Unilateral intention and dishonesty in sham trusts

Re Esteem has been viewed as a seminal decision. It seemed to answer the question of whether a trustee's intentions are relevant to sham. The Royal Court answered this affirmatively: trustees' intentions are relevant to whether the trust is a sham. This means the pretence over the true arrangement must be intentional (in the sense of not being reckless), and the motive must be to mislead third parties. This is tantamount to dishonesty.

This sets a high bar; it will be difficult to plead such a case without evidence from the trustees' files, which will not be available. This explains why there have been few cases on sham.

In this article we explain that the settlor's intentions alone determine whether the trust is constituted; once constituted, beneficiaries acquire rights. If trustees' intentions are not relevant to constitution, why are they relevant to whether the trust is a sham? The focus should be on the settlor's intentions. These intentions should be assessed objectively (consistent with ordinary canons of construction, equitable mistake, and the test for certainty of intention). Subjective secret intentions are irrelevant.

We refer to a recent case where HHJ Matthews suggests the engine of sham is the pretence as to the true arrangement. Misleading third parties is simply the product of this; it is not an essential element. However, if honesty is relevant to the sham enquiry, then we suggest it can – and should – be assessed objectively.

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This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.

© Farrer & Co LLP, January 2026