A presumption of a resulting trust may be rebutted, albeit there are limitations on what type of evidence may be put forth. The illegality defence provides that no man should be aided if his cause of action is illegal or immoral. In other words, for public policy reasons a person cannot rely upon evidence of his illegal act in order to rebut a presumption of a resulting trust or advancement (Holman v Johnson).
This answer will explain just how confusing the law in relation to the illegality defence has been in the past, and whether it should be considered by the courts at present. The case of Patel v Mirza adopted the ‘public-policy based test’ which is used currently, and it seems that the present law is in a sufficient and rational state as opposed to the previous test found in Tinsley v Milligan.
The case of Tinsley v Milligan, Mrs Milligan was allowed to claim a share in the property as she had contributed to the purchase price thus giving rise to a resulting trust. The “reliance test” found in this case provided that whether the claimant must have relied on his illegal act or not is of utmost significance. However, in this case, Mrs. Milligan did not need to rely on her fraud housing benefit claims, which is why the court helped her.
Miss Tinsley could not rebut the presumption of resulting trust by relying on the illegal purpose of the arrangement. Being a House of Lords case, the principle has been followed extensively in later cases. However, issues arose as there were differing views between the judges in nearly all the subsequent cases.
Lord Goff criticised this case and argued there was no exception to using the reliance principle especially in cases where the illegality was serious, which is a significant argument. For example, a group of terrorists securing a base for their criminal activities by buying a house in the name of a third party should not be allowed, regardless of whether the reliance test applies or not.
The case of Tribe v Tribe 1995 then went onto criticise the rigidity of the reliance principle. A father transferring his shares to his son in order to defraud his creditors had no effect whatsoever. What mattered in this case was that the father only relied on the fact that there was a presumed resulting trust. There was a voluntary conveyance with the intention of it being held on trust for the transferor. Once again the father in this case did not need to rely on the illegality in order to assert his claim. In the case of Lowson v Coombes 1999 the same approach was followed.
The case of Collier v Collier 2002 with facts similar to Tribe v Tribe had the opposite decision as in the latter case. The trust was unenforceable because it had been established for an illegal purpose. Issues with this involve that needing to rely on an illegal purpose is all a matter of luck.
After all, a maxim of equity is “he who comes to equity must come with clean hands”. Therefore, whether a person has or has not relied on his illegal act should not be considered, what really matters is that the individual has indeed done something which is against public policy. Thus, there was a need for a more public policy based test.
In the most recent case regarding illegality, Patel v Mirza 2016, a landmark decision was made by the Supreme Court maintaining that the decision in Tinsley v Milligan should not have been made. This is highly significant due to the fact that Tinsley v Milligan was authority being used since 1994 and has been followed in many cases after as shown earlier in this answer. However, the case of Patel v Mirza has changed this.
James Goudkamp in his very recent article “The end of an era? Illegality in private law in the supreme court” 2017 highlights that the test has changed to a policy-based test, rather than the previously used reliance test. Goudkamp makes reference to the fact that even in a series of cases prior to Patel v Mirza, the court seemed to have preference over the policy-based test as opposed to the reliance test (Hounga v Allen 2014, Apotex 2014, Bilta v Nazir 2015).
In these cases there was disagreement between the Lords who preferred different tests and no definite conclusion could be reached, which indicated the illegality doctrine needed to be reformed. Patel v Mirza not only endorsed the policy-based test, but also flatly rejected the reliance test.
Lord Toulson stated that the rule in Tinsley v Milligan should no longer be followed. The reasons he put forward for this are rather powerful. Firstly, there was no explanation for why it should matter whether or not an illegal act has been relied on, so there was never a proper justification to the reliance test.
Secondly, it is often a matter of luck whether the claimant may or may not need to rely on his illegal act. So for example, in the cases of Tinsley, Tribe, and Lowson v Coombes, the claimants were lucky to be able to rely on something other than the illegal act, whereas in Collier, it was simply the claimant’s bad luck that he had nothing other than his illegal act to rely on.
The policy factors to be considered are decided on a case to case basis as an exhaustive list cannot be given. Critics of the test, including Lord Sumption have said that the test is intolerably uncertain. However, Lord Toulson made reference to the fact that certainty may not be so important when it comes to people contemplating unlawful activity, which cannot be denied. It seems as though his justification is echoing the maxim of equity “he who comes to equity must come with clean hands” as mentioned earlier.
Previously the courts seemed to have been going against this maxim. This policy-based test makes a lot more sense than the previous reliance test. It takes into consideration punishment of the wrongdoer and also gives effect to the maxim. Taking these points into account, indeed the illegal purpose should be considered when deciding whether to impose a resulting trust, as “he who seeks equity must do equity”.
On the contrary, as mentioned by the Law Commission in a report, punishment is not a reasonable justification for the defence of illegality, as this does not take into consideration situations where the claimant is not the wrongdoer, and he may simply be the innocent creditor of a fraudster. Therefore, the position of the parties is simply not clear at present which calls for a reform.
Furthermore, why should the claimant be punished when actually both parties are a part of the illegal act? Going back to Tinsley v Milligan, Miss Tinsley also knew what the purpose of transferring the property into her name was, as well as in the other cases mentioned in this answer.
This was highlighted by Mrs Justice Black in the case of QvQ 2008 who said that the courts have felt uncomfortable with the outcome of the rules which may sometimes favour one party more than the other, even though both may be equally to blame for the illegal purpose. Lord Denning further makes reference to the fact that one cannot use the court to get the best of both worlds, that is; to achieve his fraudulent purpose and to get his property back (Chettiar v Chettiar).
Overall, when assessing whether illegal purpose should be considered, indeed it should. The previous reliance test failed to take into consideration an illegal purpose where there was another reason the claimant could rely on. As Lord Toulson mentioned, this is purely down to luck. He also argues the reliance test did not have any justification for why it was being used.
However, with the new policy-based test at least there is a reason and equity gives effect to its maxim and its aims. However, courts may need to be careful in the sense that the claimant is not always the wrongdoer. If illegal purpose is being taken into consideration, the law should also consider any exceptions which may be relevant. Nevertheless, the law at present is in a rational and sufficient state.