000 he benefitted from out of the $200,000 loan.40 TheCourt of Appeal considered that the man was a manipulated intermediary withno understanding of any aspect of the overall transaction. He received nobenefit from the loan, beyond the receipt and retention in his account of theapproximately $25,000. He did not know what he was signing. Looking at thematter as one of substance, he was the innocent, mentally incapable dupe of hisson. Except for the approximately $25,000, “in no real or substantive sense didhe receive and retain benefits such that it would be unjust for him not to repaythe loan”.41

The Court of Appeal noted that the following matters reinforced thisconclusion. The loan was not for necessaries. The lender made no enquiry ofthe borrower who in fact was deeply intellectually impaired and the subject ofmanipulative influence. Instead, it was prepared to lend on the basis ofdocumentation that requested the loan be assessed without documentaryevidence of the financial position of the borrower. The Court said these wererelevant considerations in assessing whether or not it was unjust for the mannot having to repay the whole of the loan money. Furthermore, because thedefence of non est factum had been made out and the loan contract was invalid,it was contrary to public policy for a party to obtain restitution and so obtainthe same result as if the invalid and void contract was in fact valid andenforceable.42

3. 3. 5. 3. Contracts and transactions entered into by those whose estates areunder administrationAs already noted in 3. 3. 1., the right of a person whose estate is undermanagement to deal with their property and affairs in any way is suspendedand any transaction they enter into is void and of no effect.43 This is an

38 Perpetual Trustees Victoria v Ford [2008] NSWSC 29.39 Ibid. [126].40 Ford by his tutor Watkinson v Perpetual Trustees Victoria [2009] NSWCA 186.41 Ibid. [127].42 Ibid. [129]-[131].43 Gibbons v Wright [1954] HCA 17, 91 CLR 423, 438-439; Re Walker [1905] 1 Ch 160; Re Marshall[1920] 1 Ch 284 and David by her tutor the Protective Commissioner v David (1993) 30 NSWLR 417,437-440.

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exception to the rule that contracts and other transactions entered into by anincapable person are valid until avoided by them in certain limitedcircumstances. All contracts and other transactions entered into involving aperson whose estate is under management should be entered into by theiradministrator at least in relation to that part of their estate that is undermanagement in situations where the whole of their estate is not covered by theorder.

While that is the proper practice, does the exception operate to allow a personwhose estate is under administration who purports to enter a contact to avoidhaving to meet their side of the bargain? The cases in which the exception wasestablished may have been cases in which the incapable person needed theirinterests protected or were trying to avoid having their property controlled bythe legislatively established processes. In Re Walker the incapable personexecuted a deed poll giving significant elements of her property to her“executors and administrators” in trust for her benefit for her life when heraffairs were being controlled under a court order.44 In Re Marshall theincapable person signed a deed in the form of a charge on his propertyacknowledging a loan of 30 pounds and repayment of it and any furtheradvances at 30% interest per annum.45 In the David Case, Mrs David purportedto transfer a property to a company which was effectively her family’sdiscretionary trust after her estate had been placed under an administrationorder.46

While administrators would negotiate with other the parties to contracts thatthose whose estates they are managing entered into and decide which contractsshould be continued in the best interests of the person whose estate they wereadministering, they would be able to treat as void contracts for certain goodsand services, such as a mobile phone and attendant phone service contract, ifthe person whose estate they were managing could not use a mobile phone orwho was at financial risk because of their inability to control the use of thephone by themselves and others.

Administrators would be obliged, as part of their responsibility to act in thebest interests of those whose estates they were managing, to get back into theircontrol any property of the person that the person had purported to transfer toothers or to recover the value of that property.

Nevertheless, the issue is addressed, to some degree, in the legislation of all theStates and Territories except Tasmania. The NSW Trustee and Guardian Act2009 (NSW) restates the common law to the effect that the power of a personwhose estate is under administration to deal with that estate is suspended

44 [1905] 1 Ch 160.45 [1920] 1 Ch 284.46 David by her tutor the Protective Commissioner v David (1993) 30 NSWLR 417.

