Summary

There were considerable difficulties in the way of a sole trader creating a trust of a share of his business, but even if it was possible the documents relied on in the instant case did not disclose the necessary intention to create a trust and properly construed imposed merely personal obligations.

Facts

The appellants appealed against a decision that a residential property which was occupied by the second appellant and his family was held on trust for the respondents.

The second appellant's father (F) had been an inventor. He carried on business as a sole trader. He had entered into a confidentiality agreement with a manufacturer in respect of a drilling device. He later sued the manufacturer for breach of contract and recovered substantial damages. The respondents were investors in F's business. They claimed that the terms on which they had agreed to invest entitled them to a share of the damages. The judge held that F had created a trust in favour of the respondents over undivided shares in his sole trader business. He further held that the money used to repay a mortgage loan on the property occupied by the second appellant was trust property and the respondents were entitled to maintain a tracing claim for the value of the property. F had entered into a "Contract of Agreement" with the first respondent, which had been prepared without legal advice. It provided for the first respondent to have a 5% equity interest in the holding company and/or any subsidiary company subsequently formed and that the "equity position will cover the activities of any company or corporate vehicle, trust, partnership or similar". The other respondents relied on letters signed by F which referred to investments and equity positions "[in] the company".

Held

Certainty of subject-matter - No case had been found addressing a trust created by a sole trader of a share of his business. Even if such a trust was possible, it raised significant issues which would have to be addressed by anyone proposing to create such a trust. The creation of a trust of a share in a sole trader's business undoubtedly caused difficulties, which had not been explored in any authority, but they went more to the question of intention than to the issue of certainty of subject-matter, London Wine Co (Shippers), Re [1986] P.C.C. 121, Hunter v Moss [1994] 1 W.L.R. 452 and Lehman Brothers International (Europe) (In Administration), Re [2011] EWCA Civ 1544 considered (see paras 12-24 of judgment).

Intention to create trust - The document relied on by the first respondent did not have contractual effect; critical terms were subject to further agreement (para.29). It was not on its face a declaration of trust (para.35). There was no template for a direct proprietary interest in the assets and goodwill of a sole trader business; that suggested that the intended effect of the document was to confer contractual rights. It did not begin to address the issues that would have to be addressed if a trust was intended (paras 42-43). There was no reference to the liabilities of the business or how it would be managed if a trust was created, nor to any right to withdraw (paras 44-46). In the light of those considerations the language of the document was inapposite to create a trust. If effect was to be given to it, the much more obvious way would be by way of a personal obligation on F's part. There was no clear evidence of intention to create a trust, Paul v Constance [1977] 1 W.L.R. 527 applied (paras 47-48). What F had said and done subsequently was inadmissible as evidence of an intention to create a trust (paras 49-53). The document relied on by the first respondent did not create a trust over the assets of F's business (para.54). In respect of the other respondents, the judge had erred in holding that it followed from the failure by F to give effect to what he had promised in the letters that he had created an immediate trust of undivided shares in his business in the respondents' favour. There were no words suggesting the creation of a trust, and no consideration given to the issues and difficulties involved in such a trust. The obvious consequence of the failure was not a trust but a claim for damages against F (para.62).

Appeal allowed