Equity and Trusts - Barnett, Simon [SRG]
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S E T O
Course Notes EQUITY AND TRUSTS
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Simon Barnett
First published 2014 by Routledge 2 Park Square, Milton Park, Abingdon, Oxon OX14 4RN and by Routledge 711 Third Avenue, New York, NY 10017 Routledge is an imprint of the Taylor & Francis Group, an informa business © 2014 Simon Barnett The right of Simon Barnett to be identified as author of this work has been asserted by him in accordance with sections 77 and 78 of the Copyright, Designs and Patents Act 1988. All rights reserved. No part of this book may be reprinted or reproduced or utilised in any form or by any electronic, mechanical, or other means, now known or hereafter invented, including photocopying and recording, or in any information storage or retrieval system, without permission in writing from the publishers. Trademark notice: Product or corporate names may be trademarks or registered trademarks, and are used only for identification and explanation without intent to infringe. British Library Cataloguing in Publication Data A catalogue record for this book is available from the British Library Library of Congress Cataloging-in-Publication Data Barnett, Simon. Course notes : equity and trusts / Simon Barnett. p. cm. – (Course notes) 1. Equity–Great Britain. 2. Trusts and trustees–Great Britain. I. Title. II. Title: Equity and trusts. Proudly sourced and uploaded by [StormRG] KD674.B37 2013 Kickass Torrents | TPB | ET | h33t 346.42004–dc23 2013018826 ISBN: 978-0-415-83913-6 (pbk) ISBN: 978-1-315-87130-1 (ebk) Typeset in Goudy and Frutiger by Wearset Ltd, Boldon, Tyne and Wear
Dedication To my parents, Beulah and Geoffrey Barnett.
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Contents Guide to the book ................................................... vi Guide to the website ............................................. viii Acknowledgements .................................................. x Preface ...................................................................... xi Table of cases ......................................................... xiii Table of statutes and other legislation ............ xxviii 1: Equity and trusts – an overview ........................ 1 2: The trust and other concepts .......................... 11 3: The three certainties ........................................ 27 4: Constitution and formalities ........................... 52 5: The beneficiary principle and non-charitable-purpose trusts ......................... 73 6: Secret trusts ...................................................... 92 7: Charities .......................................................... 102 8: Implied trusts .................................................. 127 9: Fiduciary duties and conflicts of interest ...... 147 10: Control of trustees ......................................... 163 11: Duties of trustees ........................................... 176 12: Powers of trustees .......................................... 189 13: Variation of trusts .......................................... 201 14: Breach of trust and remedies ........................ 219 15: Equitable remedies ........................................ 240 Index ...................................................................... 257
Guide to the book Check new words and essential legal terms and what they mean Definition Capacity: understanding, awareness, capability, clear mind, reasoning, ability.
Test your legal knowledge! Practice makes perfect – answer questions on what you’ve just read Workpoint Why is capacity important in criminal law?
Questions to help you delve deeper into the law and to guide your further reading
Research Point In 2003 the Parliamentary Joint Committee on Human Rights criticised the age of criminal liability in their Tenth report of Session 2002-03, HL/1High Court. Look up paragraphs 35-38 and make notes on the main arguments below.
Provides examples and extracts from the key cases and judgements you need to know Case: Antoine (2000)
The words ‘did the act or made the omission’ in the 1964 act refer to the actus reus only. The Mental element need not be explored.
People who lack capacity in criminallaw
Children under the age of ten
Corporations
Those with amental illness
Tick off what you have learnt and check you’re on track
Checkpoint – corporate manslaughter Item on checklist:
Done!
I can explain the effect of C v DPP (1995) on the doctrine of doli incapax. I can suggest ways in which a Crown Court trial could be made more accessible to a child.
Provide you with potential real-life exam questions. Answers are available on the accompanying website.
Potential exam questions: 1) Assess the ways in which incapacitated defendants are dealt with in the criminal court system. 2) Examine the role of vicarious liability in criminal law. 3) Corporations can be indicted for criminal offences the same as individuals can. Discuss.
GUIDE TO THE BOOK
Diagrams illustrate key points for visual learners
Guide to the website There is useful additional material material online online to to support support your your learning learningofof law. http://cw.tandf.co.uk/law/Medical-Law-and-Ethics http://cw.tandf.co.uk/law/Trusts/index.asp Interactive questions to help you revise aspects of the law
Model Answers Chapter 1 1. When the criminal law prosecutes and sentences criminals, its purpose is to: Uincapacitate the criminal Upunish the criminal Udeter the criminal and the public Ureform the criminal Ueducate the criminal and the public Uaffirm moral standards and restore justice in society
Useful websites to help you research further your studies in law
www.legislation.gov.uk The official website for the Stationary Office; use it to search for newly enacted and revised legislation, draft legislation and statutory instruments for the United Kingdom, Scotland, Northern Ireland and Wales.
GUIDE TO THE WEBSITE
www.parliament.uk The official Parliament website; use it to track all criminal bills currently before Parliament, explore the role of the House of Lords in law-making, and search for delegated legislation.
Acknowledgements The author would like to thank Damian Mitchell and Emma Nugent at Routledge and Jacqueline Smith at Hodder for introducing the author to the project and for their kind help and encouragement. The author would especially like to thank his wife Ellen and son Joshua for their encouragement and long suffering.
Preface This Course Notes series is intended to provide the student with useful notes, which are presented in a way that helps with visual learning. The series is also interactive with: s Workpoints for students to work through s Research Points where students are invited to further their knowledge and understanding by referring to important source materials s Checkpoints to see whether the reader has understood/learned the key points in each topic s Examination-style questions at the end of each chapter. There is also support available on the companion website where students can check their own answers to the examination-style questions against the answers on the site, as well as interactive questions and useful links for research. Jacqueline Martin Course Notes: Equity and Trusts This book on equity and trusts covers all the important issues in an accessible format. All the topics that are most frequently taught on undergraduate modules are covered. The book is split into 15 key chapters. After an introduction to the topic, the issues dealt with progress from the creation of a valid express private trust, to secret trusts, charitable trusts and implied trusts to the management and control of the trust and remedies available. The book covers many topical issues in as much depth as is permitted for its size and includes recent cases such as Sinclair Investments (UK) Ltd v Versailles Trade Finance Ltd (2011) EWCA Civ 347 concerning bribes and Attorney-General’s Reference on Benevolent Funds (Upper Tribunal) (2012) WTLR 977 concerning charitable trusts for the relief of poverty. The use of Checkpoints allows the reader to reflect on an early understanding of the issues and Workpoints help the student new to the area of equity and trusts law to consider application of the law. Diagrams are included to assist the visual learner and to engage the reader, while case law is explained in a clear format, without compromising essential detail. Potential exam questions are added at the
PREFACE
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end of the chapter to allow the student to gauge whether they can address the types of issue they may face in examinations. It is hoped that the structure and layout of the book will engage the reader and instil a long-term and genuine interest in this most fascinating area of law. Simon Barnett
Table of cases Key CA = Court of Appeal, HCA = High Court (Australia), HL = House of Lords, PC = Privy Council, SC = Supreme Court Abbott v Abbott [2007] UKPC 53, [2007] 2 All ER 432, PC ......... 138 Abou-Rahmah v Abacha [2006] EWCA Civ 1492, [2007] 1 Lloyds Rep 115, CA ...........................................................139, 232 Abrahams v Trustee in Bankruptcy of Abrahams [1999] BPIR 637 ...................................................................................... 131 Adams and Kensington Vestry, Re (1884) 27 Ch D 394 ............. 29, 32 Agip (Africa) Ltd v Jackson [1991] Ch 547, CA ..................... 228, 233 Agip SpA v Navigazione Alta Italia SpA (The Nai Genova) [1984] 1 Lloyds Rep 353, CA ....................................................... 255 Agnew v Belfast Banking Company [1896] 2 IR 204 ......................... 66 Alec Lobb (Garages) Ltd v Total Oil (GB) Ltd [1984] EWCA Civ 2, [1985] 1 WLR 173, CA ..................................................... 254 Ali v Khan [2002] EWCA Civ 974, CA .......................................... 130 Allen v Distillers (Biochemicals) Ltd [1974] QB 384, [1974] 2 All ER 365 ................................................................................. 203 American Cyanamid Co v Ethicon Ltd [1975] UKHL 1, [1975] AC 396, HL .................................................................. 246–7 Anker-Petersen v Anker-Petersen (1991) 16 LS Gaz 32, (1998) 12 TLI 166 ....................................................................... 204 Anton Piller KG v Manufacturing Processes Ltd [1975] EWCA Civ 12, [1976] Ch 55, CA ........................................................... 250 Argyll v Argyll [1967] Ch 302 ............................................................... 4 Armitage v Nurse [1997] EWCA Civ 1279, [1998] Ch 241, CA .................................................................. 174, 183, 225 Associated Newspapers plc v Insert Media Ltd [1991] 3 All ER 535, [1991] 1 WLR 571, CA ......................................... 246 Astor, Re [1952] Ch 534 ................................................. 73, 75, 78, 133 Attorney-General v Alford (1855) De GM & G 843 ...................... 177 Attorney-General for Hong Kong v Reid [1994] UKPC 2, [1994] AC 324, PC .............................................................. 136, 137 Baden, Delvaux & Lecuit v Societe General [1983] BCLC 325, [1983] 1 WLR 509................................................................. 229 Baden’s Trust Deeds (No 2), Re [1972] EWCA Civ 10, [1973] Ch 9, CA ............................................................ 43–7, 49, 51 Bahin v Hughes (1886) 31 Ch D 390, CA ...................................... 222
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Baille, Re (1886) 2 TLR 660 ............................................................. 100 Ball’s Settlement Trusts, Re [1968] 2 All ER 438, [1968] 1 WLR 899 ................................................................................... 216 Bank of Credit and Commerce International (Overseas) Ltd v Akindele [2001] Ch 437, CA ............................. 139, 228, 229 Bank of Credit and Commerce International SA (No 9), Re [1994] 3 All ER 764, [1994] 1 WLR 708, CA ........................ 249 Barclays Bank plc v O’Brien [1993] UKHL 6, [1994] 1 AC 180, HL .............................................................................. 253 Barclays Bank plc v Quistclose Investments Ltd [1968] UKHL 4, [1970] AC 567, HL .................. 19, 79–82, 83, 84, 85, 147 Barlow Clowes International Ltd (in liquidation) v Eurotrust International [2005] UKPC 37, [2006] 1 All ER 333, PC ........................................................................ 231 Barlow Clowes International Ltd (in liquidation) v Vaughan [1992] 4 All ER 22, [1992] BCLC 910, CA ................................. 236 Barlow’s Will Trusts, Re [1979] 1 All ER 296, [1979] 1 WLR 278 ............................................................................... 40, 41 Bartlett v Barclays Bank Trust Co Ltd [1980] Ch 515 ............. 177, 224 Bashir v Ali [2011] EWCA Civ 707, [2011] P & CR 12, CA ......... 243 Bateman’s Will Trusts, Re [1970] 3 All ER 817, [1970] 1 WLR 1463 ................................................................................... 99 BCCI v Akindele, See Bank of Credit and Commerce International (Overseas) Ltd v Akindele— BCCI SA (No 9), Re, See Bank of Credit and Commerce International SA (No 9), Re— Behnke v Bede Shipping Co Ltd [1927] 1 KB 649 ........................... 241 Bell v Lever Brothers Ltd [1931] UKHL 2, [1932] AC 161, HL ......... 253 Beloved Wilkes’ Charity, Re [1851] EWHC Ch J52, (1851) 3 Mac & G 440 ............................................................................ 169 Best, Re [1904] 2 Ch 354 .................................................................. 106 Beswick v Beswick [1967] UKHL 2, [1968] AC 58, HL .................. 241 Bhullar Brothers, Re [2003] EWCA Civ 424, [2003] BCLC 241, CA .................................................................... 158, 159 Biss, Re [1903] 2 Ch 40, CA ............................................................. 155 Blackwell v Blackwell [1929] AC 318, HL .......................... 97, 99, 100 Blair v Duncan [1902] AC 37 ........................................................... 106 Boardman v Phipps [1966] UKHL 2, [1967] 2 AC 46, HL ............................................ 135, 136, 137, 152, 156–7, 158, 162 Boscawen v Bajwa [1996] 1 WLR 328, CA .............................. 232, 237 Bourne v Keane ([919)] AC 815, HL .................................................. 75 Bowman v Secular Society [1917] AC 406, HL ............................... 110 Boyce v Boyce (1849) 16 Sim 476 ....................................... 36, 37, 133
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Boyes, Re (1884) 26 Ch D 531 ........................................................... 96 Bray v Ford [1896] AC 44, HL ..................... 151–2, 153, 155, 157, 176 Breadner v Granville-Grossman [2001] Ch 523 .............................. 173 Brinks Ltd v Abu-Saleh (No 3) [1995] CLC 133, (1995) The Times, 23 October ................................................................. 230 Bristol & West Building Society v Mothew [1996] EWCA Civ 533, [1998] Ch 1, CA .............................. 147, 150, 176 Bryant, Re [1894] 1 Ch 324 .............................................................. 192 Buckinghamshire Constabulary Widows and Orphans Fund Friendly Society (No 2), Re [1979] 1 All ER 623, [1979 1 WLR 936 ............. 89 Bull v Bull [1955] 1 QB 234, CA ................................................. 5, 131 Caffoor v Commissioner for Income Tax, Columbo [1961] AC 584, PC .................................................................................. 119 Cain v Moon [1896] 2 QB 283 ........................................................... 66 Campbell v Walker (1800) 1 Ves 9 ................................................... 161 CA Pacific Finance Ltd, Re [2000] 1 BCLC 494 ................................. 35 Carreras Rothmans v Freeman Mathews Treasure Ltd [1985] Ch 207 ...................................................................................... 81, 84 Catnic Components Ltd v Stressline Ltd [1976] FSR 157 ............... 247 Cayne v Global Natural Resources [1984] 1 All ER 225, CA ......... 247 Chapman v Chapman [1954] AC 429, HL ...................... 202, 203, 205 Chapple, Re (1884) 27 Ch D 584 ..................................................... 153 Chartbrook Ltd v Persimmon Homes Ltd [2009] UKHL 38, [2009] 1 AC 1101, HL ................................................................. 255 Chetwynd’s Settlement Trust, Re [1902] 1 Ch 692 ......................... 168 Chillingworth v Chambers [1896] 1 Ch 685 .................................... 222 Choithram International v Pagarani, See T Choithram International SA v Pagarani— City Index Ltd v Gawler, sub nom Charter plc v City Index Ltd [2007] EWCA Civ 1382, [2008] Ch 313, CA .......................229 CL, Re [1969] 1 Ch 587 .................................................... 202, 204, 214 Clayton’s Case, See Devaynes v Noble— Cleaver, Re [1981] 2 All ER 1018, [1981] 1 WLR 939 .................... 140 Clore’s Settlement Trusts, Re [1966] 2 All ER 272, [1966] 1 WLR 955 ................................................................................... 197 Clough v Bond (1838) 3 My & Cr 490, 40 ER 1016 ....................... 221 Cohen’s Settlement Trust, Re [1959] 1 WLR 865 ........................... 215 Coles v Trecothick (1804) 32 ER 592 ............................................. 162 Comiskey v Bowring-Hanbury [1905] AC 84, HL ................. 23, 30, 32 Commission for the New Towns v Cooper (Great Britain Ltd) [1995] Ch 259, CA ...................................................................... 255 Commissioners for Special Purposes of Income Tax v Pemsel [1891] AC 531, HL .............................................................. 103, 110
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Compton, Re [1945] Ch 123, CA ..................................................... 104 Conservative and Unionist Central Office v Burrell [1981] EWCA Civ 2, [1982] 1 WLR 522, CA ......................................... 85 Co-operative Insurance Society Ltd v Argyll Stores (Holdings) Ltd [1997] UKHL 17, [1997] 3 All ER 297, HL ................................................................................ 241, 242 Corelli, Re [1943] Ch 332 ................................................................. 111 Cornish v Brook Green Laundry [1959] 1 QB 394 .................. 4, 8, 243 Coulthard v Disco Mix Club Ltd [1999] 2 All ER 457, [2000] 1 WLR 707............................................................................. 7 Coulthurst, Re [1951] Ch 661, CA ........................................... 103, 108 Courtney, ex p Pollard, Re (1840) Mont & Ch 239 ............................. 6 Cowan v Scargill [1985] Ch 270 ...................................... 176, 183, 184 Coxen, Re [1948] Ch 747 ........................................................... 47, 116 Craven’s Estate (No 1), Re [1937] Ch 423 ......................................... 66 Curley v Parkes [2004] EWCA Civ 1515, CA ................................. 134 Customs and Excise Commissioners v Barclays Bank plc, See HM Commissioners of Customs and Excise v Barclays Bank plc Dean, Re (1889) 41 Ch D 552 .............................................. 74, 77, 112 Delius, Re [1957] Ch 299 .......................................................... 109, 111 Denley’s Trust Deed, Re [1969] 1 Ch 373 .............. 77–9, 81, 84, 85, 87 Devaynes v Noble (Clayton’s Case) (1816) 1 Mer 572, 35 ER 781 ..................................................................................... 236 Dingle v Turner [1972] AC 601, HL .................103, 104, 116, 117, 118 Diplock, Re, sub nom Minister of Health v Simpson [1951] AC 251, HL, affirming [1948] 1 Ch 465, CA ................... 233–4, 238 Dover Coalfield Extension Ltd, Re [1907] 2 Ch 76, Ch D, [1908] 1 Ch 65, CA ..................................................................... 160 Druce’s Settlement Trust, Re [1962] 1 All ER 563, [1962] 1 WLR 363 ................................................................................... 215 Dudman, Re [1925] 1 Ch 553 ............................................................. 66 Duke of Norfolk’s Settlement Trusts, Re [1982] Ch 61 .................... 153 Dunbar v Plant [1998] Ch 412, CA ................................................. 141 Dupree’s Deed Trusts, Re [1945] Ch 16 ............................................ 111 Dyer v Dyer [1788] EWHC Exch J8, (1788) 2 Cox Eq Cas 92 ........ 131 E v E [1990] 2 FLR 233 ..................................................................... 167 Eades, Re [1920] 2 Ch 353 ................................................................ 106 Earl of Oxford’s Case (1615) 21 ER 485 ............................................... 1 Edge v Pensions Ombudsman [2000] EWCA Civ 2013, [2000] Ch 602, CA ...................................................................... 171 El Ajou v Dollar Land Holdings plc [1993] EWCA Civ 4, [1994] 2 All ER 685, CA ............................................................. 228 EMI Ltd v Pandit [1975] 1 All ER 418, [1975] 1 WLR 302 ............. 250
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Endacott, Re [1959] EWCA Civ 5, [1960] Ch 232, CA .................... 75 English v Willats (1831) 1 LJ Ch 84 ................................................. 219 E R Ives Investment Ltd v High [1967] 2 QB 379, CA ..................... 71 Essery v Cowlard (1884) 26 Ch D 191 ............................................. 133 EVTR Ltd, Re [1987] BCLC 646 ............................................ 81, 82, 84 Falcke v Gray (1859) 4 Drew 651, 62 ER 250 ................................. 241 Faraker, Re [1912] 2 Ch 488 ............................................................. 120 Fawcett and Holmes Contract, Re (1889) LR 42 Ch D 150, CA ................................................................................................ 245 Fellows & Son v Fisher [1976] QB 122, CA .................................... 246 Finger’s Will Trusts, Re [1972] 1 Ch 286 ......................................... 121 Flight v Bolland (1828) 4 Russ 298, 38 ER 817 ............................... 242 Flight v Booth (1834) 1 Bing NC 370, 131 ER 1160 ...................... 245 Foskett v McKeown [2000] UKHL 29, [2001] 1 AC 102, HL .................................... 19, 135, 139, 149, 176, 234–5 Foveaux, Re [1895] 2 Ch 501 ............................................................ 125 Fry v Fry (1859) 27 Beav 144 ........................................................... 202 Futter v Futter [2011] EWCA Civ 197, [2012] Ch 132, CA .................................................................................... 172–4, 175 Garden Cottage Foods Ltd v Milk Marketing Board [1948] AC 130 ......................................................................................... 247 Gardner, Re [1924] 2 Ch 243 .................................................... 97–8, 99 Gardom, Re [1914] 1 Ch 662 ............................................................ 109 Gee, Re [1948] Ch 284 .............................................................. 139, 160 Gee v Pritchard (1818) 2 Swanston 414 ............................................... 3 George Wimpey UK Ltd v VI Construction Ltd [2005] EWCA Civ 77, [2005] BLR 135, CA ...................................... 255–6 Ghani v Jones [1970] 1 QB 693, CA ................................................ 248 Gibbon v Mitchell [1990] 3 All ER 338, [1990] 1 WLR 1304 ......... 253 Gibbons Trusts, Re (1882) 30 WR 287 ............................................ 165 Gillett v Holt [2001] Ch 210, CA ...................................................... 71 Gillingham Bus Disaster Fund, Re [1959] Ch 62, CA affirming [1958] Ch 300, ChD ...................................................... 133 Gilmour v Coats [1949] 2 AC 426, HL .................................... 105, 115 GKN Bolts and Nuts Ltd Sports and Social Club, Re [1982] 2 All ER 855, [1982] 1 WLR 774 ............................................ 88, 89 Golay’s Will Trusts, Re [1965] 2 All ER 660, [1965] 1 WLR 969 ..................................................................................... 36 Gold v Hill [1999] 1 FLR 54 ............................................................... 98 Goldcorp Exchange Ltd, Re [1995] 1 AC 74, PC ......................... 19, 35 Gonin, Re [1979] Ch 16 ...................................................................... 65 Goulding v James [1997] 2 All ER 239, CA .................................... 215 Granstown, Re [1932] 1 Ch 537 ....................................................... 111
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Grant’s Will Trust, Re [1979] 3 All ER 359, [1980] 1 WLR 360 ........... 87 Gray, Re (1925) Ch 362 ................................................................... 112 Great Peace Shipping Ltd v Tsavliris Salvage (International) Ltd [2002] EWCA Civ 1407, [2003] QB 679, CA .......................253 Grey v Inland Revenue Commissioners [1960] AC 1, HL .........................................................................18, 58, 59, 61, 132 Grove-Grady, Re [1929] 1 Ch 557, CA ............................................ 112 Guild v Commissioners of Inland Revenue [1992] 2 AC 310, HL ................................................................................. 113 Guinness v Saunders [1990] 2 AC 663, HL ...................................... 158 Gulbenkian’s Settlement Trusts, Re [1970] AC 508, HL ............ 21, 41 Gwembe Valley Development Co Ltd v Koshy [2003] EWCA Civ 1048, [2004] BCLC 131, CA ................................... 221 Gwyon, Re [1930] 1 Ch 255 ............................................................. 109 Haines, Re (1952) The Times, 7 November................................... 74, 77 Hale v Adams (1873) 21 WR 400 .................................................... 219 Halifax Building Society v Thomas [1995] EWCA Civ 21, [1996] Ch 217, CA ...................................................................... 143 Hallett’s Estate, Re (1880) 13 Ch D 696, CA .................................. 235 Hamilton, Re [1895] 2 Ch 370 ............................................... 23, 28, 29 Hanchett-Stamford v Attorney-General (2009) Ch 173 .................. 89 Harries v Church Commissioners for England [1992] 1 WLR 1241, [1993] 2 All ER 300 ...................................... 177, 184 Hart v Emelkirk Ltd [1983] 3 All ER 15, [1983] 1 WLR 1289 ........... 248 Harvard Securities, Re [1997] EWHC Comm 371, 2 BCLC 369 ......... 35 Harwood, Re [1936] Ch 285 .............................................................. 123 Hastings-Bass, Re [1975] Ch 25, CA ............ 171–2, 173, 174, 175, 252 Hawksley v May [1956] 1 QB 304 .................................................... 169 Hay’s Settlement Trusts, Re [1981] 3 All ER 786, [1982] 1 WLR 202 ........................................ 20, 21, 22, 48, 169, 189 Heath v Heath [2009] EWHC 1908 (Ch), [2010] 1 FLR 610 ......... 244 Hetherington, Re [1990] Ch 1 .................................................. 110, 115 Heys, In the Estate of [1914] P 192 .................................................. 140 Higginbottom, Re [1892] 3 Ch 132 .................................................. 166 HM Commissioners of Customs and Excise v Barclays Bank plc [2006] UKHL 28, [2007] 1 AC 181, HL ....................... 249 Hodgson v Marks [1971] Ch 892, CA ........................................ 83, 128 Holt’s Settlement, Re [1969] 1 Ch 100 ............................................ 214 Hooper, Re [1932] 1 Ch 38 ........................................................... 75, 76 Hooper v Gorvin [2001] 2 WTLR 575 .............................................. 148 Hopkinson, Re [1949] 1 All ER 346 ................................................. 110 Howard, Re (1908) The Times, 30 October ......................................... 74 Hummeltenberg, Re [1923] 1 Ch 237 ............................................... 110
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Hunter v Moss [1993] EWCA Civ11, [1994] 1 WLR 452, CA ......... 35 Hussain v Hussain [1986] 1 All ER 961, CA ................................... 246 IDC v Cooley, See Industrial Development Consultants Ltd v Cooley— Incorporated Council of Law Reporting for England and Wales v Attorney-General [1972] 1 Ch 73, CA ......................... 113 Independent Schools Council v Charity Commission [2011] UKUT 421 (TCC), [2012] 2 WLR 100 ..................... 118–19 Industrial Development Consultants Ltd v Cooley [1972] 1 WLR 443 ........................................................................... 139, 156 Inland Revenue Commissioners v Baddley [1955] AC 572, HL ........................................................................ 105, 106, 113, 117 Inland Revenue Commissioners v Broadway Cottages [1955] Ch 20, CA .................................................................... 40, 42 Inland Revenue Commissioners v Educational Grants Association [1967] Ch 993, CA .................................................. 119 Inland Revenue Commissioners v Glasgow Police Athletic Association [1953] AC 380, HL .................................. 112 Inland Revenue Commissioners v McMullen [1981] AC 1 ..................................................................................... 110, 111 Inland Revenue Commissioners v Yorkshire Agricultural Society [1928] 1 KB 611, CA ...................................................... 113 Inwards v Baker [1965] 2 QB 29, CA ................................................. 71 Ives Investment Ltd v High (1967), See E R Ives Investment Ltd v High— Jackson, Re (1882) 21 Ch D 786 ...................................................... 203 James, Re [1935] 1 Ch 449 .................................................................. 65 James Roscoe (Bolton) Ltd v Winder [1915] 1 Ch 62 ..................... 236 Jenkins’ Will Trusts, Re [1966] Ch 249 ............................................ 123 Jennings v Rice [2002] EWCA Civ 159, [2003] 1 FCR 501, CA ...... 71 Johnson v Ball (1851) 5 De G & Sm 85 .......................................... 100 Jones v Badley (1868) LR 3 Ch App 362 ........................................... 92 Jones v Kernott [2011] UKSC 53, [2012] 1 AC 776, SC ................................................................................. 135, 138, 144 Jones v Lock (1865) 1 Ch App 25......................................... 5, 52–3, 64 Jones v Selby (1710) Prec Ch 300, (1710) 24 ER 143 ....................... 66 Joscelyne v Nissen [1970] 2 QB 86, CA ........................................... 255 Joseph Rowntree Memorial Trusts Housing Association Ltd v Attorney-General [1983] Ch 159 ............................... 109, 112 K (Deceased), Re [1985] Ch 180, CA ................................................141 Kane v Radley-Kane [1999] Ch 274 ................................................. 161 Keech v Sandford (1726) 25 ER 223 ................................ 138, 154, 162 Keen’s Estate, Re [1937] Ch 236, CA ........................................... 93, 95
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Kelly, Re [1932] IR 255 ................................................................. 74, 77 Kershaw v Micklethwaite [2010] EWHC 506 (Ch), [2011] WTLR 413 ........................................................................ 167 Kershaw’s Will Trust, Re (1868) LR 6 Eq 322 ................................. 197 King, Re [1923] 1 Ch 243 ................................................................. 110 Klug v Klug [1918] 2 Ch 67 ................................................ 15, 169, 170 Knight v Knight (1840) 3 Beav 148 ................................................... 27 Knocker v Youle [1986] 2 All ER 914, [1986] 1 WLR 934 ............................................................... 207–8, 210, 216 Koeppler’s Will Trust, Re [1986] Ch 423 ......................................... 110 Koettgen’s Will Trusts [1954] Ch 252 .............................................. 119 Kolb’s Will Trusts, Re [1962] Ch 531 ................................................. 37 Lambe v Eames (1871) 6 Ch App 597 ........................................ 28, 29 Lazard Brothers & Co Ltd v Fairfield Property Co (Mayfair) Ltd (1977) 121 SJ 793 ................................................. 244 Leahy v AG for New South Wales [1959] AC 457, PC .................... 85 Learoyd v Whitely [1887] UKHL 1, (1887) 12 App Cas 727, HL ......................................................................... 182, 198 Lemann’s Trust, Re (1883) 22 Ch D 633 ................................. 166, 167 Lepton’s Charity, Re [1972] Ch 276 ................................................. 125 Letterstedt v Broers [1884] UKPC 1, (1884) 9 App Cas 371, PC ................................................................................................. 167 Lewis, Re [1954] 3 All ER 257 .......................................................... 112 Lillingston, Re [1952] 2 All ER 184 .................................................... 67 Lipinski’s Will Trusts, Re [1976] Ch 235 ...................................... 78, 87 Lipkin Gorman v Karpnale Ltd [1991] 2 AC 548, HL ................. 226–7 Lister & Co v Stubbs (1890) LR 45 Ch D 1, CA ............ 135, 136, 137 Llewellyn’s Settlement, Re (1942); Official Solicitor v Evans [1921] 2 Ch 281 Ch D ................................................................... 24 Lloyds Bank plc v Rosset [1991] 1 AC 107, HL ............................... 138 Locabail International Finance Ltd v Agroexport [1986] 1 All ER 901, [1986] 1 WLR 657, CA ................................ 241, 248 Londonderry’s Settlement, Re [1965] Ch 918, CA .................. 170, 176 Lord Advocate v McCourt (1893) 20 R 488....................................... 67 Lowther v Bentinck (1874) LR 19 Eq 166 ....................................... 197 Lysaght, Re [1966] Ch 191 ................................................................ 121 Macadam, Re [1946] Ch 73 ...................................................... 139, 160 Mackenzie v Coulson (1869) LR 8 Eq 368 ...................................... 254 Maddock, Re [1902] 2 Ch 220, CA .................................................... 98 Manisty’s Settlement Trusts, Re [1974] Ch 17 ............................. 48, 49 Manoussakis v Greece [1996] ECHR 41, (1996) 23 EHRR 387 ...... 105 Marquess of Abergavenny v Ram [1981] 2 All ER 643, [1981] 1 WLR 843 ........................................................................ 196
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Marquess of Londonderry Settlement Trusts, Re [1965] Ch 918, CA .................................................................................... 15 Marriette, Re [1915] 2 Ch 284 .......................................................... 110 Marsden v Regan [1954] 1 All ER 475, [1954] 1 WLR 423, CA ..... 223 Mascall v Mascall (1985) 49 P & CR 119 ......................................... 64 McGovern v Attorney-General [1982] Ch 321 ............... 109, 111, 115 McPhail v Doulton, Re Baden’s Trusts (No 1) [1969] 2 Ch 388, CA .................................................................................................. 42 McPhail v Doulton, Re Baden’s Trusts (No 1) [1970] UKHL 1, [1971] AC 424, HL ........................................ 42–3, 47, 48 Mettoy Pension Trustees v Evans [1990] 1 WLR 1587 ............ 168, 172 Midland Bank plc v Wyatt [1995] 1 FLR 696 .................................... 31 Miller v Jackson [1977] QB 966 ........................................................... 8 Mills, Re [1930] 1 Ch 654, CA ........................................................... 23 Milroy v Lord (1862) 4 De GF & J 264 ........................ 5, 52, 56, 63, 71 Molyneux v Fletcher [1898] 1 QB 648 ............................................. 197 Moncrieff’s Settlement Trusts, Re [1962] 3 All ER 838, [1962] 1 WLR 1344 .............................................................. 209, 211 Montagu’s Settlement Trusts, Re [1987] Ch 264, HL ...................... 228 Moore v M’Glynn [1894] 1 IR 74 ..................................................... 167 Morice v Bishop of Durham [1805] EWHC Ch J80, (1805) 32 ER 947 ..................................................................... 38, 73 Moss, Re [1949] 1 All ER 495 ........................................................... 112 Moss v Cooper (1861) 1 J & H 352 ................................................... 94 Murad v Al-Saraj [2005] EWCA Civ 959, [2005] All ER (D) 503, CA ................................................................................ 158, 159 Mussett v Bingle [1876] WN 170 ....................................................... 76 Mussoorie Bank Ltd v Raynor (1882) 7 App Cas 321 ........................ 27 Nant-y-glo & Blaina Ironworks Co v Grave (1879) 12 Ch D 738 ................................................................................. 220 National Anti-Vivisection Society v Inland Revenue Commissioners [1948] AC 31 ...................................................... 125 Nestle v National Westminster Bank plc (No 2) [1993] 1 WLR 1260, CA ......................................................................... 180 Neville v Wilson [1997] Ch 144, CA .......................... 19, 63, 141, 241 Neville Estates Ltd v Madden [1962] Ch 832 ............ 85, 86, 87, 88, 89 New, Re [1901] 2 Ch 534 .......................................................... 202, 203 Nichols v Inland Revenue Commissioners [1973] 3 All ER 632, [1973] STC 278 .............................................................................. 98 Niyazi’s Will Trusts, Re [1978] 1 WLR 910 ...................................... 109 Norris v Chambres (1861) 29 Beav 246, 3 De GF & J 583 ................. 6 Northern Development (Holdings) Ltd, Re (1978) (unreported) 6 October 1978 ......................................................................... 81, 84
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Nottage, Re [1895] 2 Ch 649 ............................................................ 110 Oatway, Re [1903] 2 Ch 356 ............................................................. 235 Oldham, Re [1925] Ch 75 ................................................................. 140 Oppenheim v Tobacco Securities [1951] AC 297, HL ......................................... 103, 104, 105, 116, 117, 119 Ottaway v Norman [1972] Ch 698 ................................... 93, 94, 95, 97 Oughtred v Inland Revenue Commissioners [1960] AC 206, HL ................................................................................ 62–3 Oxley v Hiscock [2004] EWCA Civ 546, [2005] Fam 211, CA ...... 135 Page One Records Ltd v Britton [1967] 3 All ER 822, [1968] 1 WLR 157 ........................................................................ 248 Palmer v Simonds (1854) 2 Drew 221 ............................................... 33 Parsons v Nasar [1990] 2 FLR 103, [1991] 23 HLR 1 ....................... 248 Partington, Re (1887) 57 LT 654 ..................................................... 222 Pascoe v Turner [1979] 2 All ER 945, [1979] 1 WLR 431, CA .................................................................................................. 71 Patel v Ali [1984] 1 All ER 978, [1985] Ch 283 ...................... 243, 244 Paul v Constance [1977] 1 All ER 195, [1977] 1 WLR 527, CA ........................................................................................ 30–1, 57 Pauling’s Settlement Trust (No 1), Re [1963] EWCA Civ 5, [1964] Ch 303, CA ........................... 171, 192, 197, 198, 224 Penn v Lord Baltimore (1750) 1 Ves Sen 444, 27 ER 1132 ................................................................................... 240 Pennington v Waine [2002] EWCA Civ 227, [2002] 1 WLR 2075, CA ................................................................. 68–9, 70 Perrins v Bellamy [1899] 1 Ch 797, CA ........................................... 224 Perry v Perry (1870) 18 WR 482 .......................................................197 Pettingall v Pettingall (1842) 11 LJ Ch 176 ...................................... 74 Phelps’ Settlement Trusts, Re (1885) 31 Ch D 351 ......................... 166 Pilkington v Inland Revenue Commissioners [1964] AC 612, HL ......................................................... 197, 201, 204, 213 Pinion, Re [1965] Ch 85, CA ..................................... 73, 109, 111, 115 Pirbright v Salwey [1896] WN86 ................................................. 74, 76 Pitt v Holt [2011] EWCA Civ 197, [2012] Ch 132, CA ............................................................................ 172–4, 175, 252 Polly Peck International plc (in administration) (No 2), Re [1998] 3 All ER 812, CA ........................................................ 143 Posner v Scott Lewis [1987] Ch 25 ................................................... 242 Potters-Ballotini Ltd v Weston-Baker [1977] RPC 202 ................... 247 Protheroe v Protheroe [1968] 1 All ER 1111, [1968] 1 WLR 519 ................................................................................... 155 Provident Financial Group plc v Hayward [1989] 3 All ER 298, [1989] IRLR 84, CA ..................................................................... 241
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TABLE OF CASES
Prudential Staff Pension Scheme, Re [2011] EWHC 960 (Ch), [2011] PLR 239 ............................................................................ 174 Pulvers (a firm) v Chan [2007] EWHC 2406, [2008] PNLR 9 ......................................................................................... 232 R v District Auditor, ex p West Yorkshire Metropolitan County Council [1986] RVR 24 .............................................. 48, 49 R v Ghosh [1982] EWCA Crim 2, [1982] QB 1053, CA ................ 231 Recher’s Will Trusts, Re [1972] Ch 526 ............................... 86, 89, 133 Record v Bell [1991] 4 All ER 471, [1991] 1 WLR 853 ................... 241 Redland Bricks Ltd v Morris [1970] AC 652, HL ........................ 251–2 Rees Will Trusts, Re [1950] Ch 204 ................................................. 100 Regal (Hastings) Ltd v Gulliver [1942] UKHL 1, [1942] 1 All ER 378, HL ................................................................. 158, 162 Remnant’s Settlement Trusts, Re [1970] Ch 560, [1970] 2 All ER 554 ......................................................................... 201, 214 Robinson, Re [1951] 1 Ch 198 .......................................................... 112 Roscoe v Winder, See James Roscoe (Bolton) Ltd v Winder— Rose, Re [1952] EWCA Civ 4, [1952] Ch 499, CA ............................................................................ 63–4, 68, 69, 70 Royal Brunei Airlines v Tan [1995] UKPC 4, [1995] 2 AC 378, PC........................................................ 139, 229, 230, 231 Royal Choral Society v IRC [1943] 2 All ER 101 ............................ 111 Royal College of Surgeons v National Provincial Bank [1952] AC 631 ......................................................................................... 109 Russell Cooke Trust Co v Prentis [2002] EWHC 2227 (Ch), [2002] 2 All ER 476 ..................................................................... 236 Rymer, Re [1895] 1 Ch 19.................................................................. 121 Sanders Will Trust, Re [1954] Ch 265 ...................................... 106, 109 Satterthwaite’s Will Trusts, Re [1966] EWCA Civ 3, [1966] 1 WLR 277 ........................................................................ 123 Saunders v Vautier [1841] EWHC Ch J82, (1841) 4 Beav 115 ........................... 14–16, 21, 22, 26, 60, 78, 165, 204, 205 Scarisbrick Will Trusts, Re [1951] Ch 622 ................................103, 117 Scott v The National Trust [1998] 2 All ER 705, CA ..................... 169 Scottish Burial Reform and Cremation Society v Glasgow City Corporation [1968] AC 138 ................................................ 113 Seale’s Marriage Settlement, Re [1961] Ch 574, [1961] 3 All ER 136 ................................................................. 202, 213, 215 Segelman, Re [1996] Ch 171 ..............................................................103 Sen v Headley [1991] Ch 425, CA ..................................................... 67 Sergeant v National Westminster Bank plc (1990) 61 P & CR 518, CA .......................................................................... 152
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Shaw, Re [1957] 1 All ER 745, [1957] 1WLR 729 ............... 73, 78, 109 Shelley v Shelley (1868) LR 6 Eq 540 ............................................... 29 Sheppard’s Settlement Trusts, Re [1888] WN 234 ........................... 166 Sick and Funeral Society of St John’s Sunday School, Golcar, Re [1973] Ch 51 ....................................................................... 88, 89 Sinclair Investments (UK) Ltd v Versailles Trade Finance Ltd [2011] EWCA Civ 347, [2012] Ch 453, CA ....................... 137, 143 Sky Petroleum Ltd v VIP Petroleum Ltd [1974] 1 All ER 954, [1974] 1 WLR 576 ................................................ 248 Smirthwaite’s Trust, Re (1871) LR 11 Eq 251 ................................. 166 Smith’s Will Trust, Re [1962] 1 WLR 763 ....................................... 110 Snowden, Re [1979] Ch 528 ............................................................... 93 Society of Lloyd’s v Robinson [1999] 1 WLR 756 ........................... 204 Speight v Gaunt (1883) 9 App Cas 1 .............................. 182, 198, 223 Spence, Re [1979] Ch 483 ................................................................ 122 Spence v Crawford [1959] 3 All ER 271 .......................................... 254 Sprang v Barnard (1789) 2 Bro CC 585 ....................................... 34, 93 Stack v Dowden [2007] UKHL 17, [2007] 2 AC 432 .................................................................. 5, 131, 138, 144 Starglade Properties Ltd v Nash [2010] EWCA Civ 1314, [2011] Lloyds Rep FC 102, CA .................................................... 232 Statek Corporation v Alford [2008] EWHC 32 (Ch), [2008] BCC 266 ........................................................................... 232 Stead, Re [1900] 1 Ch 237 .................................................................. 94 Steed’s Will Trusts, Re [1960] Ch 407, CA ...................................... 216 Steele’s Will Trust, Re [1948] Ch 603 ................................................ 29 Stewart, Re (1908) 2 Ch 251 .............................................................. 65 Strahan, Re (1856) 8 De GM & G 291, 44 ER 402 ......................... 219 Street v Mountford [1985] UKHL 4, [1985] AC 809............................ 5 Strong v Bird (1874) LR 18 Eq 315 ........................................ 64, 65, 68 Styles v Guy (1849) 19 LT Ch 185 .................................................. 219 Sudbrook Trading Estate Ltd v Eggleton [1983] 1 AC 444, HL ................................................................................................ 240 Suffert’s Settlement, Re [1961] Ch 1 ......................................... 210, 211 Sutton, Re (1885) 28 Ch D 464 ....................................................... 106 Swindle v Harrison [1997] EWCA Civ 1339, [1997] 4 All ER 705, CA ......................................................................... 221 T’s Settlement Trusts, Re [1964] Ch 158 .................................. 214, 217 Tamplin v James (1880) 15 Ch D 215, CA ..................................... 243 Tang Mang Sit v Capacious Investments Ltd [1996] AC 514, PC ......................................................................................... 149, 220 Target Holdings Ltd v Redferns (a firm) [1996] AC 421, HL ................................................................................ 149, 220, 221
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Taylor Fashions Ltd v Liverpool Victoria Trustees Co Ltd [1982] QB 133 ................................................................................ 70 T Choithram International SA v Pagarani [2001] 2 All ER 492, [2001] 1 WLR 1, PC ............................... 37, 67–8, 69 Tempest v Lord Camoys (1882) 21 Ch D 571 ................................. 169 Third Chandris Shipping Corporation v Unimarine SA [1979] QB 645, CA ...................................................................... 249 Thompson, Re [1934] Ch 342 ....................................................... 75, 77 Thompson v Mechan [1958] OR 357 ................................................. 66 Thorner v Major [2009] UKHL 18, [2009] 1 WLR 776, HL ............. 70 Thornton v Howe (1862) 31 Beav 14 .............................................. 110 Tilley’s Will Trust, Re [1967] Ch 1179 .................................... 235, 237 Tinker’s Settlement Trusts, Re [(1960] 3 All ER 85, [1960] 1 WLR 1011 ..................................................................................213 Townley v Sherborne (1643) J Bridge 35 ......................................... 219 Trotter, Re (1889) 1 Ch 764.............................................................. 153 Trustees of FC Jones & Son (a firm) v Jones) [1997] Ch 159, CA .................................................................................. 233 Tuck’s Settlement Trusts, Re [1977] EWCA Civ 11, [1978] Ch 49, CA ...................................................................................... 48 Turner, Re [1897] 1 Ch 536 .............................................................. 224 Turner v Turner [1984] Ch 100 ........................................................ 171 Turner’s Will Trust, Re [1937] Ch 15 ....................................... 189, 192 Twinsectra Ltd v Yardley [1999] Lloyds Rep Bank 438, CA ............. 84 Twinsectra Ltd v Yardley [2002] UKHL 12, [2002] 2 AC 164, HL .......................... 19, 79, 81, 82–3, 84, 85, 147, 230–1 Tyler’s Trust Funds, Re [1967] 3 All ER 389, [1967] 1 WLR 1269 ................................................................................... 98 Tyrell v Bank of London (1862) 10 HL Cas 26, (1862) 11 ER 934, HL .............................................................................. 137 United Scientific Holdings Ltd v Burnley Borough Council [1978] AC 904, HL ...................................................................... 243 Universal Tankships Inc of Monrovia v International Transport Workers Federation, The Universe Sentinel [1983] 1 AC 366, HL ................................................................................ 86 Vandervell v Inland Revenue Commissioners [1967] 2 AC 291, HL ...................................................... 18, 60–1, 120, 132 Vandervell’s Trusts, Re (No 2) [1974] Ch 269 ..................... 127–8, 132 Varsani v Jesani [1998] 3 All ER 273, [1999] Ch 219, CA ................................................................................ 105, 110, 125 Vernon’s Will Trusts, Re [1972] Ch 300 .................................. 121, 122 Verrall v Great Yarmouth Borough Council [1981] QB 202, CA ................................................................................................ 241