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during the currency of the administration order.47 However, the person may beauthorized to deal with part of their estate.48

In Queensland if the Supreme Court, in the exercise of its jurisdiction under thePublic Trustee Act 1978 (Qld), appoints the Public Trustee to administer theestate of an incapacitated person who is under 18 years of age, that person isnot capable, of making any transfer, lease, mortgage, or other disposition ofany part of the estate under management, or of entering into any contract (otherthan for necessaries) without the leave of the Court. However, any suchtransaction or contract is voidable by that incapacitated person or the PublicTrustee on the incapacitated person’s behalf.49 Nevertheless, the Court maygive leave to an incapacitated person to enter any such transaction or contract,if it is satisfied that the transaction or contract is for the benefit of theincapacitated person and that the incapacitated person consents to thetransaction or contract with adequate understanding of its nature.50

The Public Trustee Act 1978 (Qld) also adopts the common law position inrelation to incapable people set out in Gibbons v Wright by providing that nocontract, transfer, lease, mortgage or other disposition entered into or made byan incapacitated person can be invalidated if the other party to the contract orother transaction proves that they acted:

1. in good faith,2. for adequate consideration, and3. without knowledge that the other party was an incapacitated person.51

There are no similar provisions under the Guardianship and Administration Act2000 (Qld), consequently the common law, as set out above, applies in relationto adults in Queensland. However, the Queensland Guardianship andAdministration Tribunal has the power to make a declaration of capacity for amatter in relation to any adult and also a declaration that a person had capacityto enter a contract.52

In South Australia the Guardianship and Administration Act 1993 (SA)provides that while the property of a person is the subject of an administrationorder made by the Guardianship Board, a disposition of property or contractmade by them is voidable at the option of the administrator. However, theadministrator cannot avoid the transaction if the other party to the transactiondid not know and could not reasonably be expected to have known that theperson they were dealing with had a mental incapacity. Nevertheless, if theGuardianship Board is satisfied that the person had an adequate understandingof the nature of the transaction and that it would be for the benefit of the

47 NSW Trustee and Guardian Act 2009 (NSW) s71(1).48 Ibid. s 71(2)-(5).49 Public Trustee Act 1978 (Qld) ss 64, 65 and 83(1).50 Ibid. s 83(2).51 Ibid. s 83(4) and Gibbons v Wright [1954] HCA 17, 91 CLR 423.52 Guardianship and Administration Act 2000 (Qld), ss 146 and 147.

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person, the Board may make an order allowing the person to make a dispositionof property or enter contract which cannot be made voidable by theadministrator.53 The Aged and Infirm Persons Act 1940 (SA) has the sameprovision in relation to protection orders made by the Supreme Court.54

In Tasmania the Guardianship and Administration Act 1995 (Tas) provides thatthe Tasmanian Guardianship and Administration Board may direct that theperson whose estate is the subject of an administration order may continue tobe responsible for part of their estate.55 As to that part of their estate that iscovered by the administration order, the common law as set out above applies.

In Victoria the Guardianship and Administration Act 1986 (Vic) provides for avariation of the common law. It states that while the property of a person is thesubject of an administration order made by VCAT that person is “deemed”incapable of dealing with, any part of their property or of becoming liableunder any contract without an order of VCAT or the written consent of theadministrator. Any transaction entered into by the person without such order orconsent is void and of no effect, and the money or property the subject of thetransaction is recoverable by the administrator in any court of competentjurisdiction. However, the legislation does not render invalid any transaction bythe person made for adequate consideration with or to or in favour of any otherperson who proves that they acted in good faith and did not know or could notreasonably have known that the person was the subject of an administrationorder.56

The Western Australian Guardianship and Administration Act 1986 (WA) isvery similar to, but not identical with, the Victorian Act. It also provides for avariation of the common law. It states that while the property of a person is thesubject of an administration order made by the State Administrative Tribunal,that person is incapable of entering any contract or dealing with, any part oftheir property except to the extent that their administrator or the StateAdministrative Tribunal authorises them to do so. Any money or property thesubject an unauthorised transaction is recoverable by the administrator in anycourt of competent jurisdiction. However, the legislation does not renderinvalid any contract for necessaries or any transaction by the person made foradequate consideration with or to or in favour of any other person who provesthat they acted in good faith and did not know that the person was the subjectof an administration order.57

In the Australian Capital Territory s 71(1) of the Guardianship andManagement of Property Act 1991 (ACT) states that if a person whose property

53 Guardianship and Administration Act 1993 (SA) s 42(1)-(3).54 Aged and Infirm Persons Act 1940 (SA) s 27(1)-(3).55 Guardianship and Administration Act 1995 (Tas) s 56(3).56 Guardianship and Administration Act 1986 (Vic) s 52(1)-(3).57 Guardianship and Administration Act 1990 (WA) s 77(1)-(3).

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is the subject of an administration order purports to enter into a transaction inrelation to the property, the transaction is not void on the ground that theperson wasnot legally competent to enter into the transaction. However, if an application ismade to it within 90 days of the date of the transaction by the guardian, themanager or some other person concerned in the transaction, ACAT theSupreme Court or the Magistrates Court may, as is just:

1. confirm the transaction,2. declare the transaction void, or3. adjust the rights of the parties to the transaction.

