Law Report: Transaction loss shared: Cheese v Thomas - Court of Appeal (Sir Donald Nicholls, Vice-Chancellor, Lord Justice Butler-Sloss and Lord Justice Peter Gibson), 30 July 1993

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When setting aside a transaction on the ground of undue influence, the court's basic objective was to restore the parties as nearly as practicable to their original positions. Where an overall loss had been sustained in the value of the transaction's subject matter, the court could direct that loss to be shared by both parties.

The Court of Appeal dismissed an appeal by the plaintiff, Charles William Cheese, against the decision of Judge Michael Oppenheimer, sitting in Uxbridge County Court on 16 February 1993, that a transaction whereby Mr Cheese contributed pounds 43,000 towards the pounds 83,000 purchase price of a house which his great-nephew, the defendant Aubrey Thomas, had bought in 1990, on the agreement that Mr Cheese should occupy the house for life and it should then pass to Mr Thomas, should be set aside on the ground of undue influence, but that both parties should bear the loss in the value of the house in proportion to their contribution to the original price. The house was sold in 1993 for only pounds 55,400.

Kenneth Hamer (K E Davis & Sons, Hayes) for the plaintiff; Jonathan Ferris (Mackenzie Knight, Southall) for the defendant.

SIR DONALD NICHOLLS V-C said the house was registered in the sole name of the defendant Mr Thomas, who took out a mortgage to fund his share. Mr Cheese later found out that Mr Thomas was failing to pay the mortgage instalments and decided to withdraw. The judge upheld Mr Cheese's claim that the transaction should be set aside on the ground of undue influence.

The relationship was of a fiduciary character: they were close, Mr Thomas was considerably younger, and had business experience and a degree of actual influence over Mr Cheese. Undue influence was therefore to be presumed.

The transaction was manifestly disadvantageous to Mr Cheese, who did not enter into it after full, free and informed thought about it. He had insufficient advice and understanding to make a proper judgement. He used all his money in buying a right which was seriously insecure and which tied him to this particular house.

If the transaction was to be set aside, the next step was the restoration of the parties to their original positions. But after the house was sold and the building society repaid, the net proceeds were only pounds 17,667. That clearly had to be paid to Mr Cheese. But he remained more than pounds 25,000 out of pocket. The question then arose, on whom should the loss in the value of the house fall?

Mr Cheese contended that he was entitled to look to Mr Thomas personally to make good the whole of the shortfall. The judge rejected that. He held that the loss should be shared between the two of them in the same proportions (43:40) as they had contributed to the price. On this basis, Mr Cheese could look to Mr Thomas for a further pounds 11,000. Against this, Mr Cheese appealed.

His Lordship agreed with the judge. The transaction was that Mr Cheese and Mr Thomas would each contribute a sum of money to buying a house in which each was to have an interest.

It was well established that a court of equity would set aside a transaction even when it could not restore the parties precisely to the state they were in before the contract. The court would grant relief whenever, by directing accounts and making allowances, it could do what was practically just.

It was axiomatic that, when reversing the transaction, the court was concerned to achieve practical justice for both parties, not the plaintiff alone. He who sought equity must do equity.

Achieving a practically just outcome required the court to look at all the circumstances, while keeping firmly in mind the basic objective of restoring the parties as nearly as possible to their original positions.