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Vinogradoff, Re [1935] WN 68 ......................................................... 129 Walker v Walker [2007] EWHC 597, [2010] WTLR 1617 ............. 167 Wallgrave v Tebbs (1855) 2 K & J 313, 25 LJ Ch 241 ...................... 95 Walsh v Lonsdale (1882) 21 Ch D 9 .................................................... 5 Walton’s Settlement, Re [1922] 2 Ch 509 ........................................ 252 Watkin v Watson-Smith (1986) The Times, 3 July ................. 243, 244 Webster v Cecil (1861) 30 Beav 62, 54 ER 812 ...................... 243, 244 Wedgwood, Re [1915] 1 Ch 113, CA ............................................... 112 Weekes Settlement, Re [1897] 1 Ch 289............................................. 23 West Sussex Constabulary’s Widows, Children and Benevolent (1930) Fund Trusts, Re [1971] Ch 1 ..................... 88–9 Westdeutsche Landesbank Girozentrale v Islington London Borough Council [1996] UKHL 12, [1996] AC 669, HL ........................................................................ 141, 142 Weston’s Settlements, Re [1969] 1 Ch 223, CA ...................... 213, 215 Wheeler, Re [1896] 1 Ch 315 ............................................................ 164 White’s Will Trust, Re [1951] 1 All ER 528 .................................... 110 Wilkes v Allington [1931] 2 Ch 104 .................................................. 66 Wilkins v Hogg (1861) 31 LJ Ch 41 ................................................ 219 Williams v Barton [1927] 2 Ch 9 ...................................................... 160 Williams v Greatrex [1956] 3 All ER 705, [1957] 1 WLR 705 ................................................................................... 244 Wilson v Turner (1883) 22 Ch D 521 ............................................. 192 Windeatt’s Will Trust, Re [1969] 2 All ER 324, [1969] 1 WLR 692 ................................................................................... 215 Wokingham Fire Brigade Trusts, Re [1951] Ch 373 ......................... 124 Woodhams, Re [1981] 1 All ER 202, [1981] 1 WLR 493 ................. 121 Wragg, Re [1919] 2 Ch 58 ................................................................. 177 Wright, Re [1954] Ch 347 ................................................................ 124 Yeoman’s Row Management Ltd v Cobbe [2008] UKHL 55, [2008] 4 All ER 713, HL ................................................................ 70 Young, Re [1951] Ch 344 .................................................. 96–7, 98, 108 Zeital v Kaye [2010] EWCA Civ 159, [2010] BCLC 1, CA ........................................................................................... 69–70 Australia Consul Development Pty Ltd v DPC Estates Pty Ltd (1975) 132 CLR 373, HCA ..................................................................... 158 Hartigan Nominees Pty Ltd v Rydge [1992] 29 NSWLR 405, New South Wales CA .................................................................. 170 Queensland Mines Ltd v Hudson (1978) 18 ALR 1, PC ................. 159
Singapore Khoo Cheng Teow, Re [1932] Straits Sett LR 266 ............................. 76
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Canada LAC Minerals v International Corona Resources Ltd [1989] 2 SCR 574, (1989) 61 DLR (4th) 14, SC ................................... 144 Peso Silver Mines Ltd v Cropper [1966] SCR 673, (1966) 58 DLR (2d) 1, SC ........................................................... 158
Table of statutes and other legislation Statutes Bills of Exchange Act 1882 s 31 ................................................................................................. 56 Charities Act 1960 ........................................................................... 125 Charities Act 1993 ........................................................................... 107 Charities Act 2006 ........................... 102, 107, 113, 114, 116, 118, 126 Charities Act 2011 ........................... 102, 107, 116, 118, 124, 125, 126 s 1(1) ............................................................................................ 107 s 2(1) ............................................................................................ 107 s 3 ............................................................................................. 107–8 s 3(1)(a) ............................................................................... 108, 113 s 3(1)(b) ............................................................................... 108, 113 s 3(1)(c) ............................................................................... 108, 113 s 3(1)(d) ............................................................................... 108, 113 s 3(1)(e) ............................................................................... 108, 113 s 3(1)(f) ................................................................................ 108, 113 s 3(1)(g) ....................................................................... 108, 110, 113 s 3(1)(h) ............................................................................... 108, 113 s 3(1)(i) ................................................................................ 108, 113 s 3(1)(j) ................................................................................ 108, 113 s 3(1)(k) ............................................................................... 108, 113 s 3(1)(l) ................................................................................ 108, 113 s 3(1)(m) .............................................................................. 108, 113 s 3(2)(a) ....................................................................................... 110 s 3(2)(b) ....................................................................................... 110 s 3(2)(c) ....................................................................................... 111 s 3(2)(d) ....................................................................................... 111 s 3(2)(e) ....................................................................................... 112 s 3(4) ............................................................................................ 108 s 4 ......................................................................................... 107, 114 s 4(2) ............................................................................................ 114 s 4(3) ............................................................................................ 114 s 5 ......................................................................................... 113, 114 s 62 ............................................................................................... 124 s 62(1)(e)(iii) ............................................................................... 125 Cheques Act 1957 .............................................................................. 56
Contracts (Rights of Third Parties) Act 1999 s 1(5) ............................................................................................ 241 Copyright, Designs and Patents Act 1988 s 90(3) ............................................................................................ 55 Equality Act 2010 ............................................................................ 118 s 199 ............................................................................................. 129 Human Rights Act 1998 s 12(4) .......................................................................................... 247 Hunting Act 2004 ............................................................................... 75 Income and Corporation Tax Act 1988 s 505 ............................................................................................. 102 Inheritance Tax Act 1984 s 23 ............................................................................................... 102 Judicature Acts 1873–1875................................................................ 3, 4 Land Registration Act 2002 s 27 ................................................................................................. 55 s 116 ............................................................................................. 144 Law of Property Act 1925 s 1(1) ................................................................................................ 9 s 1(2) ................................................................................................ 9 s 2 ................................................................................................. 163 s 20 ............................................................................................... 163 s 52 ................................................................................................. 55 s 53(1)(b) ....................................... 31, 56, 57, 58–9, 69, 71, 97, 100 s 53(1)(c) ......................................................... 58–62, 69, 71, 81, 88 s 53(2) .............................................................................. 56, 62, 127 s 60(3) .................................................................................... 129–30 s 175 ............................................................................................. 192 Law of Property (Miscellaneous Provisions) Act 1989 s 2 ............................................................................................. 19, 63 Limitation Act 1980 ............................................................................. 7
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Cheques Act 1992 .............................................................................. 56 Civil Liability (Contribution) Act 1978 .................................. 222, 223 s 1 ................................................................................................. 222 s 2(1) ............................................................................................ 222 s 2(2) ............................................................................................ 222 Civil Procedure Act 1997 s 7 ................................................................................................. 249 Companies Act 2006 s 175 ............................................................................................. 160 s 740 ............................................................................................. 241 s 771 ............................................................................................... 55
TABLE OF STATUTES AND OTHER LEGISLATION
xxx
s 21 ................................................................................................... 7 s 21(3) .......................................................................................... 225 s 36 ................................................................................................... 7 s 36(1)(2) ..................................................................................... 243 Matrimonial Causes Act 1973 s 24(1)(c) ..................................................................................... 204 Mental Health Act 1983 .................................................................. 172 s 96 .............................................................................................. 204 Misrepresentation Act 1967 s 2(2) ............................................................................................ 254 Perpetuity and Accumulations Act 2009 s 18 ................................................................................................. 76 Provisions of Oxford 1258 ..................................................................... 2 Recreational Charities Act 1958 ...................................................... 113 Sale of Goods Act 1979 s 52 ............................................................................................... 241 Sale of Goods (Amendment) Act 1995 ............................................. 35 Senior Courts Act 1981 s 37(1) .......................................................................................... 245 s 50 ........................................................................................... 8, 240 Statute of Uses 1601 ......................................................................... 113 Preamble ............................................................................... 102, 107 Stock Transfer Act 1963 s 1 ................................................................................................... 55 Suicide Act 1961 ................................................................................ 66 Supreme Court Act 1981 ...................................................................... 8 Theft Act 1968 s 5(1) ............................................................................................ 223 Trade Union and Labour Relations (Consolidation) Act 1992 s 221(2) ........................................................................................ 247 s 236 ............................................................................................. 241 Trustee Act 1925 .............................................................................. 168 s 12 ............................................................................................... 198 s 14 ............................................................................................... 199 s 15(f) ........................................................................................... 199 s 16 ................................................................................................. 20 s 19 ............................................................................................... 199 s 23 ............................................................................................... 186 s 25 ............................................................................................... 186 s 31 ................................... 20, 25, 187, 189, 191, 193, 196, 197, 204 s 31(1) .......................................................................................... 192 s 31(1)(i)(a) and (b) .................................................................... 191 s 31(1)(ii) ............................................................................. 192, 193
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s 31(2) .......................................................................................... 193 s 31(2)(i) ...................................................................................... 194 s 31(3) .......................................................................................... 192 s 32 ......................................... 20, 173, 187, 189, 195, 196, 198, 204 s 33 ................................................................................. 17, 212, 253 s 34 ............................................................................................... 163 s 36 ....................................................................... 163, 165, 166, 168 s 36(1) .................................................................................. 164, 166 s 36(1)(a) ..................................................................................... 164 s 36(1)(b) ..................................................................................... 164 s 36(6) .......................................................................................... 164 s 36(8) .......................................................................................... 164 s 39 ............................................................................................... 168 s 40 ............................................................................................... 164 s 41 ....................................................................................... 165, 168 s 53 ............................................................................................... 204 s 57 ....................................................................................... 178, 204 s 61 ............................................................................... 223, 224, 225 s 62 ............................................................................................... 225 s 69 ......................................................................................... 25, 192 s 69(2) .......................................................................................... 196 Trustee Act 2000 .............................................. 153, 177, 178, 183, 185 s 1 ............................................................................. 174, 181–2, 201 s 3 ................................................................................................... 20 s 3(1) ............................................................................................ 178 s 4 ................................................................................................. 179 s 4(1) ............................................................................................ 180 s 4(2) ............................................................................................ 181 s 4(3)(a) ....................................................................................... 180 s 4(3)(b) ............................................................................... 180, 181 s 6 ................................................................................................. 179 s 6(1)(b) ....................................................................................... 180 s 8 ......................................................................................... 185, 188 s 9 ......................................................................................... 185, 186 s 11 ............................................................................................... 186 s 12(2) .......................................................................................... 187 s 12(3) .......................................................................................... 187 s 13 ............................................................................................... 188 s 15 ............................................................................................... 187 s 22 ....................................................................................... 187, 222 s 23 ....................................................................................... 187, 222 s 28(1) .......................................................................................... 153 s 28(2) .......................................................................................... 153
TABLE OF STATUTES AND OTHER LEGISLATION
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s 29(2) .......................................................................................... 153 Sch 1 ..................................................................... 186, 198, 199, 223 Sch 1, para 1 ................................................................................. 182 Sch 1, para 3 ................................................................................. 187 Sch 1, para 7 ......................................................................... 183, 225 Trustee Investments Act 1961 ......................................................... 178 Trusts of Land and Appointment of Trustees Act 1996 .................. 169 s 11 ............................................................................................... 188 s 19 ....................................................................... 165, 166, 167, 168 s 19(3) .......................................................................................... 169 Variation of Trusts Act 1958 ............................................ 205, 211, 218 s 1(1)(a)–(d) ................................................................................ 205 s 1(1)(a) ....................................................................... 206, 211, 217 s 1(1)(b) ................................................. 206, 207, 208–10, 211, 217 s 1(1)(c) ....................................................................... 206, 211, 217 s 1(1)(d) ............................................................................... 206, 217 Wills Act 1837 .................................................................................... 97 s 9 ........................................................................... 54, 55, 57, 96, 99 s 15 ................................................................................... 96, 98, 153
Statutory Instruments Civil Procedure Rules 1998, SI 1998/3132 ........................................... 2 r 25 ............................................................................................... 249 r 25(1)(f) ...................................................................................... 249
European Legislation European Convention on the Protection of Human Rights and Fundamental Freedoms 1950 ................................................................ 250
Chapter 1 Equity and trusts – an overview 1.1 Equity: an introduction Equity is the body of rules that grew up alongside the common law, eventually becoming the Court of Chancery. s It is said to s ‘fill in the gaps in the common law’ and to mitigate the ‘rigour’ of the common law; s be based on ‘conscience’ (Earl of Oxford’s Case (1615)). s Equity has in effect ‘stepped in’ s when the common law has not provided a remedy; or s where common law rules have been or are being used to justify conduct from a party with the legal title to property to engage in conduct that is unconscionable. Workpoint Consider what remedies you would want in the following situations and then decide whether these are available at law (compare the table in 1.3.2): s Trespassers are camping on your land. s You are buying a house and after exchange of contract your seller refuses to complete. s The Land Registry has failed to register your valid legal easement. s You have bought a car that is significantly faulty. s You have invented an energy-saving device but a rival company is using your designs to create a similar device. s Your trustees have used trust money to buy a holiday home for themselves. s Your trustees have used trust money to buy shares that have generated significant dividends.
EQUITY AND TRUSTS – AN OVERVIEW
2
1.2 Origins of equity (and trusts) 1.2.1 Historical development of equity s Pre-1066: s Local courts applied local customs. s The country was divided up into counties with their own laws and customs. s 1066–1485: s From the Norman Conquest in 1066 onwards common law began to develop where a system of law was imposed on the entire country. s This involved a central system of government with the king at its head. s 1485–: s Equity developed from the Tudor period onwards through to the Court of Chancery.
1.2.2 Problems with the common law s Rigidity of the writ system: s An action at common law had to be commenced by writ (now replaced by a Claim Form under the Civil Procedure Rules 1998) Each action had its own specific type of writ. s The Provisions of Oxford 1258: Parliament in 1258 issued provisions stating that no new writs would be approved without the permission of the king in Council. This effectively meant that if a new cause of action arose then no claim could be made in the common law courts as it would have required a new type of writ. s Complexity of procedures: s Most cases before the common law courts dealt with land where parties and witnesses were often not present in person. s The procedures involved were not suited to deal with personal attendance. s Limited remedies: s Remedies at common law were generally limited to damages in money.
1.2.3 The development of equity s Litigants appealed directly to the monarch for a remedy that was not available at common law.
s Eventually the monarch passed the litigants to the Lord Chancellor who was a clergyman.
s The Court of Chancery would give ‘conscience-based’ decisions in areas where the common law does not provide (but only in specific circumstances!).
1.2.4 Problems with equity s Uncertainty: s ‘Equity varies with the length of the Chancellor’s foot’ (John Seldon, Table Talk (1689)). s As equity is based on ‘conscience’, each new Lord Chancellor that is appointed will have a different conscience from the previous Lord Chancellors. s Hence a decision on exactly the same facts by a former Lord Chancellor will not necessarily be followed by the new Lord Chancellor. s Just as their feet size differ, so do their respective consciences.
1.2.5 Resolution to the problem? s Equitable principles (the ‘maxims of equity’) were established to give certainty. s The doctrine of precedent also applied to previous decisions in equity (Gee v Pritchard (1818)). s A litigant who wanted a legal and an equitable remedy would have to apply to both the common law courts and the equity court, or alternatively might have applied to the wrong court and had the case dismissed, so: s The Judicature Acts 1873–1875 fused the administrative systems of law and equity together. s It did not fuse law and equity together: the two are still separate but run ‘side by side’. s ‘The two streams have met and still run in the same channel, but their waters do not mix’ (F.W. Maitland, Equity, 2nd edn (Cambridge University Press, 1936)). s All the common law courts and the Court of Chancery could now apply all remedies, both legal and equitable.
1.2 ORIGINS OF EQUITY (AND TRUSTS)
s Eventually this led to the establishment of a separate court – the Court of Chancery.
3
EQUITY AND TRUSTS – AN OVERVIEW
4
s Where there is a conflict between law and equity then equity prevails (see next section for an example of this).
Checkpoint – equity Item on checklist:
Done!
I understand the defects in the common law. I understand how equity developed and why. I understand the problems that equity had. I understand that the Judicature Acts 1873–1875 fused the administrative systems.
1.3 The contributions of equity Equity
Maxims
Remedies
Rights
1.3.1 The maxims Equity has developed a number of maxims under which it operates. These maxims are more in the nature of principles rather than rigid rules and have exceptions; sometimes conflicts or inconsistencies occur with each maxim. ‘He who comes to Equity must come with “clean hands” ’
s The person seeking an equitable remedy must have behaved to a standard consistent with the remedy that he/she is seeking. It is therefore relevant to conduct before the court action (Argyll v Argyll (1967); Cornish v Brook Green Laundry (1959)).
‘Equity will not assist a volunteer’; ‘Equity will not perfect an imperfect gift’
5
These two principles are very similar:
s For the second maxim, where the proper legal formalities have not been followed equity will not step in to make the gift valid (see Jones v Lock (1865) and Milroy v Lord (1862) in Chapter 4). s Similar principles apply regarding gifts in void wills (known as ‘testamentary gifts’). ‘Equity follows the Law’
s Generally, where there is a legal interest or principle there will be a corresponding equitable interest or principle (see Stack v Dowden (2007) in Chapter 8). ‘Where there is a conflict between Law and Equity, Equity prevails’
s In Bull v Bull (1955) a mother and son purchased a house together, the legal title being held in the son’s name only. The law therefore only recognises the son’s interest. s However, due to the contribution to the purchase price, equity recognised the mother’s beneficial interest. s Hence a conflict between law and equity: the maxim is that equity prevails, therefore the son was unable to evict the mother from the house. ‘Equity looks on as done that which ought to be done’
s In some instances equity will award a decree of specific performance to force a party to a contract to comply with their legal obligations. s In other circumstances the maxim means that equity will regard the legal obligation as having been undertaken to allow legal remedies to be used (Walsh v Lonsdale (1882)). ‘Equity looks at the intent not the form’
s This means that equity will look at the substance of an agreement to see what the parties really intended. It will not rely on the ‘label’ or name given to the relationship by the parties (Street v Mountford (1985)).
1.3 THE CONTRIBUTIONS OF EQUITY
s The first principle means that equity will not award a remedy where the claimant has not given any consideration. It is similar to the law of contract – there must be consideration for a valid contract (see Chapter 4).
EQUITY AND TRUSTS – AN OVERVIEW
6
‘Where the equities are equal the law prevails’
s Here ‘equity’ or ‘equities’ means not just a right in equity but any sort of right, legal or otherwise. s It usually focuses on the state of mind of the holder of the right. If someone with a claim in equity to an asset has an innocent (bona fide) state of mind and someone with a legal claim to the same asset also has a bona fide state of mind, the ‘equities’ are equal and the person with the legal interest prevails. s This appears to conflict with the earlier maxim of ‘where there is a conflict between law and equity, equity prevails’. Workpoint T is a trustee of trust property on behalf of B; the trust property is an ancient artefact. T wrongfully sells the artefact to X, who pays full market value and has no knowledge that it is trust property. Consider who has the right to the artefact.
Trustee (T)
Sells artefact
Third party X (bona fide purchaser)
Beneficiary (B)
( "!&!! est in the artefact. ( "!&! $ ! !!. ( ! ! "! " ( ! !%!$ # $ ! !! ( ! $ "!& ' " $! "! notice that it is trust property.)
‘Equity acts in Personam’
s Equitable remedies generally operate against the person rather than the property itself. s At common law the courts will not consider claims of title to land outside the jurisdiction (Norris v Chambres (1861)). s However, the in personam nature of equity means that specific performance can be granted where the defendant is within the jurisdiction and the law of the country where the land is situated does not prevent the defendant from being forced to comply (Re Courtney ex parte Pollard (1840)).
‘Delay defeats Equity’ (see Chapter 15)
s If there is no limitation, the ‘doctrine of laches’ applies to time-bar claims in equity where there has been excessive delay. s Limitation Act 1980 s 21 states in part that no time limit shall apply to a beneficiary bringing an action against a trustee for fraud or to recover trust property or its proceeds as a result of fraud by the trustee. s Hence the doctrine of laches can apply in this context. s Any significant delay by the beneficiary can be evidence of acquiescence – that the beneficiary has accepted or agreed to the breach. This will always be a matter of fact and degree in each case. s The length of the delay is important as is the nature of acts done during the delay period. s As equity is based on fairness and unconscionability the delay and surrounding circumstances must be such as to make it unconscionable to permit the claimant to bring his claim. s The court can by analogy with the time limit for a corresponding common law claim regard the claim as time barred. s Authority is given to apply such analogy under the Limitation Act 1980 s 36: for example, claims against a fraudulent fiduciary (common law period for fraud of six years applied – see Coulthard v Disco Mix Club Ltd (2000)).
Research Point Consider what these other maxims mean: s Where the equities are equal the first in time prevails. s Equity will not allow a statute to be used as an instrument of fraud. s Equity imputes an intention to fulfil an obligation. s He who seeks equity must do equity. s Equity will not suffer a wrong without a remedy.
7
1.3 THE CONTRIBUTIONS OF EQUITY
s Normally the Limitation Act 1980 applies to time-bar actions brought at law or in equity if commenced outside the limitation period.
EQUITY AND TRUSTS – AN OVERVIEW
8
1.3.2 Equitable remedies Common law
Equity
Damages
Compensation
Common law tracing
Equitable tracing
Money had and received
Specific performance Rectification Injunction Rescission Implied trust Subrogation Account Lien Search order Freezing order
s As is shown above legal remedies are very limited. s Equitable remedies are only discretionary; they do not have to be awarded even if the claimant wins his/her case. s So in Cornish v Brook Green Laundry (1959) the tenant had not done his repairs and hence the court refused to grant specific performance even though the tenant had the right of renewal under the lease. s In Miller v Jackson (1977) cricket balls from the local cricket club were constantly being hit into the claimant’s garden. However, due to the social usefulness of the club an injunction to stop the game altogether was refused, though damages (being a legal remedy and hence ‘as of right’) in trespass were awarded. Note that the Senior Courts Act 1981 s 50 (formerly the Supreme Court Act 1981) permits damages to be awarded in lieu of (‘instead of ’) the injunction or specific performance.
1.3.3 Equitable rights in land
s However, since the Law of Property Act 1925 s 1(1) and (2) there are now only two legal estates (fee simple absolute in possession and the terms of years absolute) and four legal interests (easement, mortgage, right of re-entry, rentcharge). s All other interests only take effect in equity (such as the life interest estate, a restrictive covenant and an option to purchase).
1.3.4 The trust The trust is probably the most important creation of equity and will be considered for the remainder of this book except Chapter 15.
1.3.4.1 The origins of the trust During the Crusades many landowners, who were often knights, went abroad to fight. They were said to be possessed of the seisin (their right to possess and occupy) regarding the land. Before they went abroad they would transfer the seisin to a trustworthy person who they hoped: a) would re-transfer the seisin upon their return from the crusades; or b) if they died in battle, would continue to hold the land until they transferred it to the descendant of the deceased. The problem was that in effect the person with the seisin was the owner of the land and other individuals, including the original holder of the seisin, had no rights to the land; hence if the holder of the property proved untrustworthy there was little at law that could be done. s However, with the development of equity this would act on ‘conscience’. It would be inequitable or unconscionable to permit the new holder to retain their rights regardless of those of the original transferor or his descendants. s So equity recognised the original transferor’s rights and compelled the transferee to hold the property for the original transferor. Hence the beginning of the essential nature of the trust – the split in the ownership of the legal and beneficial titles to the property.
1.3 THE CONTRIBUTIONS OF EQUITY
s As stated earlier, equity follows the law and hence for every legal estate or interest there is also a corresponding equitable estate or interest.
9
EQUITY AND TRUSTS – AN OVERVIEW
10
s Also developed were the legal title holder’s (or trustee’s) responsibilities towards the beneficiaries and towards the trust property. Equity
Maxims
Remedies
Rights in land
The trust
Checkpoint – equitable maxims Item on checklist: I understand the equitable maxims. I can explain how these apply in my own words. I can identify apparent inconsistencies and contradictions in the maxims. I can identify the remedies available in equity. I understand that equity has created a substantial number of rights in land. I understand how the trust developed. I have an outline understanding of the basics surrounding the trust.
Potential exam questions 1) Critically evaluate why and how equity developed. 2) Explain and discuss the following equitable maxims: s %QUITYWILLNOTASSISTAVOLUNTEER s 7HERETHEEQUITIESAREEQUALTHELAWPREVAILS s $ELAYDEFEATSEQUITY s %QUITYLOOKSATTHEINTENTNOTTHEFORM
Done!
Chapter 2 The trust and other concepts This chapter will focus in more detail on the trust itself and how the trust compares with other concepts.
2.1 Express trusts Express trusts tend to be divided into the fixed trust and the discretionary trust; however, there is a hybrid category called the ‘protective trust’.
2.1.1 Fixed trusts It is the share that is fixed. Each beneficiary has an identifiable ‘fixed’ share and the trustees have no discretion to alter this share. Workpoint Consider the following gifts: s ‘£100,000 on trust to be divided equally between my children.’ s ‘£10,000 on trust to each of my brothers contingent on them reaching age 25.’ s ‘£1 million on trust to my children.’ Are the above gifts held on a fixed trust?
s The first gift is a fixed trust as it is to be divided equally. If it is now in operation the shares are said to be vested; they are complete as the children need not do anything or fulfil an obligation or condition. s The second gift is a fixed trust as it is to ‘each of my brothers’. However, there is a condition (known as a contingency) attached to the gift. The gift will not be complete or vested in each individual brother until that brother reaches the age of 25.
THE TRUST AND OTHER CONCEPTS
12
s With the third gift the equitable maxim ‘equity is equality’ applies. If there are no words of discretion as to how the fund is to be shared then equal division is required. The third gift is therefore a fixed trust.
Key Point A gift on trust will always be a fixed trust unless there are unequivocal words allowing the trustees discretion as to how the fund is distributed.
2.1.1.1 Beneficiaries under a fixed trust s have an identifiable share (vested or contingent); s are owed fiduciary duties by the trustees (see Chapter 9); s can compel the trustees to distribute their share to them providing any conditions or contingencies have been fulfilled.
2.1.1.2 Bankruptcy of the beneficiary – the court appoints a Trustee in Bankruptcy who s holds all the assets of the bankrupt including any vested interests under a fixed trust; s now in effect ‘stands in the beneficiary’s shoes’; s can now distribute these assets to the bankrupt’s creditors.
Checkpoint – fixed trusts Item on checklist: I understand that private trusts are generally divided into fixed and discretionary trusts. I understand that with a fixed trust it is the beneficiary’s share that is fixed. I understand that with a fixed trust the beneficiary has an identifiable share in the trust fund. I understand that the beneficiaries can generally compel the trustees to distribute their share to them, provided their share is vested and no other conditions have to be fulfilled. I understand the term ‘contingency’. I understand that where a beneficiary under a fixed trust goes bankrupt the trustee in bankruptcy can claim that beneficiary’s share if it is vested.
Done!
2.1.2 Discretionary trusts s have discretion to determine which beneficiaries are to benefit; s are not obligated to benefit every beneficiary. The beneficiaries have no right to the income from the trust nor to the capital sum; s cannot just ‘sit there’ and do nothing: the discretion must be exercised!
Reflection Point You want to make a discretionary trust for your family. s Consider whom you would choose as your trustees for the trust and why. s Can you see any disadvantages from having family members as trustees? s Consider how a discretionary trust might cause family disharmony.
Workpoint Consider the following clauses: s ‘Residue of my estate on trust for my children as my trustees shall in their absolute discretion decide.’ s ‘£100,000 on trust to any or all members of the St Albans Tennis Club.’ Are they both discretionary trusts?
s The first clause uses express words of discretion. s However, the second clause is less clear and does not contain obvious words of discretion. However, the words ‘to any’ create discretion and make the trust discretionary. Without ‘to any’ it would have been a fixed trust.
2.1.2.1 The interest of a beneficiary under a discretionary trust Key Point Individual beneficiaries in a discretionary trust do not have an identifiable beneficial interest until an advance is made in their favour.
2.1 EXPRESS TRUSTS
Trustees
13
THE TRUST AND OTHER CONCEPTS
14
The fact that the beneficiary has no identifiable interest can have a protective effect on the trust fund if the beneficiary goes bankrupt: s ‘£100,000 on trust to X, Y and Z in such amounts as the trustees in their discretion think fit’; s X goes bankrupt. s The trustee in bankruptcy/creditors cannot get hold of X’s purported share because X has no identifiable share until the trustees exercise their discretion in X’s favour.
2.1.2.2 The discretionary trust and the rule in Saunders v Vautier (1841) s Individually the beneficiaries have no identifiable share; collectively the beneficiaries can bring an end to the trust under the Rule in Saunders v Vautier (1841). s Under this rule, providing all the beneficiaries s are adults (18 years or over); and s have full mental capacity; and s are collectively entitled to the trust property they can then bring the trust to an end and have the shares distributed to them equally. Clearly this can work easily where there are no contingencies: ‘£1 million to trustees on trust to any or all of my children.’
If all the children are over 18, of sound mind and as the trust shows they are collectively entitled to the property, they can terminate under Saunders v Vautier (1841). It is more difficult where there are third parties outside the family sphere: ‘£1 million to trustees on trust to any or all of my children for life, remainder to the RSPCA for its charitable purposes.’
To terminate under Saunders v Vautier not only must all the children be over 18 and of sound mind but the RSPCA being a beneficiary must also consent to the termination. Complications can arise where there are contingencies: ‘£1 million to trustees on trust to any or all of my children contingent on them reaching age 25.’
s If all the children have reached age 25 their interests are now all vested and hence can terminate under Saunders v Vautier.
But: ‘£1 million to trustees to any or all of my two sons, Jake and David, contingent on them reaching age 25; if either should die below age 25 their share shall accrue to the survivor.’
s If Jake is 26 and David is 20 they can terminate under Saunders v Vautier. s This is because if David dies below age 25 his share automatically goes to Jake (whose interest is now vested being over 25). s Therefore Jake and David are collectively entitled to the fund because one of them now has a vested interest even though David has not yet reached the contingency. s If Jake dies it has no bearing on the trust as his interest is already vested and will pass under his will or intestacy; Jake’s beneficiary and David can still terminate under Saunders v Vautier.
2.1.2.3 Other rights of beneficiaries under a discretionary trust Beneficiaries under a discretionary trust have a right to s be considered for a distribution; s have the property managed according to the instrument that created the trust; s see ‘trust documents’; but no general right to see documents relating to discretion (Re Marquess of Londonderry Settlement Trusts (1964)); There is no general obligation on trustees to give reasons as to why they have acted or refused to act (Klug v Klug (1918)).
2.1 EXPRESS TRUSTS
s If, however, one of the children is, say, only 23, his interest is still contingent and there is no stipulation as to what would happen to his share should he die below age 25 – it would thus have to result back to the estate. So they are not yet ‘collectively entitled’.
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THE TRUST AND OTHER CONCEPTS
16
Checkpoint – discretionary trusts Item on checklist:
Done!
I understand that trustees have discretion as to whom to distribute the income and/or the capital but they must exercise their discretion. I understand that beneficiaries have no identifiable share but can terminate under Saunders v Vautier. I understand that if a beneficiary goes bankrupt the trustee in bankruptcy cannot receive that beneficiary’s income or capital from the trust. I understand that the trustees must administer the trust according to the trust instrument. I understand that beneficiaries have a right to be considered for distribution. I understand that beneficiaries have a right to see ‘trust documents’ except those relating to the exercise of discretion.
2.1.3 The protective trust It is important to understand the distinction between income and capital. The capital is the trust property itself, whereas the income is the interest that the capital sum generates. s £1m to trustees on trust for X and Y – the capital is the £1m; the interest generated is income. s The protective trust only protects income, not the capital sum. The protective trust is a hybrid between a fixed and a discretionary trust. s With a fixed trust the shares are fixed and if no contingencies the shares are also vested. The beneficiary will generally have a right to the income. s If that beneficiary goes bankrupt, a trustee in bankruptcy now has a right to the capital sum and the income of the bankrupt if the interest is vested.
This problem is avoided with the discretionary trust:
s trustee in bankruptcy cannot hold either the capital or the income; s but the beneficiary has no right to the capital or income and might never see any of the funds. So, is there a way of granting the beneficiary the right to have income but then protecting the income should he/she go bankrupt? Enter the protective trust.
2.1.3.1 The protective trust works as follows s It commences as a fixed trust in favour of A, then on A’s bankruptcy (or other similar event) it reverts to a discretionary trust automatically. A no longer has an identifiable share of the income and hence the trustee in bankruptcy cannot claim the income – it is protected. s The protective trust can be created either using express words to set out the full terms of the protection, or s Under the Trustee Act 1925 s 33 the use of the words ‘on protective trust’ suffices. The beneficiaries under the discretionary element are the principal beneficiary, his spouse and issue (children), or if no spouse and issue the next person entitled under the gift. s As the protective trust only protects income, the trust is usually created with the principal beneficiary only having a life interest (hence no right to capital). ‘£1 million to trustees on protective trust to my son David for life, remainder to my brother Tony.’
s David only has a right under a fixed trust to the income that is generated, not the capital sum. s If David goes bankrupt then the protective mechanism commences: s The income will now revert from being held on a fixed trust to a discretionary trust. s David no longer has any right to income and hence the trustee in bankruptcy cannot get the income. s The beneficiaries under the protective trust are David, his spouse and children. If no spouse or issue the other beneficiary will be Tony.
2.1 EXPRESS TRUSTS
s beneficiaries have no identifiable share either in the capital or the income;
17
THE TRUST AND OTHER CONCEPTS
18
Trustees
Trustees
Fixed trust
Discretionary trust
On David’s bankruptcy
David (fixed trust initially)
David, David’s spouse and children (or Tony if no spouse or issue)
s The protective element will last until David’s death and then the discretionary trust will end and Tony inherits the estate absolutely.
2.1.4 Bare trust s Trustees have little power – holding the legal title for the beneficiaries. s The trustees must obey the beneficiaries’ instructions. The beneficiaries are entitled to capital and income of the trust (see Vandervell v IRC (1967) and Grey v IRC (1960) in Chapter 4).
2.1.5 Other types of trust s Interest in possession trusts: s beneficiaries have a right to income from the trust. s Accumulation and maintenance trusts: s the trustees can either pay out the income to beneficiaries (maintenance) or add the income to the capital (accumulation). s Implied trusts: s created by operation of law and not by the express words (see Chapter 8).
Checkpoint – protective trusts Item on checklist:
Done!
I understand that the protective trust: s is a hybrid between the fixed and discretionary trusts s only protects the income not the capital s commences as a fixed trust in favour of the principal beneficiary. I understand that when an event such as bankruptcy of the principal beneficiary occurs then the income is held on a discretionary trust – for the principal beneficiary, his/her spouse and issue. I also understand that other types of private trusts exist.
2.2 The trust and other concepts 2.2.1 Trusts and contracts The distinctions: s A contract is based on agreement between two parties usually operating at arm’s length without fiduciary responsibilities. s A trust is based on the party’s relationship to the property; there is a split of the ownership. Trustees have fiduciary duties towards the beneficiaries (see Chapter 9). s The normal remedy for breach of contract is damages. The contract does not usually give the buyer beneficial ownership of the property to be purchased. s A trust – the beneficiaries already have the beneficial title to the property; the beneficiary can follow the trust property into the hands of the third party (Foskett v McKeown (2001)).
2.2.1.1 Overlap between trust and contract When property is part of a ‘bulk’ and is segregated: s Where property has been purchased but not yet delivered and is stacked in bulk with other property. s If the supplier goes into liquidation the buyer can only claim beneficial ownership of the undelivered property if it is segregated and identified (see Re Goldcorp Exchange Ltd (1995) in Chapter 3). Where a loan is made for a specific purpose: s If the specified purpose is unable to be carried out the funds belong to the lender on an implied trust (Twinsectra v Yardley (2002); Barclays Bank v Quistclose Investments (1970) – see Chapter 5). Where a specifically enforceable contract is created: s This usually refers to contracts for land and private shares (Law of Property (Miscellaneous Provisions) Act 1989 s 2; Neville v Wilson (1997)). The contract creates a constructive trust between the parties – the seller holds the property on trust for the buyer.
19
2.2 THE TRUST AND OTHER CONCEPTS
THE TRUST AND OTHER CONCEPTS COMPARED
THE TRUST AND OTHER CONCEPTS
20
2.2.2 Trusts and powers The main distinction is as follows: s A trust is mandatory. s A power is discretionary. A trust has to be administered; even with a discretionary trust the trustees must exercise their discretion to benefit one or more beneficiaries. However, a power is purely discretionary in substance and those holding the power at the most need only consider whether or not to exercise it (Re Hay’s Settlement Trusts (1981)).
2.2.2.1 Powers within a trust Trustees have a number of powers within the trust arrangement, which include: s how to invest (s 3 of the Trustee Act 2000); s sale of the trust property (s 16 of the Trustee Act 1925); s accumulate income; s power to make payments of income as maintenance (s 31 of the Trustee Act 1925); s power to make advances of capital sums (s 32 of the Trustee Act 1925).
2.2.2.2 Power to appoint (or power of appointment) This is the area that causes most difficulty. A power to appoint can be a transaction on its own: ‘£100,000 to X with power to appoint A, B, C.’