The section appears to invoke an application of the law as laid down inGibbons v Wright by which transactions entered into by incapable people arevoidable and provide a 90 day period in which such transactions may beavoided.58 It does not appear to exclude the possibility of a defence on non estfactum in circumstances in which the facts required to ground that defence canbe proved.59

In the Northern Territory where guardians are appointed administrators by theLocal Court under the Adult Guardianship Act 1988 (NT) the right of thosewhose estates are under administration are suspended and the common law setout above applies. However, the effect of the Supreme Court making aprotection order is that the person to whom the order relates loses the capacityto deal with as much of their estate as is covered by the order and anytransaction they enter is void, unless it is a contract for necessaries or theSupreme Court gives them leave to deal with their estate. Another exception isthat a transaction relating to part of the estate under administration that is forvaluable consideration and the other party to the transaction acted in good faithand without actual notice of the protection order relating to the estate.60

3. 4. Capacity to execute deedsAs has already been noted in 3. 3. 2, gifts during lifetime (inter vivos) and salesof property well below market value are probably two of the most commonsituations in which older, cognitively impaired people are exploited, by virtueof their inability to understand the nature and effect of what they are doing.When such gifts or sales are made between parents who are elderly and frailand lack the capacity to execute the deed making the gift and their adultchildren, parents can be left in a difficult position financially and relationsbetween them and other members of the family whose expectations aredisappointed by such transactions can be disrupted or destroyed. Nevertheless,gifts of real property between family members, particularly from parents toadult children during the lifetime of the parent, are a normal occurrence.

58 Gibbons v Wright [1954] HCA 17, 91 CLR 423, 441.59 See 3. 3. 5. 2.60 Aged and Infirm Persons Act 1976 (NT) s 20(1)-(3)

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Where real property, such as a house or land, is transferred from a parent to achild as a purely voluntary act or where love and affection is the onlyconsideration, there will be no presumption of undue influence or that thetransaction was improper unless there is evidence to raise such matters. In theUnited States, the parent is presumably the dominant party even where theparent is aged, or aged and infirm.61

There will be situations in which a transfer of property has been obtained by anadult child where the parent had no idea what they were doing and so nocapacity to carry out the transaction. In Australia, the cases brought to retrievesuch property either for the gift-giver or their estate, have been argued on thebasis of undue influence or unconscionability or both.62 As non est factum is adefence, it has not been used as a basis for a claim. Whether provableincapacity becomes a basis for action seeking a retransfer of property emergesor whether the established rules of equity continue to be relied upon is a matteris a matter to be determined by future developments in the case law.

3. 5. Setting aside lifetime gifts on grounds of undue influence orunconscionability where gift-maker has “special disadvantage”3. 5. 1 Undue influenceThis area of equity law is evolving with some parts of it more clearlyestablished than others. In 2007 in the Supreme Court of New South Wales,Biscoe AJ noted that undue influence cases fall into two classes. These are:

1. cases where undue influence will be presumed from a relationship(presumed undue influence), and

2. cases where undue influence must be affirmatively proved (actual undueinfluence).63

In cases of presumed undue influence, the party benefiting from the transactionhas the burden of rebutting the presumption. This reversal of the onus of proofis of practical importance in many cases, particularly where the circumstancesin which the transaction occurred are peculiarly within the knowledge of theparty benefitting and the gift-giver is under a disability.64

The cases of presumed undue influence themselves divide into two categories.First, those in which certain types of relationships per se give rise to thepresumption, without any need to prove more. These include relationshipsbetween solicitor and client, physician and patient, parent and child, guardian

61 In re Estate of Lane 930 So. 2d 421, 425 (2006) and Holmes v O’Bryant 741 So. 2d 366, 371 (1999).62 As an example see, Sleboda v Sleboda [2007] NSWSC 361.63 Janson v Janson [2007] NSWSC 1344 [71]. This approach seems to have been followed in Winefieldv Clarke [2008] NSWSC 882 and Barkley v Barkley Brown [2009] NSWSC 76.64 Ibid.

