Constructive trusts and illegal purposes

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

The recent Court of Appeal judgment in O’Kelly v Davies [2014] EWCA Civ 1606 addresses a frequent problem: does equity aid a claimant who was party to a benefit fraud when they seek to establish a beneficial interest under a constructive trust?

The facts

The parties purchased 42 William Street, Swansea in their joint names in 1987. In 1991, 42 William Street was transferred into the sole name of the Appellant who, in 2006, sold the property to the Respondent and purchased 74 Lon Oncha Street, Swansea with the proceeds. The Respondent let 42 William Street out to tenants until it was repossessed due to mortgage arrears.

At trial the Respondent successfully established that the Appellant held 74 Lon Oncha on trust for herself and the Respondent equally. The Appellant appealed on the grounds that (1) the judge was wrong to infer a common intention that the beneficial interest should be shared and that (2) on the judge’s findings, the Respondent had to assert an unlawful agreement to make good his claim to a beneficial interest and should not be permitted to do so.

The constructive trust

The appeal on ground (1) was dismissed. There was no express or implied agreement as to ownership but the parties’ conduct, examined objectively, justified the inference of a common intention, as between the parties, that the Respondent was entitled to a beneficial interest in the property.

The trial judge had relied, when drawing the inference, upon his finding that the parties had been in a relationship and co-habiting in the properties as a family continuously up until 2011, despite the Respondent’s long absences working abroad. Mortgage repayments throughout the period and the contribution to the purchase price made by the Respondent were important factors.

This meant that the 2006 sale and purchase of 42 Williams Street was treated simply as an arms’ length sale to a third party.

The unlawful purpose

The trial judge had found that the parties were benefit cheats; unsurprisingly this was not part of either parties’ case. The “plain and obvious” unlawful purpose behind holding the properties in the Appellant’s name was “the better to enable the appellant to make fraudulent claims for benefit [as a single mother].”

These findings were the basis for ground (2) of the appeal. The question was whether public policy, embodied in the maxim ex turpi causa, would defeat the Respondent’s claim to a beneficial interest. The trial judge had relied on a House of Lords decision, Tinsley v Milligan [1994] 1 AC 340.

In Tinsley, A asserted an equitable interest in a property solely owned by B. The property was purchased in B’s name to perpetrate a benefit fraud. Having contributed to the purchase price, in the absence of advancement, A was beneficially entitled under a resulting trust (under the "old" approach).

The case re-examined a longstanding equitable principle. The rule, as stated by Lord Eldon was that where both a claim and defence were based on dishonesty then “between the two species of dishonesty the court would not act; but would say, 'Let the estate lie, where it falls.’”

Lord Jauncey held that the “ultimate question [is] whether [B] is seeking to enforce unperformed provisions of an unlawful transaction or … relying on an equitable proprietary interest that she has already acquired under such a transaction.” This effectively tempered the harshness of Lord Eldon’s principle in relation to resulting trusts.

The effect of O’Kelly

In O’Kelly v Davies the judge had correctly looked for a constructive trust, not a resulting trust. The Court of Appeal held that this distinction – effectively the distinction between presumed and imputed intentions – made no difference. The starting point was that the equitable interest followed the legal, subject to proof of a contrary intention. The judge found the requisite contrary intention in the common intention of the parties as inferred from their conduct. The Respondent did not need to rely on the unlawful agreement to establish the constructive trust.

The decision in O’Kelly makes it clear a constructive trust will exist and be implemented where a claimant can prove the constructive trust by inferences drawn from conduct without recourse to an unlawful agreement.