Members of a family helping in the business may inherit it when the family head dies but, without an agreement, there may be no legal rights to ownership.
IT IS not uncommon in a small family business for other members of the family to get involved. They will likely be paid allowances or salaries that outsiders would receive or which they themselves would earn if they worked elsewhere. So they may be quite comfortable working and staying where they are.
Because it involves the family, there may not be any felt need to formalise the terms and conditions on which they work. Where they are the only children and the parent-owner later dies, they would in the ordinary course of events inherit the business which would then become their own.
In the meantime, they are likely to develop the belief that they also have an interest in it.
The fact that the children have decided to help in the family business that is legally owned by their parent does not, in the absence of express and explicit agreement, give them any extra rights beyond that enjoyed by an employee.
Any such further right to an interest in the business enterprise requires the existence of a contract; to create a contract, there must be an intention of the parties to enter into legal relations which it is anticipated can be enforced in a court of law. Otherwise, in the eyes of the law, such relationships often do not constitute a binding contract. This is because these are dealings between members of a family whereby it would be thought that the parties would not want to invite the assistance of the court should the agreement not be honoured.
Given the nature of the relationship and a situation where day-to-day needs are effortlessly looked after and even extras are forthcoming, it may be felt that to press for a formal arrangement would be embarrassing or unnecessary, given the existing cordial relationship. However the relationship may turn sour for reasons not earlier foreseen. When this happens, will the family member who has been working for the business have any interest in the business, apart from being a worker in the enterprise?
That such a person has helped the business grow and prosper may be a claim that would not go far. Ordinary employees of a business who are not family members also contribute to its growth and prosperity but this does not give them any rights beyond the promised remuneration.
Such cases do not always end up in the courts but some do. In the Singapore case of Choo Tiong Hin & Ors v Choo Hock Swee, the plaintiff and his wife who in the early part of their lives were poor and had started a farm.
In due course, two daughters were born and five sons adopted. Everyone helped in the farm which grew into a successful business enterprise. Differences arose after the wife died, and the father remarried, as a result of which, he left the family home.
Thereafter he brought an action claiming possession of the farm from his sons and a declaration that he was the owner of the property. The adopted sons claimed that they were entitled to an equal share as they had helped in the creation of the family wealth.
Deciding in favour of the father, the court took the view that there was no intention to create legal relations. Whyatt CJ went on to say that “the agreements, thus pleaded, possess all the characteristics of a private family arrangement depending for its efficacy upon a sense of filial duty and paternal responsibility on the part of the adopted sons and their father.”
“Agreements of this character between adopted sons and their adoptive father may well work satisfactorily so long as a spirit of trust and mutual confidence prevail within the family but if this ceases to exist, then in my opinion, the sanctions of the courts are no substitute.”
The Singapore decision reflected the view taken by the courts of family arrangements. Atkin LJ in Balfour v Balfour had expressed his views thus: “Agreements such as these are outside the realm of contracts altogether. The consideration that really obtains for them is that natural love and affection which counts for so little in these cold courts.”
Discussing such agreements, the same judge said that “the terms may be repudiated, varied or renewed as performance proceeds or as disagreements develop, and the principles of the common law … are such as find no place in the domestic code.”
Thus it bears remembering that where members of a family help in a family business without any clear and express declaration of what is agreed to, the chances are that such family members could find themselves in a similar situation.
Of course when there is no dispute and the family head who owns the business passes away, the business will ordinarily devolve unless other provisions are made upon the members of the family. Even then, there could be a dispute between those who were contributing to the business and those who were not.
This is because all would be entitled to the inheritance but those involved in the business may well feel that they have a greater interest on account of the role played by them.
As society becomes more materialistic, the need to preserve the harmony within the bigger family circle may well take a rear seat. Documenting the arrangement between those involved and in the case of inheritance, clear directions in a will can help.
Of course there may still be many who continue to have faith in resolving such disputes within the family without resorting to legal redress. If this is not possible, uncertainty and prolonged litigation could be the result.
Read the rest of this article by BhagSingh here.