Posted by: RM | July 25, 2019

Sham Agreements or Documents: The Test Revisited

The High Court has handed down its judgment in Broxfield Limited v Sheffield City Council [2019] EWHC 1946 (Admin) and has made some important observations regarding the standard of proof for establishing a ‘sham’. By way of background, this case concerned the question of liability for non-domestic rates (business rates). The commercial property in question was owned by Broxfield Limited (“Broxfield”) but immediately upon acquisition was subject to a purported demise (of the empty parts) to a company called Busy Bodies Business Services Limited (“Busy Bodies”). Sheffield City Council (“the Council”), the rating authority, was not satisfied that the lease produced by Broxfield was valid or genuine and considered that even if the document did have the apparent effect of transferring the right to possession from Broxfield to Busy Bodies, that agreement was a sham.

The matter was tried in the Sheffield Magistrates’ Court over 5 days and the District Judge concluded that the lease was not valid, that there was no other form of agreement that conferred the right to possession upon Busy Bodies and in any event the agreement relied upon was a sham. The liability orders sought by the Council were granted.

Broxfield applied to the Magistrates’ Court to state a case and then appealed to the High Court by way of case stated. The matter came before Mr Justice Mostyn and was heard over two days (almost a year apart due to amendments to the stated case at the direction of the Mostyn J). In a reserved judgment he dismissed the appeal and answered every question posed in the case stated in agreement with the approach that had been adopted by the District Judge.

Importantly, Mostyn J considered the standard of proof that is required to establish that a document or agreement is a sham. His starting point, inevitably, was the test set out in Snook v London & West Riding Investments[1967] 2 QB 786 wherein, at page 802, Lord Diplock stated that a sham “… means acts done or documents executed by the parties to the ‘sham’ which are intended by them to give to third parties or to the court the appearance of creating between the parties legal rights and obligations different from the actual legal rights and obligations (if any) which the parties intend to create”. Mostyn J then refers to Diplock LJ’s reference to “legal principle, morality and the authorities” and observed that Diplock LJ clearly “… intended the legal definition to correspond to the natural definition; he did not intend that the meaning in law should be a term of art”, para [20].

Referring to the statement by Munby J in A v A[2007] 2 FLR 467 that Diplock LJ’s statement of the law has always been treated as canonical Mostyn J went on to say “…the courts should be careful of being beguiled by the irresistible temptation of senior judges to apply spin, gloss and tweaks to a very simple literal concept …”, para [21]. He said that he struggled with the concept of a ‘strong presumption’ against holding a provision or a document to be a sham, referred to by Neuberger J (as he then was) in National Westminster Bank plc v Jones[2000] BPIR 1092 at [59], a phrase advanced by the Appellant as reason to be slow to make a finding of sham. Of course, in that case Neuberger J did recite that “… a sham provision is simply a provision or agreement which the parties do not really intend to be effective, but have merely entered into for the purpose of leading the court or a third party to believe that it is to be effective …”, para [59], a statement in complete accord with the test set out in Snook.

In the case before Mostyn J the Appellant sought to persuade the court that the test for a sham should be approached more stringently requiring “very cogent evidence“, but that submission was rejected. In his judgment Mostyn J recited part of the judgment of Baroness Hale in Re B (Children) [2009] 1 AC 11 wherein she said at para [64] “Lord Nicholls’ nuanced explanation [in Re H (Minors) (Sexual Abuse: Standard of Proof) [1996] AC 563, 586D-H] left room for the nostrum, ‘the more serious the allegation, the more cogent the evidence needed to prove it’, to take hold … it is time for us to loosen its grip and give it its quietus”. Mostyn J said “… the fact that an allegation is serious, or that its consequences, if proved, will be serious, is not a reason for subversively elevating the standard of proof from the simple balance of probability, nor for suggesting that the quality of evidence, should such an allegation be made, needs to be better than if the seriousness of the allegation were less grave. The court has to consider on the admissible evidence whether the charge is more likely than not made out, no more no less”, para [25].

Having conducted a focused but thorough review of the relevant authorities together with the evidence before the trial judge and her findings of fact, Mostyn J concluded that this was a case in which “… no reasonable judge could have reached a decision other than this one …” and “… it was an overwhelming case of sham…”, para [30]. This decision confirms the proper approach to the question whether a document or agreement is a sham generally, but is helpful in the context of non-domestic rating cases where it is not clear that the approach of the court has not been infected with the spin that some greater standard of proof is required when considering whether a document or agreement is a sham.

In SOS for Business Innovation and Skills v PAG Management Services Limited [2015] EWHC 2404 (Ch), whilst Norris J was not prepared to make any finding regarding a sham in that case he did recite the extract from Neuberger J’s judgment wherein Neuberger J said “… because the finding of a sham carries with it a finding of dishonesty, because innocent third parties may often rely upon the genuineness of a provision or an agreement, and because the court places great weight on the existence and provisions of a formally signed document, there is a strong and natural presumption against holding a provision or a document a sham”. Norris J went on to say that in the absence of the landlord as party to the proceedings “… to find each scheme user dishonest on the evidence of PAG Management’s witnesses alone would be a strong thing…”, para [41].

Of course, the court is not required to make a specific finding of dishonesty; only a finding on the balance of probabilities regarding the status of the relevant document or agreement. Sham or no sham. An explicit finding of dishonesty is not required although it follows that if a court finds a sham it carries with it an implicit finding of dishonesty.

It is hoped that the decision in this case will bring some renewed clarity to the applicable test and sweep away the tendency among those resisting a sham argument to impress upon the court the need for something more than is ordinarily required to meet the standard of proof; the balance of probabilities.

 

 

 

 


Responses

  1. […] “The High Court has handed down its judgment in Broxfield Limited v Sheffield City Council [2019] EWHC 1946 (Admin) and has made some important observations regarding the standard of proof for establishing a ‘sham’ … (more) […]


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