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and ward, and religious advisers and their adherents.65 They may also includethe relationship between express trustee and beneficiary.66 The second categoryis where it is proved that the party benefiting from the transaction occupies orassumes towards the other person a position naturally involving an ascendancyor influence over that other person, or a dependency or trust on that otherperson’s part.67

It has been suggested, by Ridge, that the current state of English equity law isthat actual and presumed undue influence have been conflated so that if it canbe shown that:

1. one party to a transaction had such strong trust and confidence in theother party, that the other (the trusted party) had the power significantlyto influence (the trusting) party's decisions in relation to the transaction,and

2. the transaction entered into by the parties was not readily explicableaccording to the ordinary motives by which people act (therebysuggesting that influence was exercised by the trusted party),

then a factual inference of actual undue influence, rather than just apresumption of it, is raised. The evidential burden is then on the trusted party(and third parties who receive the benefit of the transaction, if affected bynotice or agency principles) to show that the gift or contract was “thespontaneous act of the donor or grantor acting in circumstances which enablehim to exercise an independent will and which justify a court in holding thatthe gift or transaction was the result of a free exercise of his will”.68

That position appears on its face to be more favourable to the weaker party whomay have been taken advantage of and compensates for the difficulty suchpersons have proving their case. It is also consistent with the legal policybehind the Australian position that actual undue influence does not have to beproved before the person who benefits from the transaction has to rebut thepresumption that they gained their benefit though undue influence. Asprey JApointed out in Whereat v Duff that in cases of presumed undue influence, thecourt sets aside the gift unless the person who benefits from it rebuts thepresumption. The court does not act on the ground that any wrongful act hasbeen committed by that person, but on the ground of public policy and toprevent the relations which existed between the parties and the influencearising from that relationship being abused.69

65 Johnson v Buttress [1936] HCA 41, 56 CLR 113, 119 (Latham CJ) and 143 (McTiernan J); UnionFidelity Trustee Co v Gibson [1971] VR 573, 577; Louth v Diprose [1992] HCA 61, 175 CLR 621,629.66 Janson v Janson [2007] NSWSC 1344 [72].67 Ibid.68 Ridge, P, “Equitable undue influence and wills” (2004) 120 Law Quarterly Review 617, 619. Allcardv Skinner (1887) 36 Ch. D. 145; Goldsworthy v Brickell [1987] Ch. 378 and Royal Bank of ScotlandPlc v Etridge (No.2) [2001] UKHL 44, [2002] 2 AC 773.69 [1972] 2 NSWLR 147, 167.

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In an article published in 2002, Burns has suggested that notions developed inEnglish law in the 19th century made it clear that old age in itself was not asufficient ground for setting aside a contract or gift because the ability to makea valid transaction was not necessarily impaired with age. Secondly, thatelderly parents were unable to rely on an automatic or established relationshipof influence to set aside contracts and gifts made in their lifetimes for thebenefit of their children, even as adults because there was a strong expectationthat parents would make gifts of property to their children as it was incumbenton parents to care for them and to advance their interests. Consequently, therelationship of parent and child would justify transfers of property from aparent to a child.70

Burns argued that the assumption that parents make gifts to their children hasbecome deeply entrenched in the legal system (as it has in the United Statessystem) so that property transactions in favour of children, during the lifetimeof the parents, are considered to be natural and normal.71 She also argues that,as a result of these 19th century developments, courts have not considered thatthe advanced age of the person entitles them to any special protection ortreatment under the doctrine of undue influence and that the courts maintain ahealthy scepticism about the frailty of the elderly. Furthermore, she argues, thishas had a significant impact on the application of the doctrine of “undueinfluence inter vivos” because illness and feebleness will not necessarily besufficient to persuade a court that a transaction ought to be set aside because‘experience teaches us to be astute to vulnerability and inequality’ and in somecases elders have been considered to be quite shrewd. Also, courts have notbeen persuaded that, where elders and their relatives are involved, transactionsshould be subject to special scrutiny or that adult relatives (or third partiesacting through them) should automatically be subject to specific obligations.72

In a 2009 case, Ward J of the New South Wales Supreme Court noted thatcontrary to what was noted by Biscoe J, that the relationship between parentand child did not automatically give rise to a presumption of undue influencewhere a gift was given by a parent to a child and that there was a rebuttablepresumption that money given by a parent to a child was advanced by way of agift.73 However, she went on to note: “That said, undue influence is presumedwhere there is a sufficient relationship of dependency upon (or ascendancyexercised by) the [gift-giver]”.74

70 Burns, F, “Undue Influence Inter Vivos and the Elderly” (2002) 29 MULR 499, 509.71 Ibid. 509.72 Ibid. 511-512.73 Barkley v Barkley Brown [2009] NSWSC 76 [140]-[141].74 Ibid. [142].