This means that X can give the £100,000 to A, B or C (note the similarity with the discretionary trust). The following are general principles concerning such a power of appointment: s A power of appointment is not a trust: s X is called the donee of the power; he is not a trustee and the power to appoint is known as a ‘mere power’; s A, B and C are the objects of the power; they are not beneficiaries.
s A, B and C cannot agree to terminate under Saunders v Vautier (1841) as it is not a trust. s A, B and C cannot compel X to exercise the power. s A power of appointment must be certain. There must be a clear intention to create a power, the subject matter and the objects must likewise be certain (Re Gulbenkian’s Settlement Trusts (1970)). Alternatively, a power of appointment can be attached to a trust: ‘£1 million to X on trust for Y and Z with power to appoint A, B, C to the class of beneficiaries.’
s The trustees have power to add A, B or C to the class of beneficiaries. s A, B and C are not beneficiaries; they are merely persons who might become beneficiaries. s X is a trustee, not due to being donee of the power but because he is already a trustee under the trust for which the power is attached. s X being a ‘fiduciary’ has a mere power to appoint but he still has fiduciary responsibilities. A, B and C cannot terminate the power under Saunders v Vautier as they are not beneficiaries nor are they collectively entitled to the property. As this is a mere power with the donee (X) being a fiduciary being, can the objects of the power compel the trustee to exercise it? Case: Re Hay’s Settlement Trusts (1982)
The only rights of the objects under a mere power where the donee is a fiduciary is that they can compel the fiduciary to periodically consider: s whether to exercise it or not. They cannot actually compel the trustees to actually exercise the power; s the range of objects of the power; s the appropriateness of individual appointments.
21
2.2 THE TRUST AND OTHER CONCEPTS
s If X fails to appoint A, B or C (in other words, give one of them the property), then: s fund returns to the donor on X’s death, or s to whomever is entitled if no appointment has been made.
THE TRUST AND OTHER CONCEPTS
22
Reflection Point Is there any merit in the objects of a fiduciary power bringing an action compelling trustees to consider whether or not to exercise the power?
s Where the donee is non-fiduciary there is not even a duty on the donees to even to consider its exercise! (Re Hay’s Settlement Trusts (1982).) Workpoint Consider the similarity between the power of appointment and the discretionary trust. s In both cases the beneficiaries/objects have no identifiable interest until the trustees or donees of the power exercise their discretion. What, however, are the differences between the two concepts?
Distinguishing trusts from powers It is not always easy to distinguish whether a gift is a discretionary trust or a power of appointment. Consider the consequences: s Beneficiaries under a discretionary trust can terminate the trust under Saunders v Vautier if they are all over 18, of sound mind and collectively entitled; s An object of a power of appointment has no such rights. s Trustees of a discretionary trust have a duty to exercise their discretion; s A donee of a power only at the most has to consider whether to exercise it. How to determine whether a gift is a discretionary trust or a power of appointment Consider the instrument creating the interest: s Does the gift create an imperative binding obligation (trust) s ‘on trust for’ s ‘to hold on behalf of ’; or s merely a discretion to exercise the right at all (power) s ‘with power to appoint’ s ‘to appoint’?
s Individual words alone should not be taken in isolation s The whole gift should be read to ascertain the donor’s true intentions (Re Hamilton (1895); Comiskey v Bowring-Hanbury (1905) – see Chapter 3). s Therefore individual words ‘trust’/‘power’/‘appoint’ might be indicative of a trust or a power but must not be viewed as per se conclusive (Re Weekes Settlement (1897)). The effect of gift in default of appointment The donor might insert a clause stating ‘if no appointment is made the gift shall go’ to a specified third party (a gift in default of appointment). ‘£100,000 on trust to X to hold for such of my children A, B and C.’
s This appears on its face to be a discretionary trust from the words used. Now add the following phrase: ‘£100,000 on trust to X for such of my children A, B or C. In default of appointment the gift shall go to my nephews.’
s A trust is mandatory; it has to be carried out. Even with a discretionary trust the trustees have a duty to exercise their discretion. s However, the presence of ‘in default of appointment’ suggests that X need not make any appointment; there is no binding obligation on him to do so. s According to Re Mills (1930): s A ‘gift in default of appointment’ means that the gift is not mandatory – therefore it is a power of appointment. s So, in the above example, A, B and C are mere objects of the power, they are not beneficiaries under a discretionary trust. s A gift in default of appointments makes the gift into a power of appointment. Distinguishing a failure of appointment from a mere substitutional gift (known as a failure of appointees (beneficiaries)) s If a beneficiary of a testamentary gift predeceases the donor the gift is lost and goes into residue.
23
2.2 THE TRUST AND OTHER CONCEPTS
Remember: do not confuse this with a discretionary trust – the discretion must be exercised.
THE TRUST AND OTHER CONCEPTS
24
s It is common to put substitutional gifts in wills so if the beneficiary predeceases the testator the gift does not go into the residue but goes to whomever the testator directs. This is not the same as a gift in default of appointment.
Workpoint ‘£1 million to trustees on behalf of my son David save that if David shall fail to survive me the aforesaid £1m shall go to the RSPCA for its charitable purposes.’ s The gift to the RSPCA is a substitutional gift which will take effect only if David predeceases his father. What effect might such a gift have on the construction of whether a gift is a discretionary trust or a power?
Note again the gift in default of appointment: ‘£100,000 on trust to X for such of my children A, B, C. In default of appointment the gift shall go to my nephews.’
s This creates a power of appointment; the presence of the default of appointment clause is stating that the trustee does not have to carry out the terms of the gift – hence it is only a power. But now consider the following: ‘£100,000 on trust to X for such of my children A, B, or C; however, if none of my children are living at my death the gift shall go to my nephews.’
s Here there is no failure of appointment; it is simply the fact that if there are no living beneficiaries, the fund shall go in substitution, to the nephews. The gift is not saying that the trustee need not carry out the terms of the trust. s Thus a mere substitution clause will not per se turn a trust into a power (Re Llewellyn (1942)).
25
Checkpoint – trust/power distinction Done!
I understand the distinction between a discretionary trust and a power of appointment. I understand that it is a question of construction as to whether it is a trust or a power. I understand that a gift in default of appointment means the gift is a power of appointment as this makes the requirement only discretionary not mandatory. I understand that a mere substitution clause does not per se change the trust into a power of appointment.
2.3 Trusts and functions: why do people make trusts? 2.3.1 Taxation s Funds can sometimes attract less tax if paid into trust. s However, the donor no longer has the beneficial ownership of the funds.
2.3.2 To control property within the family Trusts also have advantages in protecting the trust funds and keeping them within the family. s Discretionary trust s Gives trustees discretion as to whom to benefit. s They can decide not to assist a ‘spendthrift’ beneficiary or a beneficiary who will use the money on gambling or alcohol. s Accumulation and maintenance trust s Allows the trustees discretion to either accumulate the income, adding it to capital or to use it to maintain the beneficiaries. ‘£100,000 on trust to X and Y contingent on age 25.’ s
Trustees have power under Trustee Act 1925 s 31 to pay income for the maintenance, education or benefit of a minor beneficiary unless there is a contrary intention in the trust instrument. (Trustee Act 1925 s 69 – see Chapter 12.)
2.3 WHY DO PEOPLE MAKE TRUSTS?
Item on checklist:
THE TRUST AND OTHER CONCEPTS
26
Checkpoint – powers and trusts Item on checklist:
Done!
I understand why trusts are created.
Potential exam questions 1) Critically evaluate the distinction between: a) A trust and a contract. b) A trust and a power of appointment. 2) Explain the operation of the rule in Saunders v Vautier. 3) Discuss the operation of the protective trust and why such is used in English law. 4) Critically evaluate the differences between the fixed and discretionary trust explaining the position of a beneficiary under each type of trust.
Chapter 3 The three certainties 3.1 Introduction For a valid express trust a key requirement is to satisfy the three certainties (Knight v Knight (1840)): a) Certainty of intention – the donor must intend to create a trust. b) Certainty of subject matter – there must be identifiable property over which the trust can operate. c) Certainty of object – there must be identifiable human beneficiaries who can enforce the trust. These certainties are not mutually exclusive and can have some degree of overlap. A lack of certainty of subject matter is arguably evidence of a lack of certainty of intention (Mussoorie Bank Ltd v Raynor (1882)).
Three certainties
Certainty of intention
Certainty of subject matter
Certainty of object
3.2 Why are they so important? s Persons receiving a gift need to know if they own it absolutely or on trust for another. s The parties need to know what property is the subject of the trust. s Beneficiaries need to know their respective rights and interests. s Trustees need to know the beneficiaries and how to identify them.
THE THREE CERTAINTIES
28
3.3 Certainty of intention Key Point The essence of a trust is that ownership is split. The trustee has the legal title and the beneficiary the beneficial title. The wording to create the gift must therefore split the title or there is no trust.
Workpoint Tom leaves £1 million by will to David ‘in the hope that he will do what is right for Brian’. s Are these words sufficient to split the ownership? s Is Brian the beneficiary under the trust? Or, s Is David the absolute owner with Brian receiving nothing? Or, s Is David merely a trustee with all the obligations of trusteeship? A mere difference in wording can mean that Brian can be the beneficiary of £1 million on trust or that David can be the absolute owner of £1 million.
3.3.1 Determining intention s Mere expressions of desire, wish or hope were held to be sufficient to split the ownership (known as precatory words). s A change: A series of cases changed the law on certainty of intention. Now imperative wording is required for the ownership to be split. Cases: Re Hamilton (1895)
Precedent is to be given little weight. ‘You take the will you have to construe and see what it means, and if you come to the conclusion that no trust was intended you say so’ (Lindley LJ).
Lambe v Eames (1871)
The testator gave his estate to his widow ‘to be at her disposal in any way she may think best for the benefit of herself and her family’. Held The words ‘in any way she may think best’ were not sufficient to split the ownership; the wife received an absolute gift.
Case: The testator left his estate to his wife ‘in full confidence that she will do what is right as to the disposal thereof between my children’. Held The words ‘in full confidence’ do not create a trust and the purported trustee (the wife) obtains an absolute gift. Therefore precatory words do not per se create a trust.
3.3.2 Wording Key Point Do not focus on individual words alone. Remember it is the testator’s subjective intention that must be ascertained. This can only be determined by focusing on the entire gift, not just individual words.
s A gift might contain both precatory words and imperative words. Lindley LJ in Re Hamilton, above, said: ‘You take the will you have to construe and see what it means, and if you come to the conclusion that no trust was intended you say so.’ So look at the entire wording of the gift. s Do not take individual words in isolation. Sometimes the testator’s intention has been inferred from reference to earlier cases. s Re Hamilton above suggests that precedent should not be relied upon; rather, each case is different and should be judged on the wording of the particular gift. s This appears not to have been followed in Re Steele’s Will Trust (1948). The gift was identically drafted to a pre-Lambe v Eames case called Shelley v Shelley (1868), heard at the time when precatory words created a trust. Re Steele held that despite the precatory wording, the identical nature of the wording to that of Shelley v Shelley showed that the donor had the necessary intention to create a trust.
3.3.3 Conflict between precatory words and imperative words Where there is a conflict between precatory words and imperative words the whole wording must be considered to ascertain the testator’s intention.
3.3 CERTAINTY OF INTENTION
Re Adams and Kensington Vestry (1884)
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Case: Comiskey v BowringHanbury (1905)
A testator left property to his wife ‘in full confidence that she will make such use of it as I would myself and that at my death she will devise it to such one or more of the nieces . . . and in default of any disposition by her . . . I direct that all my estate acquired by her . . . shall at her death be divided among by nieces’. Held The court determined on looking at the entire gift the testator intended to create a trust for his nieces.
s Even using the word ‘trust’ is not conclusive of there being a trust present. s ‘£1 million to my wife Vera whom I trust will use this to benefit the children’ is very different from ‘£1 million to my wife Vera on trust to hold on behalf of my children’. s The above cases involved testamentary gifts. Here the courts will only look at the wording of the gift to ascertain the testator’s intention and not generally permit outside evidence to be admitted.
3.3.4 Inter vivos (lifetime gifts) The courts are more willing to look not just at the words used, but also the conduct of the parties in determining intention. Case: Paul v Constance (1977)
Mr Constance who was married but estranged from his wife formed a relationship with Miss Paul. He put some money from a compensation claim in a new account in the bank. He was intending to put this in the joint names of himself and Miss Paul but the bank manager dissuaded him on the grounds that they were not married. They put their joint bingo winnings into this account and when he took out money from the account they used it jointly. He kept saying to her ‘the money is just as much yours as mine’. Mr Constance then died and his estranged wife claimed the money in the account under the rules of intestacy.
Held Mr Constance held the account on trust for himself and Miss Paul. The words ‘as much yours as mine’ were sufficient to create a trust; however, evidentially the court will look at the conduct of the parties as to whether the intention was true and will consider third-party independent evidence (such as the bank manager). It is unlikely that the court would accept the word of the intended beneficiary without other evidence.
Even if imperative wording is present that does not mean there must always be a trust; especially if the intention of the purported donor or testator is clearly not to make one. Case: Midland Bank v Wyatt (1995)
A husband and wife executed an express declaration of trust of their home for the benefit of their children (under Law of Property Act 1925 s 53(1)(b)). The declaration was kept at the family home. On the husband getting into severe financial difficulties he tried to claim that the house was no longer his beneficially to avoid creditors seizing it. Held The declaration of trust was void. It was clearly a device used to try to avoid liability to creditors. The real intention of the husband and wife was to retain the beneficial title. So no trust had been created; the ownership had not been split and hence the bank could claim the house.
3.4 Trusts and powers An area that is very confusing to many students is distinguishing between an intention to create a trust and a power of appointment. Workpoint Please check the previous chapter on the trust/powers of appointment distinction.
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3.4 TRUSTS AND POWERS
Paul v Constance (1977) (continued)
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Checkpoint – certainty of intention Item on checklist:
Done!
I understand that the words used must split the ownership. I understand the key cases of Re Adams and Kensington Vestry and Comiskey v Bowring-Hanbury. I understand that words must not be taken in isolation, the whole gift must be construed. Where inter vivos trusts are created the court will look at the conduct of the parties as well as the words used.
The words used by the donor must be sufficient to split the ownership of the gift into the legal and beneficial titles
Precatory words showing a mere hope or desire are not sufficient
The words used must be imperative in nature
Unless the wording is identical to older cases that have not been over-ruled
Even with imperative wording there is no trust if the intention was a ‘sham’
Where the trust includes both precatory and imperative wording the whole gift needs to be read to ascertain the donor’s genuine intentions
If there is a failure of certainty of intention the purported trustee receives an outright gift
3.5 Certainty of subject matter
Workpoint Consider these gifts in the will of Tony: s My favourite car on trust to my son John (Tony has several cars that he frequently drives). s My house on trust to my cousin Frank (Tony owns several properties). s 10% of the wine in the suppliers’ warehouse to Arnold (the wine has not yet been delivered – how can it be identified?). Do you think they are valid?
s Possibly a failure of subject matter means the purported gift returns on resulting trust to the estate of the donor. s Alternatively, if there is no identifiable gift then there is nothing to go back and hence the purported subject matter simply remains in the estate of the donor – it never left.
3.5.1 The property left on trust must be certain at the time the trust comes into operation s It must be clear from the start of the trust what the subject matter is. s If property is left as an outright gift with a trust for whatever is left to go to a third party, s this will fail as it is impossible to know how much will be left when the trust comes into operation. Case: Palmer v Simonds (1854)
The testator left the ‘bulk of my residuary estate’ to the purported beneficiary. Held It was not possible to know what was meant by this phrase and hence the gift failed.
3.5 CERTAINTY OF SUBJECT MATTER
Any property real or personal can form the subject matter of a trust but it must be given in such a way that it can be identified.
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Case: Sprange v Barnard (1789)
Property was given to the donor’s husband for ‘his sole use’ (hence an outright gift) and ‘the remaining part of what is left that he does not want . . . to be divided between’ various individuals. Held The purported trust failed as it could not be ascertained at the time the trust came into operation how much would go to the purported beneficiaries after the husband had finished with the fund. The husband took the whole property absolutely.
3.5.2 Special note Gifts that involve a life interest with a remainder. ‘£1 million to trustees on trust for Tony for life remainder to Frank.’
This looks like a Sprange v Barnard situation, an absolute interest with the unused sum going to Frank when Tony dies. This is not correct. s A person with a life interest has no right to the capital sum (£1 million in our example). s The person only has a right to claim the income that the £1 million generates, not the £1 million itself. s So the £1 million should be invested; any income generated then belongs to Frank. s The capital sum of £1 million only belongs to the remainderman, Tony. Therefore such a life interest trust is valid. The subject matter is certain at the time the trust comes into operation. The same principle applies to gifts of residue in a will which is also valid.
3.6 Where part of the bulk of property is involved s If part of a bulk of property is left on a purported trust the part must itself be certain where tangible property is concerned. s This is vitally important because a trust gives priority over creditors.
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Case: Gold bullion some of which had been purchased was stored in bulk in the supplier’s premises but not delivered. The suppliers went into liquidation and the purchasers claimed a trust of the bars they had purchased. The suppliers had given a certificate of ownership to the purchasers. Held The bullion was not segregated and identified; there was no identifiable property over which the trust could operate. The purchasers were therefore just unsecured creditors and could not claim priority under a trust.
However, the situation appears to be different when it comes to part of a bulk of intangible property (shares/money etc.) where such a trust is permitted. s But how can it said which money or which share the trust is operating over? s With an inter vivos declaration there should be identifiable property from when the trust comes into operation. Cases: Hunter v Moss (1994)
The donor declared a trust of 50 of his 950 shares in the same company. Held The Court of Appeal agreed with the High Court and upheld the trust. Thus it appears that where intangible property is concerned a trust of a larger bulk can be granted.
Re Harvard Securities (1997)
Similar facts to Hunter v Moss involving a declaration of trust of part of the donor’s shares; the High Court followed Hunter and held the trust valid.
Re CA Pacific Finance Ltd (2000)
Followed again the reasoning in Hunter.
Research Point Consider the Sale of Goods (Amendment) Act 1995. What effect has this had on where part of a bulk of property has been purchased?
3.6 WHERE PART OF THE BULK OF PROPERTY IS INVOLVED
Re Goldcorp Exchange Ltd (1995)
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3.7 The extent of the beneficial interest in the subject matter must also be certain It must be clear what interest in the trust property the beneficiaries are able to claim. The actual property is certain but the beneficial entitlement is not. Case: Boyce v Boyce (1849)
Two houses were devised to trustees on behalf of the testator’s two daughters Maria and Charlotte with Maria to choose first. Maria died before her father and under rules of succession where the beneficiary predeceases the testator their gift is lost and goes into residue. Therefore Maria’s right to choose also lapsed. Held The gift to Charlotte also failed because it was not known which house Maria would have chosen; there was no property over which Charlotte’s interest could operate at the time of the testator’s death.
Research Point Consider what would have happened had Maria had been in a coma but lived just a moment longer than her father but then died?
3.8 Can uncertainty of subject matter be cured without having to void the trust? s In some circumstances as with discretionary trusts the trustees can choose which beneficiaries get what sums. s In fixed trusts the courts apply the maxim ‘equity is equality’ and give equal division, though could not do this in Boyce v Boyce due to the clear wording stating that Maria must choose first. A further possibility is where the wording of the trust allows a ‘common-sense’ approach to be adopted.
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Case: A testator made a gift to executors for one ‘Tussy’ to receive a ‘reasonable income’ from my properties. Held The phrase ‘reasonable income’ was certain. The court looked at the beneficiary’s previous standard of living and determined from this what income from the trust was reasonable to maintain this standard. The court is constantly involved in objective assessments for determining what is reasonable.
s The scope of Re Golay? The trustees were given clear discretion to determine ‘a reasonable income’; when such discretion is present perhaps this common-sense approach can be used to validate the trust. s ‘Equity will not strive officiously to defeat a gift’ (per Lord Browne Wilkinson in Choithram International v Pagarani (2001)). s However, no such discretion was given to the trustees either in Boyce or in Re Kolb’s Will Trusts (1962).
Checkpoint Item on checklist: I understand certainty of subject matter. I see the difference between an absolute gift with a purported trust of anything left being void, and a gift on a life interest with a remainder being valid. I understand the difference between a trust of a bulk of tangible assets being void but of intangible assets being valid. I understand that the extent of the beneficial interests in a trust must be certain. I understand that where the trustees have discretion in some circumstances uncertainty of subject matter can be cured.
Done!
3.8 UNCERTAINTY OF SUBJECT MATTER
Re Golay (1965)
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The subject matter must be certain at the commencement of the trust
A trust of whatever is left after an absolute gift has been enjoyed will fail for uncertainty of subject matter
A gift on remainder after a life interest has ended is valid as the person with the life interest only has a right to income not the capital sum
A declaration of part of a bulk of tangible property will fail for uncertainty of subject matter
The wording of a trust might allow uncertainty to be cured by a ‘commonsense’ approach
A declaration of part of a bulk of intangible property is valid
The extent of the respective beneficial interests in the subject matter also needs to be certain
Failure of certainty of subject matter results in the property remaining in the estate
3.9 Certainty of object s There must be identifiable human beneficiaries who can enforce the trust (Morice v Bishop of Durham (1805)).
3.9.1 Fundamental concepts a) The trustees must know who the beneficiaries are. b) The court must be able to administer the trust on failure by the trustees to do so or when the beneficiaries seek the court’s assistance.
3.9.2 Consider the following gifts
s a MILLION ON TRUST TO ANY OR ALL PERSONS TOWARDS whom I have a moral obligation. s a MILLION ON TRUST TO THE EMPLOYEES OF -EGA Tobacco Ltd, their relatives and dependants in such amounts as my trustees determine. s aMILLIONONTRUSTTOTHERESIDENTSOF#HESHIRE s a MILLION TO ANY PERSON WHO CAN PROVE TOMYTRUStees that they are a friend of mine.
Workpoint What problems can you foresee in the above examples with certainty of objects?
3.9.3 In order to ascertain the tests for certainty of objects the gifts are divided into individual and class gifts A gift to an individual: ‘£1m on trust to my son Tony.’
s Clearly the test here is a ‘one person’ test – does the testator have a son called Tony? Likewise a gift to a series of individuals: ‘£1m on trust to be shared equally between my friends Marcus Brant [address], Donald Duce [address] and Frank Folds [address].’
s Again the test is a ‘one person’ test – are there persons called by these names who are friends of the donor? Gifts subject to a condition: s A gift might have a condition attached to it. s A condition precedent – where the beneficiary has already fulfilled the condition:
3.9 CERTAINTY OF OBJECT
s aMILLIONONTRUSTTOMYFRIENDS
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‘£1 million on trust to any person who can prove to the trustees that they are a friend of mine.’
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Here only persons who are already friends of the deceased can claim. s
A condition subsequent – the gift is valid on fulfilment of a future condition: ‘£1 million on trust to whomever of my children shall graduate as a doctor.’
The test is ‘one person’ in nature – does someone meet the condition? For condition subsequent the words of the condition also have to be certain.
3.9.4 Problems of construction s It might be difficult to construe whether a gift is in fact to a series of individuals (one person test) or to a class (an entirely different test). Case: Re Barlow’s Will Trusts (1979)
The donor directed her executor to ‘allow . . . any friends of mine who wish to do so’ to purchase her paintings below market value. Was this a gift to a class [‘my paintings to my friends’] or a series of individual gifts? Held It was a series of individual gifts and not a class gift and hence valid under the one person test.
3.9.5 Gifts to a class of beneficiaries s The test depends on whether the class gift is on a fixed trust, a power of appointment or on a discretionary trust. Fixed trusts s The test is the ‘complete list’ test (IRC v Broadway Cottages (1955)). s Trustees must be able to draw up a complete list of all the beneficiaries or the trust fails.
s For the trustees to do this there are two types of certainty:
b) Evidential certainty s This refers to the individuals within the class who must be capable of being identifiable. s Again ‘my friends’ would fail on this as it is not definable as to who would constitute a ‘friend’. s Unless there is conceptual and evidential certainty it is not possible for the trustees to draw up a complete list of all the beneficiaries and the trust fails. s Small family trusts should not pose much difficulty, but trusts benefiting a significant number of people will be problematic.
3.9.6 Powers of appointment s As a power of appointment is not a trust: s the objects have no beneficial interest in the property; s the donee of the power does not have the fiduciary constraints of trusteeship; s the test for certainty of objects is less strict than that for fixed trusts. Re Gulbenkian’s Settlement Trusts (1970), the test for certainty of objects is the ‘is or is not test’ or the ‘any given postulant test’. s ‘Can it be said with certainty whether any given individual is or is not a member of the class?’ s The donees of the power have to take a range of potential objects and ask whether it can be said with certainty whether each person in the range either is or is not within the class. s Reading this strictly it appears that if a potential object is a ‘don’t know’ whether he is in the class or not invalidates the power.
3.9 CERTAINTY OF OBJECT
a) Conceptual certainty s This refers to the class itself (but not the individuals within the class). s The class must be ascertainable and capable of being defined. s A fixed trust for ‘my friends’ is likely to fail as it is not possible to define the limits of who is or is not a friend (Re Barlow (1979) – compare with an individual gift which only requires a ‘one person’ test). s Likewise ‘someone to whom I have a moral obligation’ is also a class that is not capable of defining the limits.
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3.9.7 Discretionary trusts s Before 1971 the law was the complete list as per IRC v Broadway Cottages (1955). s Large discretionary trusts were failing the list test. s Some courts were artificially construing trusts as powers and hence applying the postulant test to save the gift (Court of Appeal’s approach in McPhail v Doulton, Re Baden No. 1 (1969)). s The House of Lords in McPhail v Doulton adopted a radical approach.
Research Point Read the judgment of Lord Wilberforce in McPhail v Doulton (1971).
Case: McPhail v Doulton, Re Baden No. 1 (1971) HL
Trustees had to apply the net income of the fund ‘in making at their absolute discretion grants to . . . employees . . . or to any relatives or dependants of such persons’. The question was whether the words ‘relatives’ and ‘dependants’ were sufficiently certain to validate the trust. The House first had to determine the correct test for certainty of objects for a discretionary trust. Held By a majority the House of Lords rejected the complete list for a discretionary trust and determined that the new test would be the same as that for powers of appointment. The test for certainty of objects for discretionary trusts in a class gift is now the ‘any given postulant test’. The trustees must make a survey of the range of objects and decide whether ‘any given individual is or is not a member of the class’.
The test for a discretionary trust is now the ‘any given postulant test’.
3.9.7.1 Why was the test changed? s The majority argued that the test should be amalgamated with that of powers of appointment: s In both cases the beneficiaries under the trust and the objects of the power do not have an individual identifiable beneficial interest.
s
s The minority argued the list test should stay as trustees have fiduciary duties and can only exercise these if they know who all the beneficiaries are – how can they make a distribution unless they survey all the beneficiaries? s The minority also argued that when the court administers a trust it orders equal distribution among the beneficiaries – hence all the beneficiaries must be known. s The majority rejected these arguments, stating that for very large discretionary trusts, s it would be absurd for the trustees to survey all the range of individual beneficiaries, instead they survey by class or category of beneficiary; or s they assist when a need is brought to their attention; and s in earlier cases equal distribution has not been ordered; rather distribution was made according to need and circumstances of the beneficiaries.
3.9.7.2 Delving deeper into McPhail v Doulton s The test suggests that there are three classes of persons: s those definitely within the class; s those definitely outside the class; and s the ‘don’t knows’, as to whether they are in or out. s Reading the test strictly gives the impression that the presence of any ‘don’t knows’ would invalidate the trust. s However, a more liberal interpretation of the test might suggest that only a very small number of ‘don’t knows’ should not invalidate the trust but can be presumed to be ‘is nots’: in other words, outside the class. s Counsel for the executors in McPhail v Doulton argued that the strict interpretation was correct. He focused on the ‘is not’ part of the test and stated that the word ‘relatives’ must fail the test because you cannot prove that ‘any given individual’ is not your relative.
3.9.8 Re Baden’s Trust Deeds (No. 2) (1973) McPhail v Doulton was re-submitted to the High Court to apply the new test to the phrase ‘relatives and dependants’; this then was appealed to
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3.9 CERTAINTY OF OBJECT
They are entirely dependent on the trustees or donees of the power exercising their discretion in their favour; until then they have no interest.
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the Court of Appeal under the name Re Baden’s Trust Deeds (No. 2) (1973).
Research Point Read the judgments of Lord Justices Sachs, Megaw and Stamp from Re Baden’s Trust Deeds (No. 2).
Case: Re Baden’s Trust Deeds (No. 2) (1973)
Remember the Court had to apply the ‘any given postulant test’ to the words ‘relatives’ and ‘dependants’. Held All three Court of Appeal judges agreed that using the new test the trust was valid. Sachs LJ and Megaw LJ held that ‘relatives’ simply meant ‘descendants of a common ancestor’ and hence was certain. Stamp LJ interpreted ‘relatives’ to mean ‘next of kin’, which likewise is certain. They all agreed that ‘dependants’ was likewise valid.
3.9.9 The problem with Re Baden’s Trust Deeds (No. 2) All three judges then attempted to give a broader explanation of the postulant test and gave different reasons as to its meaning. The reasoning of Sachs LJ s All that was necessary was conceptual certainty. s The class itself must be definable; there was no need for evidential certainty – to identify the individuals within the class. s So what of the postulant test? s Sachs LJ adopted the liberal approach; s any ‘don’t knows’ do not invalidate the trust, they are simply presumed to be ‘is nots’: in other words, outside the class. s It is for the potential beneficiary to prove they are inside the class. s Therefore, as long as the class is conceptually certain the postulant test has been satisfied. ‘Don’t knows’ do not invalidate the trust.
The reasoning of Megaw LJ
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s Unlike Sachs, Megaw is introducing here some evidential certainty. There must some identifiable beneficiaries who can make up a ‘substantial number’. s Sachs said that all that is necessary is conceptual certainty; there is no need to identify the beneficiaries. s While Megaw did not refer to conceptual certainty it is submitted that he must impliedly be referring to this also because unless the class is definable you cannot determine what is a ‘substantial number’. The reasoning of Stamp LJ s Stamp adopted the strict approach to the postulant test: s ‘Don’t knows’ will invalidate the trust; therefore any given individual in the trustees survey must either be definitely in or definitely out of the class or the trust will fail. s He interpreted ‘relatives’ narrowly to mean ‘next of kin’ and decided that any individual surveyed would definitely be in or out of the class and hence the trust was valid. Sachs LJ
Megaw LJ
Stamp LJ
‘Don’t knows’ do not invalidate the trust; they are presumed to be ‘is nots’ – outside the class. All that is necessary is that the class be conceptually certain only.
‘Don’t knows’ do not invalidate the trust providing there is a substantial number of beneficiaries within the class. There must be some evidential certainty – a number of beneficiaries must be identified to make up a ‘substantial number’. Probably conceptual certainty is also needed as a ‘substantial number’ can only be determined if the class is definable.
‘Don’t knows’ do invalidate the trust. This is suggesting that there must be full conceptual and evidential certainty.
3.9 CERTAINTY OF OBJECT
s He adopted the liberal approach to the postulant test: s ‘Don’t knows’ do not invalidate the trust ‘providing there is a substantial number within the trust’.
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Workpoint Consider how you would apply the reasoning of the three judges to the following: s ‘£1 million on trust to my friends in my trustees’ absolute discretion.’ s ‘£1 million on trust to any or all persons I played chess with at my local chess club.’ s ‘£1 million on trust to any or all of my colleagues at university who used to drink coffee with me at 10.30 each Monday morning.’
3.9.10 Which judgment is correct? s There has not been a Court of Appeal or House of Lords case on this topic since Re Baden’s Trust Deeds (No. 2). So all three judgments should be applied. Sachs LJ’s judgment s Sachs stated the only necessity is conceptual certainty. Any ‘don’t knows’ are presumed to be ‘is nots’ – outside the class. s This avoids the problem of Stamp’s judgment that any ‘don’t knows’ invalidate the trust and Megaw’s judgment of ‘the substantial number’. s It could be argued, though, that no requirement of some evidential certainty means that theoretically there could be a perfectly valid trust with no or possibly one beneficiary. s A trust for ‘students who drank coffee at 10.30 every Monday morning in the university refectory in 1990 during term time’ is arguably a perfectly definable class – hence is conceptually certain. s However, identifying the individual potential beneficiaries is problematic, but according to Sachs this is a valid trust as it is conceptually certain. Megaw’s LJ’s judgment s ‘Don’t knows’ do not invalidate the trust as long as there is a substantial number within the class. This avoids the problems with Stamp’s judgment –but what is meant by ‘a substantial number’? s Megaw stated that this will depend on the facts and circumstances of each case but this is unhelpful. s Trustees need certainty; if there are a proportion of ‘don’t knows’ how are they to determine if those ‘in the class’ represent a
‘substantial number’? If they are wrong and make a distribution they are in breach of trust.
Stamp LJ’s judgment s It has been argued that this in effect is a return to the complete list test which was rejected in McPhail v Doulton. s The trustees make a survey of a potential range of objects and they find no ‘don’t knows’. s The trust is now valid and the trustees make a distribution. s The trustees make a new survey of a range of objects and they find a ‘don’t know’. s The trust is now void for uncertainty and the distribution made previously is now in breach of trust making the trustees personally liable. s Beneficiaries can now try to recoup the funds distributed from the person to whom the trustees gave the money. s The only way the trustees can avoid this problem is to draw up a complete list! s It is submitted that it is absurd for a large discretionary trust to fail because a very tiny proportion of ‘don’t knows’ exist. s This surely was not the intention of the majority in McPhail v Doulton who changed the list test in order to save large discretionary trusts. s ‘A trust should be upheld if there is sufficient practical certainty in its definition for it to be carried out . . . according to the expressed intention of the settlor’, per Lord Wilberforce in McPhail v Doulton. s So all three judgments can come in for criticism but probably Stamp being the most restrictive is not correct. s Possibly the correct answer is somewhere between Sachs and Megaw but we await a Supreme Court decision to determine this.
3.9.11 Can conceptual uncertainty be rectified by delegation to a third party? s The court’s jurisdiction would be ousted if a third party was able to make the decision as to what is and what is not conceptually certain, this being a question of law not of fact (Re Coxen (1948)). If conceptual certainty cannot be cured by the court then surely it cannot be cured by a third party.
3.9 CERTAINTY OF OBJECT
s They could apply to court for directions but this mean costs, time and stress for the trustees and the potential beneficiaries, some of whom might be in genuine need.
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s However, in Re Tuck’s Settlement Trusts (1978) it was held that a class gift to persons of the Jewish faith would be void for conceptual uncertainty but a gift to such persons of the Jewish faith as determined by the Chief Rabbi was valid. However, this case concerned a gift on condition precedent which, as was said earlier, does not involve conceptual certainty and hence Lord Denning’s comments are strictly obiter. s If correct it would theoretically allow a third party with sufficient expertise to cure a conceptually uncertain gift. However, matters of evidential certainty appear to be questions of fact and hence there is no problem with a third party being used to determine who the individuals are within the class of beneficiaries.
3.10 Administrative unworkability s Sometimes the trust is certain but ‘the definition of beneficiaries is so hopelessly wide as not to form “anything like a class” so that the trust is “administratively unworkable” ’ – per Lord Wilberforce in McPhail v Doulton who gave as an example a trust for the ‘residents of Greater London’. Case: R v District Auditor ex parte West Yorkshire Metropolitan County Council (1986)
The local authority created a trust for any or all of the inhabitants of West Yorkshire. There were approximately 2,500,000 inhabitants of West Yorkshire at the relevant time. Held The trust was void for administrative unworkability; the class was too large. Trustees have fiduciary obligations and it would be impossible to exercise such for this considerable number of people.
s Can administrative unworkability also apply to powers of appointment? s This was rejected obiter in Re Manisty’s Settlement Trusts (1974) and in Re Hay’s Settlement Trusts (1982); hence mere powers of appointment are not invalidated by administrative unworkability. s This is probably because donees of a mere power do not have fiduciary obligations.
3.11 Capriciousness
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s There is no clear authority stating that capriciousness invalidates a trust. s Trustees have fiduciary obligations towards the potential beneficiaries; there must be therefore a rational basis as to how the funds are allocated. s It was stated obiter in Re Manisty’s Settlement (1974) that capriciousness will invalidate a trust. The court gave an example of a trust in favour of the ‘residents of Greater London’ where the donor has no connection with London whatsoever (see also Section 3.10 on administrative unworkability). s Capriciousness would not have been a valid ground of challenge in R v District Auditor ex parte West Yorkshire as the donor had a clear connection with West Yorkshire.
Checkpoint – certainty of object Item on checklist: I understand what is meant by certainty of objects. I understand the test for a gift to an individual or series of individuals. I am able to explain the complete list test and the need for conceptual and evidential certainty. I am able to explain the any given postulant test for discretionary trusts and powers of appointment. I can explain the decisions of the three judges, Sachs, Megaw and Stamp from Re Baden’s Trust Deeds (No. 2) and apply them to a given scenario. I understand how administrative unworkability and capriciousness can affect a trust.
Done!
3.11 CAPRICIOUSNESS
s The donor has no rational reason for making the gift to that class; and the trustees have no rational basis on which to make the allocation.
There must be identifiable human beneficiaries
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Where it is a gift to an individual or series of individuals the test is a one person test
Where the gift is to a class of persons on a fixed trust the test is the complete list test
Where the gift is to a class of persons on a discretionary trust or power of appointment the test is the any given postulant test
Sachs – only conceptual certainty required There must be conceptual and evidential certainty
Megaw – conceptual and some evidential certainty to the extent that the evidential certainty must represent a ‘substantial number’ within the class Stamp – conceptual and evidential certainty appears to be required
Administrative unworkability and probably capriciousness will invalidate a trust though probably not a power of appointment
Potential exam questions 1) You are to advise on the validity of the gifts in the validly executed will of Enid who has died: i) £1,000 to my husband in the belief that he will look after the children during his lifetime and on his death the fund shall be distributed among the children. ii) £10,000 to my trustees on trust on behalf of any or all of my colleagues at work and their loved ones. iii) Three of my favourite cars to my nieces Susan and Karen with Susan to choose first and Karen to have the other two [note that Susan is in a persistent vegetative state due to a car accident].
v) Any one of my ten antique vases to any person who can satisfy the trustees that they are a friend of mine. 2) Critically evaluate the test for certainty of objects with regard to discretionary trusts. 3) ‘It is essential to bear in mind the difference between conceptual uncertainty and evidential difficulties’ – per Lord Justice Sachs in Re Baden’s Trust Deeds (No. 2). Critically evaluate this statement.
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iv) £10,000 to David for the benefit of any of my sons. If no appointment is made the fund is to go to my brother Allen.
Chapter 4 Constitution and formalities 4.1 Introduction As well as the three certainties the trust must also be fully constituted. The property must be transferred either as an outright gift or, if on trust, into the names of the trustees. If not, there is no valid trust. Proper constitution depends on the necessary formalities being properly implemented for transferring the property. Cases: Milroy v Lord (1862)
Shares were covenanted to be transferred by the donor to the donee; however, the donor died before the transaction took effect. Held There was no valid gift as the proper formalities had not been followed. Turner LJ: ‘[T]he settler must have done everything which, according to the nature of the property comprised in the settlement, was necessary to be done in order to transfer the property. . . . He may of course do this by actually transferring the property to the persons for whom he intends to provide, and the provision will then be effectual, and it will be equally effectual if he transfers the property to a trustee for the purposes of the settlement, or declares that he himself holds it in trust for those purposes.’
Jones v Lock (1865)
A man returning from a business trip was scolded by his wife for not bringing a gift for their baby. He wrote a cheque stating ‘this is for baby’; however, he did not indorse the cheque. He then put it into a safety deposit box. He died a short while later and the question was whether the cheque was valid either by an outright gift or whether the father made a valid declaration of trust.
Held The gift failed as the formalities of indorsement had not been complied with. Where an absolute gift is attempted which fails for not following proper formalities the court will not treat a failed gift as a declaration of trust.
4.1.1 Consequences of proper constitution s The trust is valid. s Legal title is transferred to trustees. s Beneficial title is transferred to the beneficiaries. s The donor no longer has a legal or beneficial interest in the trust property and hence has no right to demand it back. Donor (transfers legal title)
Trustees (hold the title for the beneficiaries)
Beneficiaries
4.1.2 Where the donor retains the legal title s Turner LJ’s third category – that a trust will be legally binding where the donor retains the legal title but makes a valid declaration of trust and only transfers the beneficial title – is not strictly ‘constitution’ as no legal title has been transferred. s There is no need for any transfer of legal title here. s However, the correct formalities must be observed or no transfer of the will has taken place. Donor (retains legal title but transfers the beneficial title only)
Beneficiaries
4.1.3 Any help from equity? s The general rule is that ‘equity will not assist a volunteer’. A volunteer is someone who has not given any consideration in return for a gift. s Beneficiaries of an imperfect gift are volunteers, they cannot enforce the gift either in law or in equity.
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4.1 INTRODUCTION
Jones v Lock (1865) (continued)
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s ‘Equity will not perfect an imperfect gift’: s If proper formalities are not followed equity will not perfect the gift. s ‘Equity will not treat a failed gift as a self-declaration of trust.’ s Remember that with the three certainties there must be certainty of intention – words or conduct that clearly show a split of the title. s If these words or conduct are not present equity will not treat a failed absolute gift as one where a declaration of trust was made.
Checkpoint – constitution Item on checklist:
Done!
I understand that constitution means the transfer of the legal title into the names of the trustees. I understand that there are strict formalities that must be complied with for this to happen depending on the nature of the property. I understand that there are serious consequences if the trust is not properly constituted. I understand that a trust can also be created if the donor retains the legal title but makes a valid declaration of trust of the beneficial interest only. I understand that generally equity will not intervene to perfect an imperfect gift.
4.2 Constituting a trust 4.2.1 Testamentary trusts and gifts The will, in order to be valid, must comply with the Wills Act 1837 s 9: s It must be in writing, s signed by the testator, s in the presence of two witnesses who sign in the testator’s and in each other’s presence. If these formalities are not followed the will is void and hence any trusts or absolute gifts contained within are likewise void.
Reflection Point
s ‘£1 million to my son David.’ s ‘£50,000 on trust to the RSPCA for its charitable purposes.’ s ‘My house “Treetops” to my neighbour Franklin Brown.’ If this will does not comply with s 9 of the Wills Act 1837 then all the above gifts are void! David, the RSPCA and the neighbour would get nothing from this will.
