In a recent decision of the Court of Appeal in Queensland, the Court has provided some much needed clarification around the undue influence presumption in section 87 of the Powers of Attorney Act (PoA).

Under the PoA, any transaction between the principal named in an enduring power of attorney and the attorney (or a relation or friend of the attorney) gives rise to a presumption in the principal’s favour that the principal was induced to enter into the transaction by the attorney’s undue influence. As such, in a situation like that, the transaction would be struck down.  It can be a particular issue where Mum or Dad appoints one or more of their children as their attorney and then, at a subsequent point in time, gifts property to the child – whether that gift be by way of an interest in, say, a rural property, shares in a business conducted by a trading company or otherwise.

Based on some other Supreme Court cases in recent times, conservative legal advice is that there is a real danger where a transaction between principal and attorney (particularly in the parent/child situation) is entered into. However, we have recent case authority which has somewhat addressed practical concerns around such arrangements in the case of Birch -v- Birch[1].

Facts

The action was, sadly, between the mother, Betty Birch and her son, Doug.

In 2011 Betty transferred by way of gift to Doug a one-third interest in the grazing property previously conducted by Betty and her husband, Jim. This was done after having obtained legal advice and when she had full capacity to understand what she was doing.

However, at the time, Doug was her enduring power of attorney so s87 of the PoA came into play which presumed that the transaction was induced by Doug’s undue influence. That presumption though is rebuttable.

At the time of trial, Betty had lost legal capacity and the matter was pursued by her litigation guardian – one of her other sons. In the action, Betty claimed that the transaction should be set aside because it had resulted from the undue influence of her son, Doug – relying on the undue influence presumption in the PoA.

In the Supreme Court trial, the trial Judge said that the transaction did not occur because of any undue influence and so the presumption was in fact rebutted. This was the basis of the appeal.

Doug, with his wife, had worked on the family farm pretty much all his life after leaving school.

In 2008 Betty and Jim transferred a one-third interest in the farm to Doug as a gift and thereafter Betty and Jim made mutual wills leaving their respective interest in the farm to the surviving spouse but on the condition that the farm ultimately be left to Doug on the condition that Doug pay a certain sum to his siblings.

It was after this was made that Betty executed an enduring power of attorney appointing Doug as her attorney.

Jim, Doug’s father, died shortly thereafter and his interest passed to Betty.

When Betty realised that her husband’s interest was to pass to her on a life interest and then to pass to Doug on her death, she decided to transfer her one-third interest in the family farm by way of gift to Doug so as to enable Doug to finance the ultimate pay-out obligation he would be owing to his siblings. Betty had come to this decision after taking legal advice.

Doug’s siblings were not happy with the arrangement and it was found the siblings influenced Betty on the ultimate challenge of the decision taken by Betty to gift her one-third share to Doug.

Claims by Betty

Betty made a number of claims, through her litigation guardian, as to why her gift to Doug should be set aside.

The primary ground of appeal was that the lawyer involved in the transaction relating to the transfer had not provided proper and independent legal advice to Betty but rather had effectively acted for Doug. This argument rested on the argument that the advice given was seriously deficient on the basis that it was given without an understanding in material facts and was not sufficient to displace the presumed influence of Doug.  In this regard all parties acknowledged that independent advice was, generally, a way of rebutting any presumption of influence.

Decision of Appeal Court

The Court said that the undue influence presumption in s.87 of the PoA presumes an inequality between principal and attorney. However, the operation of this rule must have regard always to the particular nature of the relationship between principal and attorney.

The Court said that whilst there may have been a presumption of influence here, Betty was of full capacity at the time of the transfer and the degree of Doug’s influence, though presumed, was not high. Further, the Court said that there was nothing about the transaction which Doug had not shared with Betty.  She was able to decide whether it was in her interest to transfer her one-third interest to Doug or not.

The Court also said that whilst there was a relationship between principal and attorney here, there was another relevant relationship; namely, the relationship between mother and son in which a gift could be explained by gratitude and affection by a mother for what her son had done for the benefit of the family. Whilst that relationship may not necessarily displace the undue influence presumption in the PoA, it may well be a relevant factor.  In the present case, the Court said that that relationship was in fact of central importance.

Here, the Court said that Betty and her husband were intent on Doug inheriting their respective shares in the family farm. They entered into mutual wills to achieve that outcome.  The fact that Betty had gifted her one-third share prior to her death was consistent with the ultimate intent of mother and father.  Accordingly, the Court held that the presumption in the PoA had, in this case, been rebutted.

Lessons

We know from other Court authorities that whenever there is a transaction between principal and attorney, one must be on notice about the undue influence presumption. It will need to be rebutted.

Rebutting the presumption must at least require independent legal, and usually, financial advice to the principal. That is easier when the principal has capacity as was the case in Birch -v- Birch.  This case is very helpful in that respect.

Of course the position is far more difficult when, at the time of the transaction, the principal does not have capacity. At that point, the legal/financial advice argument will not apply and it would be difficult, if not impossible, to rebut the presumption.

[1] [2020] QCA 31