Two recent cases on the rule in Rochefoucauld v Boustead, and the Supreme Court decision in Bresco v Lonsdale

30.06.2020

In the absence of any new covid law, this bulletin looks at new developments in 2 areas of the law of considerable practical importance.

Francis Ng considers Solomon v McCarthy [2020] EW Misc 1 (CC) and Archibald v Alexander [2020] EWHC 1621 (Ch), two recent first-instance decisions on the rule in Rochefoucauld v Boustead, whilst Lara Kuehl discusses the recent Supreme Court decision in Bresco v Lonsdale [2020] UKSC 25 concerning the relationship between construction adjudication and insolvency.

Should you wish to discuss any of these topics, or raise any other queries, please feel free to contact either the clerking team (+44 (0)20 7420 9500 or clerks@selbornechambers.co.uk) or any member of Chambers. As ever, we remain fully operational and are very much open for business.

Mark Warwick QC

 

Two recent cases on the rule in Rochefoucauld v Boustead

 Where land is acquired by A pursuant to an oral agreement that he will hold it on trust for B, that trust may be enforceable under what is known as the rule in Rochefoucauld v Boustead [1897] 1 Ch 196. The principle is said to be that, while s 53(1)(b) Law of Property Act 1925 requires that declarations of trusts of land be ‘manifested and proved’ in writing, to permit B to rely on that statute would be to use it as an instrument of fraud. The precise nature of the principle and its boundaries, however, are rarely tested, with parties and judges tending to base their analysis of informal land transactions on proprietary estoppel and the modern ‘common intention constructive trust’ doctrine. The rule, however, can still have contemporary relevance, as two recent cases show.

Solomon v McCarthy

The first case is Solomon v McCarthy [2020] EW Misc 1 (CC), a decision of HHJ Matthews sitting in the county court at Bristol. The parties had been in a relationship, and the defendant had transferred a flat to the claimant. The reasons for this were in dispute. The defendant claimed that they had orally agreed that the claimant would hold it on trust for their two sons and another son of the defendant in equal shares. The claimant said that they agreed that she and the defendant would each have an equal interest. At the same time it was re-mortgaged, with the claimant solely liable on the new mortgage. Subsequently, the defendant rented it out and received the rent, but paid sufficient sums to cover the mortgage payments to the claimant.

HHJ Matthews rejected the claimant’s evidence. However, he held that it did not follow that the property was held on trust for the sons. Instead his reasoning proceeded as follows. Where A transfers property to B subject to an oral agreement that B will hold on trust for A, the court can enforce the trust to prevent s 53(1)(b) from being used as an instrument of fraud. However, where A conveys to B on trust for C, full enforcement of the trust is not necessary to prevent the fraud. It is only necessary that there be a trust rather than an absolute gift, and to allow the trust to be enforced in favour of C would excessively restrict the statute. In this scenario, a resulting trust arises so that B holds on trust for A.

In reaching this conclusion, HHJ Matthews rejected an argument that he should apply the modern ‘common intention constructive trust’ doctrine as stated in Stack v Dowden [2007] 2 AC 432 and Jones v Kernott [2012] 1 AC 776 on the basis that it did not apply to investment properties. In reaching this conclusion, he applied Laskar v Laskar [2008] 1 WLR 2695 but seemingly overlooked the ‘explanation’ of Laskar in Marr v Collie [2018] AC 631 in which the Privy Council held that common intention constructive trust reasoning could apply to investment properties).

HHJ Matthews did not engage with the lively debate as to whether the trust in Rochefoucauld should be treated as an express trust, with the statute simply disapplied to prevent ‘fraud’ (which might have justified a trust for the sons rather than the defendant). Moreover, HHJ Matthews’ decision is in tension with de Bruyne v de Bruyne [2010] 2 FLR 1240, in which the Court of Appeal applied Rochefoucauld reasoning to hold that the recipient was simply ‘bound by the agreement’. Neither did HHJ Matthews consider the circumstances where a resulting trust might not be sufficient to prevent ‘fraud’ (eg where the transferor has died and the recipient is entitled under their will or intestacy).