4.3 Constituting inter vivos (lifetime) trusts and gifts Constitution depends on the type of property involved. It is the legal title that needs to be validly transferred to trustees during the donor’s lifetime.
4.3.1 Land The Law of Property Act 1925 s 52 states that a legal estate or interest must be created by deed. s Where land has registered title, the Land Registration Act 2002 s 27 states that the transfer will not operate at law until registration.
4.3.2 Shares s To transfer legal title to shares: s a share transfer form must be properly filled in by the donor; s it must then be sent to the relevant company for registration of the shares in the name of the trustees (or new owner for an absolute gift) in the specific company’s share register. s it should be accompanied by the share certificate (Stock Transfer Act 1963 s 1; Companies Act 2006 s 771).
4.3.3 Copyright The Copyright, Designs and Patents Act 1988 s 90(3) states that legal title to copyright must be transferred in writing by the donor and signed.
4.3 CONSTITUTING INTER VIVOS (LIFETIME) TRUSTS AND GIFTS
Consider the consequences of the following gifts and trusts in the will of Harold who died recently.
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4.3.4 Bills of Exchange Under the Bills of Exchange Act 1882 s 31 these must be indorsed by the donor (though unsigned cheques can now transfer legal title under Cheques Acts 1957 and 1992).
4.3.5 Chattels To transfer the legal title to a chattel an intention to give plus delivery of the chattel is necessary; or alternatively a deed of gift will suffice.
4.4 Where the donor retains the legal title and makes a declaration of trust Lord Justice Turner in Milroy v Lord (1862) stated that a gift or trust can also be legally valid if the donor makes a valid declaration of trust. The formalities are less stringent here as the legal title is not transferred.
4.4.1 Land A declaration of trust of land must be evidenced or proved by some writing and signed by the donor (Law of Property Act 1925 s 53(1) (b)). This means that: s A declaration of trust of land need only be evidenced in writing. The trust itself need not be in writing. s For example, David orally declares he holds his house on trust for his daughter. s The oral declaration is not void, merely unenforceable by the daughter. s If David later writes to his solicitor stating he has made the oral declaration and signs the letter, this now fully constitutes the transfer of the beneficial interest to the daughter. s The written evidence of the oral declaration must have been signed by the donor. A key exception is Law of Property Act 1925 s 53(2): this states that no formalities are necessary for the creation of implied, constructive or resulting trusts (see Chapter 8).
4.4.2 All other types of property
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Workpoint Read the case of Paul v Constance (1977). Consider the following: For an express trust it is essential to know when the trust came into existence, so when exactly did this trust come into existence? Did Lord Justice Scarman refer to this point in his judgment in Paul v Constance? Also, is it likely that the court in Paul v Constance would have allowed this trust based only on Miss Paul’s evidence?
Checkpoint – constitution Item on checklist:
Done!
I understand that to properly constitute a testamentary trust, full compliance with s 9 of the Wills Act 1837 is necessary. I understand that to properly constitute an inter vivos trust depends on the type of property involved. I understand that when the donor retains the legal title, the only formality is that for land under the Law of Property Act 1925 s 53(1)(b); an oral declaration will suffice for other types of property.
4.5 Where the donor wishes to transfer a subsisting beneficial interest s Here the ownership is already split (subsisting); the beneficiary wants to validly transfer the beneficial interest only. What formality is needed? In the diagram below Beneficiary A wants to transfer his interest to Beneficiary B.
4.5 TRANSFER A SUBSISTING BENEFICIAL INTEREST
s Where the donor wishes to retain the legal title and donate the beneficial ownership an oral declaration will suffice to do this (Paul v Constance (1977) – see Chapter 3).
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Trustee
Beneficiary A
Beneficiary B
Note that all that is being transferred is the beneficial interest only. Consider the following: s There has only been a change in beneficiary. s The trust is still intact; the trustee is now trustee for B. s Trustees have fiduciary duties towards beneficiaries – they must know who they are. s It would be easy for individuals with fraudulent intent to claim an interest based on alleged oral statements by Beneficiary A only. For the above reasons strict formality is needed to transfer a subsisting beneficial interest of any type of property. Section 53(1)(c) of the Law of Property Act 1925 – the transfer of a subsisting beneficial interest must be in writing and signed by the donor or his agent. Therefore: s The transfer itself must be in writing – merely evidenced in writing is not sufficient. s The transfer must be signed by the donor or his agent. s The phrase ‘must be in writing’ shows that failure to comply with s 53(1)(c) makes the transaction not just unenforceable, but void. s Section 53(1)(c) applies to beneficial interests of all types of property not just land (Grey v IRC (1960)).
Reflection Point Do not confuse s 53(1)(c) Law of Property Act 1925 with s 53(1)(b) Law of Property Act 1925! s Section 53(1)(b) deals only with land; s 53(1)(c) applies to all types of property. s Section 53(1)(b) the ownership of land is not initially split; s 53(1)(c) only applies where there is a transfer of a beneficial interest that is already split from the legal title. s Section 53(1)(b) does not render an oral declaration void, merely unenforceable; s 53(1)(c) renders an oral declaration void. s Sections 53(1)(b) requires signature by the donor only; s 53(1)(c) requires either the donor’s signature or that of his agent.
4.5.1 Consider the following diagrams to differentiate s 53(1)(b) and (c) David Jennie
s As the ownership is not yet split David need only comply with Law of Property Act 1925 s 53(1)(b) – the declaration must be evidenced in writing and signed by David. Jennie would like to transfer her beneficial interest in the house to her partner Malcolm David Jennie
Malcolm
s The beneficial interest is split from the legal title before the transfer to Malcolm. s Jennie must therefore comply with s 53(1)(c) of the Law of Property Act 1925. s David will then become the trustee of Malcolm and Jennie is said to ‘drop out of the picture’, no longer having any interest in the land. Case: Grey v IRC (1960)
An owner of shares, Mr Hunter, transferred them to trustees to hold on bare trust for him. To save stamp duty he made an oral direction to the trustees that they now hold the shares on trust for various members of his family. He later executed a written document and signed it as evidence of the oral transfer. Hunter claimed that the oral declaration transferred the beneficial title and thus no stamp duty was payable. The Inland Revenue argued that it was the written instrument that transferred the beneficial interest and hence stamp duty was payable. Held The House of Lords found in favour of the Revenue. The oral declaration was void under s 53(1)(c) of the Law of Property Act 1925 for want of writing. It was therefore the written document only that actually transferred the beneficial title to the shares.
4.5 TRANSFER A SUBSISTING BENEFICIAL INTEREST
David wishes to declare a trust of his house in favour of his daughter Jennie
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Therefore: s Where there is a subsisting equitable interest at the commencement of the transaction and at the end of the transaction there is still a subsisting equitable interest, compliance with s 53(1)(c) is required. s The House of Lords appears to be applying the literal interpretation of s 53(1)(c) – what the actual words of the section say rather than looking at the reasons why the section was enacted (mischief rule). Workpoint What would be the situation if Mr Hunter had terminated the trust under Saunders v Vautier and then (when he had legal and beneficial ownership of the shares) orally declared a trust? Would he still be liable for stamp duty?
4.5.2 What is the situation if a beneficiary wants the entire legal and beneficial title to transfer to the third party? Note the diagram showing the key case of Vandervell v IRC (1967). Vandervell Trustees
Royal College of Surgeons (absolute title)
Vandervell (oral direction)
Case: Vandervell v IRC (1967)
Vandervell orally instructs trustees to transfer the absolute title to the shares to the Royal College of Surgeons (but with an option to buy back the shares after dividends have been declared). Here the entire legal and beneficial title was transferred. Held The House of Lords held that s 53(1)(c) applies where the beneficial title only is being transferred. Here both legal and beneficial title were transferred. The oral direction to the trustees was thus sufficient without the need for writing under s 53(1)(c).
s Lord Upjohn emphasised that s 53(1)(c) was to prevent fraud and to let trustees know who their beneficiaries are. s In Vandervell there was no hint of fraud, nor was there a trust after the transaction as the whole absolute title was transferred.
Reflection Point If the House of Lords in Grey v IRC applied the literal approach to interpretation and in Vandervell v IRC applied the mischief approach to s 53(1)(c), then which is the correct approach? Is it not the case that rules of statutory interpretation demand that the literal approach be applied first? It is only if the literal approach makes no sense that the mischief approach should be applied.
4.5.3 Does s 53(1)(c) apply if there is a specifically enforceable contract which is being transferred for value? s Some contracts such as those involving the sale of land and shares are said to be ‘specifically enforceable’. Equity will grant a decree of specific performance to make the parties comply with their agreements. Normally for breach of contract only damages are awarded but not for the sale of land and shares. s This comes from the maxim ‘equity treats as done that which ought to be done’. s Equity will treat the contract as creating a constructive trust of the beneficial interest. For example: David contracts to sell shares in a private company to Lucy. s When the contract becomes legally binding on signature a constructive trust arises over the shares. David is now the trustee of the shares on behalf of Lucy. What if before the legal transfer is complete Lucy contracts to sell her interest to Susan – is writing under s 53(1)(c) required?
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4.5 TRANSFER A SUBSISTING BENEFICIAL INTEREST
s Unlike Grey v IRC the House in Vandervell appears to be applying the mischief approach to interpretation rather than the literal approach.
David
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Lucy
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Susan
s When a contract is made between David and Lucy, the shares are held on constructive trust for Lucy. Lucy’s interest is now subsisting – it is split. s If she contracts to sell to Susan then another specifically enforceable contract is created and hence Lucy now holds the beneficial interest on trust for Susan – the contract not the written transfer under s 53(1)(c) creates the interest. s Law of Property Act 1925 s 53(2) exempts constructive trusts from the writing requirement. This would appear to create a legal ‘loophole’ where tax could be avoided. It appears to have been closed in Oughtred v IRC (1960). Company
Mrs Oughtred (life interest)
Mrs Oughtred (absolute interest) (Exchange of interests)
Son (remainder interest)
Case: Oughtred v IRC (1960)
Mrs Oughtred held an absolute interest and also a life interest in shares in a private company; her son had the remainder interest and would inherit the shares absolutely on her death. They decided orally to exchange the mother’s absolute interest and the son’s remainder interest in the shares with each other, so both would have absolute interests. This consideration created a specifically enforceable contract; thus, was writing needed under s 53(1)(c) to transfer the beneficial title to each other (and thus making them liable to stamp duty on the written transfer)? The House of Lords held by majority without recourse to s 53(1)(c) that even though there was a specifically enforceable contract, the transfer of the shares did not take place until the written transfer was executed. The majority used an analogy with land – there is no transfer of the interest until the written conveyance is completed.
s Later cases seem to be supporting Lord Radcliffe’s dissenting judgment (Neville v Wilson (1997)). s These types of situation are only likely to arise with shares in private companies and rare chattels. Contracts for the sale of land now have to be in writing pursuant to Law of Property (Miscellaneous Provisions) Act 1989 s 2. Other types of contract are not specifically enforceable – damages being an adequate remedy.
4.6 Exceptions to the rule in Milroy v Lord 4.6.1 The rule in Re Rose (every best effort rule) s The donor has done all in his power to perfect the gift. s A third party is required to perfect the gift. s Equity will treat the beneficial interest as having transferred when the donor has done all in their power. Thus this exception will only apply when an independent third party is necessary to perfect the gift. Case: Re Rose (1952)
The donor sent a completed stock transfer form with the donee’s details to the company for registration. The company secretary registered the interest several weeks after the donor sent the form. The donor died five years after he sent the form for registration but less than five years before it was actually registered. Under the old law if the donor died within five years of making the gift his estate was liable for tax. The crucial point therefore was when did the beneficial title transfer – was it when the form was sent for registration or when it was actually registered? Held The donor had done all in his power to perfect the gift when he sent it fully completed for registration. The donor therefore died more than five years after the beneficial title had transferred and hence no capital transfer tax was payable.
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s Lord Radcliffe, however, gave a powerful dissenting judgment in which he claimed that their agreement to transfer the shares meant that their respective shares were now held on constructive trust for the other party without the need for a written transfer.
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Reflection Point Consider Jones v Lock, where the father gave an unsigned cheque to his baby: the court stated that this was an imperfect gift not a trust and hence void; nor would equity treat a failed gift as a declaration of trust. Does Jones v Lock reconcile with Re Rose? Is it not true that in Re Rose there was no trust? It was an attempted absolute gift and yet the court has split the ownership when the donor sent the form for registration.
Re Rose was applied in Mascall v Mascall (1985). Case: Mascall v Mascall (1985)
A man made a gift of some land to his son; the father gave the son a completed transfer form and the land certificate. The son sent the form for registration at the Land Registry. Before registration of the legal title by the registrar the father and son fell out and the father tried to stop the registration. Held Applying Re Rose, the father had done everything in his power to perfect the gift when he gave the completed transfer form and land certificate to the son. The beneficial title passed at this point to the son. The court therefore ordered the legal title also be registered in the name of the son.
4.6.2 The rule in Strong v Bird (1874) LR 18 Eq 315 Under this exception the following factors must be fulfilled: s An imperfect inter vivos gift is given to the donee. s The intention to make the gift continues to the date of death. s The donee becomes the executor of the donor’s estate or administrator if there is an intestacy. s The subject matter must be capable of passing by will (so a life interest could not pass under Strong v Bird).
s Strong v Bird itself concerned a debt not an imperfect lifetime gift. s It was applied to imperfect lifetime gifts in Re Stewart (1908). s This was further extended to administrators in an intestacy in Re James (1935).
Case: Re Gonin (1979)
A mother who owned a house was wrongly advised that illegitimate children could not inherit real property. She had an illegitimate daughter whom she wanted to inherit her house on death (hence an imperfect lifetime gift). However, due to the advice received she told her daughter that she was not going to leave her the house but would give her the sum of £33,000 by way of a cheque. The mother wrote and indorsed the cheque but kept it in the house. When the mother died the daughter, who was the administrator of her mother’s estate, claimed the house under the rule in Strong v Bird – her legal title perfected the imperfect beneficial title. Held The Court, however, refused her claim; the mother, by stating that she would give the daughter £33,000, showed that her intention to give the house to the daughter ended at that point. The daughter was not able to claim the money either as a bank’s authority to cash cheques terminates on death. The court did, however, express its sympathy to the daughter!
Key Point So, in answering exam problem questions on formalities, ask yourself who is the executor or administrator of the deceased’s estate – are they the recipients of an imperfect inter vivos gift?
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4.6 EXCEPTIONS TO THE RULE IN MILROY v LORD
When a person becomes an executor or administrator on the deceased’s death they become the legal owner of the deceased’s assets. Therefore the legal title perfects the imperfect beneficial title.
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4.6.3 Donatio Mortis Causa (the so-called ‘death-bed’ gift) The gift is perfected on death and so is not strictly an inter vivos exception. If there is a conflict between the will and a donatio mortis causa the donatio mortis causa has priority as it is complete on death; the will only takes effect later (Jones v Selby (1710)). The factors for this exception are: s The donor is contemplating death. s The donor makes the gift conditional on death. s The subject matter is transferred to the donee before death. s The subject matter is capable of being a valid donatio. (Re Craven’s Estate (1937); Cain v Moon (1896).)
4.6.3.1 The donor is contemplating death – he must believe that he is soon going to die s However, death need not be from the expected cause. s In Wilkes v Allington (1931) the donor believed that he was dying from cancer, but actually died from pneumonia; the court held that it did not matter what the actual cause of death was; what mattered was the contemplation of death. s Irrational fears such as believing your plane is going to crash will not suffice (Thompson v Mechan (1958)); though fear of death from a serious surgical operation would probably suffice (Agnew v Belfast Banking Company (1896)). s A gift in contemplation of suicide was held in Re Dudman (1925) not to be a valid donatio mortis causa, though this is probably now incorrect as suicide is no longer a criminal offence (Suicide Act 1961).
4.6.3.2 It is fundamental to the donatio mortis causa that it is a conditional gift s Such as ‘If I don’t make it, I want you to have . . .’. In other words: ‘if I do make it’ I am having the gift back – it is conditional on death.
Research Point Read the case of Lord Advocate v McCourt (1893). If a person is definitely about to die, can it be a valid donatio mortis causa as arguably it would not be a gift conditional on death?
4.6.3.3 The subject matter must have been transferred to the donee s It was therefore thought that land could not be the subject of a donatio mortis causa as you cannot strictly speaking deliver land.
Case: Sen v Headley (1991) CA
This case involved land with unregistered title. The donor, believing he was about to die, made a conditional gift of his land to the donee. He gave the donee access to the safety deposit box where the title deeds were kept. Held This was a valid donatio mortis causa; and hence land with unregistered title can be gifted in this way without the necessary formalities. This is only obiter for registered title. Ownership of registered title is proven by the register itself not by the title deeds to the property.
4.6.4 The rule in Choithram v Pagarani This sort of situation is novel and unlikely to occur often in practice. s Basically it involves the property being vested in only one trustee instead of the body of trustees. s Equity will treat the gift as complete where it would be unconscionable for the donor to resile from the gift.
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s However, case law suggests that such words – ‘if I don’t make it’ – will be implied depending on the nature of the surrounding circumstances, such as where the donor is gravely ill and only has hours to live (Re Lillingston (1952)).
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Case: Choithram International v Pagarani (2001)
Mr Pagarani created a non-profit foundation with himself and several others to be trustees. He stated that he wanted all of his property to be held in favour of this foundation (with him retaining the legal title as trustee) but died before he could vest the property in the other trustees. The gift was therefore imperfect. Re Rose could not apply because he had not done all in his power to perfect the gift; also Strong v Bird and donatio mortis causa were inapplicable. Held The Privy Council, however, taking notice of the fact that it was a novel situation, a declaration of trust had been made and there was a trustee (Mr Pagarani), held that it would be unconscionable for his estate to resile from the gift. They therefore held that where property is vested in one trustee equity will treat the gift as being vested in all the trustees where it would be unconscionable for the donor or his estate to resile from the gift.
4.6.5 The rule in Pennington v Waine s A general rule of unconscionability would perfect an imperfect gift. s The rule in Choithram v Pagarani was approved and applied (some would argue misapplied!) in Pennington v Waine (2002).
Research Point See the article by Margaret Halliwell, ‘Perfecting Imperfect Gifts and Trusts: Have We Reached the End of the Chancellor’s Foot?’ (2003) 67 Conveyancer and Property Lawyer 192.
Case: Pennington v Waine (2002)
The donor wanted to transfer shares to her nephew Harold. She therefore completed a share transfer form but did not send it to the company for registration but rather left it with the auditor as her agent. Her nephew, meanwhile, applied to become a director of the company – this being a requirement if he was to hold the shares. The donor died before the form was sent to the company for registration.
Held The Court of Appeal applying Choithram v Pagarani held that it would be unconscionable for the donor or her estate to resile from the gift and hence awarded the shares to the nephew.
Reflection Point The case clearly conflicts with Re Rose as the donor had not done all in her power to perfect the gift; there are clear and distinct differences between Choithram and Pennington. Choithram involved s a novel situation; s an attempted express trust (though imperfect) with a trustee. Pennington s was not novel but a common situation – a share transfer; s was an attempted absolute gift not a trust.
s It is felt that Pennington has been wrongly decided. It also causes significant uncertainty as to the law. s What exactly is meant by unconscionable? s Does this mean that strict formalities such as Law of Property Act 1925 s 53(1)(b) and (c) can be avoided by proof of unconscionability on the part of the donor? s The ‘pendulum’ appears to have swung back the other way in Zeital v Kaye (2010). Case: Zeital v Kaye (2010)
A held a share in a company in trust for B; the question for the court was whether B had validly transferred his equitable interest to his mistress C. B had given her a stock transfer form which was blank apart from the trustee A’s signature. Held This clearly failed under Re Rose as B had not done all in his power to perfect the gift. Even though C could have completed the stock transfer form, B had not given her the share certificate – which in fact was lost and B had not taken steps to obtain a replacement.
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Pennington v Waine (2002) (continued)
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Zeital v Kaye (2010) (continued)
Pennington was distinguished in that the share certificates were already with the company and hence the Re Rose principle applied – B had not done all in his power to perfect the gift and hence the estranged family of B took the shares under the intestacy rules.
s It is not clear the extent to which the courts will still apply Pennington or whether the more orthodox approach in Zeital v Kaye will now be followed. s Usually the courts will distinguish a case that makes bad law such as Pennington as being one ‘decided only according to its own special facts’.
4.6.6 Proprietary estoppel Another exception to the strict formalities rules is the doctrine of proprietary estoppel. In Taylor Fashions v Liverpool Victoria Trustees (1982) it was held that proprietary estoppel involves: s a representation by X to Y, s which is relied on by Y, and s Y by his reliance suffers detriment in such circumstances that it would be unconscionable for X to return to his strict legal rights.
4.6.6.1 The nature of the representation and reliance s The representation has to be ‘clear enough’ (Thorner v Major (2009) HL) and will depend on the context. s So in Thorner v Major itself the person who made the promise was a man of few words and, while never expressly stating that he would leave his farm to the other party, showed this intention by conduct over a 29-year period. s Alternatively when it is an ‘arm’s-length’ commercial transaction and both parties have access to independent legal advice there will usually be no estoppel, as strictly speaking there is no reliance on the other party. (Yeoman’s Row Management v Cobbe (2008) HL).
4.6.6.2 Remedies under proprietary estoppel s The remedies available under proprietary estoppel are very broad in nature and include
s s
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s Older case law tended to consider the expectation of the promisee as being the deciding factor. s More modern cases have focused on what is fair between the parties to satisfy the ‘equity’ that has arisen; the expectation being merely a factor rather than being conclusive (Gillett v Holt (2001); Jennings v Rice (2002)).
Checkpoint – transferring the equitable interest and exceptions Item on checklist:
Done!
I understand how s 53(1)(b) and 53(1)(c) Law of Property Act 1925 interact. I understand how s 53(1)(c) operates in different contexts. I have taken full note of the exceptions to the rules of constitution in Milroy v Lord and can apply them to given scenarios. I understand the fundamentals of proprietary estoppel.
Potential exam questions 1) Albert has recently died and his validly executed will appoints Susan Johnson as his executor and leaves his entire estate to his grand daughter Abigail. Your solicitor’s firm is administering the estate on Susan’s behalf. After the will is read several persons come to see you. Albert’s son David tells you that last week Albert called the family together and stood up and said ‘I now hold my house “Treetops” on behalf of you David’. s Albert’s friend Eggbert approaches you and says that Albert has shares in a company called Greensleaves which are held on trust for him by his accountants Swindle & Co. Eggbert states that in front of him Albert telephoned Swindle & Co and told them to transfer the shares to Eggbert.
4.6 EXCEPTIONS TO THE RULE IN MILROY v LORD
s
the freehold (Pascoe v Turner (1979)); a life interest (Inwards v Baker (1965)); an easement (Ives Investment Ltd v High (1967)).
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s Susan Johnson also approaches you and states that Albert told her that he wanted to gift his Rolls-Royce to her. Tony also approaches you and states that two days before Albert died he called Tony to his bedside and said, ‘If I don’t make it I want you to have my Rolex watch’. Advise the parties on the validity of the purported gifts. 2) Critically evaluate the maxim that ‘equity will not perfect an imperfect gift’.
Chapter 5 The beneficiary principle and non-charitable-purpose trusts 5.1 Introduction There must be identifiable human beneficiaries who can enforce the trust (Morice v Bishop of Durham (1895)). Most cases under this heading tend to have the relevant object as being a purpose rather than a person. Cases: Re Pinion (1965)
The testator had bequeathed his art studio and set up a trust to have his works exhibited as a museum. After considering expert evidence of their lack of educational value the court held that the trust failed as a charity and hence was purely a non-charitable-purpose trust and hence void for want of a beneficiary. The court referred to the testator’s works as a ‘heap of junk’ and ‘atrociously bad’.
Re Shaw (1957)
George Bernard Shaw set up a testamentary trust to promote a new 40-letter alphabet. The court rejected the educational value of the alphabet and held the trust to be a non-charitable-purpose trust and hence void for want of a human beneficiary.
Re Astor (1952)
The testator created a testamentary trust for the promotion of unity between nations and for the integrity of newspapers. There was no human beneficiary and hence the trust failed.
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5.2 Exceptions to the beneficiary principle 5.2.1 Anomalous exceptions (trusts of imperfect obligation) s There are a number of anomalous cases where the courts have held a valid non-charitable-purpose trust despite the absence of a human beneficiary. These cases must comply with the following factors in order to be upheld as valid.
5.2.1.1 They must come within the recognised categories (subject to the perpetuity rule below) Gifts for specific animals: s All the following gifts were held to be valid. Cases: Pettingall v Pettingall (1842)
Gift for the maintenance of the testator’s favourite black mare.
Re Dean (1888)
Gift for the maintenance of the testator’s horses and hounds.
Re Haines (1952)
Gift for the maintenance of the testator’s cat.
Re Kelly (1932)
Gift for the maintenance of the testator’s dogs.
Re Howard (1908)
Gift for the maintenance of the testator’s parrot.
Gifts for the erection and maintenance of tombs and monuments: Case: Pirbright v Salwey (1896)
Valid gift for the maintenance of the enclosure in the church graveyard where the testator and his child were buried.
Cases:
75 Valid gift for the maintenance of a monument to the testator.
Re Endacott (1959)
Gift for ‘some useful memorial to myself ’ was held void; the phrase ‘some useful memorial’ being too broad and could go beyond the meaning of a monument.
Gifts for private masses for the dead: Bourne v Keane (1919). Gifts for the promotion of fox hunting? In Re Thompson (1934) the court allowed the gift for the promotion of fox hunting. This is unlikely to be followed today as fox hunting is unlawful under the Hunting Act 2004. What about the possibility of new categories arising? The court in Re Endacott and Re Astor stated that these categories will not be extended. They are closed and new categories will not be added. Workpoint Consider a testamentary gift for the maintenance of the grave of a pet cat – is this within any of the recognised categories above?
Research Point Read the case of Re Endacott (1959) – does it appear that another factor influencing the court’s decision was the large sum of money involved (£20,000)? If so, how might this affect substantial gifts for maintaining an animal?
5.2.1.2 They must be limited in perpetuity (known as the rule against inalienability) s A trust cannot last forever. The common law rule is that the funds (the capital sum) can only be tied up for a ‘life in being plus 21 years’. If there was a mere possibility that the trust could continue beyond this time then it was void from the start.
5.2 EXCEPTIONS TO THE BENEFICIARY PRINCIPLE
Re Hooper (1932)
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s The ‘life in being’ was any person nominated in the trust instrument to be the ‘life in being’ provided they were alive at the testator’s death. If no ‘life in being’ was nominated then the trust could only last 21 years from the testator’s death. s The life in being need not be anyone connected with the testator or the trust (Re Khoo Cheng Teow (1932)). s Many purpose trusts have failed the perpetuity test because a purpose can last forever. Even some of the recognised categories above have failed or partially failed on this ground. Case: Mussett v Bingle (1876)
The gift was in two parts, £300 for the erection of a monument for a deceased person and £200 for its maintenance. The court held the £300 gift valid as building the tomb would undoubtedly be within the perpetuity period; however, the £200 gift was declared void as maintenance denoted a mere possibility that the trust could last longer than the life in being plus 21 years.
s Note that the Perpetuity and Accumulations Act 2009’s period of 125 years and also a ‘wait and see’ approach do not apply anyway to purpose trusts (s 18). s It is still the common law test of the life in being plus 21 years for purpose trusts.
5.2.1.3 Ways around the perpetuity problem s A phrase of limitation that limits the gift to the perpetuity period Cases: Re Hooper (1932)
‘Money for . . . upkeep of family graves as far as trustees can legally do so’ was held valid as the phrase ‘can legally do so’ meant the trust had to end within the perpetuity period.
Pirbright v Sawley (1896)
A trust for the maintenance of certain graves for ‘so long as the law permits’ was likewise held valid for the same reasons as in Hooper.
s Re Haines (1952) – the court took note that cats generally do not live more than 21 years and allowed the gift. (In Re Dean (1888) the gift for the maintenance of the testator’s mare was for 50 years, the perpetuity point was not properly considered by the court.) s The correct law was given in the Irish case of Re Kelly (1933) where the court stated that the life in being means only ‘human lives not animals or trees in California’. s The life in being is either that of the person nominated as such in the will or 21 years from the testator’s death. The court will not therefore consider the life of the animal.
5.2.1.4 There must be someone who is willing to enforce the trust Normally the courts will demand an undertaking from the trustees that they will use the funds for the intended purpose (Re Thompson (1934)). The anomalous exceptions to the beneficiary principle
They must come within the recognised categories
The gift must be limited in perpetuity
There must be someone willing to enforce the trust
5.2.2 The principle in Re Denley’s Trust Deed (1969) Case: Re Denley’s Trust Deed (1969)
The testator left a testamentary trust in favour of the employees of a particular company for the provision and maintenance of a sports pitch; the gift was limited to the perpetuity period (see Re Hooper above) and so there was no problem as to perpetuity.
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s Sometimes where animals are concerned the courts have been willing to look at the lifespan of the species. If this is less than the perpetuity period then the gift has been allowed.
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5.2.2.1 How could the gift in Re Denley be interpreted? s As a gift absolutely to human beneficiaries but with a mere wish or moral obligation that they use it to provide and maintain a sports pitch; or s As a gift for purposes but for the benefit of identifiable humans.
5.2.2.2 The decision s The court decided that the wording of the gift suggested that the second interpretation was correct – it was clearly a purpose trust. s The problem was that it did not come within the recognised anomalous categories above. s However, the court decided that the gift should be upheld. s The court distinguished between abstract outward-looking purposes (see Re Astor and Re Shaw) and the case in question. s Here there were identifiable humans (the employees) who could enforce the trust. s Re Denley was followed and approved in the case of Re Lipinski (1976). Workpoint Is Denley based on sound reasoning? Were the employees actually beneficiaries in the sense of being the owners in equity – if so could they not have terminated the trust under Saunders v Vautier, sold the sports pitch and divided up the money? What happens to the employee’s interest if he leaves the employment? If they are not owners in equity would they really have locus standi to enforce the trust?
5.2.2.3 Summary of the Re Denley principle s The trust is made for a purpose which is ‘inward looking’ in nature (for the benefit of ascertainable individuals and not the general public); and s there are ascertainable humans who not being strictly beneficiaries in the legal sense can still enforce the trust; and s the trust is limited in perpetuity; it will be upheld as valid.
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Re Denley
Ascertainable humans who can enforce the trust
Limited to the perpetuity period
5.2.3 Commercial trusts In some circumstances an ordinary arm’s-length commercial transaction appears to take the form of a trust for purposes (though it appears that such trusts are now classed as implied or resulting trusts (Twinsectra v Yardley (2002)). This primarily stems from the House of Lords decision in Barclays Bank v Quistclose Investments (1970). Case: Barclays Bank v Quistclose Investments (1970)
Quistclose was a high-risk lender – lending to firms in financial difficulty. Rolls Razor Ltd was to pay dividends to its shareholders but did not have funds to do so and had a substantial overdraft with Barclays Bank. Quistclose made a loan to Rolls Razor for the sole purpose of paying the dividends to the shareholders (hence apparently a purpose only). The money was put into a separate account at Barclays Bank which had notice of the purpose of the loan. Rolls Razor Ltd went into liquidation before the dividends could be paid. The question was who did the money in the account belong to? Barclays claimed the money under relevant banking law to offset their overdraft. Quistclose under normal principles were just unsecured creditors and hence would have to take their place ‘at the back of the queue’ behind the secured creditors. The only way that Quistclose would have a better claim than the bank is if it could show the money in the account was held on trust. Held The House of Lords, Lord Wilberforce giving the lead judgment, held the money belonged to Quistclose. He stated that when the loan was made for a specific purpose a fiduciary relationship between Quistclose and Rolls Razor was created, meaning that the funds could only be used for the specific purpose. When this purpose failed due to the liquidation of Rolls Razor – company law prevents companies in liquidation paying dividends – then the money would return to the lender.
5.2 EXCEPTIONS TO THE BENEFICIARY PRINCIPLE
‘Inward-looking’ purpose for ascertanitable individuals
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5.2.3.1 For such a trust to occur s Money must be loaned for a specific purpose only. s The funds must be put in a separate bank account. s The bank where the account is kept must have notice of the purpose of the loan.
5.2.3.2 Quistclose: the problems s The outcome that the funds return to the lender has never been in doubt; but s The difficulty lies in explaining how the beneficial interest in the fund returns to the lender and the nature of the trust that is created by the specific purpose.
5.2.3.3 Lord Wilberforce’s reasoning in Quistclose s Lord Wilberforce stated that when the loan was made a primary trust in favour of the shareholders came into operation. s When the purpose failed due to the liquidation the primary trust also failed and hence a secondary trust came into operation in favour of Quistclose. Primary trust Quistclose
Rolls Razor
Secondary trust
Barclays Bank
Shareholders
s Quistclose appears to be a fiscal/policy decision rather than legal. If the House of Lords had found for Barclays Bank then high-risk lenders like Quistclose Investments might not lend; more business would fail, damaging the economy, and so on.
5.2.3.4 Criticisms of the Quistclose decision a) The House of Lords did not specify the nature of the primary and secondary trusts. (Were they purpose trusts or private express or implied trusts?) This has caused much confusion and speculation.
Workpoint How valid are these differing views? With a constructive trust there must usually be unconscionable conduct – where was the unconscionable conduct in Quistclose? In Re Denley there must be ascertainable humans to enforce the trust – how can this work when the loan is made for a purpose only as in Re EVTR? If the Court of Appeal in Twinsectra v Yardley are correct that there is no trust then why is there a need for a separate bank account? If the funds are used for a wrong purpose then why has Quistclose and other cases emphasised that proprietary claims such as tracing can be used?
b) Peter Millett QC, in his article ‘The Quistclose Trust: Who Can Enforce It?’ (1985) LQR, suggests two further criticisms: s According to Lord Wilberforce, on payment of the loan the shareholders become the equitable owners. Why can they not therefore enforce the trust? They are the owners (they can only divest themselves of their interest under s 53(1)(c) LPA 1925 – in writing and signed). This was not done; surely they are still the owners in equity and can enforce the trust. s According to Lord Wilberforce in Quistclose, the purpose failed because company legislation prevents a company in liquidation from paying dividends out of its own assets. s Rolls Razor was never the beneficial owner of the loan, only a trustee. s If a trustee of any trust goes bankrupt, that does not affect the beneficial ownership of the funds. s Hence there was no reason why Rolls Razor could not have paid over the money to the shareholders.
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s Judges in the similar cases of Re EVTR Ltd (1987) and Carreras Rothmans v Freeman Mathews (1985) suggested the primary trust was a constructive trust and the secondary trust a resulting trust. s Megarry J in Re Northern Developments suggested the primary trust was an express trust but in the form of Re Denley – a trust for a purpose but with identifiable persons who can enforce the trust. s The Court of Appeal in Twinsectra v Yardley (1999) held that the primary trust was not a trust but that the full beneficial interest in the funds transfers to the borrower subject to a contractual right in the lender by way of injunction to prevent the funds from being used for a wrong purpose. Only if the purpose fails will a resulting trust in favour of the lender be created.
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c) The decision in Quistclose has elevated an unsecured creditor to being in effect a secured creditor with a beneficial interest – is this correct? There is no system of registration for the Quistclose-type creditor. Therefore there is no way for later creditors to discover the existence of the ‘Quistclose creditor’ and could potentially lose out.
5.2.3.5 The case of Twinsectra v Yardley (2002) HL Case: Twinsectra v Yardley (2002) HL
Twinsectra made a loan to Yardley of £1 million for the sole purpose of Yardley purchasing land with the money. Twinsectra made the loan through a solicitor Sims, who passed the funds on to Yardley’s solicitor, Leach, who was aware of the purpose of the loan. Leach on Yardley’s instructions released and used some of the funds for purposes other than that of purchasing land. The case was concerned with whether Leach had dishonestly assisted with a breach of trust but the House of Lords had to determine who the remaining funds of the loan belonged to.
s In Twinsectra v Yardley the same Peter Millett who wrote the article cited above was Lord Millett who gave the lead judgment on the Quistclose matter in Twinsectra. s Lord Millett analysed four possibilities as to the passage of the beneficial interest when the loan was made: Twinsectra (where does the beneficial interest go?)
Borrower?
Ultimate beneficiary?
Suspense?
Stays with lender?
Which is correct? s To the ultimate beneficiary? – Lord Millett rejected this as the beneficiary might be a purpose (as in Re EVTR above), making the trust void. s To the borrower absolutely? – This was rejected as that would mean that in Quistclose, Barclays Bank could have claimed the funds – and hence defeats the whole object of the high-risk lending.
s The lender – accepted as being the only possibility left after the ‘impossible [the other three] have been eliminated’. s So according to Lord Millett the beneficial interest never leaves the lender; the borrower is given a power to apply the funds for its intended purpose. If that power fails for some reason such as insolvency of the borrower, the interest remains with the lender. s Of the other judges in Twinsectra only Lord Hoffmann made some comment. Lord Hoffmann did not mention Quistclose but did say that on failure of the purpose the funds would go back to the lender on resulting trust. Consequently we have very powerful House of Lords authority that a Quistclose trust is indeed a resulting trust.
Research Point Read the judgment of Lord Millett in Twinsectra v Yardley. Why does he quote and apply words from Sir Arthur Conan Doyle’s Sherlock Holmes?
Criticisms of Millett’s judgment s What sort of resulting trust is it? s The nature of an automatic resulting trust (see Chapter 8) is that it results back if the beneficial interest does not vest in the intended beneficiary. Here it has never left. s With the other type of resulting trust – the Presumed Resulting Trust – the Court of Appeal in Hodgson v Marks (1971) held that where money is loaned the presumption of a resulting trust is rebutted and hence probably a Quistclose trust is not a presumed resulting trust either. s So is Quistclose a new species of resulting trust? s A further problem with Millett’s judgment is his rejection of the ‘being in suspense’ argument as artificial. s If one considers closely the discretionary trust, here no beneficiary has an identifiable interest until the discretion is exercised in the beneficiary’s favour. So who owns the beneficiary interest before the discretion is exercised?
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s To be in suspense – Lord Millett rejected this as ‘artificial’ due to the equitable remedy of the resulting trust. Under English law if the beneficial interest fails to find ‘a target’ it results back to the donor; it does not remain in suspense.
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s
Probably the beneficial interest is in suspense until the discretion is exercised – something rejected by a House of Lords judge as being ‘artificial’.
Research Point Read the article by James Penner, ‘Lord Millett’s Analysis’, in W.J. Swadling (ed.), The Quistclose Trust: Critical Essays (Hart Publishing, 2004), p. 41. Why and to what extent does he criticise Lord Millett’s judgment?
Key cases regarding the nature of the Quistclose trust: Re Northern Developments
Megarry regarded the primary trust as an express trust but in the form of a Re Denley purpose trust. This would put the beneficial interest in suspense until payment is either made or becomes impossible when it would return to the lender on resulting trust.
Carreras Rothman v Freeman Mathews
Peter Gibson held that the primary trust was a constructive trust. [But a constructive trust only arises due to the conduct of the trustee and is regardless of the parties intentions.] This would then return to the lender on resulting trust on failure of the purpose.
Re EVTR
Similar reasoning to Carrerra Rothman; the court also stated obiter that the relevant fund need not be segregated to attract the Quistclose protection – something of doubtful authority.
Twinsectra v Yardley (Court of Appeal)
Two conclusions, one being that the beneficial interest is in suspense until either applied for the intended purpose or on failure goes back on resulting trust to the lender. The other view was that there was no trust at all; recipient receives whole beneficial interest subject only to a contractual right vested in the lender to prevent the recipient using it for a different purpose. If the purpose fails then there is a resulting trust.
Twinsectra v Yardley (House of Lords)
Lord Millett: there is no primary trust; recipient holds on resulting trust from the moment of the loan subject to a power in the recipient to use the funds for the intended purpose. General agreement by Lord Hoffmann.
Workpoint
5.2.4 Gifts to unincorporated associations An unincorporated association generally includes clubs and societies and other entities of a non-commercial nature but which have an important social value. s It is not a corporate body and hence has no legal personality. s As such it cannot sue or be sued in its own name and exists solely through its members. s As it has no legal personality then strictly speaking it cannot be the recipient of a gift as it does not exist. s Any purported gift cannot therefore be to the association itself but rather for its purposes, which infringes the beneficiary principle and is hence void unless it can be saved by the earlier shown Re Denley exception. The characteristics of an unincorporated association were given in Conservative and Unionist Central Office v Burrell (1982): s two or more persons, s coming together for a non-commercial purpose, s whose relationship is governed by contract (the terms being the rules of the association).
5.2.4.1 Construction of gifts to unincorporated associations s Because of the social usefulness of unincorporated associations the courts have attempted to find ways to validate gifts and legacies to such entities. s In Leahy v AG for New South Wales (1959) the court imposed two possible interpretations: s a gift to the members as joint tenants or tenants in common, or s a gift for the association’s purposes. s In Leahy the gift was for cloistered nuns and hence was held to be for the purposes of the association.
5.2 EXCEPTIONS TO THE BENEFICIARY PRINCIPLE
David makes a loan to Charles for the sole purpose of Charles buying a take-away curry for Paul and Brian. When Charles arrives at the curry house it is closed. Using the principles from Quistclose and Twinsectra show the transmission of the beneficial interest of the loan.
