The first, "The Sham Doctrine and Intention: Address the Bilateral Nature of Sham Trusts", which appeared in the Law Quarterly Review, argued that:
1. There is an independent sham doctrine that operates in all bilateral private law arrangements;
2. As such, the sham doctrine cannot operate in trusts created by declaration because there is only one party to the creation of the trust; and,
3. There is no such thing as an emerging sham.
The reason for the point 2. is that were it otherwise, settlors would be able to invalidate trusts on a whim, as some have attempted to do when it is convenient (see, Commissioner of Stamp Duties v Jolliffe), to the detriment of beneficiaries.
The reason for point 3. is that were it otherwise, it would permit trusts to be invalidated which have already been properly constituted, simply because some parties to the trust (involving the trustee, but we cannot be sure who else), have breached its terms. A breach is a breach, not an invalidation of the whole arrangement from the outset.
Following on from this the second article, "The Limits of Sham: Whether a Trust's Terms Matter", published in the Journal of Equity, argued that sham can only be established by the parties' intention at the outset to use the arrangement as a disguise or a facade for some other, different, arrangement.
Accordingly, in this article I took issue with the decision in JSC Mezhdunarodniy Promyshlenniy Bank v Pugachev, that implied a finding of sham could be based on how an arrangement's terms were used to mislead others regarding beneficial ownership; as distinct from the true arrangement being entirely different from the one that the parties entered into. The distinction is between using an arrangement to bamboozle others (which is not a sham), as compared with using the arrangement as a disguise for some other different arrangement (which is a sham).
Despite the debate in the case law and scholarly literature that sometimes proceeded these conclusions, as a matter of practical law, it appears fairly settled. For example, in a recent English High Court case, Malik v Messalti, both sham and the nascent illusory trust doctrine were invoked with little success. Importantly, the court confirmed the very conventional understanding of the sham doctrine that I have articulated above.
Interestingly though, despite a largely homogeneous judicial view of how the sham doctrine works (which was also confirmed through a recent discussion with an English Court of Appeal Lord Justice), it is often invoked with some regularity in cases where it rarely succeeds.
The question might then be asked as to why? The allegation of sham is seemingly raised whenever there is a claimant who wishes to invalidate an arrangement. Yet these allegations are often given short shrift by judges who have not had the kind of evidence presented before them that would go even a reasonable way to proving sham. It appears that sham has been thrown into pleadings without sufficient thought as to the evidential burden required to prove it.
Proving sham is not easy. It requires evidence beyond the four corners of the arrangement, that very clearly shows an intention to use the arrangement to deceive others as to the true arrangement: there must be a provable, separate, and different arrangement than the one entered into. This does not entail evidence that the arrangement is part of an asset protection strategy; since in such a case, the whole point of the strategy is that the arrangement take effect according to its terms (i.e., to be as legally sound as possible).
Accordingly, evidence is required of the alternative arrangement, and that the parties were acting according to the terms of that arrangement. Essentially, what sham requires is evidence of two arrangements: first, the facade; and secondly, the true, secret, arrangement. It then requires evidence that there was an intention to use the first arrangement to deceive; although not necessarily to the extent required to prove the tort of deceit. The exact level and nature of the intention to deceive in sham is, therefore, an area that still remains unclear: actual intention to deceive will definitely prove it, but so have lesser levels... watch this space for announcements regarding forthcoming work on this topic.
The result is that sham is not a simple matter to prove. It requires careful and deliberately focused evidence that addresses its elements.
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