Archibald v Alexander

The second case is last week’s decision in Archibald v Alexander [2020] EWHC 1621 (Ch). This was an appeal from a decision of HHJ Gerald sitting in the county court at central London. HHJ Gerald had found that, shortly before a house was bought, an oral agreement had been made between a mother and her three children that the house would be held on trust for the mother for life and then for the three children in equal shares. In the event, only one of the children was registered as owner (together with the mother). After the mother died, the child who was registered as owner became sole legal owner by survivorship, and the two children who were not registered owners claimed that the property was held for the three of them on constructive trust. HHJ Gerald allowed the claim. On appeal, the legal-owner child argued inter alia that no constructive trust could have arisen because of the absence of detrimental reliance by the other children.

Fancourt J dismissed the appeal. He agreed with HHJ Gerald that the other children had relied to their detriment on the agreement by not taking steps to have themselves registered as joint proprietors. However his primary ground for dismissing the appeal was that, notwithstanding HHJ Gerald’s frequent references to a ‘common intention constructive trust’, the constructive trust was one ‘imposed by equity to prevent a transferee… from acting unconscionably by denying the terms on which they received the property’ and that this did not require a finding of detrimental reliance (referring to Rochefoucauld and applying the Court of Appeal’s decision in de Bruyne v de Bruyne).

Notably, Fancourt J simply enforced the agreed trust (as opposed to applying resulting trust reasoning as HHJ Matthews did in Solomon by treating the property as asset of the mother’s estate). Fancourt J did not attempt to justify this approach (and does not appear to have been aware of Solomon), though he appears to have based it on de Bruyne v de Bruyne. However simply relying on de Bruyne is not entirely satisfactory for two reasons. First, the Court in de Bruyne did not analyse the point. Secondly, they did not need to – all that was determined in de Bruyne was that the property was not beneficially owned by the recipient for matrimonial finance purposes – the court did not need to decide how the property was held.

 

Conclusions

These cases show that judges remain willing to analyse informal agreements between family members by reference to the Rochefoucauld doctrine. Archibald shows that it can be usefully deployed by claimants in circumstances where it will be difficult to prove detrimental reliance. Care, however, should be taken when trying to extrapolate broader principles from them. HHJ Matthews’ decision not to consider common intention constructive trust reasoning will not necessarily be replicated now that Laskar has been ‘explained’ in Marr v Collie. Moreover, his decision not to enforce the trust is in tension with the outcomes in de Bruyne and Archibald. However, the approach of simply enforcing the agreement in Archibald and de Bruyne itself appears to have been assumed rather than argued, so the point is likely to remain live for the time being.

 

Bresco v Lonsdale: Insolvency set-off and construction adjudication

The Supreme Court has handed down its much anticipated judgment in Bresco Electrical Services Ltd (In Liquidation) v Michael J Lonsdale (Electrical) Ltd [2020] UKSC 25.

The appeal and cross-appeal raised important questions about the compatibility of two statutory regimes: the adjudication of construction disputes and the operation of insolvency set-off.

The two issues considered by the Supreme Court were:

  1. Jurisdiction: Whether the effect of insolvency set-off was that cross-claims were replaced with a single claim for the net balance, such that there was no longer a claim (or a dispute) under the construction contract.  If so, then an adjudicator would have no statutory or contractual jurisdiction to determine the dispute.
  2. Futility: Given that adjudication in the context of insolvency set-off would generally not lead to an enforceable award, whether such an adjudication was an exercise in futility which the court should restrain by injunction.

In a unanimous decision, the Supreme Court held that construction adjudication on the application of the liquidator was not incompatible with the insolvency process.  In answer to the two issues above: (i) the effect of insolvency set-off was not to deprive an adjudicator of jurisdiction to determine a construction dispute; and (ii) it was not an exercise in futility.

 

Facts and procedural history

In 2014, Bresco Electrical Services Ltd (“Bresco”) had agreed to carry out electrical installation works for Michael J Lonsdale (Electrical) Ltc (“Lonsdale”).

In 2015, Bresco went into creditors’ voluntary liquidation.

In correspondence in 2017, Bresco (through its liquidator) and Lonsdale both claimed that the other was in breach of contract.  Lonsdale claimed that Bresco had abandoned the project, causing it to spend £325,000 for Bresco’s contracted work to be carried out by another contractor.  Bresco claimed that those works were additional to the contracted works and that it was owed £219,000 in unpaid fees.

