Snook v London and West Riding Investments Ltd [1967]

Snook v London and West Riding Investments Ltd [1967] 2 QB 786 is a landmark Court of Appeal decision that established the leading English law definition of a sham transaction. The significance of the case lies in its authoritative definition of sham, which has been widely applied in trust, company, and tax law. This ruling shows that equity and common law will not be deceived by labels if the reality shows no genuine transfer of rights or obligations.

The case arose when the plaintiff, Mr Snook, sought to raise money using his car as security. He entered into a series of hire-purchase-style arrangements with finance companies (including the defendant, London and West Riding Investments Ltd), under which he purportedly sold the car to one company, which then "hired" it back to him with an option to repurchase. In reality, Snook remained in possession of the car throughout and continued to use it as his own. The arrangement was structured to give the appearance of a genuine hire-purchase agreement, but it was alleged to be a device to disguise what was effectively a loan on the security of the car, potentially to circumvent restrictions or mislead third parties (such as in the context of hire-purchase regulations or creditor claims).

The Court of Appeal (with Lord Diplock LJ giving the leading judgment) held that the transaction was a sham. Lord Diplock famously defined a sham as: "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." For a transaction to be a sham, there must be a common intention among the parties (or at least the relevant ones) to create a false appearance for the purpose of deceiving others, while the true agreement between them is different. The court emphasised that sham requires clear evidence of this mutual intent to mislead; mere unilateral pretence or poor drafting is insufficient.

The decision clarified that sham transactions are invalid or disregarded where the disguise is proven, allowing courts to look to the substance of the arrangement rather than its form. Snook has become the foundational authority on sham in English law, frequently cited in trusts, tax avoidance, family law, and commercial cases involving alleged pretences. In trusts law, it means that a trust will be treated as a sham if the settlor and trustees never genuinely intended the trust to operate according to its terms, for example where trustees are mere nominees and the settlor secretly retains full control.