Equitable fraud – an overlooked arrow in the lawyer’s quiver?

Introduction

The doctrine of undue influence is frequently employed to attack gifts.¹ However, can the doctrine of equitable fraud apply when the requirements of undue influence are not otherwise met? That is the subject of this blog.

The doctrines of undue influence and equitable fraud² are closely related. Both depend on a relationship predicated on vulnerability.³ While the circumstances in which undue influence and equitable fraud may apply frequently overlap, doctrinally they are distinct. In some ways, equitable fraud is the broader of the two doctrines.

The Supreme Court of Canada’s description of equitable fraud suggests that transactions that offend the court’s moral compass⁴ as being unconscionable may be set aside even in the absence of deceit or a special relationship between the parties⁵.

Undue Influence

In Goodman Estate v. Geffen⁶, Justice Wilson of the Supreme Court of Canada described the presumption of undue influence as arising in a situation in which “one person [has the ability] to dominate the will of another, whether through manipulation, coercion, or outright but subtle abuse of power”.⁷

In order to trigger a presumption of undue influence, the first question the court is tasked to decide is whether the “potential for domination inheres in the nature of the relationship itself”. Equity has traditionally recognized certain types of relationships in which a presumption of undue influence arises. One such relationship is between parent and child.⁸

However, the overriding concern is relationships which give rise to dependency, which are not always easy to categorize. For example, minor children are typically dependent on their parents (or those who act in a similar capacity). In contrast, elderly parents may be dependent on their adult children, effectively a role reversal caused by aging.

If the requisite type of relationship of dependency and the potential for domination is found, then the second question the court must consider is the nature of the transaction itself. In the case of gifts, the court’s concern is that the donor’s “beneficence not be tainted.”

If circumstances giving rise to the presumption of undue influence are found, then the legal burden shifts to the recipient of the gift to demonstrate that undue influence was not employed against the donor in connection with the making of the gift. The presumption of undue influence may be rebutted by showing that no actual influence was deployed, that the donor had independent legal advice in connection with making the gift, etc.

This gives rise to an interesting question. What if the recipient of the gift is able to discharge their burden of showing that no undue influence was deployed against the donor, for example by showing that the donor obtained independent legal advice before making the gift, but that the effect of the gift is to render the donor a pauper? The doctrine of equitable fraud arguably may apply in such a situation if the nature or effect of the gift itself offends the “conscience” of the court.

Equitable Fraud

While equitable fraud is also grounded in a relationship of vulnerability, unlike undue influence, it does not necessarily depend on the ability of one person to dominate the will of another. Instead,  equitable fraud concerns “conduct which, having regard to some special relationship between the two parties concerned, is an unconscionable thing for one to do towards the other”.  Others argue that no special relationship is required.⁹

Equitable fraud is distinct from common law fraud because it does not depend on dishonesty. Instead, it is predicated on the breach of a duty imposed by equity.¹⁰ As explained by the Supreme Court of Canada in Performance Industries Ltd. v. Sylvan Lake Golf & Tennis Club Ltd.:¹¹

What amounts to “fraud or the equivalent of fraud” is, of course, a crucial question. In First City Capital Ltd. v. British Columbia Building Corp. (1989), 1989 CanLII 2868 (BC SC), 43 B.L.R. 29 (B.C.S.C.), McLachlin C.J.S.C. (as she then was) observed that “in this context ‘fraud or the equivalent of fraud’ refers not to the tort of deceit or strict fraud in the legal sense, but rather to the broader category of equitable fraud or constructive fraud…Fraud in this wider sense refers to transactions falling short of deceit but where the Court is of the opinion that it is unconscientious for a person to avail himself of the advantage obtained” (p. 37). Fraud in the “wider sense” of a ground for equitable relief “is so infinite in its varieties that the Courts have not attempted to define it”, but “all kinds of unfair dealing and unconscionable conduct in matters of contract come within its ken”.

Some other differences between equitable fraud and undue influence are worth noting.  Undue influence involves a rogue taking steps to coerce.  Equitable fraud may come about even in the absence of some action.  It may just be an omission the constitutes equitable fraud.  It may even be an honest inadvertent, mistake¹². It is the unconscionable result that is the key.

Discussion

The recent case of Roach v. Todd¹³ is a good example of how the doctrine of equitable fraud may be employed. One of the issues that arose in that case was a gift made by an elderly father, Willie, to his daughter, Claudette, in the amount of $57,000, leaving only $2,961.31 in Willie’s bank account (the “Impugned Gift”). While this case turned in large measure on undue influence and Willie’s apparent lack of capacity to make the Impugned Gift, the doctrine of equitable fraud would also likely apply.¹⁴

Claudette acted as Willie’s attorney under a continuing power of attorney for property executed by Willie (the “POA”). The evidence established that Claudette exercised sole control over Willie’s financial affairs from the time that the POA was signed until Willie’s death.

