North & Anor v Wilkinson & Ors

The Court of Appeal allowed the appellants' appeal and held that the documents and discussions relied upon did not create trusts over undivided shares in the sole trader business carried on by Mr North. The court applied the familiar three certainties required for a trust (beneficiaries, subject-matter and intention) and emphasised that an intention to create a trust must be objectively manifest in the words or conduct at the relevant time. The judge at first instance was wrong to construe the Wilkinson Agreement and the later letters as declarations of trust: the instruments were primarily directed to contractual/ company-style arrangements (shareholdings or personal obligations) and did not address how liabilities, management, withdrawal or other consequences of a proprietary interest in a sole trader's business would operate. The Court also rejected reliance on subsequent admissions as proof of the settlor's intention at the relevant dates.

Background and parties:

• Mr John North carried on a business using spallation drilling technology and recovered substantial damages from Electrolux. The investors (the 1st–8th respondents) alleged they had invested in the venture and were entitled to agreed percentage equity positions; they claimed those percentages were held on trust in their favour.
• The appellants are two sons of Mr North. The 9th respondent is a company to which legal title in a residential property was transferred; the respondents claimed that property (and other assets) were subject to trusts.

Procedural posture: This was an appeal from HH Judge Pelling QC in the Chancery Division (HC-2014-000072). The judge had declared that trusts were created in favour of the respondents. Permission to appeal was granted and the Court of Appeal heard the matter.

Nature of the claim / relief sought: Declarations that specified percentages of the assets and goodwill of Mr North's business (and consequential proprietary interests in proceeds such as the Electrolux damages or the Rackheath property) were held on trust for the respondents.

Issues framed:

1. Whether the documents and discussions (notably the 1997 "Wilkinson Agreement" and letters of 1999–2000) manifested the necessary intention to create trusts.
2. Whether the subject-matter of any alleged trusts was sufficiently certain given the business was carried on by Mr North as a sole trader and comprised fluctuating and various assets and liabilities.
3. Whether subsequent admissions by Mr North could be relied upon to prove his intention at the relevant times.

Court’s reasoning:

• The court reiterated that certainty of subject-matter and a clear objective intention to create a trust are required. It observed there was little or no legal formality in the documents and they were prepared without legal advice.
• The Wilkinson Agreement on its face was primarily an agreement to grant an equity position (and envisaged a company and employment terms). It did not use language apt to create an immediate proprietary trust in the assets of a sole trader business and left essential matters unaddressed (treatment of liabilities, management rights, withdrawal or realisation, timing of any trust and how an undivided share would operate).
• The letters to other investors expressly referred to "the company" and investments in a company; the judge erred in converting that language into an immediate declaration of trust over Hydratherm's assets when no company existed. The more realistic legal effect was a contractual/personal obligation or a promise of company shares if a company were formed.
• The court concluded that the first-instance judge had been wrong to find trusts. Subsequent admissions by Mr North were inadmissible to prove his intention at the dates of the documents and could not supply the missing objective manifestation of a trust.

Wider observations: The Court noted that the concept of a trust of an undivided share in a sole trader's business raises difficult and largely unconsidered issues, and that substantial care would be required if such an instrument were to be attempted.

Appeal allowed. The Court of Appeal held that the Wilkinson Agreement and the later letters and discussions did not manifest the necessary objective intention to create trusts over undivided shares in Mr North's sole trader business; the instruments were primarily contractual or contemplated company shareholdings and failed to address essential consequences of a proprietary interest in a sole trader's business (liabilities, management, withdrawal and timing). Subsequent admissions could not be used to prove intention at the time of the documents.

Appeal from the High Court of Justice, Chancery Division (HH Judge Pelling QC), HC-2014-000072. Permission to appeal granted by Lewison LJ. Determined in the Court of Appeal, neutral citation [2018] EWCA Civ 161.