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However, it is clear that Johnson v Buttress remains a leading authority in thisarea of the law. In that 1936 case, a 67 year old, who was wholly illiterate, oflow intelligence and devoid of experience in business affairs, transferred hishome by way of a gift to a relative of his wife. He had become reliant on her inmany ways, was constantly in her company, relied upon her advice anddepended on her kindness after the death of his wife. The transfer was executedin the office of the gift-receiver’s solicitor. The gift-giver did not haveindependent advice. It was held that, because of the special relationship ofinfluence that was shown by the circumstances to have arisen, there was apresumption of undue influence that arose from that relationship. Dixon Jexplained the basis of the jurisdiction Supreme Courts had to deal with thismatter:

The basis of the equitable jurisdiction to set aside an alienation ofproperty on the ground of undue influence is the prevention of anunconscientious use of any special capacity or opportunity that mayexist or arise of affecting the alienor’s will or freedom of judgment inreference to such a matter.75

Using the language of and examples from the time, Dixon J noted that wherethe parties stand in a relation that gives to one an authority or influence overthe other, it is proper that the latter should be protected from any abuse of thatrelationship. In these circumstances, the party in the position of influencecannot retain as a gift the beneficial title to property of substantial value givento them by the other person, unless they satisfy the court that they took noadvantage of the gift-giver, and that the gift was the independent and well-understood act of a person in a position to exercise a free judgment based oninformation as full as that known by the gift-receiver. This burden is imposedupon one of the parties to certain well-known relationships as soon as itappears that the relationship existed and that they had obtained a substantialbenefit from the other person. Consequently, a solicitor must thus justify thereceipt of such a benefit from their client, a physician from their patient, aparent from their child, a guardian from their ward, and a man from the womanhe has engaged to marry.76

Burns referred to that case but claimed that:

In practice, courts in Australia and New Zealand have set a highstandard for proof of an antecedent relationship of trust and confidencewhere elders are concerned. Generally elders have had to demonstrate aphysical, emotional and/or financial dependence on the defendant. Anelder will be dependent upon a relative or caregiver if the elder relies onthat person for the basic necessities of life, leaves the management oftheir financial affairs in that person's hands and/or is incapable of

75 Johnson v Buttress (1936) 56 CLR 113, 134.76 Ibid.

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looking after himself or herself without the intervention of the relativeor caregiver. Severe physical or mental impairment can be an importantfactor leading to the conclusion that the elder is dependent.77

While those who claim that they have gifted away their property under undueinfluence have to make their claims in the Supreme Court and have to gothrough the psychological stress and the financial risk of running a court case,cases decided since Burns wrote her article suggest that proving undueinfluence that elderly parents should be protected from is not as difficult as shesuggests.78 In a 2008 case, Barrett J of the New South Wales Supreme Courtheld that a mother’s transfer of half her home to her daughter and creating ajoint tenancy through which it was almost certain that the daughter wouldbecome the sole owner of the property on her mother’s death could not standbecause of presumed undue influence. The mother had moderate dementia atthe time the transfer took place. The daughter paid off the balance of themortgage on the property, but did not pay anything for her half interest in it.Just before the transfer the daughter took her mother out of an aged care facilityand brought her back to her home and cared for her there.79

Barrett J noted that the circumstances in at the time of the transfer were suchthat the mother’s dementia based incapacity, combined with her gratitudetowards her daughter for having brought her home from Queensland andrestored her to her home environment, consolidated both dependence and truston the mother’s part and ascendancy and influence on the part of the daughter.He continued:

This situation was a natural one in the circumstances. An old lady withfailing mental powers and in deteriorating health was cared fordiligently and with affection by her daughter. The [daughter] is to becommended for the way in which she looked after her mother. But thefact that the [daughter] acted towards her mother as she did out ofrespect and affection does not change the legal conclusion that the[daughter] stood in a position of undue influence towards [her mother].

That being so, the law requires that the [daughter] positively justify theretention of the benefit conferred upon her by [her mother].80

After considering the evidence Barrett J concluded:

In the circumstances, it is not possible to conclude that the transfer wasthe independent and well-understood act of a woman in a position toexercise a free judgment based on information as full as that of the [gift-

77 Burns op cit (footnote 70) 518.78 See for example, Smith v Glegg [2004] QSC 443 and Sleboda v Sleboda [2007] NSWSC 361.79 Winefield v Clarke [2008] NSWSC 88280 Ibid. [43]-[44].