At the time that Willie made the Impugned Gift to Claudette, Willie was in a hospital and was suffering from significant cognitive impairments. The evidence appeared to show that Claudette had prepared a document which she had Willie sign in secret in connection with the Impugned Gift, which was purportedly made by Willie to Claudette to compensate her for taking care of him.

However, after the Impugned Gift was made, Willie only lived with Claudette for six months and was then transferred to a care home for the remainder of his life. Willie, thus, gave Claudette effectively $9,500.00 per month for any care she rendered during the short period of time that he actually lived with her.

Willie received no independent legal advice in connection with the Impugned Gift. The only witness to the document evidencing the Impugned Gift was Claudette’s fiancé. Justice Heeney found it to be incredible that no nurse or other person at the busy hospital where Willie was an inpatient could be found to act as an independent witness and, therefore, concluded that the Impugned Gift was intended by Claudette to have been made in secret and without the scrutiny of her siblings.

Although Justice Heeney’s judgment turned on undue influence and Willie’s lack of capacity to make the Impugned Gift, it could have equally been decided under the doctrine of equitable fraud. As explained by John E. S. Poyser¹⁵ in his case annotation¹⁶:

…The judge then found that the gift could be set aside on the grounds of equitable inter vivos undue influence, and more specifically equitable undue influence by presumption. Again, this ground is in common judicial use.

Heeney J. then went on to find that the child who received the gifts was acting in a fiduciary role as the attorney for property of the gift-maker, and therefore had a duty to act in his best interests. She violated her duty by encouraging and accepting gifts from him in circumstances that effectively reduced him to the state of a pauper. No authority was cited, but this is a traditional ground that allows a court to set a gift aside as voidable under the doctrine of equitable fraud.

This raises an interesting issue. What if the facts in Roach v. Todd were different such that: (1) the presumption of undue influence was rebutted; and (2) Willie’s capacity to make the Impugned Gift was not in issue. For example, what if the evidence showed that while Willie was in the hospital convalescing, that he contacted his long-time solicitor, Mr. Law, and instructed him to prepare documents associated with the Impugned Gift, which were later witnessed by Mr. Law and a nurse at the hospital without Claudette or her fiancé being present. What if also, Claudette made no suggestion or representation that she would take care of Willie in exchange for the Impugned Gift, but Willie decided to give it to her anyways. On those hypothetical facts, arguably the presumption of undue influence may have been found to be rebutted by the court.

Yet, as Claudette was managing Willie’s financial affairs under a POA, and the fact of the Impugned Gift rendered Willie “a pauper”, the Impugned Gift may have arguably been set aside on the basis of the doctrine of equitable fraud alone as being unconscionable for Claudette to accept in the circumstances.

A case in point where the equitable fraud argument might have made a difference is the case of John Gironda et al. v. Vito Gironda et al.¹⁷ In that case, the applicants argued that Vito Gironda exercised undue influence over his mother for her to change her will and to gift all of her money ($175,000) to him. They argued that she was physically and emotionally dependent on Vito; she was socially isolated because Vito alienated the rest of the family; there was a great deal of family conflict between Vito and his brothers; the mother had experienced recent bereavement in the loss of her husband of almost 60 years; she was making a will which was significantly more favourable to Vito than her prior wills; and, simultaneously, executing new powers of attorney for property and personal care removing her existing joint attorneys. Justice Penny observed as follows:

I certainly agree that there are grounds for the suspicion of undue influence in these circumstances and that, particularly given the signs of some cognitive decline, careful probing of the circumstances surrounding the execution of these documents is warranted. It is not sufficient, however, merely to allege the possibility or suspicion of undue influence.  There must be evidence to establish the presence of undue influence on a balance of probabilities.¹⁸

Query whether the transfer to Vito of all his mother’s money and her house would have met the threshold of unconscionability to set these inter vivos transfers aside absent the finding of undue influence. In these sorts of cases, equitable fraud may have been another arrow in the quiver.

Conclusion

The elastic and open-ended definition of equitable fraud is a cause of concern for some.  Its very flexibility makes it difficult to apply and defend against.  Case law demonstrates that judges sometimes rely on this doctrine to deviate from an unfair strict application of legal technical rights.  It is a doctrine that could very well be a useful weapon against an unconscionable result. For those lawyers who are considering how equitable fraud might be pleaded, a sample Statement of Claim is available on our website.