In many family enterprises parents transfer ownership of the family business based on “sweat equity” (work performed in the business for less than market conditions) on the basis that the business will be gifted (with no consideration paid) and or transferred for less than market value payments at time of transfer on or before their retirement or death. In many instances there is a lack of legal formality in such decisions, which could have unintended consequences.
In Nolan v Nolan and Others [2014] QSC 218 an ex-wife gained a substantial interest in her ex-husband’s family enterprise belonging to her ex – parents in law on the basis that she contributed to her parents in law farming enterprise. This decision reinforces the principal that despite the lack of legal formality the Law of equity can recognize future expectations or services performed not only by children but by their children’s spouses (or in this instance their son’s ex-spouse who was not working directly in the family business).
What follows is an overview of the circumstances that could give rise to a family business being in danger of inadvertently enabling an in law to benefit despite not being wanted.
Facts
The Plaintiff and her ex – husband (‘the First Defendant’) were married for 18 years. During this time, they contributed to the running of the parents (‘Second & Third Defendant’) farming enterprises and associated spraying business (‘the Fourth Defendant’). The ex-husband left the marriage in 2009.
The Plaintiff then commenced proceedings to seek recognition of her contribution to her ex-husband’s family farming enterprise by way of declaration of constructive trust in her favour, either on the basis of her future expectation that herself and the ex-husband would inherit the farming properties and associated businesses, or on the basis that she was engaged in a common endeavour with the ex-husband and his family in regards to the farming enterprise.
Decision and implications
Future Expectations and Equitable Estoppel:
In accordance with the principle outlined in Finn v Finn [1993] 3 VR 712 the Plaintiff argued that proprietary estoppel may be established even where conduct of a party is such that the expectation has not been precisely defined.
Lyons J held that while a vague expectation could satisfy the requirements of equitable estoppel. Her honour was not satisfied that there was any intention by the ex-husband and his parents of passing on all of the farming property & enterprises to the Plaintiff and her ex-husband without any recognition of the parents other children.
Lyons J further considered that the Plaintiff did not suffer a sufficient detriment to warrant a claim in equitable estoppel. Her Honour was of the view that while the plaintiff and her ex-husband lived at Kitcombe, they did not live there on reliance on the specific representation that they would one day inherit the property and farming enterprise.
Implications – Clearly document correctly your intentions to children and or their spouses should you wish in the future to benefit or not benefit a child or their spouse.
Common Endeavour and Constructive Trust:
The Plaintiff sought to assert a constructive trust on the basis of common endeavour between the Plaintiff and the ex-husband and his parents. Lyons J noted that this equitable remedy does not depend on the common intention of the parties and is imposed by equity regardless of the actual or presumed intention of the parties. This remedy prevents the unconscionable retention of property as outlined in Willetts v. Marks [1994] QCA 515.
Where a constructive trust is sought by common endeavour, the usual practice is to make an equal division of property, particularly when parties have equally contributed over a substantial period of time. These contributions do not necessarily have to financial contributions: the court can take into consideration contributions to family welfare by way of domestic assistance, home making and parenting.
Lyons J found that the Plaintiff was engaged in a common endeavour with the Defendants because of her role as homemaker for her family, co-borrower and guarantor for farm machinery and vehicles, the use of her wage to help the Defendants in difficult financial times, and administrative and physical work relating to the farming enterprises and related spraying business.
Her Honour further held that the Plaintiff had suffered a detriment as a result of her involvement in the common endeavour and that it would also be unconscionable for the Defendants to benefit from her contributions to the common endeavour without some compensation to her.
Implications – The respective that a child or an in-law may not be working directly in a family business ensure that the unintended beneficiary whether a child or their spouse (the in-law) is adequately compensated for both indirect and direct contributions to the family business.
Orders
The Plaintiff was assigned 50% of the asset pool ($405,000.00) that was originally assigned to her and her husband, minus the deduction of $69,300.00, to acknowledge that Plaintiff had lived rent free on the Defendants’ property since the marriage ended.
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