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s The problem with the first interpretation is that the members could sever their share immediately. s In Neville Estates v Madden (1962), a new category was introduced which was inserted between the first and second categories of Leahy (a new category 2). s This was a gift to the members but not on a joint tenancy or tenancy in common basis but as an accretion to the funds of the association. s What is done with the gift is dependent on the rules of the association not on the intentions of individual members. s This is a contractual rather than a trust basis and is known as the ‘contract holding theory’ as what is done with the funds depends on the contractual rules of the association. The three possible constructions of a gift to an unincorporated association: Category 1: A gift to the members as joint tenants or tenants in common. Category 2: A gift to the members subject to the rules of the association. Category 3: A gift on trust for the association’s purposes (a purpose trust).
5.2.4.2 How important is the new category 2? s The later High Court case of Re Recher (1972) approved the contract holding theory from Neville Estates v Madden. s Now when a gift is made to an unincorporated association the presumption is category 2 – a gift for the members but to be administered according to the rules of the association. s This reasoning was approved by the House of Lords in Universal Tankships Inc of Monrovia v International Transport Workers Federation, The Universe Sentinel (1983).
5.2.4.3 What can rebut the category 2 presumption and make the gift a category 3 or category 1 or even void? s According to Re Recher and Universal Sentinel if the gift is made ‘on trust’ for the association’s purposes then it will have to be category 3. It cannot be put into category 2 if this is the case. s A gift that is clearly stated to be for the members ‘as joint tenants [or tenants in common]’ will put the gift into category 1.
s If the gift is made for a specific purpose but not ‘on trust’ this will not rebut the category 2 presumption.
Re Lipinski (1976)
A gift was made to a Jewish association for the specific purpose of building. Held This did not take the gift out of category 2 as the members could use the gift for anything within the rules of the association. The specific purpose was treated as a mere hope or moral obligation rather than a legally binding one.
s The gift will be void as breaching the rules against perpetuity where the unincorporated association does not have the power to wind itself up (Re Grant’s Will Trust (1979)). Workpoint Why could the members in Re Grant not have given an undertaking to the court to amend the rules to allow them to wind up the association?
s If it is a category 3 gift it might be saved by Re Denley (1969) – providing the gift is for an inward-looking purpose; there are identifiable humans who can enforce the trust and a perpetuity clause limiting the gift to the perpetuity period.
5.2.4.4 Does the Neville Estates category 2 method fulfil the intentions of the donor? s While the category 2 approach prevents the individual member immediately severing their share there is nothing stopping the members winding up the association and distributing the funds among themselves. s Hence the gift is valid but there is nothing that the donor can do to enforce the terms (if there are any in the gift). s Likewise if a specific purpose is mentioned the unincorporated association can use the funds according to its rules and does not need to comply with the terms of the gift (Re Lipinski (1976)). So again the gift is valid but unenforceable by the donor. s Hence ‘The price of validity [of the gift] is unenforceability’ (per Brian Green, ‘Dissolution of Unincorporated Associations’ (1980) 44 MLR 459).
5.2 EXCEPTIONS TO THE BENEFICIARY PRINCIPLE
Case:
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5.2.4.5 Do unincorporated associations frequently break the rules on formalities? s According to Neville Estates category 2 the gift is for the members subject to the rules of the association. Each member thus has a subsisting equitable interest in the gift (legal title being held by the holders of the bank account where the funds are stored). s Therefore when a member leaves the association what happens to his share? If the rules allow him to sever then he can take his share; most likely the rules will be silent on this and hence he loses his share on leaving. s If a new member comes in then that new member takes the share. However, according to the Law of Property Act 1925 s 53(1)(c) a subsisting equitable interest can only be transferred in writing and signed by the donor. This does not happen and yet the new member still gets the old member’s share assuming the association winds up during his membership. s Therefore unincorporated associations appear to break the rules on formalities.
5.2.4.6 Dissolution According to Re GKN Bolts and Nuts Ltd, Sports and Social Club (1982) and Re Sick and Funeral Society of St John’s Sunday School, Golcar (1973): s dissolution occurs when there is a formal meeting to wind up; s mere inactivity is not enough; s if there is no meeting to wind up then unequivocal conduct to show the association is being wound up, such as selling-off of the association’s property, is required.
5.2.4.7 Distribution of funds: where do the funds go when the association is wound up? There are two High Court cases with fundamentally different outcomes: s Re West Sussex Constabulary Fund Trusts (1971) – on dissolution the funds go either s bona vacantia to the crown, or s where there is an identifiable donor back on resulting trust to that donor.
Workpoint
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s Re Buckinghamshire Constabulary Fund (1979) (‘Re Bucks’) heard after Re Recher and follows the contract holding approach: s All gifts under category 2 of Neville Estates belong to the members; s hence on dissolution they still belong to the members and should be distributed to them. s If the gift is category 3 then it will revert back on resulting trust. s If the association is moribund (having only one member) then the funds (if on a category 2 gift) go to the crown as bona vacantia. Re Bucks clearly reflects the modern ‘contract holding approach’ and is likely the correct law. s The Re Bucks approach has been approved and followed in HanchettStamford v Attorney-General (2009) except for the point about the moribund association – the court in Hanchett stated that the funds would go on a joint tenancy survivorship basis to the last surviving member.
5.2.4.8 How much does each member receive? s Distribution is normally per capita unless the rules specify otherwise. s Also, if the subscription payments are different distribution is made in proportion to the subscription (Re Sick and Funeral Society of St John’s Sunday School, Golcar (1973); Re GKN Bolts and Nuts (1982)). Unincorporated associations
Definition: Two or more persons Non-commercial purpose Contractual relationship
Construction As gift for the members subject to the rules Unless: Gift made on trust for the association’s purposes; or it cannot wind itself up
Dissolution To the members per capita Unless: Subscriptions different; or Category 3 gift (on trust for the association’s purposes)
5.2 EXCEPTIONS TO THE BENEFICIARY PRINCIPLE
Re West Sussex was heard after Neville Estates v Madden but before Re Recher which approved the Category 2 of Neville Estates and brought into effect the ‘contract holding’ approach. West Sussex was thus decided under the old principle that when a member paid his subscription he had his right of membership and that was the consideration. The member had no more entitlement. Gifts from the outside were treated as gifts for purposes of the association which on dissolution revert back to the donor if known or go bona vacantia.
Presumption that the gift is for the members subject to the rules of the association.
The loan is made for a specific purpose. The loan is kept in a separate account and the bank has notice. The purpose of the loan fails.
The money remaining reverts to the lender on resulting trust.
Gift is made for an ‘inward-looking purpose’ [for identifiable or ascertainable individuals]. Those individuals can enforce the trust.
The gift must be limited in perpetuity.
Must be within recognised categories: specific animals; tombs and monuments; private masses.
Must be limited in perpetuity to the common law period of a life in being plus 21 years.
Must be someone (usually the trustees) who will give an undertaking to fulfill the trust.
Generally void for offending the beneficiary principle and the rule against inalienability.
Specifying a particular purpose for the gift will not remove the category 2 presumption.
This presumption is rebutted if the gift is made ‘on trust for the association’s purposes’ or clearly for the members as joint tenants or tenants in common.
Unincorporated associations
Loans
Rule in Re Denley
Anomalous exceptions
General abstract purpose
A comparison of the different types of trust made for purposes
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Potential exam questions i) £20,000 for the provision of Esther’s paintings of dead animals to local museums. ii) £10,000 for the upkeep and maintenance of her pet hamster Harold so long as the law allows. iii) £50,000 for the provision of a café for the sole use of employees of Duds Ltd for the perpetuity period. iv) £50,000 for the Bedfordshire Private Tennis Club for the sole purpose of purchasing tennis rackets. Consider the validity of the above gifts. 2) ‘The search for an orthodox legal conceptual rationale for the Quistclose case will probably never reach an entirely satisfactory conclusion. . . . The brevity and content of Lord Wilberforce’s speech . . . suggests a decision driven by policy at the expense of legal analysis’ (Gary Watt, Equity and Trusts (Oxford University Press, 2010)). Discuss with reference to Quistclose trusts. 3) Some years ago 12 chess-loving friends combined their savings to purchase property for conversion into a private chess club, ‘Fischer Knights’. New members were admitted provided they agreed by signature to pay their annual subscription and to conform to the club’s rules. Adult members’ subscriptions were twice as much as those of juvenile members. A number of persons have made gifts to the club: i) donations from collection tins and raffles; ii) gift from Gary Romanov of £100 to each individual member of the club; iii) donation from Colonel Tibbs of £100,000 to be used for the sole purpose of recruiting new members of local origin only; iv) donation from Dr John Finch on trust for the purpose of providing new equipment. Advise the Chairman as to how these gifts should be construed and what would occur should the club be dissolved.
5.2 EXCEPTIONS TO THE BENEFICIARY PRINCIPLE
1) Esther has died and her valid will leaves the following legacies:
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Chapter 6 Secret trusts 6.1 Introduction The chapter will consider fully secret and half-secret trusts. A fully secret trust occurs when a testator appears to leave in his will an absolute gift to a beneficiary but due to a communication with that beneficiary before his death has stated that the beneficiary is to hold the gift on trust for a third party. The will does not reveal that the purported beneficiary is in fact a trustee nor does it reveal the identity of the true beneficiary. A half-secret trust is when a gift is left in a will to a trustee; however, the holder of the beneficial interest is not stated in the will. So here the will reveals that there is in fact a trust but not the identity of a beneficiary. A will is a public document; for reasons known to the testator he might not want the public to know who his beneficiaries are. The secret trust is a means of protecting identities. Secret trusts
Fully secret trusts
Half-secret trusts
Intention Communication before death Acceptance before death
Intention Communication before execution of the will Acceptance before or at the time the will is executed
6.2 Fully secret trusts: general principles s The burden is on the secret beneficiary to prove the existence of the trust (Jones v Badley (1868)).
s The standard of proof for the secret trust is the ordinary civil standard of a balance of probabilities (Re Snowden (1979)). s A secret trust could also arise on intestacy if the the donor states to his next of kin who would inherit under the intestacy rules that if he does not make a will the latter is to hold the property for a beneficiary. s It is essential that the communication must take place before the testator’s death. s This does not mean the trustee has to know the identity of the beneficiary before the death; s it is simply that he knows that there is a beneficiary and has agreed to the terms of the trust. Case: Re Keen’s Estate (1937)
The testator put the name of the beneficiary into a sealed envelope that was marked ‘Not to be opened until my death’. He passed the envelope to the trustee who knew its contents but not the name of the beneficiary. The trustee had agreed to the terms of the trust. Held The communication was at the time of delivery of the envelope and hence during the testator’s lifetime. The court used the illustration of a ship sailing under ‘sealed orders’ only to be opened when in the open sea. The orders being delivered before the ship sailed, though the captain did not know the terms. [Note that the secret trust failed on other grounds here.]
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s Similar principles for proving the existence of the trust apply as with express private trusts: s There must be evidence of certainty of intention, subject matter and object; mere precatory words imposing a moral obligation or showing a general intention will not suffice (Re Snowden (1979)). s In Ottaway v Norman (1972) part of the secret trust failed where money was first left to the purported trustee and anything that was left of it was to go to the secret beneficiary. This failed due to the lack of certainty of subject matter – it was unknown how much money would be left (compare Sprange v Barnard (1789) in Chapter 3).
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s A secret trust can also create only a life interest. Case: Ottaway v Norman (1972)
The testator left real property in his will to X, his second wife; but before his death communicated to X that when X died she was to leave that same property in her will to Y, his son from his first marriage. X agreed to this but prior to her death had made a will leaving the property to a third party. Held A valid secret trust existed; X merely had a life interest in the property that was left to her by the testator and was bound to leave it in her will to Y. [Note a similar gift of money failed for uncertainty of subject matter.]
Workpoint Whereas the outcome of Ottaway v Norman is probably correct, is the court’s reasoning sound here? Can a will be made irrevocable? Would it not have been more logical that X held the property on constructive trust for the son?
s If property is left by will to two or more persons as co-owners what is the situation if only one or some of the co-owners give their consent to the secret trust? s If the property is left to co-owners as tenants in common only those who agreed to be bound by the secret trust will in fact be bound; the other co-owner or co-owners take beneficially (Moss v Cooper (1861)). s If property is left to co-owners as joint tenants then all the co-owners are bound providing that at least one of them was informed before the execution of the will (Re Stead (1900)). If communication to one of the joint tenants was after execution of the will then only that joint tenant will be bound.
6.3.1 The essential elements come predominantly from the case of Ottaway v Norman (1972) s Intention: The testator must intend to impose an obligation on the purported recipient of the property that he will hold the property on trust for the secret or true beneficiary. s Communication: The identity of the beneficiary and the terms of the trust must be communicated to the purported trustee before the testator’s death by the testator himself or by his agent: s the actual identity and terms do not need to be known – they just have to be communicated – see Re Keen’s Estate (1937) above. s Acceptance: The purported trustee must expressly promise the testator or (by his silence or acquiescence) imply that he will hold the relevant property given to him on trust for the purported beneficiary. s This expressed or implied promise can be made by the purported trustee either before or after the will is executed but must be before the testator’s death. s The testator must leave the property to the purported trustee in his will.
6.3.2 Evidential difficulties s It appears apparent that secret trusts are open to fraud or oversight. s If the purported trustee denies totally that he gave a promise to the testator it might be very difficult for the secret beneficiary to prove otherwise. s Much might depend on the skills of the lawyers in cross-examination in court! s Alternatively, if it can be shown that communication was not given to the purported trustee until after the testator’s death then the trustee takes the gift absolutely (Wallgrave v Tebbs (1855)). This would also be evidence of a lack of intention on the part of the donor to create the secret trust.
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6.3 THE ESSENTIAL ELEMENTS OF THE SECRET TRUST
6.3 The essential elements of the secret trust
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s If the secret trustee gave a promise to hold on trust but communication of the identity of the beneficiary did not occur until after the testator’s death then the trustee holds the property not beneficially but on resulting trust for the testator’s estate (Re Boyes (1884)).
6.4 Are fully secret trusts in breach of the Wills Act 1837? Workpoint Read Wills Act 1837 s 9: ‘9 Signing and attestation of wills. No will shall be valid unless – a) it is in writing, and signed by the testator, or by some other person in his presence and by his direction; and b) it appears that the testator intended by his signature to give effect to the will; and c) the signature is made or acknowledged by the testator in the presence of two or more witnesses present at the same time; and d) each witness either – i) attests and signs the will; or ii) acknowledges his signature, in the presence of the testator (but not necessarily in the presence of any other witness), but no form of attestation shall be necessary.’
s According to this section a will is invalid if it fails to meet the above requirements. s Yet a secret trust can be formed by later communication in a letter to the purported trustee which does not need to be attested or by means of oral communication. s Therefore is a secret trust in breach of the Wills Act 1837 s 9?
6.4.1 The construction of secret trusts Case: Re Young (1951)
The terms of a secret trust was that the chauffeur would receive a legacy; a problem is that the chauffeur had witnessed the will (and hence should be precluded from receiving a gift under Wills Act 1837 s 15).
Held The gift to the chauffeur was valid. Danckwerts J stated ‘[the person] does not take the by virtue of the gift in the will but by virtue of the secret trust imposed upon the [trustee] who does in fact take under the will’.
s Re Young (1951) is stating that the trust was created during the life of the testator and is hence an inter vivos trust. s It arises by acceptance of the terms by the purported trustee. s In the House of Lords case of Blackwell v Blackwell (1929) Lord Warrington referred to the secret trust as being created: s from the acceptance of the purported trustee of the trust s that was communicated to him by the testator s on the promise that the property would be left to him by will. s It is therefore ‘dehors’ or outside the will but is still dependent or conditional on the validity of the will. If the will is void then the gift to the purported trustee (and hence the secret beneficiary’s gift) is also void.
6.4.2 Miscellaneous matters 6.4.2.1 Formalities s If the secret trust is not a testamentary trust (created by will) but an inter vivos express trust then surely it must comply with the formalities for creating such trusts. s A trust of land must be created by means of the Law of Property Act 1925 s 53(1)(b) – it must be evidenced in writing and signed. s However, in Ottaway v Norman (1972), above, the subject matter included land; there was no evidence in writing and yet the court did not consider this point but held there was a valid secret trust. s Where trusts of property other than land are involved an oral declaration suffices and hence the same problem should not arise with personalty.
6.4.2.2 Secret trusts can avoid the strict requirements of the Wills Act 1837 s Under the doctrine of lapse if a beneficiary predeceases the testator the gift is lost; however, in Re Gardner (1924) it was held that the beneficiary under a secret trust who predeceases the testator does not
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6.4 WILLS ACT 1837
Re Young (1951) (continued)
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lose the gift but passes the beneficiary’s estate. The reasoning being again that the beneficial interest comes about via the trust which was perfected when the will was made. Workpoint Is the reasoning in Re Gardner sound? If a secret trust is inter vivos and not testamentary then it must be fully constituted for it to be valid. A will is not legally binding until the death of the testator – it can be revoked or modified any time up to the moment of death – so how can a trust be created at the time the will is made? If the secret trust is not fully constituted until the death of the testator how can it be valid when the promise is made by the secret trustee? If the intended trustee predeceased the testator the gift would lapse; however, Re Gardner suggests that it has already passed to the intended trustee.
s In Re Maddock (1902) it was held that if the intended trustee predeceases the testator then the gift to the purported beneficiary is also lost as the trust is conditional on the property vesting in the trustee. (This appears to contradict the maxim that ‘a trust will not fail for want of a trustee’.) s As stated earlier under Wills Act 1837 s 15 a gift is lost if a beneficiary signs as a witness; this is not the case with a secret trust if a beneficiary of the secret trust attests the will. The gift comes via the secret trust not the will itself (Re Young (1951)).
Research Point Could a secret trust apply to inter vivos dispositions? A promises to transfer property to B on the understanding that he will hold the property for C. See Gold v Hill (1999) 1 FLR 54; Re Tyler’s Trust Funds (1967); Nichols v IRC (1973).
Research Point Consider the maxim ‘equity will not permit a statute to be used as an instrument of fraud’. How does this affect the rationale for the existence of fully secret trusts?
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Checkpoint – fully secret trusts Done!
I understand the circumstances in which a secret trust can arise. I understand the essential elements of the fully secret trust. I understand the difficulties surrounding Wills Act 1837 s 9. I understand the inconsistencies in the case of Re Gardner.
6.5 Half-secret trusts With a half-secret trust the existence of the trust is identified in the will but not the identity of the beneficiary.
6.5.1 The elements of the half-secret trust (Blackwell v Blackwell (1929) HL) s The testator must communicate to the intended trustee that he is to hold the property on trust before the will is executed. s The testator must communicate the identity of the beneficiary before the will is executed in the mode specified (or if non-specified method then orally or in writing). s X must indicate his acceptance before or at the time the will is executed. s The will must state that X holds the property as trustee and must indicate that the identity of the beneficiary has been communicated to him.
6.5.2 These requirements are mandatory in nature Case: Re Bateman’s Will Trusts (1970)
The communication of the identity of the beneficiary was made after the will was executed. Held The trust was invalid and the property went back to the estate on a resulting trust.
6.5 HALF-SECRET TRUSTS
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Case: Johnson v Ball (1851)
The testator bequeathed the proceeds of a life assurance policy to trustees to hold the same for those appointed by letter. The testator had orally stated who the beneficiaries were before the will was executed but the letter was written afterwards. Held The secret trust was invalid – the mode of communication stated had not been followed before the will was executed.
6.5.3 Miscellaneous points for half-secret trusts s The burden of proof is on the beneficiary claiming the interest. s It appears that evidence is not admissible from a trustee seeking to establish that he was to have a full or partial beneficial interest in the property (Re Rees Will Trusts (1950)). This is most likely to prevent fraud on the part of the trustee. s If the trustee predeceases the testator, the maxim ‘equity will not allow a trust to fail for want of a trustee’ applies and the gift is still valid. s Where formalities are concerned, if a trust of land is involved it appears that the Law of Property Act 1925 s 53(1)(b) will need to be complied with (Re Baille (1886); Blackwell v Blackwell (1925)). s As the trustee is identified in the will as trustee if the gift fails for any reason the property will be held on resulting trust for the estate (Johnson v Ball (1851)). s The primary difference regarding the required elements for the halfsecret trust as opposed to the fully secret trust is the communication element: s A fully secret trust can be communicated to the intended trustee any time up to the moment of death. s A half-secret trust must be communicated to the intended trust before the will is executed. s The rationale for this appears to be that the trustee must know of the terms of the trust and be able to disclaim his trusteeship if he so wishes.
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Checkpoint – half-secret trusts Done!
I understand the requirements for the half-secret trust. I understand that these requirements are mandatory. I understand that as the trustee is identified in the will as a trustee there are differences with the fully secret trust.
Potential exam questions 1) Critically evaluate the fully secret and half-secret trusts. Include in your answer why such trusts, or one of them, are said to be ‘dehors’ the will. 2) Michael has two children with his wife Henrietta; unknown to Henrietta, Michael had an affair five years ago and has a son, David, as a result of that affair. Michael wants to provide for David in his will but is concerned that Henrietta will discover his affair. Advise Michael how he can provide for David in his will without Henrietta discovering the truth.
6.5 HALF-SECRET TRUSTS
Item on checklist:
Chapter 7 Charities 7.1 Advantages of charitable status a) Less stringent test for certainty of objects: s no need for identifiable human beneficiaries. b) Tax advantages – exemption from: s inheritance tax (Inheritance Tax Act 1984 s 23), s income tax (Income and Corporation Tax Act 1988 s 505), and s capital gains tax (as above). Partial exemption from council tax; though not exempted from value-added tax. c) Perpetuity rules of inalienability do not apply to charities. d) The cy-pres doctrine might permit a failed gift to be transferred to a charity with similar objects.
7.2 Regulation of charities s Charities are regulated by the Charity Commission.
7.3 The law before the Charities Acts 2006 and 2011 Three factors had to be fulfilled: a) The gift must come within the spirit of the preamble to the Statute of Uses 1601.
Research Point Read the preamble to the Statute of Uses 1601.
b) The gift must be for the public benefit. This factor has been sub-divided into two main heads. First, there must be an identifiable benefit, and second, the benefit must be for the public or a section of the public. Public benefit
Identifiable benefit
For the public or section of the public
Key Point The identifiable benefit was automatically presumed for the first three charitable heads. For the fourth head, ‘other purposes beneficial to the community’, there was no such presumption and hence an identifiable benefit had to be shown by the party claiming charitable status.
The benefit must be for the public or section of the public: s The tests for ‘section of the public’: 1) Trusts for the relief of poverty s The test was whether there was an identifiable class of poor people (Dingle v Turner (1971)). This means that there might be a very narrow class of beneficiaries: s Re Scarisbrick Will Trusts (1951); Re Segelman (1995) – known as the ‘poor relatives’ cases – were held charitable. s Dingle v Turner (1971); Re Coulthurst (1951) – a trust for ‘poor employees’ of a company attracts charitable status. 2) Trusts for the advancement of education s The test comes from the House of Lords case of Oppenheim v Tobacco Securities (1951) – known as the ‘nexus test’. s In order to constitute a section of the public, there must be no ‘nexus’ (personal connection) whether by blood or by contract between the beneficiaries and any given person.
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s These charitable heads were consolidated into four categories in Commissioners for Special Purposes of Income Tax v Pemsel (1891): 1) trusts for the relief of poverty; 2) trusts for the advancement of education; 3) trusts for the advancement of religion; 4) trusts for other purposes beneficial to the community.
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Cases: Re Compton (1945)
A trust for the education of the descendants of three named persons was held not to be for a section of the public due to the ‘blood’ nexus.
Oppenheim v Tobacco Securities (1951)
A trust for the advancement of education where the potential beneficiaries were the children of employees and former employees of a group of companies was held not to constitute a section of the public (due to the ‘contractual’ nexus), even though the number of employees was over 100,000.
Criticism of the nexus test: s Lord MacDermott gave a powerful dissenting judgment in Oppenheim, stating there was no fundamental distinction: s between those who are employed in a particular industry before it is nationalised (impersonal nexus and would be valid) and s those employed once it has been nationalised and one employer has taken the place of many (personal direct nexus which would fail as a charity). s So a trust for railwaymen working north of Watford would avoid the nexus test whereas when the railway is nationalised those working for an identifiable named railway company would fall victim to it. s Lord MacDermott stated the test should be one of fact and degree, taking into account the potential size and number of beneficiaries. s All the Law Lords in Dingle v Turner, obiter, agreed with Lord MacDermott; Lord Cross stated that the distinction between personal and impersonal relationships is unsatisfactory and approved the fact and degree test as the public benefit test for educational charities. s The decision of the majority of the House of Lords in Oppenheim appears to be fiscal in nature preventing tax perks. Workpoint Would the following be charitable? s A trust for the education of children of persons working in the tobacco industry in London. s A trust for the education of children working at Tobacco Securities Ltd based in London.
Research Point
3) Trusts for the advancement of religion s The test appears to be that the members of the religion have contact with the community; this does not mean proselytisation but simply ordinary day-to-day contact. s Hence a gift to cloistered nuns (who have no contact with the outside world) was not charitable (Gilmour v Coats (1949)). s The court will not make an evaluation of religious doctrine – ‘as between religions the law stands neutral’ (Varsani v Jesani (1998)); nor should the court use other religions to evaluate each other. Case: Manoussakis v Greece (1996)
Four Greek Jehovah’s Witnesses had rented a property in Crete for a place of worship. A permit was refused by the authorities inter alia because it was opposed by the Greek Orthodox Church. Held The European Court of Human Rights declared unlawful the Greek practice of allowing the Greek Orthodox Church the right to evaluate other religions before religious status was granted.
4) Trusts for other purposes beneficial to the community s This head did not have a presumption of public benefit; a more stringent test was used. This was basically a double test of: s the nexus test from Oppenheim v Tobacco Securities, followed by s the ‘class within a class’ test. s This comes from IRC v Baddley (1955). The House of Lords gave the example of a bridge in a town to be used only by Methodists. Such a gift would fail as being a class (the Methodists) within a class (the people of the town). The court distinguished between: s a gift that could be enjoyed by the public generally but only chosen to be so by a distinct few (valid), and s a gift that was restricted to a distinct few but could be enjoyed by the public generally (invalid). Hence a gift to provide a bridge to be used only by Methodists would fail. c) The purposes must be exclusively charitable An organisation or gift cannot qualify as charitable unless its objects or purposes were all exclusively charitable.
7.3 THE LAW BEFORE THE CHARITIES ACTS 2006 AND 2011
Would Lord MacDermott’s ‘fact and degree’ test really be better in practice than the nexus test?
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Cases: IRC v Baddley (1955)
Land was provided for the Methodist Mission for ‘the promotion of the religious, social and physical well being of persons resident in . . . West Ham’. This failed as charitable due to word ‘social’ which can have a broader meaning than charitable.
Re Sanders Will Trust (1954)
A gift for the working class was not a trust for poverty as the working classes were not exclusively poor.
Note also the ‘and/or’ cases: s Where a gift is made for ‘charitable or public purposes’ the public purposes are a separate category and hence the gift would fail as charitable (Blair v Duncan (1902)) (known as a ‘disjunctive construction’). s If the gift is made for ‘charitable and benevolent’ purposes then the ‘and’ causes the second purpose to be a sub-set of the first purpose – i.e. ‘benevolent’ means a benevolent purpose that is charitable (known as a ‘conjunctive construction’). s Re Sutton (1885): ‘charitable and deserving objects’ held valid; s Re Best (1904): ‘charitable and benevolent’ held valid. s Where, however, three purposes are mentioned they are generally regarded as separate categories even with the ‘and’ present (Re Eades (1920): ‘religious, charitable and philanthropic objects’ held void).
Reflection Point Concerning the old law on charities: s Should there be a statutory definition of charity? s Should public benefit be presumed? s Should charitable status be defined by a 400-year-old statute? s Case law was sometimes inconsistent and difficult to reconcile. s Should there be separate tests of public benefit?
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Checkpoint – old law on charities Done!
I understand that the old law required the purpose to be within the spirit of the preamble to the Statute of Uses 1601. I understand that the purpose had to benefit the public or a section of the public. I understand that an identifiable benefit was presumed for poverty, education and religion. I understand that the test for section of the public depended on the type of purpose. I understand that the purposes had to be exclusively charitable.
7.4 The new law: the Charities Acts 2006 and 2011 The Charities Act 2011 is merely a consolidating statute bringing together the Charities Act 2006 and the Charities Act 1993 and does not alter the Charities Act 2006.
7.4.1 Definition of ‘charity’: a statutory definition s Under s 1(1) of the Charities Act 2011 (‘the 2011 Act’), a charity is defined as an institution which s is established for charitable purposes only, and s falls to be subject to the control of the High Court in the exercise of its jurisdiction with respect to charities.
7.4.2 The meaning of ‘charitable purposes’ s Section 2(1) of the 2011 Act defines charitable purposes as s those which fall within s 3 of the Act and s which is for the public benefit under s 4. s Section 3 increases the number of heads to 13.
7.4 THE NEW LAW: THE CHARITIES ACTS 2006 AND 2011
Item on checklist:
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Workpoint Section 3(1) sets out 13 charitable heads: a) b) c) d) e) f) g) h)
prevention or relief of poverty; advancement of education; advancement of religion; advancement of health or the saving of lives; advancement of citizenship or community development; advancement of the arts, culture, heritage or science; advancement of amateur sport; advancement of human rights, conflict resolution or reconciliation or the promotion of religious or racial harmony or equality and diversity; i) advancement of environmental protection or improvement; j) relief of those in need by reason of youth, age, ill health, disability, financial hardship or other disadvantage; k) advancement of animal welfare; l) the promotion of the efficiency of the armed forces of the Crown, or of the efficiency of the police, fire and rescue services or ambulance services; m) any other purposes within sub-s (4).
s Section 3(4) – the purposes in s 3(1)(m) include charitable purposes under the existing case law. s The old law is incorporated into the new, unless it conflicts with the new law. The old pre-2006/2011 Charities Act cases are hence still of fundamental importance. s The ‘any other purposes’ in paragraph (m) extends to all that were ‘other purposes beneficial to the community’ under the old law.
7.4.2.1 ‘Prevention or relief of poverty’ s This includes the ‘prevention’ of poverty. s Re Coulthurst (1951) – poverty does not mean ‘destitution’. It means people who have to ‘go short’ in the ordinary meaning of that term, having due regard to their ‘status in life’. s Clear words suggesting poverty need to be used. Case: Re Young (1951)
A trust for ‘distressed gentlefolk’ was valid.
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Case: A trust for ‘ladies of limited means’ was valid.
s The purposes must still be exclusively charitable – all the members had to be poor (Re Gwyon (1930); Re Sanders Will Trusts (1954)). s In Re Niyazi’s Will Trusts (1978), a provision of a working men’s hostel in Cyprus was valid. Persons who had to live in the hostel were likely to be poor. Workpoint What is the difference between relief and prevention of poverty? s To relieve poverty, the trust must relieve a need (Joseph Rowntree Memorial Trusts Housing Association Ltd v Attorney-General (1983)) and hence ‘relief ’ suggests that the beneficiaries are already poor. Prevention therefore would be to assist those before such would become poor. (See The Prevention or Relief of Poverty for Public Benefit – Charity Commission Analysis (2008).)
7.4.2.2 The advancement of education s This includes schools and universities, museums, scholarly societies, industrial and technical training, music and fine arts (Re Delius (1957)). s Expert evidence can determine what is ‘educational’ (Re Pinion (1965); Re Shaw (1957)). s Professional bodies might also be charitable providing the main object is the promotion and advancement of a science, not the protection of those practising a particular profession (Royal College of Surgeons v National Provincial Bank (1952)). s It is also the case that research can be charitable (McGovern v Attorney-General (1982)) if: s the subject matter of the proposed research is a useful subject of study; s the knowledge acquired is disseminated to others (usually presumed); s the trust is for the public benefit or a section of the public.
7.4 THE NEW LAW: THE CHARITIES ACTS 2006 AND 2011
Re Gardom (1914)
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s Most educational trusts for young people will qualify (Re Marriette (1915)) though sport generally did not (Re Nottage (1895)). s However, sport linked to providing facilities at schools and colleges is generally valid (IRC v McMullen (1981)). s The provision of amateur sport is now a separate charitable purpose. (Charities Act 2011 s 3(1)(g)). s Political objects will not qualify as charitable. s The court cannot determine the public benefit of a change in the law or government (Bowman v Secular Society (1917)). s Political objects disguised as educational trusts by providing for education based on the principles of a particular party have failed (Re Hopkinson (1949)). s If the gift is strictly educational but merely involves political debate the gift is valid (Re Koeppler’s Will Trust (1986)).
Note: Is there a difference between a political purpose and an ancillary political activity?
7.4.2.3 Advancement of religion s Section 3(2)(a) – includes belief in more than one god, and belief in no god. s The law ‘stands neutral’ as between religions (Varsani v Jesani (1998)); and will not evaluate religious doctrine unless contrary to morality (Re Hummeltenberg (1923)). s Beliefs and practices regarded as ridiculous and unorthodox will not negate charitable status (Thornton v Howe (1862)). s Ancillary matters to religious purposes also qualify as charitable: s public masses (Re Hetherington (1990)) s a stained glass window in a church (Re King (1923)).
7.4.2.4 Advancement of health or the saving of lives s This was charitable under the fourth Pemsel head, and included s benefit of hospitals (Smith’s WT (1962)) s accommodation for nurses Re White’s WT (1951). s This head also includes the prevention or relief of sickness, disease or human suffering (s 3(2)(b)).
7.4.2.5 Advancement of citizenship or community development
7.4.2.6 Advancement of the arts, culture, heritage or science s These purposes had to be educational in nature in order for them to be charitable (Royal Choral Society v IRC (1943)). s It is likely that expert evidence will be used to determine its value (Re Delius (1957); Re Pinion (1965)).
7.4.2.7 Advancement of amateur sport s Sport was only charitable if linked to education (IRC v McMullen (1981)). s A major change here is establishing amateur sport as a separate head. s The Charity Commission had recognised that certain sports could be charitable on the grounds of the promotion of health. s Under s 3(2)(d), ‘sport’ means ‘sports or games which promote health by involving physical or mental skill or exertion’. Thus, games involving no physical skill or exertion could now be included. s A trust for promoting chess for young people was valid as improving mental skills (Re Dupree’s Deed Trusts (1945)).
7.4.2.8 Advancement of human rights, conflict resolution and equality See Charity Commission guidelines RR12, The Promotion of Human Rights, to assist with this head. s Note a body should not have political purposes as it is likely to fail (McGovern v Attorney-General (1982)).
7.4.2.9 Advancement of environmental protection or improvement s Gifts for the preservation of natural amenities (Re Granstown (1932); Re Corelli (1943)).
7.4 THE NEW LAW: THE CHARITIES ACTS 2006 AND 2011
s Section 3(2)(c) – includes rural or urban regeneration and the promotion of civil responsibility, volunteering, the voluntary sector or the effectiveness or efficiency of charities.
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7.4.2.10 Relief of those in need by reason of youth, age, ill health, disability, financial hardship or other disadvantage s Section 3(2)(e) – ‘includes relief given by the provision of accommodation or care to the persons mentioned’. s This overlaps with relief of poverty and advancement of health. s Gifts are valid for the relief of s the disabled (Re Lewis (1955)) s the aged (Re Robinson (1951)). s The word ‘relief ’ means the beneficiaries must have need attributable to their condition (Joseph Rowntree Memorial Trust Foundation v Attorney-General (1983)).
7.4.2.11 Advancement of animal welfare s Gifts for specific animals are not charitable (Re Dean (1889)). s Gifts for animals generally are a recognised charitable head (Re Wedgwood (1915); Re Moss (1949)). s Under the old law (Re Grove-Grady (1929)) charitable trusts for animal welfare had to bring tangible benefits to humans; this might not be the case any longer with this new head.
7.4.2.12 Promotion of the efficiency of the armed forces of the Crown, or of the efficiency of the police, fire and rescue services or ambulance services s In Re Gray (1925) a gift to promote sport in a regiment was valid as improving the physical efficiency of the army. s But mere recreational facilities for athletic sports and pastimes are not per se charitable, being private in nature (IRC v Glasgow Police Athletic Association (1953)).
Checkpoint – the new heads of charity Item on checklist: I understand that the number of heads has been extended to 13. I understand that the existing heads of religion and poverty have been extended. I understand that the old case law still applies.
Done!
The Charities Act 2011 s 3(1)(m) sets out a residuary category of other purposes that will qualify as being charitable; these are:
s There are some which are not referred to in paragraphs (a) to (l) and will instead come under s 3(1)(m). Some include: s Publication of law reports (Incorporated Council of Law Reporting for England and Wales v Attorney-General (1972)). s Promoting agriculture (IRC v Yorkshire Agricultural Society (1928)). s Charities under the Recreational Charities Act 1958: s Recreation per se has not been regarded as charitable until the Recreational Charities Act 1958. s The Act came about primarily due to the House of Lords case of IRC v Baddley where the word ‘social’ negated charitable status. s It is unclear what is meant by ‘social’ and ‘recreation’; also whether it is correct to deny charitable status for provisions for particular groups such as young people because of inclusion of the word ‘social’ or ‘recreational’. s The Recreational Charities Act 1958 permits charitable status to be granted in certain circumstances involving social welfare and recreation where conditions of life are improved. s This Act with some amendments has been consolidated in the Charities Act 2011 s 5.
Research Point Read s 5 of the Charities Act 2011.
s Does ‘improving the conditions of life’ mean that those benefited had to be already in deprivation or in need? s Guild v IRC (1992): the House of Lords held that deprivation or need does not have to be shown. Rather the purpose is to improve the conditions of life of the community generally. Analogous purposes s Under the law pre-Charities Act 2006 if a purpose could be shown to be within the spirit of the preamble to the Statute of Uses 1601 it would be charitable (Scottish Burial Reform and Cremation Society v Glasgow City Corporation (1968)).
7.4 THE NEW LAW: THE CHARITIES ACTS 2006 AND 2011
7.4.3 Purposes recognised under the law before the Charities Act 2006
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s Thus categories of charities are not closed and new purposes can be created in the future taking into account social and economic changes.
7.5 Public benefit In order to be granted charitable status the gift or entity must fulfil the public benefit requirement. This is the key requirement that distinguishes charitable trusts from private express trusts. The Charities Act 2011 s 4 sets out the public benefit requirement:
Key Point Section 4(2) of the Charities Act 2011 states that the presumption of public benefit has been removed.
s This occurred from the coming into force of the Charities Act 2006 (April 2008). Remember under the old law there was a presumption of public benefit for religion, education and poverty. s Therefore it is now for the charity to prove public benefit. s This requirement not only applies to the application for charitable status but at any time after charitable status has been granted. The 2006 Act did not contain any new definition of public benefit and hence this had to be determined by reference to the pre-existing law (Charities Act 2011 s 4(3)).
Reflection Point So the new law does not really assist with the problem of the number of different tests for the section of the public as shown earlier depending on what the purpose of the charity was.
s However, the Charities Act 2011 s 17 provides that the Charity Commission shall issue guidance ‘in pursuance of its public benefit objective’. s The guidance sets out the framework by which the Charity Commission will assess public benefit but does not alter or change the law.
7.5.1 The two principles of public benefit a) There must be an identifiable benefit or benefits. b) Benefit must be to the public, or section of the public.
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Public or section of the public
Clear what the benefits are Benefits related to the aims Benefits balanced against any detriment or harm
The beneficiaries must be appropriate to the aims Where benefit is restricted to a section fo the public, it must not be unreasonably restricted either by geographical location or the fact fees are charged People in poverty must not be excluded Private benefits should be incidental
7.5.1.1 First limb: there must be an identifiable benefit or benefits Under principle (a), there are three sub-principles: 1) It must be clear what the benefits are. 2) The benefits must be related to the aims. 3) Benefits must be balanced against any detriment or harm. Sub-principle (1): ‘It must be clear what the benefits are.’ Different charitable aims will involve different sorts of benefits. s In Gilmour v Coates (1949) (a group of cloistered nuns who had no contact with the community) charitable status was refused. The court could not assess the public benefit of the prayers of the nuns. s In Re Pinion (1965) there was no benefit from the ‘junk’ that the testator wanted to put in trust. s Courts cannot assess the benefit of political purposes (McGovern v Attorney-General (1982)). s The benefits to the public should be capable of being identified, defined or described, but not necessarily quantified (see Re Hetherington – saying of public masses charitable though not quantifiable).
7.5 PUBLIC BENEFIT
Identifiable benefit(s)
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Sub-principle (2): ‘The benefits must be related to the aims.’ s Charities must act within their charitable aims. s Where a charity has more than one aim, all those aims must be charitable. s If a charity has a non-charitable element which is merely incidental to its main aims, this will, however, be permitted (Re Coxen 1948). s Accidental or unplanned public benefit will not be permitted in the assessment of the charity’s aim as meeting the public benefit. s So in Oppenheim v Tobacco Securities (1951), though society generally would benefit from the education of the children of the employees, this is not a factor to be considered. Sub-principle (3): ‘Benefits must be balanced against any detriment or harm.’ s ‘Benefit’ means the overall or net benefit to the public. s The benefits will be measured against any detriment or harm which is caused by the charity’s pursuit of its aims. s Hence a medical research charity might be refused charitable status if it uses human subjects that might be subjected to harm from the research.
7.5.1.2 Second limb: the benefit must be to the public, or a section of the public s The 2011 Act has not substantively altered the law and hence uncertainty remains as to the status of the old tests. Workpoint See again Oppenheim v Tobacco Securities – the nexus test, and Lord MacDermott’s fact and degree test that was approved in Dingle v Turner. Which truly represents the law today?
