Common Intention Constructive Trusts

The new weapon of trust law?

The widely publicised separation and property dispute of Sally Ridge and Adam Parore saw the High Court consider the concept of a common intention constructive trust. While well-established in Australia and England, this concept is relatively new in the context of New Zealand trust law.

What is a common intention constructive trust?

A traditional constructive trust is created where there has been no direct or indirect declaration of trust, but that it would be unfair for a legal owner to have full beneficial ownership. A common intention constructive trust is based on the assertion that the parties had a common intention for assets to be held for their equal benefit, regardless of the legal ownership of those assets.

Sally Ridge and Adam Parore case¹

Following the separation of Sally Ridge and Adam Parore, the division of property between them was made difficult as the majority of the assets were held in two family trusts. Both Sally Ridge and Adam Parore and their four children were beneficiaries of each trust. Sally and Adam were also trustees of each trust.

The parties’ assets were restructured so that the family home was owned by Sally Ridge’s trust and the business assets held by Adam Parore’s trust. This structure was set up in early 2007 to protect their family home from any trading liabilities of the couple. The evidence showed that it was the intention of the parties that Adam’s trust would fund the parties’ lifestyle and allow the income and assets of both trusts to be shared equally between the parties.

It’s not clear whether Sally Ridge received independent legal advice in relation to the restructure, but it is clear that she was kept well informed, as she attended meetings with, and received email correspondence from, the lawyer instructed to put the restructure in place. Sally was, however, not particularly interested in the details of the restructure and relied on Adam to ensure the arrangements were appropriate.

In mid-2008, Adam’s trust purchased a company called Small Business Accounting (SBA). SBA was successful and allowed Adam’s trust to fund the parties’ living expenses.

Sally Ridge and Adam Parore separated in 2010. Sally claimed that the parties had a common intention that SBA would be held equally for the benefit of the parties and therefore Adam’s trust was holding half of the shares in SBA on a common intention constructive trust for her trust.

While few, if any, cases of a common intention constructive trust have been recognised in New Zealand, the Australian and English authorities are clear that such trusts are founded on ‘proof of a subjective common intention, clearly and unequivocally established by words or conduct.’

One problem that Sally faced was that in each of her pleadings before the court, the parties to the alleged common intention kept changing. At one point Sally claimed Adam’s trust was holding the shares for the parties personally; at a later point it was that Adam’s trust was holding the shares for the benefit of the two trusts.

The court found that Sally’s claim was contradicted by the evidence:

• The 2007 restructure was completed to clearly separate the family home and business assets. There was never a suggestion that the trustees of Adam’s trust would hold assets for the beneficiaries of Sally’s trust, and
• The concept of equal sharing was achieved by the trustees of each trust exercising their discretions to benefit Sally and Adam as equal beneficiaries of each trust, not by sharing ownership of the assets between the two trusts.

As Sally couldn’t show a clear and unequivocal intention that half of the shares in SBA were held by Adam’s trust for her own trust, the court declined to find in her favour.

This case illustrates the importance of properly recording your intentions if those intentions aren’t consistent with the formal documents or structures that have been to set up to own your trust’s assets.

¹ Ridge and Ridge v Parore and Lloyd [2014] NZHC 318 [28 February 2014]