The contract between Bresco and Lonsdale was a construction contract to which section 108 of the Housing Grants, Construction and Regeneration Act 1996 applied.  It contained an express provision for adjudication, but (if it had not done so) default terms providing a right to refer disputes to adjudication would have been implied by statute.

On 18 June 2018, Bresco served on Lonsdale a notice of intention to refer a dispute to adjudication, seeking payment of £219,000 for work done and damages for lost profits.

On 26 June 2018, Lonsdale issued proceedings in the Technology and Construction Court for a declaration that the adjudicator lacked jurisdiction and for an injunction restraining the further conduct of the adjudication.

 

At first instance the High Court (Fraser J) ([2018] EWHC 2043 (TCC)):

  • Granted a declaration that the adjudicator lacked jurisdiction and granted an injunction preventing the continuation of the adjudication.
  • Held that a company in liquidation could not refer a dispute to adjudication when that dispute included whether any further sums were due to the referring party from the responding party.

The reasoning was that the High Court considered that, as at the date of liquidation, through operation of the Insolvency Rules, claims and cross-claims were no longer capable of separate enforcement and were instead replaced by a single debt (the net balance).  An adjudicator could not conduct an account under the Insolvency Rules and therefore did not have jurisdiction to determine such a dispute.

 

The Court of Appeal ([2019] BCC 490):

  • Allowed the appeal in relation to jurisdiction, finding that an adjudicator did technically have jurisdiction to determine a dispute in these circumstances. Importantly, the Court of Appeal concluded that insolvency set-off did not, in principle, preclude the determination of the underlying claims.
  • Held that there was a basic incompatibility between adjudication and insolvency. Any award by the adjudicator would ordinarily not be enforceable in these circumstances and was therefore “an exercise in futility”.  The Court of Appeal therefore continued the injunction.

 

The Supreme Court’s decision

The Supreme Court:

i. Provided a detailed analysis of the objectives of the statutory regime for construction adjudication, observing that:

a.  It is an extremely successful mechanism for dispute resolution and that it frequently provides de facto final resolution of most of the disputes referred to an adjudicator.

b. Adjudication is a right conferred upon every party to a construction contract (with no exclusion of any particular types of person, such as a company in liquidation). It provides a speedy and cheap method of dispute resolution by an independent and expert adjudicator.

ii. The existence of a cross-claim operating by way of insolvency set-off did not mean that the underlying disputes simply “melted away” so as to render them incapable of adjudication. The assumption that claims and cross-claims lose their separate identity on the cut-off date resulted from an over-literal reading of Lord Hoffman’s speech in Stein v Blake [1996] AC 243.  A liquidator was entitled to pursue a company’s claims by arbitration (if there was an arbitration agreement) and there was no reason for treating adjudication differently.

iii. Adjudication was not an exercise in futility in these circumstances. In particular, it was wrong to suggest that the only purpose of construction adjudication was to obtain summary enforcement of a right to interim payment – adjudication was (and was always intended to be) a mainstream method of ADR, leading to final resolution of many of the disputes referred to adjudication.  In many cases, disputed cross-claims needed to be resolved as a prelude to a final arithmetical insolvency set-off account.  An adjudicator would be better placed than most liquidators to resolve construction disputes, even if this was only by way of a declaration as to the value of the claim.

iv. An insolvent company has both a statutory and contractual right to pursue adjudication as a means of resolving a construction dispute. Only in exceptional circumstances should injunctive relief be granted to restrain an attempt to enforce a contractual right, let alone a statutory right. The fact that the costs of adjudication might be irrecoverable against an insolvent company could not on its own be a reason for preventing by injunction the statutory right to adjudication.

 

Conclusion

The effect of the decision is to provide judicial support, at the highest level, for the use of construction adjudication by liquidators (or any other insolvency office holder), even where an insolvency set-off applies.  The decision provides helpful further clarification in relation to Lord Hoffman’s speech in Stein v Blake [1996] AC 243, which had been relied upon in a number of previous authorities to suggest that claims and cross-claims were extinguished by insolvency set-off.

The Supreme Court’s analysis of the relationship between insolvency and adjudication will be of considerable interest to both the construction industry and to insolvency practitioners, particularly as the unfortunate economic consequences of Covid-19 and the lockdown begin to have an impact on parties to construction contracts.

 

 

 

 

 

 

 

 

 

 

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