Reflection Point Should the law not have a general standardised test for public benefit? Should it be left to common law to decide on what is public benefit? Has the Charities Act 2006 (now Charities Act 2011) missed an important opportunity here?
a) The beneficiaries must be appropriate to the aims. b) Where benefit is restricted to a section of the public, it must not be unreasonably restricted either by geographical location or the fact fees are charged. c) People in poverty must not be excluded. d) Private benefits should be incidental. Sub-principle (a): ‘Beneficiaries must be appropriate to the aims.’ This depends on whom the charity aims to benefit. s The key factor is who could benefit as well as who does; anyone who is eligible should be able to apply for the charity’s benevolence and not be excluded (hence the fact and degree test from Lord MacDermott in Oppenheim and approved in Dingle v Turner (1971)). s There is therefore a difference between purposes which s can be open to the public as a whole but taken advantage of only by a small number and s could have been made available to the public but is made available to a select few only (IRC v Baddley (1955)). Sub-principle (b): ‘Where benefit is restricted to a section of the public, it must not be unreasonably restricted either by geographical or other restrictions or by inability to pay fees charged.’ s When the benefit is to a section of the public, the restriction must be reasonable, taking account of s the needs of the beneficiaries, or s how limited are the resources of the charity. s Geographical restrictions: s However, the more narrow the restriction, the less likely it is to be valid. s A trust to benefit the poor in a particular street is not likely to be valid due to the class of possible beneficiaries being unduly narrow, without any reasonable justification for the restriction. s Yet charities for ‘poor relatives’ have been upheld though these are not based on geographical restriction (Re Scarisbrick).
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Charity Commission guidance indicates that there are four subprinciples in determining whether an organisation’s aims meet the principle of the public benefit requirement. These are:
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s Charitable need: s This would include the disabled or children and the very young. s It is reasonable to so restrict because a particular charitable need is being relieved or addressed. s Restrictions based on personal characteristics: s These might include gender, ethnicity or sexual orientation, and might not be reasonable especially if in breach of the Equality Act 2010. s However, a restriction to men would be reasonable if it were to relieve a particular health issue (prostate or testicular cancer). s Where the restriction is due to a personal connection (‘a nexus’): s The Charity Commissions’ Guidance on Public Benefit (2008) stated that s Lord Cross’s fact and degree test from Dingle v Turner would be the basis for determining the section of the public test; and s The nexus test is still relevant for ‘trusts of that type’; so where there are identifiable human beneficiaries the nexus test will still be used (Charities and Public Benefit: Analysis of the Law, paragraph 3.14). s In poverty cases the nexus test was not used (Dingle v Turner (1972)). s The fact and degree test considers the potential size of the charity and hence would appear to rule out the ‘poor employee’ or ‘poor relations’ cases for poverty. s However, in 2012 the Upper Tribunal (Tax and Chancery Chamber) heard a reference by the Attorney-General as to whether such poverty trusts had survived the new Charities Act 2006. s The Upper Tribunal held that they did so survive. s The poverty cases stem back over 200 years and hence should not be over-ruled. s The Charities Act 2006 and Charities Act 2011 have therefore not introduced certainty into this part of the law of charities. Sub-principle (c): ‘People in poverty must not be excluded.’ s The October 2011 Upper Tribunal decision regarding fee-charging independent schools (Independent Schools Council v Charity Commission) held that: s The charity must go beyond minimal benefits where the poor are concerned. Some charities charge fees, and provision would have to be made for those in need to be able to attend. s However, after they have done this the charity need only consider, taking into account the charity’s circumstances, what further
provision should be made for the poor and this is a matter for the trustees to consider.
Sub-principle (d): ‘Private benefits should be incidental.’ s Private benefits will be incidental if they are a necessary result or ancillary to carrying out the charity’s aims. s An educational charity which provides funds to an individual student in carrying out its aims provides an incidental (private) benefit to the student in receipt of the support. s However, it seems that a preference might be given for a private individual or a class of private individuals. Case: Re Koettgen’s Will Trusts (1954)
The donor provided a trust for the commercial education of the public but that a preference be given for the employees of a particular company, John Batt & Co., for up to 75% of the fund. Held The court found the trust valid as the primary trust was charitable and there was no duty on the trustees to apply it for the benefit of the private class.
s This decision was criticised in Caffoor v Commissioners for Income Tax Columbo (1961) as being really a private ‘employee trust’, and seems to be inconsistent with the nexus test in Oppenheim v Tobacco Securities Ltd. s The Court of Appeal in IRC v Educational Grants Association (1967) refused to follow Koettgen for similar reasons as in Caffoor above. Note Charity Commission guidelines in The Advancement of Education for the Public Benefit (2008) (as amended in 2011) states that only if the class that is preferred is, in itself, a section of the public would the charity in question be recognised as having aims for the public benefit. Thus it appears that Re Koettgen is no longer good law.
7.5 PUBLIC BENEFIT
s In the case of charities charging an entrance fee, there should be a concession for those in need.
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Checkpoint – public benefit Item on checklist:
Done!
I understand that the presumption of an identifiable benefit no longer applies. I understand how the Charity Commission guidelines define the identifiable benefit. I understand the factors involved for determining the ‘section of the public element’.
7.6 Cy-pres doctrine (‘as near as possible’) On failure of an express private trust usually the property results back to the donor or his estate on a resulting trust (Vandervell v IRC (1967)). In some circumstances a charitable gift will not result back to the donor but will be applied cy-pres to another charity with similar objects. A vital distinction is between ‘initial failure’ and ‘subsequent failure’.
7.6.1 Initial failure s Either the charity has ceased to exist before the gift becomes vested or has never existed at all. s So A dies leaving his estate to a charity; if the charity ceased to exist before he died then there is initial failure. s There must have been a general charitable intention on the part of the donor to benefit charity generally. s If an association has been amalgamated with another charity or renamed the gift can be made to the amalgamated body without a cypres scheme (Re Faraker (1912)).
7.6.1.1 Ways of determining whether the charitable intention is general or not s This can also apply to situations where a charitable entity is still in existence but refuses to accept the gift due to some restriction or limitation. s If a general charitable intention is shown the restriction or limitation can be removed.
What was the donor’s purpose in making the gift?
Cases: Re Rymer (1895)
The donor made a gift of £5,000 for the education of priests at St Thomas’s seminary. The seminary had ceased to exist at the time of the donor’s death. Held The donor’s purpose was to benefit that particular seminary and not the education of priests generally and hence the gift failed and went back on resulting trust to the donor’s estate.
Re Lysaght (1966)
The donor left sums of money to the Royal College of Surgeons stipulating that they were to be used for medical studentships though only for Britishborn men who were not of the Roman Catholic or Jewish religions. The college would not accept the gift on these terms. It was held that the donor had a general charitable intent to benefit medical training generally and hence the gift could be applied cy-pres without the religious restrictions.
s Reconciling the two cases: s In Rymer the donor’s purpose went to the heart of the gift – the seminary had to be in existence; s whereas in Lysaght the donor’s restrictions were merely ancillary to the primary purpose of training medical students (see also Re Woodhams (1981)). What is the structure of the organisation that the gift is given to? s A charitable unincorporated association has no legal personality and the gift is construed as if it were for the association’s purposes rather than for the association itself (Re Vernon’s Will Trusts (1972)). s (Note: do not confuse this with non-charitable unincorporated associations – see Chapter 5). s As the purpose has not failed, the equitable maxim that ‘a trust will not fail for want of a trustee’ is relevant to direct the funds to a new trustee. s Strictly, this is not a cy-pres scheme as cy-pres involves transferring the funds to a body with similar purposes. The purposes of the
7.6 CY-PRES DOCTRINE
s Was it to benefit the particular institution only or for the general purposes of the institution?
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unincorporated association are still intact. There is thus no need for a general charitable intention here (Re Finger’s Will Trusts (1972)). s Where the gift is made to a corporate charity the gift is for the charity beneficially and hence a general charitable intention must be proved but is unlikely except in exceptional circumstances to be found (Re Vernon’s Will Trusts (1972); Re Finger’s Will Trusts (1972) – where such circumstances were found). Workpoint s Consider the distinction between amalgamation as in Re Faraker and the scheme for the unincorporated charity in Re Fingers Will Trusts. In Re Faraker the amalgamated charity was far broader than what the testator intended. s Would the Re Faraker construction be followed where the purposes of the amalgamated charity were fundamentally different than that intended by the donor? (See Re Roberts 1963).
Is the gift for a named institution or for a charitable purpose only? s If the gift is for a named institution this has been construed as being for that institution only and hence no charitable intention is imputed. Case: Re Spence (1979)
Money was left for ‘the Old Folks Home at Hillworth Lodge, Keighley’, but the home ceased to exist before the donor died. Held Where the institution is correctly identified then there is no general charitable intention.
Workpoint Is Re Spence too narrow a view? s Why should describing the beneficiary specifically exclude a general charitable intention, especially if the purpose is commonly carried out by other institutions? s How does this compare with the construction given to charitable unincorporated associations shown earlier?
Has the charity ever existed at all?
s Where, however, the charity has never existed the court is more likely to find a general charitable intention. Case: Re Harwood (1936)
A gift was given for the benefit of the Peace Society of Belfast. However, such a charity never existed and hence the court found a general charitable intention to promote the purposes of peace and permit a cypres application of the funds.
Sometimes a general charitable intention can be inferred by considering the other gifts in the will of the donor. s If the donor has also made a number of valid charitable gifts then it is likely that a general charitable intention will be found for the gift in dispute. Case: Re Satterthwaite’s Will Trusts (1996)
The donor left her estate to a number of different charitable institutions for animal welfare. One of these institutions did not apparently exist. The court held that taking into account the other charitable gifts the donor must have had a general charitable intention when making the gift and so it was applied cy-pres.
s Note: cy-pres will not be used to make a clear non-charitable gift into a charitable one. The court in Re Jenkins (1966) stated ‘if you meet seven men with black hair and one with red hair you are not entitled to say that there are eight men with black hair’.
7.6.2 Subsequent failure This is where the charity ceases to exist after the death of the donor but before the funds are distributed. Here there is no need to establish a general charitable intention; the funds will be applied cy-pres. s The relevant date in determining whether the failure is initial or subsequent is the date the trust is created even if the first part of the trust is non-charitable.
7.6 CY-PRES DOCTRINE
s If it has then the above principles apply.
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Case: Re Wright (1954)
The donor left property for an individual for life with remainder to charity. The relevant charity ceased to exist after the donor died but before the individual with the life interest died. Held The relevant date for determining initial or subsequent failure was when the trust was created – the death of the donor not that of the tenant for life when the charity became entitled in remainder. The failure was therefore subsequent and the property could be applied cy-pres.
s In cases of surplus where a fund has been set up for a charitable purpose and the purpose is fulfilled any surplus will usually be regarded as subsequent failure and hence be applied cy-pres (Re Wokingham Fire Brigade Trusts (1951)).
7.7 Effect of the Charities Act 2011 on cy-pres Section 62 provides that property can be applied cy-pres where: s The original purposes in whole or in part have been fulfilled or cannot be carried out according to the spirit of the gift. s The original purposes provide a use for part only of the property available by virtue of the gift. s The property from the gift and other property for similar purposes can be made applicable to common purposes. s The original purposes have been laid down due to an area which has ceased to be a unit, or to a class of persons or an area which has ceased to be suitable. s The original purposes have been adequately provided by other means, or ceased as being useless or harmful to the community or ceased to be charitable; or ceased to provide an effective way of using the property. For the last three methods above the court or Charity Commission must have regard to s the spirit of the gift (rather than just the literal wording) and
s the social and economic circumstances prevailing at the time of the proposed alteration of the purposes.
Case: Re Lepton’s Charity (1972) (based on similar provisions in the Charities Act 1960)
A will which came into force on the donor’s death in 1715 where trustees had to pay £3 per annum to the Minister with any surplus of profits to the poor. The income from the gift in 1715 was £5 per annum but in 1970 it was £800. Held In line with the first requirement concerning the spirit of the gift the court raised the amount to the Minister to £100 per annum.
s The fifth method (now Charities Act 2011 s 62(1)(e)(iii)) will benefit those charities that lose their charitable status. Had the section been in force in 1948 then the National Anti-Vivisection Society (National Anti-Vivisection Society v IRC (1948)) could have used that section as it was once charitable (Re Foveaux (1895)).
Research Point Look up the case of Varsani v Jesani (1999). Which section would have been applicable in that case?
Checkpoint – cy-pres Item on checklist: I understand the principles behind the cy-pres doctrine. I understand how cy-pres applies when there is initial failure and subsequent failure. I understand the effect of the Charities Act 2011 on the cy-pres doctrine.
Done!
7.7 EFFECT OF THE CHARITIES ACT 2011 ON CY-PRES
The Commission can therefore look at the circumstances in the modern day rather than when the purposes were first made.
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Potential exam questions 1) Critically evaluate the extent to which the Charities Act 2006 (now consolidated in the Charities Act 2011) has substantively altered charity law. 2) Critically evaluate the charitable status of the following bequests: i) £200,000 to provide a youth centre in the village of Ryesly. The purpose of the centre is to encourage teenage children in the area to take an interest in sport and to help young people to develop socially. ii) £50,000 to promote the books of Jeanie West. [Jeanie West has written a number of self-help manuals encouraging people to develop spiritually through meditation and fasting.] iii) £10,000 to campaign against destruction of the Amazon landscape. iv) £50,000 for a bursary to Puddletown Private School for Young Ladies provided that at least £30,000 of the gift is made available for youngsters from Puddletown. v) £20,000 for the provision of a scholarship to the University of Devon for persons in need save that atheists are excluded. [Note that such a university does not exist.] vi) Residue to provide grants to such retired former employees of Sludge & Co Ltd who are struggling to make ends meet on their old-age pensions.
Chapter 8 Implied trusts 8.1 Introduction This chapter concerns implied trusts, namely the resulting and constructive trust. With an implied trust there is no requirement for words denoting an express intention to split the ownership into the legal and equitable title. To create an implied trust the formalities required for express trusts are not necessary (Law of Property Act 1925 s 53(2)).
8.2 The resulting trust s The beneficial interest ‘results’ or returns to the original donor or transferor, so in the diagram below X purportedly transfers property to B. X s s
B
However, for some reason the beneficial interest reverts in whole or in part back to X; and B holds the property on trust for X or for himself and X.
A resulting trust can arise in the following general situations: s A transfer on trust from A to B; but the transferor, A, fails to part with the entire beneficial interest. s A voluntary conveyance from A into B’s name (a voluntary conveyance is one made without consideration from B). s Where A provides the purchase money for property but the property is put into the name B.
8.3 Classification of resulting trusts s In the case of Re Vandervell’s Trusts (No. 2) (1974) Megarry J attempted to classify resulting trusts into two categories: s ‘presumed’ resulting trusts s ‘automatic’ resulting trusts.
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s The presumed resulting trust is said to represent the presumed intention of the donor ‘A’. s If the beneficial interest is not transferred it must have been A’s intention that the beneficial interest ‘results’/comes back or remains with him. s Do not confuse this with express certainty of intention – with this the words themselves must denote and express an intention to split the ownership. s The automatic resulting trust according to Megarry J is not dependent on the presumed intention of the donor but rather happens due to an unforeseen failure by the settlor to dispose of the beneficial interest. Resulting trust
Presumed resulting trust
Automatic resulting trust
8.3.1 The presumed resulting trust When will there be the presumption of a resulting trust? s Equity raises a presumption in relation to certain circumstances: s a voluntary conveyance of property from A to B (B has given no consideration); or s A provides purchase money for B to buy a property which is held in B’s name. s In both situations equity will presume from the start that the parties had the intention that the gift will be held on trust for the donor, A.
8.3.2 Ways to rebut the presumption s Where the money is given by way of a loan (Hodgson v Marks (1971)). s Where the property is given as an absolute gift (Hodgson v Marks (1971)). s Where the presumption of advancement applies. This is a competing presumption with that of the resulting trust. The presumption is that the donee holds the property absolutely in specific situations. The presumption of advancement applies with:
s s
8.3.3 Voluntary conveyance into the donee’s sole name or joint names of the donor and donee 8.3.3.1 Personal property s If no consideration is given the presumption of a resulting trust applies – this is undoubtedly the case where personal property is voluntarily conveyed. Case: Re Vinogradoff (1935)
A grandmother had £800 in bonds which she transferred into the names of herself and her granddaughter who was only four years old at the time. This was a voluntary conveyance as the grandchild had given no consideration. When the grandmother died the question was whether the granddaughter kept the bonds outright or whether she held the bonds on trust for the remainder of the grandmother’s estate. Held As the conveyance was voluntarily made, the presumption of a resulting trust applied. The grandmother and grand daughter were therefore trustees under a resulting trust on behalf of each other as tenants in common. So when the grandmother died her estate inherited her beneficial share of the bonds.
8.3.3.2 Voluntary conveyance and real property transfers s There is a problem in deciphering the meaning of the Law of Property Act 1925 s 60(3).
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8.3 CLASSIFICATION OF RESULTING TRUSTS
s
a gift from a parent to a child; a gift from husband to wife. This does not apply the other way round and such gifts will be presumed to be held on a resulting trust instead. Note that the Equality Act 2010 s 199 will abolish the presumption of advancement when that section is eventually brought into force.
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Workpoint Law of Property Act 1925 s 60(3): In a voluntary conveyance a resulting trust for the grantor shall not be implied merely by reason that the property is not expressed to be conveyed for the use or benefit of the grantee.
s Does this section abolish the presumption of a resulting trust when real property is concerned? Case: Ali v Khan (2002)
A man who owned a house voluntarily conveyed the house to his two daughters for the sole purpose that they could use the house to raise money on a mortgage to finance their respective weddings. When the father and daughters fell out the question was raised as to what the interest of the father was (if any) in the house. The father raised the presumption of the resulting trust and the fact that the presumption of advancement was rebutted by him transferring the house for a specific purpose only. Held The Court of Appeal held that s 60(3) does in fact abolish the presumption of a resulting trust of real property on a voluntary conveyance. However, the Court still found in favour of the father by stating that because he transferred the legal title to house only for the purpose of the daughters acquiring a mortgage he did not intend the beneficial interest to be transferred to them, only the legal interest. So there was in fact a resulting trust for him.
s So it appears that Law of Property Act 1925 s 60(3) has indeed abolished the presumption of a resulting trust on a voluntary transfer of real property. s But it is only the presumption that is abolished. The court can still find a resulting trust based on the clear intentions of the parties when making the transaction as in Ali v Khan (2002).
8.3.4 Provision of purchase money
8.3.4.1 Personal property Case: Abrahams v Trustee in Bankruptcy of Abrahams (1999)
A wife purchased shares in a lottery scheme for herself and her husband; she continued to pay the dues herself. The husband and wife split up but she still continued to pay the funds for both her and her former husband. The husband’s ticket won £242,000. Held The court held that as she had provided the purchase money the presumption of the resulting trust applied. Nothing had occurred to rebut the presumption and hence the husband held the money on resulting trust for his former wife.
8.3.4.2 Real property Case: Bull v Bull (1955)
A mother and son each paid a proportion of the purchase money to buy a house in the son’s name only. The parties fell out and the son sought to evict the mother. Held The court stated that as the mother had provided part of the purchase price the presumption applied and the son held the property on trust for himself and his mother and she could not be evicted.
s However, since the House of Lords case of Stack v Dowden (2007) it appears that the presumption of a resulting trust of domestic property no longer applies. Rather the property will be held on constructive trust, as will be discussed later (per Lord Walker).
8.3 CLASSIFICATION OF RESULTING TRUSTS
s Where A gives money to B to buy property and the property is held in A and B’s name or in B’s name only there is a presumption of a resulting trust in favour of A or of A and B (if B has also provided funds) (Dyer v Dyer (1788)).
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Checkpoint – presumed resulting trust Item on checklist:
Done!
I understand that an implied trust does not require the formalities of express trusts. I understand the situations when a presumed resulting trust will arise. I understand how to rebut the presumption of a resulting trust. I understand that for real property which is voluntary conveyed there is no immediate presumption of a resulting trust. I understand that a resulting trust arises where money is given by A to B to hold property in B’s name. I understand that for domestic property only the presumption will not arise where A gives money to B to buy property in B’s name.
8.3.5 The automatic resulting trust The other type of resulting trust identified by Megarry J in Re Vandervell (No. 2) (1974) is the automatic resulting trust. This sort of resulting trust usually arises s due to an error by the transferor, or s due to some event unforeseen by the transferor. s If so, the beneficial interest ‘boomerangs’ back to the transferor. s In effect the donor had attempted to ‘throw’ the beneficial interest so that it lands on someone; however, it has failed to land and hence, like the boomerang, flies back to the donor again. This can occur in a number of different ways:
8.3.5.1 No valid trust is declared No trusts are declared at all. s Vandervell v IRC (1967) (see Chapter 4). A trust is declared but there is a lack of proper formalities. s Grey v IRC (1960) (see Chapter 4).
Where there is a failure of certainty of objects.
Where the trust breaches the rule against inalienability. s A trust for a purpose must end within the perpetuity period which at common law is a life in being plus 21 years (see Chapter 5).
8.3.5.2 Where a valid declaration has been made but the trust fails for some other reason s A beneficiary predeceases the trust coming into force. s If a beneficiary predeceases the testator then the gift is lost and goes into residue on resulting trust (Boyce v Boyce (1849) (Chapter 3). s If a relevant condition is not met. s In Essery v Cowlard (1884) a trust would come into existence when the beneficiary got married. He never did get married and so the funds went back on resulting trust to the donor’s estate.
8.3.5.3 Where beneficial interests are not completely disposed of s A life interest is granted without a remainder interest: s A donor gives ‘property to X for life’. s When X dies the property must go back to the donor on resulting trust as there is no remainder interest specified. s Where there are undisposed-of surpluses (Re Gillingham Bus Disaster Fund (1959)): s Note that this will only apply to non-charitable situations as charitable donations can be applied cy-pres. s To an unincorporated association ‘on trust’ for the association (Re Recher’s Will Trust (1972)). Workpoint Consider if an automatic resulting trust will apply in the following situations: a) Tom leaves by will each of his two houses to his two daughters Susan and Toni with Susan to choose first. Susan and Tom are in a serious car accident; Tom is instantly killed and Susan is in a coma and dies later that day. What of Toni’s gift in the will?
8.3 CLASSIFICATION OF RESULTING TRUSTS
s Re Astor (1952) (see Chapter 5).
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b) Archi leaves by will a gift of £20,000 for the St Albans Squash Society – a non-charitable unincorporated association. Recently the society has resolved to wind up and distribute the assets. Can Archi receive back his gift? c) Bob leaves by will a gift for the promotion of the belief that the earth is flat.
Checkpoint – automatic resulting trusts Item on checklist:
Done!
I understand that with the automatic resulting trust the interest ‘boomerangs’ back to the donor. I understand that it is usually due to an error by the donor or some unforeseen event or consequence. I understand the situations when the automatic resulting trust arises. I understand that the resulting trust can apply in the areas of purpose trusts, unincorporated associations and for general non-charitable activities where there might be a surplus of funds.
8.3.6 Quantum under a resulting trust If property subject to a resulting trust is sold, how much do the respective beneficiary or beneficiaries receive? s The rule is that the beneficiary receives the proportion that they originally put in. So if the beneficiary contributed 40% towards the purchase they receive back 40% of the proceeds of sale. s Therefore the respective beneficial shares are determined at the time of purchase. s Subsequent conduct is irrelevant (Curley v Parkes (2004)).
8.4 Constructive trusts This is the other type of implied trust. A constructive trust is: s imposed by law regardless of intention; s usually only where there is some form of unconscionable conduct by a fiduciary.
s The correct test is not to infer an intention as to quantification from the start but to decide what was fair having regard to the whole course of dealing between them (Oxley v Hiscock (2004) – approved in the Supreme Court in Jones v Kernott (2011)).
8.4.1 Constructive trusts can arise in a number of different ways 8.4.1.1 Trustees’ or fiduciary’s unauthorised profits usually resulting from a conflict of interest s Boardman v Phipps (1967); see Chapter 9.
8.4.1.2 Breach of trust or fiduciary duty leading to unauthorised profits or purchase of identifiable property with the trust money s Foskett v McKeown (2001); see Chapter 14.
8.4.1.3 Misuse of confidential information by the fiduciary s See Boardman v Phipps (1967) above.
8.4.1.4 Where the fiduciary accepts bribes: s There are serious questions as to the status of the bribe. s If the bribe is held on constructive trust for the beneficiary then s any property purchased with the bribe money belongs to the beneficiary to the exclusion of other creditors; s the beneficiary receives a ‘windfall’ without any loss. s Alternatively if the remedy is only personal in nature then the beneficiary has to take his place ‘in the queue’ alongside other creditors. s In Lister v Stubbs (1890) the Court of Appeal held that where a fiduciary takes a bribe the remedy is personal only for restitution of the bribe; hence any profit made by the fiduciary from the bribe belongs to the fiduciary.
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s The quantum of the interest is generally better than the share awarded under a resulting trust. This is particularly the case in family relationships regarding the beneficial ownership of the home.
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Workpoint Does this mean that a dishonest fiduciary who accepts a bribe is in a better position than an honest bona fide fiduciary who makes a secret profit? (Boardman v Phipps (1967).) How does this principle equate with the prevention of unjust enrichment?
s The matter came before the Privy Council in Attorney-General for Hong Kong v Reid (1994). Case: Attorney General for Hong Kong v Reid (1994) PC
The defendant being a public prosecutor in Hong Kong took bribes to delay or obstruct prosecutions amounting to approximately HK$12 million. He purchased three freehold properties in New Zealand for about NZ$500,000 with part of the money. The properties were targeted by the Hong Kong Government for recovery of at least part of the HK$12 million, stating they were held on constructive trust for the Government. The defendants opposed this on the grounds that the Crown had no equitable interest in the three New Zealand properties. Held The Privy Council (main judgment delivered by Lord Templeman) ruled that the three properties so far as they represent bribes accepted by Mr Reid are held in trust for the Crown.
Reflection Point Is this decision correct? Consider the following: s Should the claimant get priority over other creditors? s If the bribe has increased in value then the beneficiary gets a ‘windfall’ – even though no loss to him has been made. s Should an alternative be to balance the interests of creditors and the beneficiary by imposing only personal liability for an increase in value? Some have referred to the decision as ‘proprietary overkill’ – see Peter Birks, An Introduction to the law of Restitution, rev. ed. (Clarendon Press, 1989), p. isions follow Lister v Stubbs or Reid? s Should later decisions follow Lister v Stubbs or Reid?
In a recent case the Court of Appeal had an opportunity to reconsider the Reid case.
Sinclair Investments (UK) Ltd v Versailles Trade Finance Ltd (In Administration) (2011) CA
A director fraudulently increased the value of his own shareholding, making a secret profit of about £30 million. The director had not acquired the shares from company funds; however, the profit derived from his breach of fiduciary duty to the company. The question was whether the director held the profit on constructive trust for the company or whether he was only personally liable and hence other creditors could claim a share. Held The Court of Appeal followed its own decision in Lister v Stubbs and declined to follow Attorney-General for Hong Kong v Reid. Therefore the liability was only personal in nature and no constructive trust was imposed.
Several reasons were given by the Court of Appeal but two appear to stand out: s Five decisions of the Court of Appeal spread over almost 100 years, all of which follow the reasoning in Lister v Stubbs, and a House of Lords case, Tyrell v Bank of London (1862), which likewise followed the same reasoning as Lister v Stubbs. s The Court of Appeal in Sinclair distinguished between s where a fiduciary is unjustly enriched by depriving the beneficiary of an asset (proprietary claim); and s where he enriches himself by doing a wrong to the beneficiary (as with taking a bribe) (personal claim only). So the law since Sinclair Investments (UK) Ltd v Versailles Trade Finance Ltd (In Administration) (2011) CA is as follows: s A beneficiary cannot claim a proprietary interest unless s the asset was beneficially owned by the beneficiary; or s the fiduciary acquired the asset by taking advantage of an opportunity which was properly that of the beneficiary (as in Boardman v Phipps (1967)).
8.4 CONSTRUCTIVE TRUSTS
Case:
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s
s
If not the remedy is not proprietary but personal – an equitable account of the property received in breach of fiduciary duty; the beneficiary must therefore take his place alongside other unsecured creditors. However it is still unclear the extent to which this principle applies where the asset increases in value. If the remedy is personal then, generally, increases in value cannot be taken into account.
8.4.1.5 In the family home, either s an express common intention by the parties that the beneficial interest is shared, followed by some detrimental reliance on that intention by the party either claiming an interest or disputing the quantum; or s an inferred common intention that the beneficial interests are shared based on the conduct of the parties; s there is some judicial disagreement as to the threshold of conduct required for the inferred common intention constructive trust. s The House of Lords in Lloyds Bank v Rosset (1991) per Lord Bridge felt that only a contribution to the purchase price or payment of the mortgage instalments would suffice and ‘nothing less will do’. s However, obiter comments in Jones v Kernott (2011) and Stack v Dowden (2007) suggest that this threshold is too high and that indirect payments should count. s The Privy Council in Abbott v Abbott (2007) regarded indirect payments as evidence of an inferred common intention. Constructive trust of the family home
Express common intention plus Detrimental reliance
Inferred common intention (Conduct required which meets or exceeds minimum threshold)
8.4.1.6 Where a trustee takes the renewal of a lease in his personal capacity that was previously held by him on trust s Keech v Sandford (1726) (see Chapter 9).
8.4.1.7 Where a trustee uses trust funds for his own personal benefit
8.4.1.8 Where a fiduciary fails to disclose the existence of a contract in his personal favour that is relevant to his fiduciary duties s IDC v Cooley (1972) (see Chapter 9).
8.4.1.9 Receipt of unauthorised commission or fees related to their fiduciary duties s Re Macadam (1946) (see Chapter 9). s Note, however, Re Gee (1948) where the director was appointed as such not by the beneficiaries but by other shareholders not having a connection to the trust. He was therefore allowed to keep his fees.
8.4.1.10 Where a third party has dishonestly assisted in a breach of trust Though strictly speaking there is no trust property here for the trust to operate – see Chapter 14. s The test is objective – would a reasonable man think that the third party had been dishonest taking into account his age, qualifications and experience? (Royal Brunei Airlines v Tan (1995); Abou-Rahmah v Abacha (2006).)
8.4.1.11 Where a third party has knowingly received trust property such that it would be unconscionable for the third party to retain the benefit of the receipt s BCCI v Akindele (2001) – see Chapter 14.
8.4.1.12 Mutual wills s Here two persons (usually husband and wife) agree that on the death of the first to die, all their property shall accrue to the other party and after the survivor’s death to beneficiaries nominated by the parties. s The parties make ‘mutual wills’ to this effect and if so the property is held on constructive trust by the survivor for the beneficiaries.
8.4 CONSTRUCTIVE TRUSTS
s Foskett v McKeown (2001) (see Chapters 9 and 14).
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s There must be an agreement to make irrevocable wills (In the Goods of Heys (1914)). s The mere fact that the parties make wills at the same time in similar terms does not per se create a mutual will (Re Oldham (1925)). s Irrevocability need not be in exact words but could be inferred from the circumstances. Case: Re Cleaver (1981)
An elderly couple married in 1967, the husband having three children from a previous marriage. The couple made wills, leaving everything to each other and in default to the three children. In 1974 each party made a new will reducing the share of one of the daughters to a life interest only. When the husband died the wife made a new will which likewise left the daughter a life interest only but with absolute interests to the other two children. Later the wife made another will enlarging that daughter’s life interest to an absolute one and leaving the residue to that daughter also; the other two children were disinherited. Held When the wife died the court held that the estate was held in trust as per the 1974 will. This will was irrevocable due to: s the similarity of the original wills; s the fact also they were created at the same time. s The successive wills were also made simultaneously and s both parties reduced the daughter’s interest; s the terms of the new will made after the man’s death were consistent with the 1974 will. s The court also took note that in the evidence adduced to the court the wife regarded herself as being obligated to leave her share to the children.
8.4.1.13 A seller under a specifically enforceable contract s This applies where there is a contract for the sale of land or of shares in a private company, and
8.4.1.14 Where one party kills another and inherits or gains the deceased’s property (such as by survivorship under a joint tenancy) s The killer will hold on constructive trust for the deceased’s estate. s In Re K (Deceased) (1985) it was held that under a joint tenancy severance (turning the equitable joint tenancy into a tenancy is common) is automatic on the killing. s It appears that the killing must be in the nature of murder or manslaughter (Dunbar v Plant (1998)).
8.5 Types of constructive trust 8.5.1 ‘Institutional’ constructive trust s The institutional constructive trust is recognised in English Law. s There must be a pre-existing proprietary interest in the property retained or acquired by the trustee and a fiduciary relationship. s It refers to a property interest that is already existing which the court merely ‘confirms’. s It is therefore similar to when the court makes a declaration – the court is not creating new rights but is merely stating what rights already exist.
Reflection Point s The institutional constructive trust begins from the date of the unconscionable or relevant conduct not from the date of the court decision. s The court merely confirms the existence of the trusts and orders transfer of the property to the ‘beneficiary’ under this implied trust (Westdeutsche Landesbank Girozentrale v Islington London Borough Council (1995) per Lord Browne-Wilkinson). s The constructive trusts shown above are all examples of the institutional constructive trust.
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s When the contract becoming legally binding the vendor holds the property on constructive trust for the purchaser (Neville v Wilson (1997)).
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8.5.2 ‘Remedial’ constructive trust s The remedial constructive trust does not exist in English Law but does exist in other common law jurisdictions. s The trust operates from the date of the court order in the interests of ‘fairness’ and is therefore a ‘remedy’. s It is a remedy for unjust enrichment, and s depends on the inadequacy of other remedies. s Generally it will not be granted if there are other available remedies.
8.5.2.1 Westdeutsche Landesbank Girozentrale v Islington London Borough Council (1995) In this case Lord Browne-Wilkinson regarded the ‘remedial constructive trust’ s as a remedy ‘giving rise’ to an enforceable equitable obligation; its retrospective effect is at the discretion of the Court. s It is a trust imposed by the Court at its discretion when B knowingly withholds property from A and such retention constitutes an unjust deprivation of A. s Through the exercise of discretion the remedy can be altered to meet the particular circumstances, so innocent third parties are not prejudiced.
8.5.2.2 Why has the remedial constructive trust been rejected in English Law? s There is no need for a pre-existing fiduciary relationship or a prior proprietary interest and hence non-fiduciaries could claim. s Unsecured creditors could therefore be elevated to beneficiary status and thus ‘jump the queue’. s It is detrimental to other creditors. s It is uncertain, depending arguably on the whim of the individual judge hearing the case, as to what is fair.
8.5.2.3 An attempt to introduce the remedial constructive trust into English law
Case: Halifax Building Society v Thomas (1996)
Thomas lied about his income to get a mortgage, but later defaulted on the mortgage payments. s When the house was sold the building society received all of its money back. s However, the building society claimed that as the money was advanced as a result of fraud a constructive trust should be imposed over all the proceeds of sale in its favour and hence claimed beneficial ownership of the entire house and therefore was entitled to the remainder of the proceeds of house. Held The Court of Appeal saw this as an attempt to introduce a remedial constructive trust into English law and positively rejected this and refused to acknowledge the constructive trust.
Key Point Note that Thomas was not a fiduciary for the building society; he was simply a debtor.
s Note how this differs from the cases above where the individual in all situations was a fiduciary. s The Court of Appeal in Re Polly Peck (No. 2) (1998) likewise firmly rejected the concept of the remedial constructive trust in English Law. s See also Sinclair Investments (UK) Ltd v Versailles Trade Finance Ltd (In Administration) (2011) above where it was held that the remedial constructive trust is not recognised in English law because the existence of a proprietary interest is not a matter of judicial discretion but one of property law. In other words it must already be in existence under property law principles and not created by way of a remedy.
8.5 TYPES OF CONSTRUCTIVE TRUST
A good example of an attempt to introduce the remedial constructive trust into English law was in Halifax Building Society v Thomas (1996):
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Research Point Research Point 1 Consider the decisions of the House of Lords in Stack v Dowden (2007) and (now the Supreme Court) in Jones v Kernott (2011). These decisions appear to be based on ‘fairness’ – is this introducing a remedial constructive trust into English law? Or is the fairness in relation not to the creation of the interest but to the quantification of the interest? Research Point 2 Consider the Canadian case of LAC Minerals v International Corona Resources Ltd (1989) 2 SCR 574 and discuss how and why a remedial constructive trust was imposed.
Checkpoint – constructive trusts Item on checklist:
Done!
I understand the methods by which a constructive trust will be imposed. I understand that these are all institutional constructive trusts. I understand that the court does not create such a trust but merely declares that it already exists. I understand the remedial constructive trust and why it does not exist in English law.
8.6 The doctrine of proprietary estoppel See Chapter 4 for a general discussion of this doctrine. s There are clear similarities with constructive trusts as s both involve detriment and reliance and unconscionability, s both are binding on third parties (see s 116 of the Land Registration Act 2002 for estoppel); however, there are differences:
Proprietary estoppel Much broader in terms of remedies – show that the estoppel can create any proprietary or personal interest such as s a life interest s an easement s a fee simple absolute in possession s a sum of money. With estoppel the conduct relating to the interest usually commences after the purchase. An estoppel commences as a unilateral representation; the other party has a choice whether to rely on the representation. The estoppel comes into existence from the date of the court judgment.
Only remedy is that of beneficial ownership.
With family home trusts the trust tends to come into being at the start of the purchase – a common intention either express or inferred that the beneficial interest will be shared.
The trust usually involves a joint enterprise – an agreement that the beneficial interest would be shared.
The trust comes into existence from the date of the relevant conduct in detrimental reliance on the express or inferred common intention; the court merely declares that it exists.
8.6 THE DOCTRINE OF PROPRIETARY ESTOPPEL
Constructive trust
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Reflection Point One of the reasons why the remedial constructive trust was rejected in English law was because the judiciary do not wish to create proprietary rights in land. Is not this precisely what proprietary estoppel does – creates rights in land?
Potential exam questions 1) Critically evaluate the means by which a constructive trust is recognised in English law. 2) Lucy and Harold, an unmarried couple, decide to purchase a house. All of the purchase money is provided by Lucy; the remainder is by way of a mortgage. The house and the mortgage is in Lucy’s name only. Harold has undertaken to pay the household bills and to pay for a new conservatory at the rear of the house. One year later Lucy falls pregnant and so she invites her grandmother Lois to come to live with them at the house to be a carer for her and for the baby. When Lois arrives Lucy tells her that the house is now her home to live in as long as she wants. Lois then pays for one of the bedrooms to be converted into a self-contained en-suite granny flat. About one year later Lucy meets her former boyfriend Ivan and decides she wants to sell the house and move in with him. She tells Harold and Lois that they have to leave within one month. Advise Harold and Lois.
Chapter 9 Fiduciary duties and conflicts of interest This chapter focuses on the capacity of fiduciary, when the fiduciary relationship is breached and the remedies for such a breach.
9.1 What is a fiduciary? s ‘Someone . . . [acting] for . . . another . . . in circumstances which give rise to a relationship of trust and confidence . . . the distinguishing obligation of a fiduciary is loyalty’ (Bristol & West v Mothew (1998), per Millett LJ). s It is therefore a relationship characterised predominantly by a duty of loyalty.
9.2 Fiduciary relationship per se Some relationships are automatically fiduciary in nature, such as: s trustee/beneficiary s principal/agent s solicitor/client s company directors/company s security services/Crown.
9.3 Other instances where a fiduciary relationship is imposed Where money is loaned for a specific purpose (see Chapter 5). s In two House of Lords cases, Barclays Bank v Quistclose Investments (1970) and Twinsectra v Yardley (2002) (see Chapter 5), both Houses
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held that a fiduciary relationship is imposed on the borrower to use the funds for the intended purpose only. Where A gives some form of undertaking to B and B relies on the undertaking by placing property or their confidence with or in A. Case: Hooper v Gorvin (2001)
A group of leaseholders nominated A to negotiate on their behalf in the purchase of the freehold of their properties; however, the nomination was informal and no agency agreement was made. A discovered that he could purchase the freehold from his own funds and did so while negotiating on behalf of the leaseholders. Held A had given an undertaking to the other leaseholders to negotiate on their behalf; they had relied on his undertaking by placing their confidence in him. He therefore was in a fiduciary capacity to the leaseholders and had to hold the property on trust for them.
9.4 Why is establishing a fiduciary relationship so important? s It is primarily to do with the remedies available which are far more advantageous than those available to non-fiduciaries. Remedies
Account of profits
Constructive trust
Equitable lien
Equitable compensation
9.4.1 Remedies for breach of fiduciary duty s Account (personal remedy) – this applies when the fiduciary has made a profit from the breach of his fiduciary duty.
s
s Constructive trust – this is a proprietary claim where the other party is claiming beneficial ownership of the property purchased or obtained due to the breach of fiduciary duty. s The constructive trust has significant advantages over the personal remedies (see Foskett v McKeown (2001) in Chapter 14): s It grants beneficial ownership of the property to the injured party. s It gives priority over other creditors of the fiduciary. s Equitable lien – this is a proprietary claim where the claimant has a charge over the relevant property to the value of the claim. s This is normally used if the property purchased has decreased in value; the claimant can then make a personal claim of equitable compensation against the fiduciary to make up the loss. s Equitable compensation – this is a personal remedy and appears to be similar to damages in tort as it involves the fiduciary replenishing the fund – putting the fund back in the position had the breach of fiduciary duty not occurred. s However, general rules of legal causation such as foreseeability and remoteness of damage do not apply with equitable compensation. s However, factual causation (the ‘but for’ test in tort) must be present as the breach must have caused the loss (Target Holdings v Redferns (1996)). Hence providing the breach caused the loss even if the loss itself or the extent of the loss is unforeseeable the fiduciary is still liable.
