KembaraXtra - Legal Terms - Sham Transaction

A sham transaction is a transaction that appears to create legal rights and obligations but is not intended by the parties to have the legal effect that it outwardly suggests.

The classic definition was given by Lord Diplock in Snook v London and West Riding Investments Ltd [1967] 2 QB 786, where he identified three essential elements of a sham.

First, acts are performed or documents are executed by the parties.

Secondly, those acts or documents appear to create legal rights and obligations in the eyes of third parties.

Thirdly, the parties share a common intention that the apparent legal rights and obligations are either different from the true legal position or that no genuine legal rights and obligations are intended to exist at all.

This principle was reaffirmed by the Court of Appeal in Hitch’s Executors v Stone [2001] EWCA Civ 1224, where Lord Justice Arden emphasized that a finding of sham requires proof of the parties’ common intention. If a transaction is found to be a sham, the court disregards its apparent form and gives effect to the parties’ true legal relationship.