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receiver]. The freedom of the mother’s will, her understanding and herdecision-making were affected by the dependence on her daughter thatwas, in part at least, the product of her mental deterioration. And theevidence provides no basis for concluding that the [daughter] haspositively justified the retention of the benefit conferred on her.81

The 2009 case Barkley v Barkley Brown is another example.82 In that case achildless woman raised her niece, her nearest relative, from childhood. Later inlife she became dependent on her niece after a period when the niece wasaway. Ward J found that the woman’s vulnerability or susceptibility to herniece’s influence was clear. Her niece cared for her and spent a considerabletime with her. The woman’s health was deteriorating and her delight in herniece’s return was manifest. The fact of the woman’s physical dependence onand emotional attachment to her niece and the position of trust and confidencein which her niece was placed, in which the niece acknowledged obliged her toact in best interests of her aunt, and not her own best interests, led Ward J toconclude that the niece (without being conscious of any impropriety) benefitedfrom her aunt’s disadvantageous position, by taking for her own benefit or forthat of her family gifts and money in accordance with what she understood tobe her aunt’s instructions and ordered her to repay at least some of the gifts.83

Ridge has claimed that is regarded as settled law that the equitable doctrine ofundue influence does not apply to gifts given in wills despite the fact that thefactual scenarios involving a gift in a will may be virtually indistinguishablefrom a gift given during lifetime.84 Undue influence in relation to wills is dealtwith in Chapter 4.85

3. 5. 2. UnconscionabilityIn a speech given in 2007, Gleeson CJ of the High Court of Australia referredto the use of the concept of unconscionability as a basis for giving equitablerelief to one party to a transaction where that person, because of some specialdisadvantage, was unable to act in their own best interests.86 He referred to a1948 case in which the High Court upheld the decision of a trial judge to setaside a deed in which an uneducated man of dull intellect and defective hearingwas bustled into making a gift of his share of his wife’s estate to his stepson.87In that case Latham CJ noted that courts of equity can set aside a transactionand cancel a document on various grounds, such as fraud, undue influence,mistake, lunacy, duress, non-disclosure of material facts when there is a duty todisclose, abuse of confidential relationship, or, in some cases, failure to show

81 Ibid. [50].82 [2009] NSWSC 76.83 Ibid. [170], [171] and [175].84 Ridge op cit (footnote 57) 617.85 See 4. 7, 4. 7. 2 and 4. 7. 3 in particular.86 Gleeson, M, “Australia’s contribution to the common law” (2008) 82 ALJ 247, 250.87 Wilton v Farnsworth (1948) 76 CLR 646, [1948] HCA 20.

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that there had been no such abuse. However, Latham CJ also noted that thiswas not such a case and, specifically, that there had been no confidentialrelationship between the parties. He also noted that this was not a businesstransaction where different considerations might apply. Nevertheless, althoughhe didn’t use the term “unconscientious” that his colleague judges used, henoted that where a gift was not a business transaction, the gift-receiver was themoving spirit in the transaction, the gift was all or most of the person’sproperty and the gift-giver is “of weak will or of poor mentality”, a court ofequity will set aside the gift unless it is shown that the gift-giver understood thesubstance of what they were doing.88

Rich J, with whom Dixon J agreed, noted that, in this case:

1. the contents of the deed and its implications were not explained to thegift-giver and that, although he executed it, he did not know he wasmaking a gift of his share in his late wife's property,

2. the gift-giver did not know the extent of the share of his wife’s propertyto which he was entitled or its value,

3. he was bustled into executing the deed with unseemly haste,4. a copy of the deed was not left with him, and5. the gift-receiver made no attempt to explain the nature of the transaction

to the gift-giver beyond some reading of the deed which, even if the gift-giver had heard it, he would not have been able to understand.89

Rich J stated that the jurisdiction of courts of equity is based uponunconscientious dealing and continued:

It has always been considered unconscientious to retain the advantage ofa voluntary disposition of a large amount of property improvidentlymade by an alleged donor who did not understand the nature of thetransaction and lacked information of material facts such as the natureand extent of the property particularly if made in favour of a doneepossessing greater information who nevertheless withheld the facts.90

He concluded by stating that the transaction was “neither fair nor righteous andin the view of a court of equity it must be regarded as unconscientious for the[gift-receiver] to take the gift or retain it”.91

In a 1992 case which shows that the unconscionability principle can be appliedin a broad range of situations, Deane J noted that it has long been establishedthat the jurisdiction of courts of equity to relieve against unconscionabledealing extends generally to circumstances in which:

88 Ibid. 649.89 Ibid. 65490 Ibid. 65591 Ibid.

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1. a party to a transaction was under a special disability in dealing with theother party to the transaction with the consequence that there was anabsence of any reasonable degree of equality between them, and

2. that special disability was sufficiently evident to the other party to makeit prima facie unfair or "unconscionable" that that other party procure,accept or retain the benefit of, the disadvantaged party's assent to theimpugned transaction in the circumstances in which he or she procuredor accepted it.

