Watts v Watts Claim no: HC02C02559

WTLR Issue: December 2014 #145

ARTHUR JAMES WATTS

V

JOHN HARRIS WATTS

Analysis

The claimant Arthur Watts (Arthur) sued his brother James Watts (James) in respect of trust transactions in 1998.

In 1967 Geoffrey Watts, the father of Arthur and James, made a settlement in favour of his children and grandchildren. In 1976 this trust fund was split into separate trust funds for each of Geoffrey’s children. James was one of the trustees of Arthur’s trust fund. The main beneficiaries were Arthur in his lifetime and thereafter his legitimate children. Clause 4 allowed the trustees to pay all the capital to Arthur if they considered it to be to his advantage. In 1989 Arthur’s sister Louise became the co-trustee. By 1996 Louise was seriously mentally ill and took little part in trust decisions after that date.

Arthur’s only income was from the trust and he received £40,000 per year.

The trust fund was invested in conservative UK shares. Between 28 January 2008 and 6 February 1998 all the shares were sold for £2.2m, incurring a tax liability of £296,000.

By a deed of appointment dated 19 February 1998 Louise and James appointed Arthur as their co-trustee. On 20 February 1998 the three trustees agreed to advance the entire trust fund to Arthur. James made it clear that the funds were then at Arthur’s disposal and not subject to any legal control by the trustees. However, Arthur had no idea where the money was or how to access it and James did not tell him.

On 23 February 1998 Arthur signed a deed of gift giving James £2m.

Arthur’s case was that the deed of gift was not a deed and not effective. The consideration for the deed of gift was the defendant’s oral representation that he would invest the money and his own money in blue chip shares, move to Ireland and become a tax exile and make a gift each year to Arthur starting at £60,000 and increasing to £100,000 for life. There was no real intention to give his money away and the deed of gift was signed to appease HMRC.

Arthur claimed that he had always been bullied by his elder brother. He felt coerced by James to accept his plans but he had no real choice as otherwise he would always be beholden to him. James was a chartered accountant and a professional investor and he trusted him. Arthur believed James when he said that if he received gifts from abroad there was no UK tax to pay. James ordered him not to take legal advice otherwise their relationship would be ruined.

James stopped making payments to Arthur in 2002 having only made partial payments prior to that. In 2006 James told Arthur that the money from the trust fund had always really been his as he was the first born.

Proceedings were issued on 9 September 2002 but Arthur lacked the funds to pursue legal action at that time and was depressed. Arthur claimed breach of contract, deceit, breach of trust and undue influence.

James’ case was that Arthur had suggested that the trust fund be wound up as it had ruined his life and that he wanted to make his own way in life and that his children should not have the burden of inherited money. Arthur could not stand having a continual annual connection to HMRC through having to do a tax return. Arthur wanted James to be rich and if James was rich this would allow Arthur to believe that the family as a whole was rich.

James had asked Arthur and Arthur’s fiancée several times if he intended to have children as they would be potential beneficiaries. James thought that it was a bad idea to wind the trust up but Arthur wanted to.

There was no agreement to pay anything back to him and no discussion about avoiding UK tax. The later payments were gifts by him to Arthur but after losing money on the stock market he could no longer afford to make those gifts.

James stated that Arthur’s insistence on winding up the trust fund had no impact on his decision to sell the shares; it was simply the right time to sell them.

James applied to amend his defence to plead that, on the claimant’s case, there was a contract between the claimant and the defendant for the purposes of facilitating unlawful tax evasion.

Held (there was a breach of trust and deceit but disallowing the contractual claim because of illegality):

  1. 1) The application to amend the defence is allowed as there is no prejudice to the claimant as it is based on his own case on the facts. In any event the court would have had to consider the question of illegality of its own motion.
  2. 2) The defendant’s case that the claimant gave him his trust fund is rejected. The claimant had no job, substantial financial commitments and was about to get married. There was an agreement where the claimant entrusted the management of his money to the defendant in return for an agreed level of income which has only been paid to a limited extent.
  3. 3) The claimant would not have stated that he did not plan to have children. The defendant was seeking to protect himself against a claim by possible future beneficiaries. The careful sequence of the signing of the documents was to obtain the funds without there being a breach of trust.
  4. 4) At the outset the defendant did intend to pay the promised amounts to the claimant but did not tell him that he intended to have a high risk investment strategy.
  5. 5) There was a contract between the two parties. The claimant has treated the defendant’s conduct as a repudiation of the contract and accepted it by his re-amended particulars of claim in 2012. The claimant is entitled (subject to illegality) to the arrears of income and repayment of his capital.
  6. 6) The defendant is liable for damages for deceit. The defendant represented that he intended to pay the agreed income regularly but in fact he would only do this if there was enough money left over after satisfying his needs. The defendant promised to involve the claimant, keep him up to date with information and provide an account. The defendant had no intention of fulfilling this promise.
  7. 7) No express representation was made that the money would be invested in blue chip shares. However the defendant failure to tell the claimant his high risk investment plan was fraudulent because at the time he was the claimant’s trustee and owned him a fiduciary duty. It was also misrepresentation by omission as he did not state that he always intended to put himself first.
  8. 8) The claimant’s case that he was induced to enter into the alleged agreement by the defendant’s fraudulent misrepresentation that UK tax could be lawfully avoided is rejected. The defendant did say that but the claimant suspected this was incorrect and did not rely on it. The claimant did not take legal advice as he feared that he would be advised that he could not lawfully avoid UK tax and did not want to lose the prospect of higher income.
  9. 9) There was a breach of trust. The main object of the dissolution was unlawful tax evasion, it involved the participation of his co-trustee Louise who lacked mental capacity, he failed to mention his investment plans or that he intended to sell all the existing shares and incur a large CGT liability.
  10. 10) The self-dealing rule applies even though the trust was at an end when the money was given to him. It is also irrelevant that Arthur was a co-trustee. This is because these steps were designed by the defendant to protect himself.
  11. 11) There was undue influence. The defendant abused his position as trustee by persuading the claimant to enter into a disadvantageous contract by both false promises and non-disclosure. He also exploited the claimant’s susceptibility to false assurance of family co-operation.
  12. 12) On the basis of the present law on the effect of illegality on otherwise valid claims the claimant is barred from enforcing his contractual claims. Both parties agreed at the outset to evade tax and it was central to the agreement and therefore for public policy considerations no recovery is possible. He is not barred from enforcing his claims for damages for deceit and breach of trust as they are wrongful acts of the defendant that are unconnected with the illegality. To deny the claimant redress would be unjust.
  13. 13) The reasons for the delay in pursuing the case are accepted and do not affect the credibility of the claimant’s evidence.
Mr N Strauss QC (sitting as a deputy judge of the High Court)
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Counsel Details

Mr Stephen Boyd (Selborne Chambers, 10 Essex Street, London WC2R 3AA, e-mail clerks@selbornechambers.co.uk, tel 020 7420 9500) instructed by Wilson Barca LLP (Carlisle Buildings, 18 Carlisle Street, London, W1D 3BX, e-mail soho@wilsonbarca.com, tel 020 7272 2072) appeared for the claimant.

Mr Peter Shaw (9 Stone Buildings, Lincoln’s Inn, London WC2A 3NN, tel 020 7404 5055, e-mail clerks@9stonebuildings.com_ instructed by Messrs Harrison Clark Rickerby (5 Deansway, Worcester WR1 2JG, tel 01905 612 001) appeared for the defendant.

Cases Referenced

Legislation Referenced

  • Human Rights Act 1998
  • Palermo Protocol 2000
  • Race Relations Act 1976 s56(1)(b) s57(1)