Hong Kong Court of Appeal affirms law on express, constructive and resulting trust

The Hong Kong Court of Appeal ("CA") in Ip Fung Kuen v Sam Kee Frozen Meat Co Ltd and others (CACV 107/2016) recently affirmed the well-established principles of express, constructive and resulting trust under Hong Kong law. As well as confirming those principles, the judgment is also noteworthy because of the CA's confirmation of the Court of First Instance ("CFI")'s finding that the plaintiff's lack of education and sophistication in comparison with the appellant (a company established and controlled by the plaintiff's eldest brother) was relevant to whether a trust was established. The CA upheld the CFI's ruling that the appellant held the disputed property in trust for the plaintiff.

Facts

In brief, the dispute took place between siblings who were involved in their parent’s family business. The plaintiff had little formal education and had helped in the business since her teens whilst her eldest brother had completed extensive courses in business administration before taking up a management role in the business. The primary agreement in dispute was a Letter of Ownership ("Letter"), executed by the appellant via the plaintiff's eldest brother, the plaintiff and three other family members.

The Letter declared that the plaintiff was the sole beneficial owner of a commercial property at Happy Valley, Hong Kong (the "Property") and that the appellant, who was the legal owner of the Property, was merely managing the property on her behalf. The plaintiff supplied the majority of the purchase price of the Property, and was responsible to the bank for repayments on a loan secured by mortgage taken out by the appellant.

Some years later the plaintiff asked for the Property to be transferred to her.  However, the appellant refused.

Express Trust

The appellant argued that the Property could not have been held on express trust by the appellant. This was so (the appellant argued) because the plaintiff did not know at the time of execution of the Letter that the Property was to be assigned by the vendor to the appellant as the purchaser. It was not until sometime much later that the plaintiff became aware that the Property was held in the appellant's name. The CA, considering the fact that the plaintiff was an "unsophisticated" (i.e. uneducated) person, held that she would not be aware of the appellant's 'unconscionable departure from the Letter of Ownership in that not only was it to manage the property, it had subsequently taken up the assignment in its name'. Equally important was that the wording of the Letter was sufficiently clear to create an express trust.

Constructive Trust

The appellant also argued that even if the Letter had established an express trust, the parties had changed their initial common intention being that the Property be owned by the plaintiff. The appellant argued that a new understanding had been reached that the appellant was to own the Property beneficially. The appellant pointed to the fact that the appellant took over the mortgage payments after a certain period of time as evidence of this. Once again, possibly taking into account the differences in sophistication between the parties, the CA held that there was no evidence to suggest that the plaintiff had consented to the change of intention in ownership once the mortgage payments were paid by the appellant. Equally important was evidence to the contrary suggesting that the appellant was well-aware that the beneficial interest of the Property lay with the plaintiff, despite making the mortgage payments.

Resulting trust

In terms of resulting trust, the CA upheld the CFI's finding that the appellant had obtained a mortgage loan to help the plaintiff pay the purchase price and that the plaintiff would be responsible for repaying that loan. In the event of default, the bank was at liberty to pursue the plaintiff for repayment. The CA held that the appellant 'was merely used as a conduit to obtain the advance from the bank'. Hence, any presumption of resulting trust in the appellant's favour was effectively rebutted.

Comment

In the formation of trusts, one needs to be highly alert to the level of education and sophistication of all the parties involved. This might involve ensuring that less sophisticated parties have access to independent legal advice and fully understand the legal consequences of their conduct and words.  It seems the courts of equity will still assist those who have funded the purchase of an asset even if they do not fully understand the ownership structure.

For more information, please contact Richard Norridge, Joanna Caen or your usual Herbert Smith Freehills contact.

Richard Norridge
Richard Norridge
Partner
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+44 20 7466 2686
Joanna Caen
Joanna Caen
Senior Consultant
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+852 2101 4167

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