Deane J noted that where such circumstances are shown to have existed, anonus was cast upon the stronger party to show that the transaction was fair, justand reasonable in order to obtain or retain the benefit of it.92

He also noted that the adverse circumstances which may constitute a specialdisability for the purposes of the principle may take a wide variety of forms andare not susceptible of being comprehensively catalogued. However, he listedsome established examples of special disability as poverty or need of any kind,sickness, age, sex, infirmity of body or mind, drunkenness, illiteracy or lack ofeducation, lack of assistance or explanation where assistance or explanation isnecessary and noted that the common characteristic of such adversecircumstances seemed to be that they had the effect of placing one party at aserious disadvantage vis-a-vis the other.93

Deane J and the other majority judges were of the view that the gift-giver wasunder a special disability in dealing with the gift-receiver at the time the gift-giver gave the impugned gift to the gift-receiver. That special disability arosenot merely from the gift-giver’s infatuation with the gift-receiver but that itextended to the extraordinary vulnerability of the gift-giver in the false"atmosphere of crisis" in which he believed that the woman with whom he was"completely in love" and upon whom he was emotionally dependent was facingeviction from her home and suicide unless he provided the money for thepurchase of the house. The gift-receiver was aware of that special disabilitywhich, to a significant extent, she had deliberately created. She manipulated thesituation to her advantage to influence the gift-giver to make the gift of themoney to purchase the house. When asked for restitution she refused. Also,from the gift-giver's point of view, the whole transaction was plainly a mostimprovident one.94

3. 5. 3. Undue influence and unconscionability – similar but different – bothmay be available in a particular caseIn a 1983 case, Deane J noted that the equitable principles relating to reliefagainst unconscionable dealing and the principles relating to undue influencewhile closely related were distinct. Undue influence, like common law duress,

92 Louth v Diprose (1992) 175 CLR 621, 637, [1992] HCA 61.93 Ibid. 637-638. See also Blomley v Ryan (1956) 99 CLR 365, [1956] HCA 79.94 Ibid. 638.

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looked to the quality of the consent or assent of the weaker party, whileunconscionable dealing looked to the conduct of the stronger party inattempting to enforce, or retain the benefit of, a dealing with a person under aspecial disability in circumstances where it was not consistent with equity orgood conscience that they should do so. He also noted that the adversecircumstances, which may constitute a special disability for the purposes ofrelief against unconscionable dealing, may take a wide variety of forms and arenot susceptible to being comprehensively catalogued.95 In that case a majorityof the judges held that it would be unfair and unconscientious for a bank to relyon a guarantee obtained from the elderly migrant parents of a customer, whowere unfamiliar with written English.

In a 2007 case a father and son had owned a farm together as tenants incommon in equal shares. In 1981, when the son was faced with the prospect ofcriminal charges and, acting on advice, transferred his interest in the propertyto his father. In 2002, the father conveyed the entire interest in the property tohis son. The father understood that the documents he had signed were to returninterests in the property to what they had been in 1981when father and sonwere tenants in common in equal shares. At the time of the 2002 conveyance,the father was 79 years old. The son knew that his father had difficulty withEnglish and that he was partially deaf. He also knew that his father trusted himand, in particular, that his father was prepared to do whatever he asked him todo in relation to the property and he knew that his father was relying upon himto accurately convey to the solicitor the terms of any agreement that had beenreached between them as to how the title should be held.96

The father did not raise a case of non est factum, but put it on two bases: undueinfluence and unconscionable conduct. Gzell J found that both had been madeout. He found that the father was under a special disability in dealing with hisson. He was partially deaf following his heart by-pass operation and his sonknew that his father had difficulty reading English and placed his completetrust in his son. The relationship between them was that the son had suchinfluence over his father that the father’s decision to sign the documentswithout taking independent advice, without having them read to him andwithout explanation was not voluntary but was overborne by his son’sinstruction to him to sign the documents. The father’s decision to sign thedocuments did not arise from an independent and well-understood act on hispart. Gzell J also found that when the father signed the documents therelationship between him and his son was such that his son was in a superiorposition to his father. The son was aware that his father trusted him and thatthat trust was such that his father would do anything his son asked him to dowith respect to the property. Gzell J found that the son made unconscientious

95 Commercial Bank of Australia v Amadio (1983) 151 CLR 447, 474. For a case in whichunconscionability and undue influence pleas were made our, but not non est factum, see Johnson vJohnson [2009] NSWSC 503.96 Sleboda v Sleboda [2007] NSWSC 361.