9.4.1.1 The two personal remedies of account and equitable compensation cannot be claimed at the same time as the claimant would be doubly compensated (Tang Mang Sit v Capacious Investments (1996)) s Note that if the proprietary claim of constructive trust is used the claimant is stating that his entire interest is in that property and hence cannot be used with equitable compensation. Workpoint A trustee steals £10,000 from the trust fund. Consider which fiduciary remedy would be best where: a) He dissipates the fund;
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s
He must ‘account’, that is, pay over the profits to those with whom he is in fiduciary relationship. This is a personal remedy; it matters not that the actual profits are no longer in the fiduciary’s possession or control.
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b) He gambles away all the money but comes away with winnings of £1,000; c) He uses the £10,000 to buy a painting now worth £30,000; d) He uses the £10,000 to buy a car now worth £5,000.
9.4.1.2 Important note s Not every breach by a fiduciary is a breach of fiduciary duty. s In order to be in breach of fiduciary duty the fiduciary must breach s the duty of loyalty; s trust and confidence.
Case: Bristol and West B.S. v Mothew (1998)
The defendants were a firm of solicitors who were acting for both the lender and the borrower in a mortgage transaction. They failed to disclose to the lender that the borrower already had a first mortgage over the relevant property and hence the lenders made a loan believing they were first mortgagees. On default of the mortgage payments by the borrowers the lenders suffered heavy losses and brought an action for breach of fiduciary duty in order to claim the much better remedies above. Held The Court of Appeal held that the failure to disclose the existence of the first mortgagee was not a breach of the duty of trust, loyalty and confidence – it was merely common law negligence and hence the lenders had to rely only on common law damages.
Thus such things as s misuse of confidential information, s making secret unauthorised profits from the relationship, or s being in competition with the other party are likely to be a breach of fiduciary duty; but a mere omission is common law negligence.
Workpoint
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David’s company has learned that David did not disclose to them that the Chinese company uses child labour as part of its workforce and is demanding David return the fees earned. Has David committed a breach of fiduciary duty in the non-disclosure?
Checkpoint – fiduciary Item on checklist:
Done!
I understand the definition of a fiduciary. I understand the remedies available for breach of fiduciary duty. I understand that not all the fiduciary remedies can be claimed together. I understand that a breach of duty by a fiduciary is not necessarily a breach of fiduciary duty.
9.5 The general rule concerning fiduciary duties In Bray v Ford (1896) Lord Herschell stated: s ‘It is an inflexible rule . . . that a fiduciary . . . is not, unless otherwise expressly provided, entitled to make a profit’; s ‘he is not allowed to put himself in a position where his interest and duty conflict’.
9.5.1 What is Lord Herschell saying? s A trustee (or fiduciary) must not receive any benefit unless expressly authorised. s A trustee (or fiduciary) must not allow his personal interests to conflict with those of the beneficiaries.
9.5 THE GENERAL RULE CONCERNING FIDUCIARY DUTIES
David is a company director for Yackuza Ltd which manufactures machine parts; most of the components are imported from a company based in China due to a lucrative contract negotiated by David for which he earned substantial commission.
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s The rule is inflexible – hence it is strict liability.
Research Point We could term these the ‘no profit’ rule and the ‘no conflict’ rule – is Lord Herschell advocating one rule or two rules here? Could it be said that the first rule is in fact an example of the second rule? See the dissenting speech of Lord Upjohn in Boardman v Phipps (1967) 2 AC 46.
9.5.2 When can a fiduciary keep his profits? s A fiduciary can make a profit from his position as fiduciary provided the profit is authorised by those with whom he is in a fiduciary relationship. s This can be difficult where in a trust the beneficiaries are minors or mentally incompetent and hence are incapable of giving consent. s It can also be difficult where a company director is concerned; he will owe a fiduciary duty to his fellow directors and to the shareholders who should give consent in general meeting to such profits. By the time the meeting is called the opportunity might be lost.
Express authorisation
Beneficiaries/ fellow directors and shareholders
Trust instrument
Inherent jurisdiction
Statute
9.5.3 Express authorisation 9.5.3.1 Express authority in the trust instrument s A trustee can be remunerated where there is express authority in the trust instrument (Sergeant v Nat West (1990)).
s The old law has now been replaced by the Trustee Act 2000: s Professional trustees can now charge for what a lay trustee could have done (s 28(2)). s Charging clauses are no longer regarded as gifts (s 28(1)) but are now a debt on the estate; hence if the trustee signed as a witness this would not void the charging clause.
9.5.3.2 Authorisation by the court s The court has an inherent jurisdiction to award payment to a fiduciary whether or not there is already a charging clause present (Re Duke of Norfolk’s Settlement Trusts (1982)).
9.5.3.3 By Statute: Trustee Act 2000 s Where there is no charging clause then professional trustees can charge ‘reasonable remuneration’ if each other trustee has agreed in writing (s 29(2)).
Checkpoint – fiduciary liability Item on checklist: I understand Lord Herschell’s principles of fiduciary liability in Bray v Ford. I understand that there might be ‘two limbs or just one limb’. I understand that fiduciaries can make authorised profits. I understand the ways that authorisation can be made.
Done!
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s The old law was that the payment clause was to be construed restrictively against the trustee. s In Re Chapple (1884) it was held that the payment clause could only be used by the fiduciary where the work could only be done by a professional trustee. s If the payment clause was contained in a will then this was not regarded as a debt, but rather as a legacy (gift) to the trustee. Under the Wills Act 1837 s 15 if a beneficiary of a gift also signs the will as a witness then the gift is lost (see Re Trotter (1889)).
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9.5.4 Examples of conflicts of interest and unauthorised profits s If there is a conflict of interest between the fiduciary and the other party then the fiduciary is liable. s Usually the conflict of interest results in profits or advantages to the fiduciary for which he will have to account (or the beneficiary claims a constructive trust). Conflict of interest
Rule in Keech v Sandford
Secret profits
Misuse of confidential information
Directors and commission fees
Self-dealing and fair dealing
9.5.4.1 The rule in Keech v Sandford (1726) s A trustee cannot retain the benefit of a renewed lease that was previously held by him in trust. s ‘[T]his may seem hard that the trustee is the only person of all mankind who might not have the lease, but it is very proper that the rule be strictly pursued’ (Lord King LC). Case: Keech v Sandford (1726)
A trustee held a lease of Romford Market on behalf of an infant. The lease came up for renewal; however, the landlord was not willing to grant a new lease on the same terms due to the difficulty of enforcing contracts against minors. However, the landlord negotiated with the trustee to take on the lease in his personal capacity only. The infant then brought an action claiming that due to the fiduciary nature of the relationship the trustee was in a conflict of interest situation in negotiating for himself while purported acting for the beneficiary and held the renewed lease in trust for the beneficiary. Held The court agreed and stated what is known as the rule in Keech v Sandford (above).
s How extensive is this rule? Case: Protheroe v Protheroe (1968)
Here a husband held a lease in trust for himself and his wife, and negotiated with the owner to buy the freehold. On purchase of the freehold the marriage broke down and the wife brought an action for a declaration stating that the husband held the freehold in trust for himself and her. Held The court extended the rule in Keech from renewal of the lease to the purchase of the freehold by the trustee. The husband as trustee was in a fiduciary capacity to the wife and hence was in conflict of interest in buying the freehold in his own right.
Re Biss (1903)
A man who operated a business died intestate and his wife administered his estate (hence a fiduciary). The lease was renewed and the freeholder awarded the lease to the man’s son in his personal capacity. The wife brought an action claiming the son held the lease in trust for her. The court rejected this stating that the son was not a fiduciary – he did not owe the wife a duty of trust, confidence and loyalty, etc. Had the lease been awarded to the wife only then she as administrator (and hence a fiduciary) would have to hold the lease on trust for the son.
9.5.4.2 Secret profits If a fiduciary makes secret profits as a result of a conflict of interest he is liable to account for those profits (hence the connection between the first and second limb of Lord Herschell in Bray v Ford).
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s Why applied so strictly? s To prevent possible conflict between the fiduciary’s interests and his duty to the trust. s The trustee might not do his best for the trust if he could take personal advantage of such situations.
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a) Where the fiduciary is in competition with the other party: Case: IDC v Cooley (1972)
Cooley was the managing director of Industrial Development Consultants but was offered a contract in his personal capacity to be consultant to the Eastern Gas Board utility. Cooley did not disclose this offer to his board of directors and resigned claiming he had a serious illness. After the resignation he then took on the contract for the Eastern Gas Board. IDC brought an action claiming breach of fiduciary duty. Note that IDC would never have got this contract. Held Cooley’s fiduciary duties meant that he should have made full disclosure of the contract and gained authorisation from IDC. He did not do this and hence had to account for the profits made from the contract.
b) Misuse of Opportunities and Information The leading case is the House of Lords decision in Boardman v Phipps (1967): Case: Boardman v Phipps (1967)
Boardman was a solicitor to a family trust which had a minority shareholding in a company. Boardman, from attending meetings of the company while acting for the trust, realised that it was being run badly. He approached the managing trustee, Mr Fox, requesting that the trust purchase the majority shareholding. Mr Fox replied that the trust could not purchase the additional shares as it did not have the funds nor did it have the power in its trust instrument to do so. Boardman and one of the beneficiaries then out of their own money purchased the majority shareholding, though full disclosure was not made to the beneficiaries (one of them being senile anyway). Boardman and the beneficiary successfully ran the company, making about £47,000 for the trust and approximately £75,000 for himself. Note that Boardman had acted completely bona fide throughout the transaction. Held
The House of Lords by a majority decision held that Boardman held the profits made on constructive trust for the trust, though the House did allow Boardman reasonable remuneration for the work he had done. The majority decided that Boardman might have to in the future advise on the acquisition of these shares – which he now owned and hence there was a conflict of interest.
Analysis of Boardman A number of issues had to be addressed in Boardman; one of the key issues was exactly where the threshold was for a conflict of interest to occur. The majority decision in Boardman: Lords Cohen, Guest, Hodson
The minority decision in Boardman: Lord Upjohn and Viscount Dilhorne
s The threshold is a ‘mere possibility of conflict’. s The information was acquired by Boardman while representing the trust; he might have to advise regarding these shares which he now owned – hence a mere possibility of a conflict; and hence the profits were held on constructive trust for the trust.
s The minority put the threshold of liability much higher. s The threshold should be ‘would a reasonable man think that there was a real sensible possibility of conflict’. s Boardman had already approached the managing trustee, Mr Fox, who stated that the trust would not buy the shares because it had neither the funds nor the power to do so – so a reasonable man would not think that there was a real sensible possibility of conflict here.
Workpoint Are the majority and minority opinions of the House of Lords, focusing on the rules in Bray v Ford being in effect just one rule, a conflict of interest, or are they viewing the no-profit rule as being separate from the no-conflict rule?
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Boardman v Phipps (1967) (continued)
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Research Point Two of the majority judges in Boardman, Lords Guest and Hodson, thought that information itself could be trust property. However, this was rejected by Lord Cohen (also a majority judge) and the two dissenting judges, Lord Upjohn and Viscount Dilhorne. Do you think that information itself can constitute trust property? Can you foresee any difficulities if this were the case?
9.5.4.3 What have other English cases said? s Generally English law has followed the strict rule in Boardman rather than the minority. In Regal Hastings v Gulliver (1942) (not reported until after Boardman was heard) the court stated that ‘liability to account for that profit in no way depends on fraud or absence of bona fides . . . liability arises from the mere fact of a profit having . . . been made’ (hence the strict position) (per Lord Russell).
s In Guinness v Saunders (1990) the House of Lords followed the majority approach in Boardman.
9.5.4.4 A change of judicial approach? s In Re Bhullar Brothers (2003), involving a family-run company where the directors had fallen out with each other, some of the directors purchased a plot of land near the company’s premises without telling the other directors. The Court of Appeal stated that the land was held on constructive trust for the company – rather surprisingly the Court applied the Boardman minority test in deciding whether there was a conflict of interest. s In Murad v Al-Saraj (2005) the obiter comments of two members of the Court of Appeal suggest an invitation to a later Supreme Court to follow the minority ruling: s ‘at some time in the future the House of Lords may consider that the time has come to relax the severity of the no-conflict rule . . . but that day has not yet arrived’ (Jonathan Parker LJ); s Lady Justice Arden made similar comments in the case. Why the change of judicial attitude? s In foreign jurisdictions, particularly in the Commonwealth, the minority approach in Boardman represents the law (Peso Silvermines v Cropper (1966); Consul Development v DPC Estates (1975)).
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Case: Hudson was a director of Queensland Mines and the Tasmanian Government wanted Queensland mines to do some consultancy work. Queensland Mines refused but Hudson took on the work in his personal capacity and made disclosure of this to the Board who agreed to him doing this; but he did not make disclosure to the shareholders in general meeting and hence did not get shareholder authorisation. Held The Privy Council, however, held that there was no conflict of interest. Disclosure to the Board who gave the authorisation was sufficient. [It should be noted that the directors were also the majority shareholders and this might have influenced the Privy Council’s decision.]
s Hence the Court of Appeal in Murad and possibly in Re Bhullar Brothers appears to be influenced by these out-of-jurisdiction cases.
Reflection Point Summary of the ‘No Conflict’ Rule s A fiduciary under the Boardman majority ruling appears liable to account where there was a mere possibility of conflict even though he acted bona fide and the beneficiary: s risked or lost nothing, s does not wish to purchase, s makes substantial gains. s A fiduciary under the Boardman minority ruling would only be liable to account if a reasonable man would think that there was a real sensible possibility of conflict. Hence if the Board of Directors has rejected the opportunity then probably there is no conflict if the director takes advantage of the opportunity himself.
9.5 THE GENERAL RULE CONCERNING FIDUCIARY DUTIES
Queensland Mines v Hudson (1978) (Privy Council) (Remember the Privy Council is made up of House of Lords judges!)
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9.5.4.5 Voiding the strict liability rule s Payment by express authority in the trust instrument. s If there is no such authority then: s make full disclosure of all material facts; s obtain the consent of all relevant parties (not easy when the beneficiaries are minors or not mentally competent, or where a general meeting of a company has to be called).
Research Point Look at s 175 of the Companies Act 2006 – does it follow the majority or minority reasoning in Boardman? Does it suggest that there are two rules – the ‘no profit’ and ‘no conflict’ rule – or just one rule?
9.5.5 Directors’ fees s A trustee is appointed as director of a company of which the trust holds shares. s The trustee/director must account for any unauthorised fees paid. s In Re Macadam (1946) the trustees had power to appoint any person to become a director and receive fees as a result. They therefore appointed themselves (by reason of their trusteeship) without authorisation from the beneficiaries and had to account for the fees. The question is ‘Did the trustee acquire the position by which he drew the remuneration by virtue of his position as trustee?’ (per Cohen J). s In Re Dover (1907) the trustees were already directors of the company before they became trustees – hence their directorship was not because of their fiduciary position to the trust; hence they were permitted to keep their fees. s In Re Gee (1948) the trustees were voted as directors by the other non-beneficiary shareholders and hence could keep their fees (again their directorship was not by reason of their fiduciary position).
9.5.6 Commission fees s If a fiduciary earns an unauthorised commission for introducing trust business he is liable to account. s In Williams v Barton (1927) a trustee worked for a stock-brokers and introduced the business to the trust by which the trustee earned a commission. He had to account to the trust for the commission earned.
9.5.7 Self-dealing and fair dealing s A trustee purchases or appropriates property from the trust (remember that the trustee is the legal owner of the property and hence is in effect purchasing from himself ). s In such a case ‘any trustee purchasing trust property is liable to have the purchase set aside [at the option of a beneficiary]’ (Campbell v Walker (1800)). s The transaction is therefore not void but voidable at the option of a beneficiary who has not consented to the transaction. s The courts adopt a strict liability approach and hence the absence of mala fides (bad faith) is irrelevant. Case: Kane v Radley-Kane (1998)
A father had two sons and later remarried. He died intestate and his second wife applied for letters of administration to administer his estate (making her a fiduciary). His estate was predominantly shares worth at the time around £50,000. Under the intestacy rules the surviving spouse was automatically entitled to statutory legacy of £125,000. The wife therefore appropriated the shares to herself claiming them as part of her £125,000 statutory legacy. About two years later the shares increased in value to over £1 million. One of the sons then brought an action stating that she was self-dealing by appropriating the shares. Held The court stated that shares were not the same as money and hence declared the transaction void as she had not obtained their consent or the consent of the court. She received her statutory legacy of £125,000; the rest went to the two step-sons under the intestacy rules.
9.5.7.2 The fair-dealing rule s Here the trustee purchases the beneficial interest from one or more beneficiaries.
9.5 THE GENERAL RULE CONCERNING FIDUCIARY DUTIES
9.5.7.1 Self-dealing
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s Rules are less strict as negotiations take place between the trustee and the beneficiary. s The trustee has to show that he has not taken any advantage of the beneficiary by virtue of the trustee’s position (Coles v Trecothick (1804)).
Checkpoint – examples of conflict Item on checklist:
Done!
I understand that a fiduciary is strictly liable for when there is a conflict of interest. I understand the rule in Keech v Sandford and how this has been extended. I understand how a fiduciary can be liable for a conflict of interest. I understand the reasoning of the majority and minority speeches in Boardman v Phipps. I understand the change in judicial attitude towards the minority reasoning. I understand the self-dealing and fair-dealing rules.
Potential exam questions 1) ‘[L]iability to account for that profit in no way depends on fraud or absence of bona fides . . . liability arises from the mere fact of a profit having . . . been made’ (per Lord Russell in Regal Hastings v Gulliver (1942)). Critically evaluate this statement; to what extent does the statement reflect the position in English law today? 2) Critically evaluate the decision in Boardman v Phipps (1967) and explain the extent to which it represents the law today.
Chapter 10 Control of trustees This chapter focuses on the appointment, removal and retirement of trustees as well as the means for challenging trustees’ decisions. Control of trustees
Appointment
Challenging decisions Retirement
Removal
10.1 Capacity s Generally any person has capacity to hold property as a trustee except that a minor cannot be a trustee of an express trust including that of personal property (Law of Property Act 1925 s 20). s A minor, however, can be the trustee of an implied trust.
10.2 Number of trustees s While there are no restrictions on the number of trustees of personal property, too many will make administration onerous. s Where land is concerned there can only be a maximum of four trustees (Trustee Act 1925 s 34). s There should also be a minimum of two to allow the over-reaching provisions of Law of Property Act 1925 s 2 to come into play.
10.3 Appointment of trustees 10.3.1 Order of appointment The starting point is the Trustee Act 1925 s 36.
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s Trustee Act 1925 s 36(1) permits a new trustee to be appointed in the place of a trustee who: s is dead, s or remains out of the United Kingdom for more than 12 months, s or desires to be discharged from all or any of the trusts or powers reposed in or conferred on him, s or refuses or is unfit to act therein, s or is incapable of acting therein, s or is an infant.
10.3.2 Who does the appointing of new trustees? s Section 36(1)(a)(b) gives the order of appointment: s Section 36(1)(a) – the person nominated in the trust instrument to appoint trustees. s This can be a general appointment for all situations when an appointment is to be made, or s only in a specific situation (such as if the trustee becomes incapable; Re Wheeler (1896)). s Section 36(1)(b) – the Surviving or Continuing Trustees. s If there is no person appointed in the trust instrument to appoint new trustees or if, as in Re Wheeler above, the specific situation for appointment has not risen then the next persons with the right to appoint new trustees are the surviving or continuing trustee or trustees. s The continuing trustees can also include a retiring trustee (Trustee Act 1925 s 36(8)), but not, it appears, one who has been removed as a trustee against their will. s If there is nobody satisfying the criteria then Trustee Act 1925 s 36(1)(b) continues that personal representatives of the last or continuing trustee to die has power to appoint new trustees. s Note that Trustee Act 1925 s 36(1) only gives the power to appoint when a new trustee replaces an existing trustee who is no longer serving for any of the reasons given above. s New trustees should always be appointed by deed so that the trust property will then vest in them (Trustee Act 1925 s 40); though where land is concerned the land register will need to reflect the change in legal ownership also. s Additional trustees can be appointed under Trustee Act 1925 s 36(6). This applies to trusts with three or fewer trustees. The person nominated
10.3.3 An independent right for the beneficiaries to appoint trustees under Trusts of Land and Appointment of Trustees Act 1996 s 19 (‘TOLATA’) s TOLATA 1996 s 19 allows the beneficiaries to appoint new trustees where: s all the beneficiaries are of full age and capacity; s all are absolutely entitled to the trust property; s the trust instrument makes no provision for appointment. s Note that this section is broader in scope than the Trustee Act 1925 s 36 as TOLATA 1996 s 19 does not require specific instances or reasons for appointment as does s 36.
Reflection Point Note the similarity with the Saunders v Vautier (see Chapter 2) criteria where beneficiaries can terminate a trust providing they are all of majority age, mentally competent and collectively entitled to the trust property.
10.3.4 The power of the court to appoint new trustees s Trustee Act 1925 s 41 permits the court to appoint new trustees either in substitution for an existing trustee or in addition to the existing trustees or where there is no trustee. Workpoint Read Trustee Act 1925 s 41.
s It must be ‘inexpedient, difficult or impracticable to do so without the assistance of the court’. s However, the court will not normally exercise its jurisdiction to do so when the s 36 mechanism could be used (Re Gibbons’ Trusts (1882)).
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in the trust instrument for appointing trustees, or if none, the surviving or continuing trustees, can appoint an additional trustee or trustees but the total number of trustees must not exceed four.
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s Often the court will exercise its powers when s the sole trustee dies intestate (and hence s 36 cannot be used), or s where all the trustees of a testamentary trust predecease the testator (Re Smirthwaite’s Trust (1871)), or s where a sole trustee is incapable of acting (Re Phelps Settlement Trusts (1885), where the trustee was in his mid-80s and deaf and unsound in mind), or s where there is significant friction between trustees (who must usually act unanimously) (Re Lemann’s Trust (1883)).
10.3.5 Rules about order of appointment s The rules are applied strictly in order. Case: Re Higginbottom (1892) (A pre-s 19 TOLATA 1996 case)
The executor of a sole surviving trustee who had now died was intending to appoint a new trustee under the relevant statutory power. However, the beneficiaries wanted their own choice and petitioned the court to appoint instead. Held The statutory power to appoint took precedence over the court’s power; hence the executor’s choice of trustee was appointed.
s If two or more persons have power to appoint trustees they must exercise it jointly. s In Re Sheppard’s Settlement Trusts (1888), two persons were appointed in the trust instrument to nominate new trustees. They disagreed on who to appoint, and consequently they lost their priority and the existing trustees were now entitled to appoint under the statutory power.
10.4 Removal of trustees 10.4.1 Trustee Act 1925 s 36(1) permits a trustee to be removed who is s out of the United Kingdom for at least 12 months, s refusing to act, s unfit to act, s incapable of acting, providing the trustee is replaced with a new trustee.
10.4.2 TOLATA 1996 s 19 permits the beneficiaries who are s have full capacity and s are collectively entitled to the trust property (and nobody is nominated in the trust instrument to appoint new trustees), to remove a trustee for ‘any reason’.
10.4.3 The court also has an inherent jurisdiction to remove trustees where s the court is satisfied that the trustee’s conduct is such to be prejudicial to the due performance of the trust and to the beneficiaries (E v E (1990)); s where the trustee is ignoring his duties to the trust (Walker v Walker (2010)); s dishonesty by the trustee (Re Lemann’s Trust (1883)); s bankruptcy by the trustee (Re Barker’s Trust (1875)); s where the trustee is guilty of a serious conflict of interest (Moore v M’Glynn (1894)). An important point to consider is whether hostility or difficulties between the trustee and the beneficiaries is a valid ground for removal. s The general rule is that such things are not a valid ground for removal unless the proper execution of the trust was being affected. s In Letterstedt v Broers (1884) it was held that the courts’ main guide must be the welfare of the beneficiaries; hence if there is serious ongoing friction the court will remove the trustees. In Kershaw v Micklethwaite (2011) the judge stated that a relevant consideration was the intention of the testator in appointing the trustee: s Would the testator have appointed the trustee if he did not think the trustee would be competent? s Also the costs of administration in appointing the new trustee was a further factor.
10.4 REMOVAL OF TRUSTEES
s all of sound mind,
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10.5 Retirement of trustees Special note: Trustees cannot just walk away from the trust! Any purported retirement is invalid under complying with the necessary formalities (Mettoy Pension Trustees v Evans (1990)).
s This means that the trustee is now discharged from his responsibilities under the trust and will not be liable for future breaches by beneficiaries.
10.5.1 Power in the trust instrument to retire s Often such a power is not present as the powers in the Trustee Act 1925 are generally considered adequate.
10.5.2 Powers in the Trustee Act 1925 s A trustee can retire: s if a new trustee is appointed in his place (s 36), or s if this is not possible, then a trustee can retire under the provisions of s 39. s Under Trustee Act 1925 s 39 a trustee may retire if: s at least two trustees or a trust corporation remain, and s the remaining trustees consent, and s anyone in the trust instrument with power to appoint trustees consents, and s the retirement is by deed.
10.5.3 Under an order of the court s The court will allow a trustee to retire where it will replace him with another trustee under Trustee Act 1925 s 41. s The court also has an inherent jurisdiction to permit retirement without replacement where it is reasonable to allow the trustee to retire (Re Chetwynd’s Settlement Trust (1902)).
10.5.4 By the beneficiaries under TOLATA 1996 s 19 s As with appointment and removal, the beneficiaries (who satisfy the requirement of being of full age and sound mind and collectively entitled to the property) can give directions to the trustee to retire.
Checkpoint – change of trustees Item on checklist:
Done!
I understand how trustees can be appointed. I understand how trustees can retire. I understand how trustees can be removed.
10.6 Challenging trustees’ decisions Duties of trustees are mandatory and must be fulfilled; however, powers being discretionary should only be considered as to whether to exercise them. s There is no obligation on the trustee to actually exercise the power at all or to exercise them in any particular method. The court will not compel a trustee to do so but will compel the trustee to consider exercising the power (Re Hay’s Settlement Trusts (1982)); Tempest v Lord Camoys (1882)). s There is no general duty on trustees to consult beneficiaries (Hawksley v May (1956)). s Note, though, that the Trusts of Land and Appointment of Trustees Act 1996 imposes an obligation on trustees of land to consult beneficiaries who are in possession of the land concerning any dealings with that land.
10.6.1 Is there a requirement for trustees to give reasons for their decisions? s There is no general requirement for trustees to give reasons for their decisions (Re Beloved Wilkes Charity (1851); Klug v Klug (1918)) unless there is a ‘legitimate expectation’ on the part of the beneficiaries (Scott v National Trust (1998)).
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s The trustee can then retire providing he executes a deed indicating his retirement; there are at least two trustees or a trust corporation remaining; another trustee will be appointed in his place or the remaining trustees consent to his retirement (TOLATA 1996 s 19(3)).
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s A legitimate expectation might include: s where the trustees have been making payments of income for some time for beneficiary A who needs the payments for specific things like private school fees. s However, the trustees suddenly stop making the payments. s There might be a legitimate expectation for the beneficiary to know why the payment has suddenly stopped. s However, trustees do have an obligation to disclose ‘trust documents’ – which would include accounts and minutes of trustees meetings. s However, this obligation does not extend to the giving of reasons for exercising their discretion (Re Londonderry’s Settlement Trusts (1965)). s Note that if beneficiaries bring litigation against the trustees, then under normal rules of discovery of documents they would then have the right to see confidential trust documents. However, they must have a ground of action to do this and not engage in a mere ‘fishing exercise’ (Hartigan Nominees v Rydge (1992)).
10.6.2 When will the court intervene when trustees exercise their powers? s Where the decision is based on irrelevant considerations. Case: Klug v Klug (1918)
A daughter beneficiary requested her mother trustee for an advanced payment of capital. However, the daughter had recently married a Frenchman without her consent and the mother gave these as the reasons for refusing the advance. Held The court declared the refusal void for the reasons she gave and awarded the advance.
Workpoint What do you think would have happened in Klug v Klug if the mother had not given reasons? Would the court have interfered with her refusal? Would the daughter have had a ‘legitimate expectation’ for reasons to be given?
s Where the decision is for an improper purpose without proper supervision.
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Case: Trustees made payments to the parents of the beneficiaries, who used the payments to pay off their personal debts and to finance their ‘lavish lifestyle’. Held The trustees were held liable for the payments. There was no proper supervision that the payments made were used for the intended purpose.
s Where a decision was made that no reasonable trustee would have made. This is probably the most difficult of all to prove (Edge v Pensions Ombudsman (2000)). s Where the decision is based on no proper exercise of discretion. Trustees must exercise their discretion and must not allow a third party to influence or dominate them. Case: Turner v Turner (1984)
The father of the beneficiary was giving the trustees documents some of which involved land and other property transactions and the trustees were just stamping or signing the documents without considering their contents. Held The transactions were set aside by the court.
s Where trustees have exercised a power under a misapprehension – the Re Hastings-Bass saga. s Difficult questions arise when the trustees have in good faith exercised their discretion but the outcome is not what was intended due to a misunderstanding. Case: Re HastingsBass (1975)
A mistake by the trustees is not fatal unless it cannot be regarded as reasonably for the benefit of the beneficiary. If it is not for the beneficiary’s benefit then it does not fall within the scope of the power and is ultra vires. In other words, the court will intervene when the trustees have failed to take into account the relevant factor of benefit to the beneficiary in making their decision.
10.6 CHALLENGING TRUSTEES’ DECISIONS
Re Paulings ST (1964)
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s However, this principle appears to have been extended to ‘the court will set aside the trustees’ decision where the trustees have failed to take into account all relevant factors or have failed to disregard all irrelevant factors when making their decision.’
(Mettoy Pensions Trustees v Evans (1990)) Problems with the Re Hastings-Bass principle: s It has given a ‘blanket right’ to trustees whose decisions have been unwise, and which with hindsight would not have been made, to have them set aside on the basis that they failed to: s account for all relevant factors or s failed to ignore all relevant factors. s It is also unclear whether the unwise disposition was merely voidable (at the option of a beneficiary) or void from the start. s Note that trustees generally will take professional legal and financial advice before making a distribution or disposition. s If they based their decisions on this advice that turns out to be bad then trustees or beneficiaries could likewise have the decision set aside under this same principle. A change of judicial approach: Case: Pitt v Holt (2011) and Futter v Futter (2011) heard together in the Court of Appeal Pitt v Holt (2011)
The Court of Protection was dealing with a man who had suffered severe brain damage in a road traffic accident. The court appointed his wife to be his receiver under the Mental Health Act 1983. After taking legal advice, his wife as receiver exercised a power to create a discretionary trust, for the benefit of the husband. The receiver did not consider that this would have serious inheritance tax consequences. She then applied to have this set aside based on the Re HastingsBass principle – the receiver had not taken into account all relevant factors (the tax) or had failed to ignore irrelevant factors when making the decision.
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Case: Trustees awarded an advancement of capital under Trustee Act 1925 s 32 after having received incorrect legal advice that this would not affect capital gains tax liability. The trustees applied to have the disposition set aside under the Re-Hastings Bass principle.
The decision in Pitt v Holt and Futter v Futter (2011): The Court of Appeal held that while the decision in Re Hastings-Bass was correct, the so-called ‘Re Hastings-Bass’ principle was incorrect. The Court of Appeal stated the following key principles: s The law is that the exercise of a discretionary power will be void if what is done is not within the scope of the fiduciary’s power. Acts outside the scope of the power would include: s a necessary consent not being obtained, or s distribution was made to a non-beneficiary or non-object of the power, or s where the power of appointment ended before the distribution was made (Breadner v Granville-Grossman (2001)). s When will the exercise of a power be voidable at the option of a beneficiary? s Where the exercise is within the scope of the power but the trustees have breached their duties regarding its exercise by failing to take account of all relevant matters and disregarding irrelevant considerations. s What of trustees who act on incorrect legal or financial advice? s When trustees proceed within their powers but on the basis of bad legal advice as in Futter v Futter and Pitt v Holt the disposition is not void; s nor is it voidable as the trustees have considered relevant factors – the legal advice. s The trustees’ remedy is thus not to have the disposition set aside but rather a claim against the legal advisors. s As a consequence of the decision in Pitt v Holt and Futter v Futter claims by trustees or beneficiaries to have the disposition or distribution set aside under a mistake of fact when they acted on legal or financial advice are likely to be less successful. s Hence the almost ‘blanket right’ to have bad decisions set aside has been removed.
10.6 CHALLENGING TRUSTEES’ DECISIONS
Futter v Futter (2011)
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s
Lord Neuberger writing extra-judicially referred to the Re HastingsBass principle as a ‘get-out-of-gaol-free card’ for trustees who now regretted what they had done. (Lord Neuberger, ‘Aspects of the Law of Mistake: Re Hasting-Bass’, lecture to the Chancery Bar Association, London, January 19, 2009, published in (2009) 15/4 Trusts & Trustees, 189.)
s Note that in Re Prudential Staff Pension Scheme (2011) the High Court stated that in certain matters within the trustee’s own knowledge and skill there is no need to seek legal advice and hence there was no breach of fiduciary duty. Therefore, when a trustee acts in such a way within their powers they will not be able to have the distribution set aside should the distribution not turn out as expected.
Reflection Point Is a trustee who does not seek legal or financial advice before making a distribution or disposition now in a better position than the trustee who acts on bad advice? The first trustee’s decision if within the scope of the power but failing to take account of relevant factors is now voidable at the option of the beneficiary. The second trustee’s only remedy is an action against the legal or financial advisor. Alternatively if a trustee does not seek legal or financial advice would he not be in breach of either the common law or statutory duty of care (Trustee Act 2000 s 1)?
Further considerations: s If liability is now on the legal advisor this can be difficult for beneficiaries who wish to bring an action. s Professional negligence actions can be significantly difficult to prove, especially where the contractual nexus is with the trustee and the advisor not the beneficiary. s If beneficiaries wish to bring an action against the trustee they may be faced with exemption clauses in the trust instrument protecting the trustees from liability for negligence (Armitage v Nurse (1997)). s Proving that the powers has been exercised ultra vires is also difficult to prove; if, for example, all the beneficiaries consent to the trustees’ distribution would this still make the decision ultra vires? Note that the Supreme Court has approved the Court of Appeal’s judgment in Pitt v Holt and Futter v Futter concerning the Re Hastings-Bass principle (Pitt v Holt /Futter v Futter 2013)
Checkpoint – challenging trustees’ decisions Done!
I understand how trustees’ decisions may be challenged. I understand the principle in Re Hastings-Bass. I understand the changes made by the Court of Appeal to the Re Hastings-Bass principle in Pitt v Holt and Futter v Futter. I understand the consequences of the latter two cases.
Potential exam questions 1) Critically evaluate the principle in Re Hastings-Bass (1975). 2) Explain the circumstances in which a trustee can be appointed or replaced or be permitted to retire. 3) ‘Duties are mandatory but powers are discretionary.’ Critically evaluate this statement with regard to the circumstances when a trustee’s exercise of their powers is subject to legal challenge.
10.6 CHALLENGING TRUSTEES’ DECISIONS
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Chapter 11 Duties of trustees Remember that unlike a power a duty has to be performed, though trustees can have powers as to how to exercise the particular duty.
11.1 Fiduciary nature of trusteeship Trustees are in a fiduciary position; they owe the beneficiaries duties of confidence, trust and an obligation of loyalty (Bristol and West Building Society v Mothew (1998)). The following are the key duties of trustees: s To act in the best interests of the trust; trustees must not allow their personal interests to conflict with their duties to the trust (Bray v Ford (1896); Cowan v Scargill (1985)). s To vest trust property in themselves (see Chapter 4): s Where the trust property is land the trustees must apply to the Land Registry to have the trust property vested in themselves or where a new trustee is appointed to have the register amended with the name of the new trustee. s Similar principles apply to shares – the share register will have to be amended with the name or names of the new trustees. s To provide accounts and information: s Trustees have a general duty to provide ‘trust documents’ to beneficiaries. s However, it was held in Re Londonderry’s Settlement (1965) that trustees do not have a duty to provide documents relating to the exercise of their discretion. s To properly distribute the trust property: s Trustees must only distribute property to those entitled under the trust and will be personally liable if a wrongful distribution is made. s Likewise a proprietary claim on behalf of the beneficiaries can be made against third parties who have innocently or knowingly received trust property (Foskett v McKeown (2001)).
11.2 Duty to invest
s If a trustee has committed a breach of trust by making an unauthorised investment but makes a profit and a loss across the range of investments he may be permitted to ‘set off ’ the loss against the profit. In other words, rather than being fully liable for the loss, the loss is reduced by the degree of profit made by the authorised investment. Case: Bartlett v Barclays Bank Trust Co. Ltd (1980)
Company directors of a company of which the trust had the majority shareholding invested in a highly speculative and risky property development venture. Part of the venture was a significant failure, the other part a significant success. The trustees were in breach as they could have restrained the directors from the venture. Held As the two parts were from the same venture the trustees were permitted to ‘set off ’ their losses from the first part against the gains from the second part.
11.2.1 What is meant by an ‘investment’? s Older cases such as Re Wragg (1919) referred to an investment as ‘to apply money in the purchase of property . . . for the income it will yield’. This will exclude capital assets such as real property, paintings, antiques, etc. s However, more modern cases have broadened the definition. In Harries v Church Commissioners (1992) the court referred to investments as where the ‘trustees are seeking to obtain maximum return by way of income or capital growth’. Hence this will now include the purchase of capital assets even though not necessarily producing an income. s The law on investment has only recently been updated with the Trustee Act 2000.
11.2 DUTY TO INVEST
s Note that this is a duty not a power; the trustees must invest. A trustee will be personally liable if he leaves trust money uninvested for an unreasonable period (Attorney-General v Alford (1855)).
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11.2.2 Trustee Investments Act 1961 The old law was contained in the very ‘paternalistic’ Trustee Investments Act 1961. The 1961 Act, unless there was contrary intention in the trust instrument, s limited the categories of assets in which funds could be invested, s aimed to ensure that trustees invested only in ‘safe’ investments, and s had no separate power to invest in land. As a result of these limitations trust investments had to have very broad investment clauses inserted; if not, the trustees could only invest according to the limited powers in the Trustee Investments Act 1961. s Hence many trust instruments did not give trustees the power they needed to fulfil their duty to invest in the modern day. s If trustees wanted to broaden their investment powers they would have to apply to court for a variation of the trust under Trustee Act 1925 s 57.
11.2.3 The new law is the Trustee Act 2000 which s came into force on 1 February 2001, s does away with the categorisation in the Trustee Investments Act 1961, s applies to all trusts whenever created; it is therefore a retrospective statute and hence all trustees immediately came under this new statute from 1 February 2001 onward, s gives a General Power of Investment to trustees, and s gives a separate Power to Invest in Land.
11.3 The General Power of Investment under the Trustee Act 2000 s Trustees may make any kind of investment as if they were absolutely entitled to the assets (s 3(1)). However, this incredibly wide power does not come without obligations.
s The General Power of Investment is subject to: s the Trust Instrument, s the Standard Investment Criteria, s a duty to obtain proper advice, s the newly created Statutory Duty of Care, and s some Common Law Duties.
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Common law duties
Trust instrument Standard investment criteria
Duty to obtain proper advice
Statutory duty of care
11.3.1 The General Power of Investment and the Trust Instrument s The General Power of Investment is in addition to the powers in the trust instrument but subject to any restriction in the trust instrument (s 6). s It is, therefore, vital to read the wording of the trust instrument. s If, for example, the wording is ‘trustees can invest in general utilities such as coal and gas’, then the General Power of Investment in effect automatically adds the words ‘and anything else’. This is because the General Power of Investment is in addition to the powers in the trust instrument. The powers in the trust instrument are said to be merely inclusive. s If, instead, the wording of the trust instrument is ‘trustees can invest in general utilities and nothing else’, the General Power of Investment is now excluded because it is subject to any restriction in the trust instrument. Here the powers in the trust instrument are said to be exhaustive – not permitting anything else. s Note that the General Power of Investment applies to trusts whether created before or after commencement of the Act.
11.3.2 The General Power of Investment and the Standard Investment Criteria s The General Power of Investment is also subject to the Standard Investment Criteria (s 4).
11.3 GENERAL POWER OF INVESTMENT
General Power of Investment
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s The Standard Investment Criteria has two elements: s The suitability of the Type of investment proposed and the Particular investment, and s The Need for Diversification. s Note that the Standard Investment Criteria (unlike the General Power of Investment) cannot be modified or restricted by the trust instrument ((s 6(1)(b)). s The Standard Investment Criteria applies to any power of investment ‘whether under the Act or otherwise’ (s 4(1)). s The ‘otherwise’ refers to the trust instrument. If all or most of the powers of investment derive from the trust instrument rather than the Act, then the Standard Investment Criteria still applies.
11.3.2.1 Suitability (Trustee Act 2000 s 4(3)(a)) s If, for example, the trustees are considering investing £1m in the shares of a public gas company, how do they comply with the suitability requirement of the Standard Investment Criteria? s First, they have to consider the Type of investment proposed. s So the first question is ‘should we invest in shares in a public company or would a private company be more suitable?’ s If the answer to that question is yes then the next question is ‘should we invest in shares in a public gas company or some other public company?’ s If the trust decides that a public gas company is most suitable then they must now consider the Particular investment; in other words, ‘which particular public gas company should we invest in?’ s The trustees should then carefully minute that they have made full consideration of these criteria before making the investment.
11.3.2.2 Need for diversification (s 4(3)(b)) The trustees must also consider the second aspect of the Standard Investment Criteria – the need for diversification, often referred to as the Modern Portfolio Theory (Nestle v Nat West (No. 2) (1993)). s There is a general duty on trustees to diversify their investments; they cannot put ‘all their eggs in one basket’. So if one investment fails that does not mean the trustees are liable for breach of trust. s ‘[M]odern trustees . . . judged by risk level of . . . entire portfolio rather than each investment taken in isolation’ (Nestle v Nat West (No. 2) (1993)).
s However, the duty to diversify is not absolute; it does not apply in all circumstances.
