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Constructive trusts and illegal purposes - Part two

A version of this article was first published in the Solicitors Journal.

This is the second of two articles discussing the Court of Appeal judgment in O’Kelly v Davies [2014] EWCA Civ 1606. The first article analysed the question whether equity would aid a claimant seeking to establish a beneficial interest in a property under a constructive trust where the claimant had been a party to a benefit fraud. This article focuses on the lessons practitioners can take from the case.

The material facts were that the property was initially owned in the joint names of the claimant and defendant, who lived in the property together. The property was then transferred into the sole name of the defendant. This was done, as the judge at first instance found, “the better to enable the [defendant] to make fraudulent claims for benefit.” Nevertheless the judge found that the claimant was beneficially entitled under a common intention constructive trust. The defendant appealed on the ground that the claimant had relied upon the parties’ unlawful agreement to assert his interest. The Court of Appeal rejected this submission – the finding of a constructive trust arose not from the unlawful agreement but from the common intention of the parties as inferred from their conduct: Tinsley v Milligan [1994] 1 AC 340 applied. The judgment of LJ Pitchford contains an instructive explanation of the common law’s development of the common intention constructive trust, which he describes as “a more sympathetic approach in an evolving social environment to the assessment of beneficial property rights of cohabiting partners.” Beyond revision there are a number of lessons to be learnt relating to common intention constructive trusts in the context of unlawful agreements.

First, the pleadings are important. The particulars of claim should indicate, albeit they are not definitive, whether an unlawful agreement is being relied upon. If the agreement is not pleaded then it is less likely that the claimant relies on it. A claimant should avoid pleading an unlawful agreement. In O’Kelly the unlawful agreement was not pleaded – the focus was on the conduct that the claimant relied upon for an inference of a common intention to share the beneficial ownership of the property.

Second, what is the basis on which the claimant asserts a beneficial interest? The claim in O’Kelly succeeded because the claimant did not rely on an unlawful agreement but on conduct. A claim on dissimilar facts failed in Barrett v Barrett [2008] EWHC 1061 (Ch). The claimant sold his house to his brother to put the property beyond the reach of his trustee in bankruptcy. The brother purchased the property with the aid of a mortgage. The claimant made periodical payments to his brother and relied on those payments as the conduct from which a common intention constructive trust could be inferred. His brother argued that the payments were for rent. For the claimant to show that the payments gave rise to a constructive trust he would need to rely on the agreement which had an unlawful purpose – to avoid the claimant’s obligations under section 333(2) of the Insolvency Act 1986. Equity would not permit him to do this. The different outcomes in O’Kelly and Barrett emphasise the importance of focussing on the basis for claiming a beneficial interest.

Third, is there a presumption of advancement? In O’Kelly the parties were neither married nor related and so there was no presumption of advancement. If claimant and defendant had been married then there would be an evidential presumption that the transfer was intended as a gift. To rebut the presumption the husband would need to rely on the unlawful agreement, which equity will not allow: see the line of cases from Gascoigne v Gascoigne [1918] 1 KB 223 to Re Emery’s Investment Trusts [1959] Ch 410. At first glance this may seem strange. Why should the common law favour one party over another where both have been party to the same unlawful agreement? The answer lies in the interplay between law and equity and the maxim ex turpi causa. Equity will not permit a person to rely on his own wrongdoing to demonstrate a beneficial ownership and so the ownership in equity must follow that at law.