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use of his superior position to the detriment of his father and that theconveyance was caused by the undue influence of the son over the father.97

Gzell J ordered the son execute all documents and do all the things that werenecessary to return the interests in the property to what they were before the1981 transfer.98

3. 6. Liability of lawyers and others who fail to protect the interests of theirclientsRecent cases in New South Wales show that lawyers can be held to be liable topay damages for losses made by their clients if they do not act prudently toprotect their client’s interests. In a 2004 case, a son forged the signatures of hisparents on a power of attorney and then used that forged power of attorney toobtain a loan to buy a home unit for himself. The son instructed the solicitorwho obtained the certificate of title to the parents’ property, and with thesolicitor’s help obtained the loan. The son’s parents knew nothing about eitherthe power of attorney or the mortgage. They brought claims against their sonand the solicitor. They settled the claim against their son and pursued thesolicitor for the balance of their loss. Young J upheld their claim against thesolicitor and also held that his insurance policy did not cover his conduct sothat he was personally liable for his clients’ loss.99

Young J noted the argument that the point of a power of attorney is that peopledeal with the maker and do not consult the donor and that people must be ableto treat attorneys under power of attorney as prima facie having authority to dowhat they have to do, but continued:

However, especially for solicitors, red lights should flash when certainfactors exhibit themselves, one red light flashes when one can see thatthe donor of the power of attorney is to receive no benefit at all from atransaction yet the donee is to receive a considerable benefit. One canrationalise that this is because it is a family dealing, but a prudentsolicitor when he or she sees the red light, makes enquiries.Furthermore, a prudent solicitor is extremely careful about documents towhich he or she puts his or her signature and professional reputation andtakes precautions against misleading anyone else. Unfortunately, MrMurphy, whilst probably not dishonest in the criminal sense, fell shortof the standard here and is liable to indemnify the mortgagee for its losswithout recourse to his insurer.100

A 2006 case, Graham v Hall, extended the liability to both justices of the peaceand ordinary witnesses attesting documents. 101 In that case both the solicitor

97 Ibid. [51]-[52].98 Ibid. [54].99 Yaktine v Perpetual Trustees Victoria Ltd [2004] NSWSC 1078.100 Ibid. [65].101 [2006] NSWCA 208, 67 NSWLR 135.

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who drew up and registered a mortgage and the justice of the peace whoattested to the signing of the mortgage and the statutory declaration relating tothe mortgage were held to be liable in damages because of their part in theprocess by which a fraudulent mortgage was obtained.

Mr and Mrs Hall were joint owners of the family home. When Mr Hall foundhimself in financial trouble, he decided to re-mortgage the family home withouttelling his wife. He instructed a solicitor, to act for both him and Mrs Hall ineffecting and registering the mortgage. Mr Hall told the solicitor that his wifewas dying of cancer and therefore the solicitor could not see her or visit her. MrHall said that he would take the papers to his wife and arrange for her to signthem.

The solicitor knew that, after payment of the existing mortgage and somebusiness debts, the rest of the money from the new mortgage was to be paid toMr Hall alone. Nevertheless, he did not investigate why a woman dying ofcancer would want to enter into a new mortgage. In fact, Mrs Hall did not havecancer and was not aware of either her husband’s financial difficulties or hisvisit to the solicitor. The solicitor got Mr Graham, a justice of the peace,attested a mortgage document and a statutory declaration related to themortgage both of which appeared to have been signed by Mrs Hall as co-mortgagor. In fact her signature had been forged by Mr Hall. However, bysigning the mortgage document Mr Graham attested that it was “signed in mypresence by the mortgagor who is personally known to me.” In fact, Mrs Hallhad never met Mr Graham.

The new mortgage was registered in 2001. Mr Hall died in 2003. After hisdeath Mrs Hall discovered the existence of the new mortgage. She sued boththe solicitor and the solicitor and Mr Graham. Both were found liable indamages apportioned 60% to the solicitor and 40% to Mr Graham as justice ofthe peace. On the appeal by Mr Graham The Court of Appeal held that the riskof harm to Mrs Hall’s interests in the property that arose from the fact that thefalsely attested mortgage was likely to be registered was clearly foreseeableand that not only a justice of the peace but also an ordinary witness owes a dutyof care in these circumstances.102

102 Ibid. [68]. See also Re: Dr Athanasios Gouras [2004] MPBV 10 about the professionalresponsibilities of doctors witnessing the making of a document by incapable persons [69-[79].