LA Micro Group Inc v LA Micro Group (UK) Ltd [2024] UKSC 42

A holds a share in a private company on trust for A and B. Without writing, B agrees to ‘sell’ its equitable interest in the shares to A for valuable consideration. What right does A acquire under the contract? Does the contract alone bring the trust to an end, allowing A to keep the share for its own benefit?

In simplified form, these were the facts before the Supreme Court in LA Micro Group Inc v LA Micro Group (UK) Ltd. At first instance, Jarman J had ruled at [59] that “any disposition of [B]’s beneficial interest in respect of [A’s] ownership would need to be in writing to comply with section 53(1)(c)” of the Law of Property Act 1925, and “the lack of such writing means that such disposition is not valid”. As such, the oral contract per se did not affect B’s equitable interest in the shares.

The Court of Appeal disagreed. Nugee LJ concluded that, as the oral contract was specifically enforceable, it gave rise to a constructive trust over B’s equitable interest in the shares in A’s favour. Section 53(1)(c) was no obstacle to this: s 53(2) provides that “[t]his section does not affect the creation or operation of…constructive trusts”. Further, as Males LJ put it at [123], “the constructive trust…came into existence and ceased to exist at the same moment”. The Court of Appeal found at [113] that as A held the share on trust for B, who held its interest on a constructive sub-trust for A, B ‘dropped out’. This left A holding legal title to the share for its own benefit. Perhaps counterintuitively, then, the Court of Appeal found that the constructive trust effectively destroyed its own subject matter—B’s equitable interest. 

The Supreme Court ultimately upheld the decision of the Court of Appeal that the contract destroyed B’s interest, in what Lord Briggs described at [23] as a “a resolution by reference to first principles”. First, Lord Briggs ruled that there was nothing problematic about the Court of Appeal’s conclusion that A acquired legal title to the shares for its own benefit without signed writing: he stated at [1] that this was simply “one of the ways in which effect is given to the maxim that equity treats as done that which ought to be done.”

Secondly, Lord Briggs rejected the appellants’ argument that a contract to destroy B’s interest could not generate a vendor purchaser constructive trust. His reasoning focused on a novel distinction between matters of “substance” and “technical mechanics” ([38]): the “objective of the agreement” reached by “businessmen who no doubt thought in terms of ownership” meant it should be treated like a standard sale. Treating a beneficiary’s sale to a trustee as distinct from sales of other kinds would produce an “irrational and arbitrary outcome” depending “entirely upon the happenstance that the purchaser of the relevant equitable interest is also the legal owner of the underlying property” ([46]), bringing about different results in “circumstances which are commercially indistinguishable” ([48]).

Finally, at [50]-[54], Lord Briggs refused the respondents permission to argue that section 53(1)(c) applied to land only, not personalty, on the basis that the point was too well settled to be arguable.

The judgment raises several wider issues for property lawyers, three of which will be discussed here.

The first concerns the controversial doctrine of ‘dropping out’. It is sometimes argued that if A holds a legal right on trust for B, and B holds that right on sub-trust for C, that B will ‘drop out’, and A will be left holding legal title for C. As we have seen, the Court of Appeal at [113] relied on this reasoning.

The Supreme Court explained the destruction of B’s interest differently, using the doctrine of merger: if a person receives two rights in the very same asset, those rights will ‘merge’ where the parties expressly intend them to. Though the point is not fully explained, Lord Briggs seems to have concluded that because it was agreed that A would take legal title free of B’s interest, A’s interest under the constructive trust ‘merged’ with A’s legal title, and so B’s interest was destroyed.  It thus remains the case, as Lawrence Collins LJ observed in Nelson v Greening, that there is little authority for sub-trustees ‘dropping out’. 

The second issue is Lord Briggs’ puzzling distinction between “substance” and “technical mechanics”, in particular his suggestion that the law would be arbitrary in treating a beneficiary’s agreement to release its interest in favour of the trustee as distinct from sales of other kinds. Taken literally the statement cannot be right. Bespoke rules exist for cases where a trustee seeks to acquire a beneficiary’s interest: the rules on fair dealing.

The distinction is also problematic in a broader sense. Lord Briggs’ reasoning might suggest that the rights and duties created by any given agreement—the ‘technical mechanics’—should take a back seat to expectations of the parties about the agreement’s effects.  This is difficult to reconcile with the orthodox approach to legal characterization, as explained by Lord Millett in Agnew v Commissioner of Inland Revenue. A court starts by looking, not at the intended objective of an agreement, but at “the nature of the rights and obligations” it creates. Then, it asks “as a matter of law” what the proper legal consequences of an agreement are, given the rights and obligations created. Beyond the question of the content of those rights and obligations, characterisation, in Lord Millett’s words at [32], “does not depend on the intention of the parties”.

The third issue concerns the vendor purchaser constructive trust (VPCT). The Supreme Court held that such a trust can arise from a specifically enforceable contract for the destruction of an interest. This involved an extension of the law. Classically, a vendor-purchaser constructive trust arises where B agrees to transfer a specific right to A. The trust arises over the subject matter of the contract, to preserve that subject matter until it is formally transferred to A. Where B has agreed to destroy a right, however, is there any need for the law to preserve something that is to be destroyed? Lord Briggs’s answer at [34] is that A needs to be protected from B transferring the right to some third party or B’s becoming insolvent before carrying out the promised formalities.

Perhaps more problematic is Lord Briggs’ argument that, where a specifically enforceable agreement is made for the sale of an equitable interest, no signed writing is necessary. In that sense, the oral contract acts as a conveyance, despite s 53(1)(c).  Although the ratio of the decision is confined to a contract between a trustee and a beneficiary it is also suggested that any purported disposition of an equitable interest arising from a specifically enforceable contract does not require signed writing—such a contract can be seen as ‘self-executing’. If the trustee is given notice of the agreement, then ‘the VPCT does all the necessary heavy lifting’ ([32])

Such reasoning does away with the s 53(1)(c) signed writing requirement for many contracts to dispose of equitable interests. This departs from the treatment of s 53(2) in earlier cases, including Oughtred v IRC [1960] AC 206. According to the orthodox view, the VPCT does not leave the disponee with the very interest they have bargained for. Such a disposition requires signed writing. On this view s 53(1)(c) and s 53(2) work in harmony and equity does not undermine the statutory requirement.  It simply provides the intended disponee with an interest in the interval between the contract and execution of the appropriate formalities.

Lord Briggs’ judgment, however, rejects this distinction, in ruling that a VPCT can give a disponee the very interest they have bargained for. This is said to follow from the maxim that ‘equity treats as done that which ought to be done’. The reasoning here is difficult.  An equitable maxim is “not a specific rule or principle of law. It is a summary statement of a broad theme which underlies equitable concepts or principles” (Corin v Patton (1990) 169 CLR 540 (HCA) per Mason CJ and McHugh J). How can such an abstract statement support the specific conclusion—contrary to all previous authority—that a VPCT can altogether bypass a statutory formality requirement? Even if equity did wish to treat a specifically enforceable bargain as performed, how can it do so in the face of a statute? The judgment in LA Micro answers this question by extending the concept of the constructive trust referenced in s 53(2). Whether its reasons for doing so will stand up to scrutiny remains to be seen.