JOHNSON v (1) EBS PENSIONER TRUSTEES LIMITED (2) GORDON MICHAEL O’SHEA

The fair dealing doctrine applies whenever a solicitor deals with a client, whether for the solicitor or another person. Its application is not confined to transactions involving the transfer of property.

The solicitor must disclose every fact which would or might influence the client’s decision whether to transact or negotiate different terms, and must establish that the transaction was fair. A contract affected by abuse of confidence remains enforceable until set aside. Rescission is an equitable and discretionary remedy. The court may refuse it where counter-restitution is impossible or rescission would confer an unjustified benefit, and may instead order an account of an undisclosed profit.

A solicitor arranged a loan to a client’s company from private lending clients of his firm. The client guaranteed the loan, but the firm did not disclose the 1.5 per cent service charge received from the lenders. The solicitor later claimed reimbursement and an indemnity arising from liabilities connected with the secured property. The client sought to set aside the surety and related transactions for abuse of confidence and breach of fiduciary duty.

Patten J enforced the surety and indemnity arrangements, but ordered an account of the service charge. The client appealed. The central questions were whether the fair dealing doctrine extended beyond transactions involving transfers of property, whether the service charge was material, and whether non-disclosure made the surety unenforceable or required rescission.

1. Appeal dismissed unanimously. Mummery and Dyson LJJ and Douglas Brown J held that the fair dealing doctrine was capable of applying to the surety. The doctrine is not confined to sales, purchases, leases or other transactions involving the transfer of property. It applies where a solicitor participates in dealings with a client, whether acting personally or for another person. It does not apply where the terms were agreed before the fiduciary became involved.

2. A solicitor dealing with a client must disclose everything which is or may be material to the client’s judgment and must establish that the transaction was fair. The duty may be breached by inadvertent non-disclosure. It applies where the solicitor acts as trustee for another party, because conflicting duties do not excuse failure to fulfil the duty owed to the client.

3. Dyson LJ and Douglas Brown J formed the majority on materiality. They held that the undisclosed service charge was material because knowledge of it might have influenced the client to seek a lower interest rate. It was immaterial that the client would ultimately have proceeded if better terms were refused. Mummery LJ dissented on this point. He considered that the charge was not material because disclosure would not have altered the decision to proceed.

4. The court agreed that the surety remained enforceable. A contract affected by abuse of confidence is neither illegal nor automatically unenforceable. It remains effective until set aside. Rescission for abuse of confidence or breach of fiduciary duty depends upon the court’s equitable discretion, including whether counter-restitution can be made and what fairness requires in all the circumstances.

5. The transaction was otherwise fair, the client was an experienced businessman, and the loan substantially benefited his business. Rescission would release him from substantial obligations without restoring that benefit to the lenders. The appropriate relief was therefore an account of the service charge, with the resulting sum set off against liability under the surety.

6. The assignment to the pension trustees was not a dealing between solicitor and client to which the fair dealing doctrine applied. The unchallenged findings also disclosed no conscious disloyalty or other breach of fiduciary duty concerning that assignment. The appeal was dismissed with costs on the indemnity basis, and permission to appeal to the House of Lords was refused.

• Court of Appeal (Civil Division): The appeal was dismissed unanimously. The order concerning costs below was amended by agreement. Costs of the appeal were awarded on the indemnity basis, and permission to appeal to the House of Lords was refused.
• Chancery Division (Patten J): The court enforced the surety and indemnity arrangements, dismissed the claims to set aside the transactions and for fiduciary compensation, and ordered an account of the undisclosed service charge with a corresponding set-off. Permission to appeal was refused by the judge.