Resulting trusts and illegality

This post has been contributed by Professor Robert Chambers, Module Convenor for Equity and Trusts

If you are studying Equity and Trusts this year, you have probably not yet reached chapter 12 of the study guide and so are still looking forward to resulting trusts. You will know a bit about them from the introduction to types of trusts in chapter 3. Before you begin your study of resulting trusts in earnest, you should know about an important development in the law.

In July 2016, the Supreme Court released its judgment in Patel v Mirza [2016] UKSC 42, [2016] 3 WLR 399, concerning the effect of illegality on private law claims. In that case, the claimant had paid £620,000 to the defendant under an agreement to use insider information to bet on the price of shares in Royal Bank of Scotland. The betting did not happen and the claimant sued to recover the money. Their agreement was illegal under s.52 of the Criminal Justice Act 1993, since it was a conspiracy to commit an offence of insider dealing. The claimant had to give evidence of that illegality in order to prove his claim.

The Supreme Court held that there had been a failure of consideration and so the claimant was entitled to recover the money as restitution of unjust enrichment, despite having to rely on evidence of his own illegality. The court overruled the controversial judgment of the House of Lords in Tinsley v Milligan [1993] UKHL 3, [1994] 1 AC 340, which held that litigants would normally not be allowed to rely on evidence of their own illegality to establish a claim or defence. While Patel v Mirza did not involve a trust, it applies with equal force to trusts. Tinsley v Milligan, now overruled, was a case of resulting trust.

In Tinsley v Milligan, the parties had purchased a house together. Title was registered in Tinsley’s name alone and held in trust for Milligan and herself. Milligan pretended that there was no trust and that she paid rent to Tinsley in order to obtain benefits fraudulently from the Department of Social Security. The parties split up and Milligan obtained a declaration that Tinsley held the house in trust for both of them in equal shares. The House of Lords held that Milligan could not rely on evidence of her own illegality to establish the trust, but that she did not need that evidence because she could rely on the presumption of resulting trust.

The presumption of resulting trust can arise when one person pays all or part of the price to purchase assets in someone else’s name. There is an assumption that no gift was intended and that the owner of the assets holds them in trust for the persons who paid for it, in proportion to their contributions, unless it is proved otherwise. That presumption does not apply when a father purchases assets for his children nor when a husband purchases assets for his wife. Instead, the presumption of advancement applies and it is assumed that a gift is intended unless it is proved otherwise.

The presumption of resulting trust no longer applies when a couple purchases a family home together (Jones v Kernott [2011] UKSC 53, [2012] 1 AC 776), so if Tinsley v Milligan occurred today, Milligan would not be able to rely on the presumption of resulting trust. Fortunately, she would no longer be prevented from relying on evidence of her own illegal behaviour and could establish that the parties had intended to create a trust.

While Patel v Mirza is itself a controversial decision, it does sort out a difficulty created by the presumptions of resulting trust and advancement. When parties could not rely on evidence of their own illegality, the presumptions could unfairly determine the outcome of cases. For example, if a father hid assets from his creditors by putting them in his child’s name, the presumption of advancement would apply and he would not be able to recover them if his purpose had been achieved. If instead the child hid assets in the father’s name, the presumption of resulting trust would apply and the assets could be recovered. Since both parties were involved in the illegality, it was difficult to justify different outcomes based solely on the choice of presumption, which was not relevant to the real issues. As Peter Birks wrote in ‘Recovering Value Transferred Under an Illegal Contract’ (2000) 1 Theoretical Inquiries in Law 155 at 166:

“Where the litigation concerns the assertion of proprietary rights the courts thus seem prepared to watch the parties play an amoral game of cards, in which the party who turns over the illegality card loses…”

With that problem solved, the presumptions of resulting trust and advancement should no longer lead to unfair results and should rarely be needed since courts are now willing to decide what the parties probably intended based on minimal circumstantial evidence: Lohia v Lohia [2001] EWCA Civ 1691.