11.3.3 The General Power of Investment and the Duty to Review (s 4(2)) The General Power of Investment is also subject to the Duty to Review: s Trustees must from time to time review investments and consider whether, regarding the Standard Investment Criteria, the investment should be varied (s 4(2)). s Trustees must review their investment strategy at important times – these would likely include the government budget and when fundamental changes in the stock market occur. s When the Trustee Act 2000 came into force on 1 February 2001 all trustees should have reviewed their investment strategy with the new powers they suddenly received from the Act.
11.3.4 The General Power of Investment and the Duty to Obtain and Consider Proper Advice (s (1)) s Before investing trustees must obtain and consider proper advice from a person reasonably believed by the trustees to be qualified to give such advice by reason of his ability and practical experience of financial and other matters relating to the investment. s This is both a subjective test (the trustees must genuinely believe the person is suitable) and objective test (the belief must also be reasonable). Unless: s The trustees ‘reasonably conclude it is unnecessary or inappropriate to do so’.
11.3 GENERAL POWER OF INVESTMENT
s Trustee Act 2000 s 4(3)(b) refers to the duty to diversify but then adds ‘as is appropriate to the circumstances of the trust’. So there are situations where diversification might not be necessary, such as: s Perhaps the fund is relatively small and diversification would not be practical. s The trust property is not money but perhaps company shares as the only asset. s The trust property is a capital asset such as a single freehold property.
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s Therefore this duty is not absolute and trustees should carefully minute why they have decided not to obtain and consider such advice; some valid reasons could include: s The size of trust – the trust fund is very small and the probable high fees payable to an expert would not be commensurate with a relatively small fund. s The type of investment considered may be very low risk. s The trustee or trustees is or are sufficiently skilled and experienced.
11.3.5 The General Power of Investment and the Statutory Duty of Care (Sched 1, para 1 and s 1) s When exercising the General Power of Investment the trustees must comply with the Statutory Duty of Care. s This is a new creation of the Trustee Act 2000. s The common law standard of care (which still applies in some circumstances) was the standard of the ‘ordinary prudent man of business acting for someone to whom he had a moral obligation’ (Learoyd v Whitely (1887); Speight v Gaunt (1883)). This was solely objective and appears to impose the same standard of care on the professional and lay trustee. Workpoint Read Sched 1 to the Trustee Act 2000: The duty is that the trustee must ‘exercise such care as is reasonable having regard to: s any special knowledge or experience that he has or holds himself out as having and s . . . if he acts as a trustee in the course of a business . . ., to any special skill or knowledge that it is reasonable to expect.’
s The duty is still overall objective; however, there are clear subjective elements in the first part of the duty – to consider ‘any special knowledge or experience’ that the trustee has or holds himself out as having. Hence a professional trustee will have a higher standard of care than a lay trustee. s Therefore the new duty of care has ‘widened the gap’ between the standard of care of the professional and lay trustee (see L.M. Clements, ‘Bringing Trusts into the Twenty-First Century’ (2004) 2 Web JCLI).
s The second part of the duty is solely objective – being the standards of the profession of the professional trustee;
s At common law a trustee’s liability for negligence could be excluded by a properly drafted exclusion clause (Armitage v Nurse (1997)) but not for dishonesty or fraud as this would be void as against public policy. s The Trustee Act 2000 appears to have enacted this principle for the statutory duty of care. Workpoint Read Sched 1, para 7 of the Trustee Act 2000, ‘Exclusion of the duty of care’: 7 The duty of care does not apply if or in so far as it appears from the trust instrument that the duty is not meant to apply.
s Therefore the statutory duty of care can be negated or modified by the trust instrument.
11.3.6 Common law duties The General Power of Investment is also subject to a number of common law duties.
11.3.6.1 Duty to act in the best interests of the trust s As stated previously trustees have a duty to act in the best interests of the trust; they must not allow their personal views to influence them. Case: Cowan v Scargill (1984)
The leader of the National Union of Mineworkers was also trustee of the miners’ pension fund and made a policy not to invest in any investments from abroad and that were in competition with the coal industry. Held The trustee was in breach of trust; trustees must not allow their own personal views to influence them. They must act in the best interests of the trust.
11.3 GENERAL POWER OF INVESTMENT
11.3.5.1 Exclusion of the statutory duty of care
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s What of so-called ‘ethical investments’, which might be based on the trustees’ or indeed the beneficiaries’ or settlor’s own views? The principle in Cowan v Scargill still applies, though there are exceptions. s If the trust is charitable and the investment would conflict with the charity’s objects then the trustees need not invest in that particular investment (Harries v Church Commissioners (1993)). So a religious charity or a health charity need not invest in, say, tobacco or armaments. s A further exception is if such ethical investments are permitted by trust instrument then such investments can be made.
11.3.6.2 A further common law duty is the duty to properly balance the interests of the beneficiaries s A gift is given on trust of ‘£100,000 to X for life remainder to Y’. s X, being the life tenant, is only entitled to the income that the £100,000 produces; X cannot touch the capital sum itself. s Y, however, will be entitled to the whole capital sum on X’s death. s Therefore X will want income-producing investments, whereas Y will want the capital sum to grow and hence require capital growth investments. s Trustees have a duty to properly balance the investments to take into account the needs of X and Y.
11.3.7 Summary The trustees want to invest in X Co. Ltd. To do so lawfully they must consider: General Power of Investment
Trust instrument
Standard investment criteria Duty to review
Common law duties
Duty to obtain proper advice
Statutory duty of care
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Checkpoint – duty of investment Done!
I understand the general duties of trustees. I understand that under the previous law trustees had very limited powers to fulfil the duty of investment. I understand that the Trustee Act 2000 is a respective statute significantly widening trustee investment powers. I understand the General Power of Investment. I understand that the General Power of Investment is subject to the trust instrument, the standard investment criteria, the duty to review, the statutory duty of care, the duty to obtain proper advice and certain common law duties. I understand that the statutory duty of care can be excluded or modified by the trust instrument.
11.3.8 The power to acquire land Workpoint Read ss 8 and 9 of the Trustee Act 2000. Under s 8 of the Trustee Act 2000: ‘(1) A trustee may acquire freehold or leasehold land in the United Kingdom – (a) as an investment, (b) for occupation by a beneficiary, or (c) for any other reason. (2) “Freehold or leasehold land” means – (a) in relation to England and Wales, a legal estate in land.’ Under s 9 of the Trustee Act 2000: ‘Restriction or exclusion of this Part etc. The powers conferred by this Part are – (a) in addition to powers conferred on trustees otherwise than by this Part, but (b) subject to any restriction or exclusion imposed by the trust instrument or by any enactment or any provision of subordinate legislation.’
11.3 GENERAL POWER OF INVESTMENT
Item on checklist:
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s As can be seen above this is a very broad power to acquire land. s Land can be purchased by the trustees not just as an investment but for occupation by a beneficiary or for any other reason. s However, the statutory duty of care applies when acquiring or managing land (Sched 1 to the Trustee Act 2000). s The section makes explicit reference to the legal estate in freehold or leasehold title. s This would therefore likely exclude purchases of the equitable title only to land. s Note also that investment in overseas properties is excluded by the section. s The power to acquire land can be restricted or modified by the trust instrument (s 9).
11.4 Investment and the power of delegation Investment is often linked with delegation as the body of trustees might delegate their investment duties to an investment expert and hence it is dealt with here rather than under the ‘Powers of Trustees’ chapter.
11.4.1 The old law relating to delegation was under the Trustee Act 1925 s Trustee Act 1925 s 23 permitted delegation by the body of trustees of administrative functions only; fiduciary functions and those relating to investment could not be delegated. s Trustee Act 1925 s 25 allowed a single trustee to delegate all his responsibilities by Power of Attorney to last one year.
11.4.2 The new law of delegation by the body of trustees is contained in the Trustee Act 2000 s 11 s This allows the body of trustees to delegate all their functions except ‘Non-Delegable’ Functions, of which there are four: s how the fund is to be distributed (only the trustees can decide, for example, in a discretionary trust which beneficiary is to benefit; or
s s
11.4.3 Duties of the trustees when appointing the agent s When appointing the agent the trustees must comply with the Statutory Duty of Care (Sched 1(3)). This, remember, is a predominantly objective test but taking into account a professional trustee’s knowledge and skill and the standards of that profession. s A beneficiary, no matter how qualified or experienced, cannot be appointed as an agent (s 12(3)). s Where the trustees have appointed two agents, the agents must exercise the function jointly not severally (s 12(2)). This has led to criticism as it means that documents and cheques will have to be signed by both parties rather than just one of the agents. s This can cause problems if one of the agents is abroad or for some other reason cannot be contacted. s The trustees cannot sit idly by; they have a duty to review the acts of the agent and if necessary intervene (s 22). Intervention could simply mean giving the agent further directions or could mean removing the agent from his responsibilities entirely. All will depend on the degree of seriousness of the situation. s Asset Management Functions (s 15): where the agent is instructed as an investment manager or has some other asset management function such as relating to acquiring or managing property then s 15 demands that there be s an agreement in writing or evidenced in writing between the trustees and the agent that the agent will comply with the ‘Policy Statement’. s The Policy Statement sets out the responsibilities of the agent and an undertaking that the agent will comply with these responsibilities.
11.4.4 Liability of the trustees s Trustee Act 2000 s 23 – if trustees complied with the statutory duty of care in appointing and reviewing the agent they are not liable for acts or defaults of the agent.
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s
in a contingent trust whether to make early payments of income or capital under ss 31 and 32 of the Trustee Act 1925 to beneficiaries before the contingency is fulfilled); whether to pay fees out of income or capital; appointing a new trustee; appointing another agent.
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11.4.5 Duties of the agent s The agent has the same restrictions as the Trustees (s 13). s The agent must s consider the Standard Investment Criteria when investing, s obtain proper advice unless it is not reasonably necessary to do so. s Where land is involved there is a duty to consult beneficiaries who are in possession (Trusts of Land and Appointment of Trustees Act 1996 s 11).
Checkpoint – land and agents Item on checklist:
Done!
I understand the broad power to acquire land in the Trustee Act 2000 s 8. I understand that this broad power is subject to the statutory of care. I understand the power of delegation. I understand that the body of trustees can delegate all their functions to the agent except the four ‘nondelegable’ functions. I understand the continuing responsibilities of trustees concerning the agent. I understand the liability of the trustees for the acts of the agent.
Potential exam questions 1) Critically evaluate the new powers of investment and delegation pursuant to the Trustee Act 2000.
Chapter 12 Powers of trustees 12.1 Introduction Unlike duties, powers are discretionary and hence do not have to be performed. The only obligation of a trustee who is under a fiduciary power is to consider whether to exercise it (Re Hay’s Settlement Trusts (1981)). If it is not a fiduciary power there is not even a duty to consider its exercise. This chapter will focus primarily on the powers of maintenance and advancement available to trustees. Such powers might be expressly made in the trust instrument or come from the Trustee Act 1925 ss 31 and 32. This chapter will be concerned primarily with the statutory power and usually is most relevant with regard to contingent (future) interests.
12.2 Why are such contingent trusts made? s Tax – usually the trust is formed as a tax-saving device. s Protect funds of an estate – if money is tied up or subject to the trustees’ control the funds are protected from such things as bankruptcy of a beneficiary. s Control a spend-thrift beneficiary – it is not advisable to give teenagers or other young people very large sums of money. s Provide income for a beneficiary when needed.
12.3 The accumulation and maintenance trust Consider the following contingent trust: s ‘100,000 shares on trust for my two children “A” and “B” when reaching 25.’
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s Reading the trust literally it would appear that the beneficiaries are unable to have anything of the fund until they reach the age of 25. This would not be helpful if funds are urgently needed and the contingency has not yet been reached. s The shares comprise the capital of the trust. These shares will generate dividends or income. Similar principles apply where the capital sum is money. The money will be invested to generate interest or income. s Such a form of trust is generally referred to as an ‘accumulation and maintenance trust’. s Here the income produced by the shares may be either: s added (accumulated) to the capital, or s used to maintain a beneficiary (maintenance).
12.4 The destination of the income of the trust When can the trustees pay income under a trust and to which beneficiaries?
12.4.1 The trust instrument The trust instrument is always the first ‘port of call’ as to the powers of the trustees. Case: Re Turner’s Will Trust (1937)
The beneficiary had not yet reached the age of the contingency but after reaching the age of majority requested the income be paid to him under the relevant statutory power (see 12.4.2 below). However, the trust instrument stated that the income had to be accumulated until the contingency was fulfilled. The beneficiary died before the contingency had been reached and his estate claimed the income from the age of majority until death. Held The trust instrument took precedence over the statutory power and no income could be paid to the beneficiary’s estate.
12.4.2 The statutory power to pay income
Read s 31 of the Trustee Act 1925: ‘31 Power to apply income for maintenance and to accumulate surplus income during a minority. (1) Where any property is held by trustees in trust for any person for any interest whatsoever, whether vested or contingent, then, subject to any prior interests or charges affecting that property – (i) during the infancy of any such person, if his interest so long continues, the trustees may, at their sole discretion, pay to his parent or guardian, if any, or otherwise apply for or towards his maintenance, education, or benefit, the whole or such part, if any, of the income of that property as may, in all the circumstances, be reasonable, whether or not there is – (a) any other fund applicable to the same purpose; or (b) any person bound by law to provide for his maintenance or education.’
12.4.3 Payments of income to minor beneficiaries (those under 18 years of age) s Trustee Act 1925 s 31 gives the trustees power to make payments of income and distinguishes between a minor beneficiary and an adult beneficiary. According to s 31(1) of the Trustee Act 1925 above: s Trustees have power to pay income for the maintenance, education or benefit of an infant (minor) beneficiary if: a) There is not a prior interest (one which comes before the minor can inherit): s ‘1000 shares to X for life remainder to B’ here X has a prior interest and hence the trustees have no power to pay income to B; s ‘1000 shares for “A” and “B” when reaching age 25’ if A is 16 and B is 18 clearly B will reach age 25 first – however, B does not have a prior interest over A; they have the same interest even though B will reach age 25 first. B’s interest is not dependent in any way on A; hence the trustees have power to pay income to A as a minor.
12.4 THE DESTINATION OF THE INCOME OF THE TRUST
Workpoint
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b) There must be no contrary intention expressed in trust instrument (Trustee Act 1925 s 69 states that the powers contained in the Act are subject to any restrictions in the trust instrument; and see again Re Turner (1937) above). c) Where the gift is contingent it must carry the ‘intermediate income’ (Trustee Act 1925 s 31(3)): s The intermediate income is the income generated by the capital fund during the period of the trust up to the time the contingency is fulfilled. s The rules for when gifts do and do not carry intermediate income are highly complex and do not follow logical coherent steps (see the Law of Property Act 1925 s 175). d) Under s 31(1)(ii) the trustees must in deciding to make a payment of income have given ‘regard’ to: s the age of the infant, s any other income available, s the infant’s requirements, s all other relevant circumstances of the case. What is meant by giving ‘regard’ to? s Generally it is similar to the responsibilities of trustees when exercising their powers (see Chapter 10). Note that if the trustees act in good faith within their powers the court will not generally interfere with the decision (Re Bryant (1894)). s So, for example, when exercising their powers under s 31 to pay income for the maintenance, education or benefit of a minor, the trustees must 1) consciously exercise their discretion: s In Wilson v Turner (1883), the trustees merely completed documents to do with the trust that were handed to them by the beneficiaries’ father. The court declared the transactions void as the trustees had not exercised their discretion properly; 2) consider only the interests of the beneficiaries: s In Re Paulings Settlement Trusts (1964) the trustees made payments to the parents of the beneficiaries from the trust fund without proper supervision that the payments were being used for the beneficiaries. However, the parents used the money to pay off their personal debts and to finance their ‘lavish lifestyle’. The court held the trustees personally liable. 3) pay a proportion from each fund if there are several funds (s 31(1)).
s According to s 31(2) any income not paid for maintenance is to be accumulated by investment during the beneficiary’s minority.
12.5.1 According to the Trustee Act 1925 s 31(1)(ii) s When the beneficiary attains the age of majority (18 years of age) the Trustees shall pay the income until the contingency is fulfilled. s It is therefore a duty to pay the income, as opposed to a power, unless: s the trust instrument prevents it, or s there is a prior interest.
Reflection Point s ‘100,000 shares for “X” and “Y” when reaching the age of 25’ s X is 18; Y is 16. Consider how the Trustee Act 1925 s 31 can be applied to X and Y.
s With Y being under 18 he is still a minor and hence trustees only have a power to give income for Y’s maintenance, education or benefit; note that as it is a power there is no duty on the trustees to exercise this, though if they give reasons for non-exercise of the power these can be challenged (see Chapter 10). s X, however, has now attained majority and there is a duty to pay his share of the income unless there is a prior interest (which there is not here) or the trust instrument states otherwise.
12.6 Accumulated income Let us say that there is a trust of 100,000 shares in a private limited company for the benefit of a minor: s From 2001 to 2013 this trust generated £50,000 income, which was all accumulated. s In 2013 the beneficiary has now attained the age of majority (18). s Certainly there is a duty to pay the income that is generated from age 18 onwards to this beneficiary (subject to the prior interest and the
12.6 ACCUMULATED INCOME
12.5 Adult beneficiaries
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trust instrument) but what of the accumulated income before the beneficiary reached 18? s Can the beneficiary now claim the £50,000 income that accumulated before he reached 18? s The answer is only yes if either s the trust instrument allows it, or s if the trust instrument is silent then the beneficiary is only entitled to accumulated income if he is entitled also to the capital at age 18 (Trustee Act 1925 s 31(2)(i)). s In other words, only if the contingency is fulfilled when the beneficiary reaches the age of majority can he gain the accumulated income. So if instead the gift stated: s ‘100,000 shares on trust to B on attaining 18’ – s In this case the capital sum of the shares is payable on attaining age 18. s He is then entitled also to all the accumulated income. s If the beneficiary has no such entitlement the accumulated income is added to the capital until the contingency is fulfilled.
Checkpoint – power of maintenance Item on checklist: I understand the power to pay maintenance. I understand that the law distinguishes between a minor and an adult beneficiary. I understand that a payment can be made to a minor for his maintenance, education or benefit. I understand the circumstances when the above payment can be made. I understand that trustees have a duty to pay income to an adult beneficiary unless the trust instrument prevents it or there is a prior interest. I understand that an adult beneficiary has no right to accumulated income before reaching majority unless the trust instrument allows it or the contingency is fulfilled on reaching majority.
Done!
12.7 Advancement of capital
‘£100,000 on trust for my two children “A” and “B” when reaching the age of 25.’
s Again, reading this strictly suggests that the capital sum (£100,000) cannot be touched by either A or B until reaching age 25. s Assume that child A is 20 and child B is 16. s Can either/both claim an advance of capital?
12.7.1 Trustee Act 1925 s 32 s This section gives trustees power to apply capital for the benefit of any beneficiary entitled to capital, whether the interest is vested or contingent. s So any beneficiary can claim except someone with only a life interest as such persons have no entitlement to capital (they can only claim the income that is generated from the capital sum).
12.7.2 General principles s The advance of capital can be made regardless of age (so minors and adult beneficiaries can claim). s The maximum advance in total to a particular beneficiary must not exceed one-half of the beneficiary’s presumptive share of the capital. s If ‘£100,000 is left on trust for A and B in equal shares on reaching age 25’: s The trustees have power under s 32 to advance one-half of their presumptive shares to A and B before the contingency is fulfilled – £25,000 each. s If the trustees advance the full one-half share, can they make any further advances if the trust fund later increases in value?
12.7 ADVANCEMENT OF CAPITAL
So far we have only considered the income that is generated from the capital sum. We now need to consider whether the trustees have power to make payments from the capital sum itself before the contingency is reached. Let us consider the following trust:
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Case: Marquess of Abergavenny v Ram (1981)
The trustees had advanced the full one-half of the beneficiaries’ presumptive share; the fund went up in value and the beneficiary requested a further sum to reflect this increase. Held No more advanced payments could be made. So it is better for trustees not to advance the full half but advance smaller sums instead and then later they can take advantage of any increase in value of the fund to award higher amounts.
12.7.2.1 The effect of a prior interest s We saw that under the Trustee Act 1925 s 31 the existence of a prior interest is fatal to the trustees’ powers to apply income to a beneficiary. s This is not the case with a payment of capital under s 32 of the Trustee Act 1925. s The trustees can still make a payment if the person with the prior interest gives written consent to the payment. Example £10,000 to ‘A’ for life, remainder to ‘B’ s B wants a capital payment. s Remember that A cannot get a capital payment as he only has a life interest. s A must give written consent for B to receive the advance. This is because A’s income is likely to go down as the capital fund will be reduced. s The trustees, if A gives written consent, can now advance up to one-half of B’s share, namely £5,000.
12.7.2.2 The trust instrument s The power to pay an advance is subject to any contrary intention in the trust instrument (Trustee Act 1925 s 69(2)). s Therefore the trust instrument could exclude the statutory power or reduce or increase the percentage that can be advanced by the trustees.
12.7.2.3 ‘Benefit or Advancement’
s What does ‘benefit’ and ‘advancement’ mean? s In Pilkington v IRC (1964) the House of Lords: s gave ‘benefit’ a meaning referring to direct financial benefit; s ‘advancement’ referred to an advance payment which helped to establish the beneficiary in life.
12.7.2.4 Interpreting ‘benefit’ and ‘advancement’ The interpretation of ‘benefit’ and ‘advancement’, in both pre- and post-Pilkington cases, has been very broad and generous and includes: s an advance payment setting up the beneficiary in business (Re Kershaw’s WT (1868)); s an advance payment to reduce tax liability by setting up new trusts in the beneficiaries’ favour (Pilkington v IRC (1964)); s an advance payment to buy and furnish a house for the beneficiary to live in (Perry v Perry (1870)); s payment of the beneficiary’s debts (Lowther v Bentinck (1874)). s In Re Clore’s Settlement Trusts (1966) it was held that trustees could lawfully make an advance to the beneficiary due to the latter’s moral obligation to contribute to a charity. Had he not been given the payment he would have made it from his taxable income instead, hence the advancement was granted. Some payments have been held not to be for the beneficiary’s benefit or advancement: s Where the payment results in a benefit to the trustee. In Molyneux v Fletcher (1898) a payment to a beneficiary to allow her to pay her father’s debt to one of the trustees was set aside as one made mal fide (bad faith). s Where payments were used to pay the parents’ debts and finance their ‘lavish lifestyle’ (Re Paulings Settlement Trusts (1964)).
12.7.2.5 The duty of care when exercising their discretion s Note that when exercising their discretion trustees must comply with the common law duty of care.
12.7 ADVANCEMENT OF CAPITAL
s The payment of capital under s 31 of the Trustee Act 1925 must be for the beneficiary’s ‘benefit’ or ‘advancement’.
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s The new Statutory Duty of Care in the Trustee Act 2000 does not apply to payments of maintenance and advancement (Trustee Act 2000 Sched 1). s The common law duty of care is objective in nature and imposes a standard on a trustee of ‘an ordinary prudent man of business acting for someone to whom he has a moral obligation’ (Learoyd v Whitely (1887); Speight v Gaunt (1883)). s Trustees must meet this standard when deciding to exercise their powers of maintenance and advancement. s So with advancing funds for a business they should consider the age, qualifications and experience of the beneficiary; s remember that most businesses fail in the first year. s They also have a supervisory duty to see that the trust funds are used for their intended purpose (Re Paulings Settlement Trusts (1964)).
Checkpoint – powers of advancement Item on checklist:
Done!
I understand that s 32 of the Trustee Act 1925 permits an advance of the capital sum to any beneficiary who is entitled to capital. I understand that if there is a prior interest the person with that interest must give written consent to the advancement. I understand that the most that can be advanced is onehalf of the beneficiary’s presumptive share. I understand that the trust instrument can prevent or modify the exercise of the statutory power and change the amount that can be advanced. I understand that the power under s 32 can only be exercised for the beneficiary’s benefit or advancement but that this is broadly interpreted.
12.8 Other powers of trustees 12.8.1 Power to sell s Trustee Act 1925 s 12 permits trustees to sell any trust property providing they get the best price reasonably obtainable.
12.8.2 Power to insure s Trustee Act 1925 s 19 gives trustees power to insure trust property and to pay the premiums from the trust funds whether this be income or capital. s Under the Trustee Act 2000 Sched 1 trustees must comply with the statutory duty when insuring. s They will therefore be liable if they have underinsured the property and failed the statutory duty of care when so doing.
12.8.3 Power to compound liabilities s Trustees have at times to make decisions about what strategy to adopt if the trust is involved in litigation or proposed litigation by an outside body. s Trustee Act 1925 s 15(f) gives trustees the power to settle claims made against the trust. They can do this by ‘compromises’ (agreements to settle) or abandonment of the claim or submit it to arbitration.
Potential exam questions 1) Critically evaluate the extent of the trustees’ powers of maintenance and advancement. 2) Tom and Margaret are the trustees of the Tomlin Trust created five years ago by the late Thomas Tomlin for the benefit of his wife Elicia for life with remainder to his two sons, Malcolm (now aged 18) and Peter (now aged 15) contingent on them reaching the age of 25. If either of his two sons should die before the age of 25 their share shall accrue to the survivor. The trustees wish to know their responsibilities with regard to the following requests from the beneficiaries: i) Peter is desiring to undertake skiing lessons and requests assistance from the trust;
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s Trustee Act 1925 s 14 permits trustees to give a valid receipt to a purchaser. Thus the purchaser’s title to the property is perfected and there is no need for the purchaser to inquire as to whether the terms of the trust have been complied with in the sale.
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ii) Malcolm wants to start up in business to market new-age herbal medicines via the internet and requests assistance from the trust. He also requests his share of any income that has been accumulated by the trustees since the trust was created; iii) Elicia requests an advance of capital so she can buy a house. Would your answer differ as regards (i) and (ii) above if Elicia was already dead at the time of the requests?
Chapter 13 Variation of trusts In some circumstances the law permits trusts to be varied. The variation could be of administrative matters or varying the beneficial interest of one or more beneficiaries.
13.1 Why are trusts varied? s For taxation purposes. This might occur due to s (a) changes in tax laws, and s (b) tax planning – perhaps moving the trust to another jurisdiction or restructuring the trust to be more tax efficient (Pilkington v Inland Revenue Commission (1964)). s To widen powers of investment (though since the Trustee Act 2000 s 3 trustees now have the General Power of Investment – see Chapter 11). s To alter other powers of management and administration. s In the general interests of the beneficiaries. Case: Re Remnant (1970)
The testatrix specified that if any of her children became or married Roman Catholics they would be disinherited. Some of the family did become Roman Catholics. Held A variation was permitted to remove the antiRoman Catholic clause in the interests of family harmony.
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Cases: Re C.L. (1969)
A mother who had a life interest in the trust fund had become mentally incompetent. The remainder interest was held by her daughter who applied for a variation so she could inherit the remainder interest immediately and use the funds to look after her mother. Held The court agreed to the variation and decided that that is what the mother would have wanted to happen.
Re Seale’s Marriage Settlement (1961)
The court permitted a variation to move the trust funds to Canada where the family had already emigrated.
The general principle is that trustees must not depart from the terms of the trust (Fry v Fry (1859)) and hence specific procedures are necessary for a variation to be valid in law. It is also important that any ‘variation’ be a variation in substance and not in reality a resettlement of the trust property on new trusts.
13.2 Methods of variation s Under the inherent jurisdiction of the court: s Such jurisdiction only relates to the management and administration of the trust rather than to varying the beneficial interests. s The jurisdiction must be exercised with ‘great caution’ (Re New (1901)). s The court has authority to exercise its inherent jurisdiction in two areas – Emergency and Compromise (Chapman v Chapman (1954)). The House of Lords in Chapman v Chapman (1954) defined Emergency and Compromise as follows: Emergency
Compromise
Interpreted negatively to mean anything which, by not taking action, interferes with the settlor’s intention
Where there is a conflict as to the precise meaning of the terms of a trust they approve a variation to remove the conflict (’a compromise’). The court is said to be ‘defining’ not altering the beneficial interests
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Cases: The trustees requested the court to exercise its jurisdiction allowing them to borrow money to repair part of the trust property that was about to collapse. Held This was allowed as ‘emergency’ as the collapse of the trust property would interfere with the settlor’s intentions.
Re New (1901)
A company had been restructured and released new shares in this restricted company. The trustees wanted to vary the trust by investing in these new restructured shares; the trust already had shares in this company before the restructuring and the variation would benefit the beneficiaries. Held Merely benefiting the beneficiaries was not a valid reason for permitting the variation under the emergency provision. However, the variation was allowed as this would fulfil the settlor’s intentions. The shares were altered as to their nature (the restructure) rather than as regards the trust property itself.
Chapman v Chapman (1954)
The House held that it had no jurisdiction under the ‘compromise’ jurisdiction to vary trusts for minors, the unborn or unascertained individuals. There must be a genuine dispute with regard to the terms of the trust.
Workpoint Does Chapman v Chapman mean then that beneficiaries who are in dispute are in a much better position than those who are not in dispute?
Research Point Read the case of Allen v Distillers (Biochemicals) Ltd (1974) 2 All ER 635 concerning the damage done to children in the early 1960s by the Thalidomide drug. Why was a compromise allowed in that case?
s By express authority in the trust instrument: s For example, the trustees might be given a power to add a particular person or persons to the class of beneficiaries as they think fit.
13.2 METHODS OF VARIATION
Re Jackson (1882)
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s
They must, however, exercise any power of variation within the scope of the purposes for which it was granted and must act in the interests of the beneficiaries and not benefit themselves (Society of Lloyd’s v Robinson (1999)).
s Trustee Act 1925 s 57 – this is suitable for when the trustees seek to make changes only in the ‘management and administration’ of the trust (Anker-Petersen v Anker-Petersen (1990)). s The consent of the beneficiaries need not be obtained. s Trustee Act 1925 s 53: s Here the trustees on approval by the court can sell trust property for the purpose of ‘maintenance, education or benefit of an infant’ beneficiary. s Do not confuse this section with the Trustee Act 1925 s 31 which allows payments out of income for a beneficiary’s maintenance, education or advancement. s Matrimonial Causes Act 1973 s 24(1)(c): s permits the court to vary any trusts regarding matrimonial property by making ‘property adjustment orders’. s Mental Health Act 1983 s 96 permits the court to vary the trust if a beneficiary has been sectioned under the mental health legislation (see Re C.L. above). s The rule in Saunders v Vautier (1841): s The beneficiaries, provided all are of sound mind and over the age of majority and are collectively entitled to the trust property, can authorise the trustees to vary the trust. s Alternatively all the latter beneficiaries can terminate the trust and form a new trust or divide up the trust property. s Trustee Act 1925 s 32 (see Chapter 12): s This gives the power to advance capital to beneficiaries entitled whether the interest is vested or contingent. s This is also a form of variation. In Pilkington v IRC (1964) an advancement was allowed to create a new tax-efficient trust for the particular beneficiary.
Checkpoint – methods of variation Item on checklist: I understand that it is possible to vary a trust. I understand the reasons why some want to vary a trust. I understand the methods for varying a trust.
Done!
13.3.1 The Variation of Trusts Act 1958 s varies or revokes the trusts; s enlarges powers of the trustees; s permits variation of the beneficial interests; s was enacted after the restrictive decision of the House of Lords in Chapman v Chapman (1954) (above).
13.3.2 General points about the 1958 Act s The court does not vary the interest itself but gives consent to the variation on behalf of four types of beneficiary, and could be termed a statutory ‘Saunders v Vautier’. s For the first three types of beneficiary the court must be satisfied that the variation will benefit the beneficiary on behalf of whom they are consenting. s Generally the court cannot and will not consent on behalf of identifiable adult beneficiaries who must give their own consent to the variation; the court will not force them to do so.
Key Point For those beneficiaries for whom the court will not consent those beneficiaries must give their express consent to the variation (no matter how remote they might be). If they do not give consent the trust cannot be varied.
13.3.3 For whom will the court consent to a variation? s Section 1(1)(a)–(d) lists the type of beneficiary on behalf of whom the court will give consent.
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13.3 KEY METHOD OF VARIATION
13.3 The key method of variation is under the Variation of Trusts Act 1958
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Workpoint Read s 1 of the Variation of Trusts Act 1958.
Summary of s 1(1)(a)–(d) of the Variation of Trusts Act 1958: s Section 1(1)(a) – the court can consent on behalf of children and persons who are not mentally competent. s Section (1)(b) – the court can consent on behalf of persons who may have an interest at s a future date or s on the occurence of a certain event; but (known as the ‘proviso’): not if the said Person would have inherited had the Principal Beneficiary died on the date of the application to court to vary. s Section 1(1)(c) – the court can consent on behalf of persons unborn. s Section 1(1)(d) – the court can consent on behalf of persons who would have a discretionary trust under a protective trust where the protective trust has not failed.
13.3.4 Children, mental patients and the unborn s Sections 1(1)(a) and (c) are clear: the court can consent on behalf of children, mentally incompetent persons and the unborn provided that the variation will benefit them.
13.3.5 Sections 1(1)(b) and 1(1)(d) are substantially less clear s Section 1(1)(b) has two key elements: s someone who ‘may have an interest’, that is an unidentifiable interest and hence is referring to those who have a mere hope or expectation of an interest; s that person must not inherit the interest had the principal beneficiary died at the date of the court application to vary (the proviso).
13.3.5.1 What is meant by ‘someone who may have an interest’?
Knocker v Youle (1986)
The testator created a trust in favour of his daughter for life; on her death the remainder was to go to whomever she appointed in her will. If no appointment was made the remainder would go to the testator’s son (her brother). If the son was not alive at her death the remainder would go to the settlor’s four sisters. If these were all deceased the remainder would go to the ‘issue’ (children) of the four sisters. [See the diagram below.] Daughter 1 2 Appointed in her will
Testator’s son
3
4
Testator’s sisters ‘Issue of the sisters’
The daughter and the son (her brother) applied to vary the trust. The daughter and the son being competent adults had to give their own consent to the variation. Who was left for the court to consider? At the date of the court application she had not appointed anyone to inherit the remainder in her will and all the sisters of the testator had deceased. However, the testator’s sisters had approximately, between them, 13 adult children (the daughter and son’s cousins) who were living in Australia. The daughter and the son requested the court to consent on behalf of the adult cousins under the Variation of Trusts Act 1958 s 1(1)(b). Were those cousins merely ‘someone who may have an interest’? Held The cousins were not ‘someone who may have an interest’. They had clear ascertained interests in the property even though remote; the court would not consent on their behalf.
13.3 KEY METHOD OF VARIATION
Case:
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13.3.5.2 Analysis of the Knocker v Yule decision The Court in Knocker v Yule gave a very restrictive interpretation to s 1(1)(b). s Persons with clearly defined contingent interests (i.e. ‘the issue of ’ is clearly defined) is not someone who ‘may have an interest’. s Rather such persons do have an interest no matter how remote. s Hence the court would not consent on behalf of the cousins and they would have to give their own consent to the variation. s Note that had the daughter appointed someone in her will before the court action it would not have made any difference as a will is revocable up to the point of death and hence the cousins would still have had a clearly defined contingent interest even though very remote.
13.3.5.3 So to what does s 1(1)(b) refer? Who is someone who ‘may have an interest’? s In Knocker v Yule (1986) the court stated that the section referred only to those having a mere hope or expectation of an interest. The court gave the example of: s a prospective future spouse, or s a prospective next of kin. s So if, for example, the trust had instead been phrased as follows: Daughter
1 Appointed in her will 2
3
4
Testator’s son And future spouse
Testator’s sisters ‘Next of kin of the sisters’
then the court would be able to consent under the first limb of Variation of Trusts Act 1958 s 1(1)(b) for the prospective future spouse and the next of kin.
13.3.5.4 The second limb of Variation of Trusts Act 1958 s 1(1)(b) – the proviso s The court will not give consent if the Person who ‘may have an interest’ would have inherited had the principal beneficiary died at date of the application to court to vary the interest.
s So if the person is ascertainable the court will not exercise its discretion under s 1(1)(b). s The best way to understand the proviso is to consider the case law. Case: Re Moncrieff (1962)
The testator settled a testamentary trust on his daughter Anne for life and on her death the remainder was to go to her issue (children). If no issue was alive at Anne’s death the remainder was to go to the ‘next of kin’. Anne had an adopted son and several cousins. Anne applied to varied the trust and requested the court consents to the next of kin (the cousins) under s 1(1)(b) of the Variation of Trusts Act 1958. If the son were a child she could apply for the court to grant consent for him under s 1(1)(a); if not he would have to give his own consent. 1
Anne
Issue
2 Next of kin
The court held that the cousins as ‘next of kin’ were persons who ‘may have an interest’ and hence the first limb of s 1(1)(b) is satisfied. The court then had to apply the proviso – who would inherit if Anne had died at the date of the court application to vary the trust? s Clearly it would be the son; s therefore the cousins as next of kin have no interest on A’s death, and s the court was able to consent on their behalf providing benefit could be shown to them from the variation.
s Note how the next of kin must be at least two contingencies away in order for the proviso requirements to be met.
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13.3 KEY METHOD OF VARIATION
s The court now performs a notional exercise: s The court ‘pretends’ that the Principal Beneficiary has died at the date of the court application to vary. s If the Person who may have an interest would then have inherited the estate (in other words, their interest is now clearly definable) no consent can be given.
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Case: Re Suffert (1961)
A testator settled a testamentary trust on his daughter, an unmarried spinster aged 61. s On her death the remainder was to go to her children. s If she had no children the fund would go to any whom she appointed in her will. s If no appointment the fund would devolve on her next of kin who happened to be three cousins. Miss Suffert and one of the cousins applied to vary the trust and requested the court to consent on behalf of the other two cousins under s 1(1)(b). Miss Suffert 1 Issue
2 Appointment
3 ‘Next of kin’ (Three adult cousins)
Under the first limb of s 1(1)(b) the two cousins were persons who ‘may have an interest’, they being identified as only next of kin. Applying the proviso, who would inherit had Miss Suffert died at the date of the court application? s She had no children and had made no appointment at the date of the court application. s Therefore it would be the cousins who would inherit and hence the court refused to give its consent. s The two cousins would have to give their own consent to the variation.
Workpoint Re Suffert: Would it have made a difference if Miss Suffert had appointed someone in her will before her application to vary?
13.3.5.5 Summary of Variation of Trusts Act 1958 s 1(1)(b) s The court will only consent where s the person has mere hope/expectation (Knocker v Youle (1986)) (if they are clearly identifiable by name or by class (‘issue’; ‘children of ’) then they do have an interest, even though very remote), and
s
the person would not gain an interest had the principal beneficiary died on the date of the application to court to vary the trust.
s Note again the diagrams in Re Moncrieff and Re Suffert. s In Re Moncrieff the next of kin were two contingencies away (the adopted son being the first contingency) and hence the court could consent on the cousin’s behalf. s In Re Suffert the cousins were only one contingency away as there were no issue and no appointment had been made; hence the cousins would inherit had the principal beneficiary died at the date of the court application to vary. Workpoint Lance has died and his will vests a testamentary trust on Abigail for life, remainder to Abigail’s children. If Abigail has no children the remainder shall go to whomever she shall appoint by will. If no appointment is made the remainder shall go to Abigail’s next of kin. Abigail wishes to vary the trust; consider how the Variation of Trusts Act 1958 will apply in the following situations: a) Abigail has no children, has made no appointment in her will but has three cousins as closest relatives. b) Abigail has a son, David, aged 12, has made no appointment in her will and has three cousins as closest relatives after David. c) Abigail is pregnant, has a son, Adam, who is 18, a mentally incompetent mother and also three cousins.
Checkpoint – Variation of Trusts Act 1958 s 1(1)(a) to (c) Item on checklist: I understand s 1(1)(a) and (c) of the Variation of Trusts Act 1958. I understand that s 1(1)(b) is in two parts: there must be someone who may have an interest; and that person must not inherit had the principal beneficiary died at the date of the court application to vary the trust. I understand that ‘may have an interest’ means someone who is not ascertainable, such as a next of kin or prospective future spouse.
Done!
13.3 KEY METHOD OF VARIATION
s The proviso is known as the ‘two contingencies away’ rule.
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13.3.6 Section 1(1)(d) Variation of Trusts Act 1958 The court can consent on behalf of a person who would have a discretionary trust under a protective trust where the protective trust has not failed. s Remember that the protective trust only protects the income not the capital. It can be created by use of the words ‘on protective trust’ (Trustee Act 1925 s 33).
13.3.6.1 How the protective trust works A trust has given £100,000 to X for life on protective trust, remainder to Y. s X currently enjoys the income under a fixed trust. s However, if an event occurs depriving X of the right to income such as bankruptcy then: s A discretionary trust arises in favour of X and X’s spouse and issue; or, if no spouse and issue, to X and the next person entitled (Y in our example). s As shown in Chapter 2 the beneficiary under a discretionary trust has no identifiable interest in the fund until the discretion is exercised in his favour. Therefore a trustee in bankruptcy and creditors cannot get hold of the trust income. Returning to variation, the court can consent on behalf of the spouse and issue or Y to vary the trust under Variation of Trusts Act 1958 s 1(1)(d). s Note that benefit need not be shown to those who would be the beneficiaries under the discretionary trust.
13.4 Benefit In order to consent to the variation the court must be satisfied that the variation will benefit those on behalf of whom it is consenting. General principles: s Benefit does not need to be shown for those in s 1(1)(d). s Benefit can take different forms and there might be competing benefits.
s The court considers the risk of the variation not turning out to be beneficial.
Research Point See the article by R. Cotterrell, ‘The Requirement of “Benefit” under the Variation of Trusts Act 1958’, (1971) 34 MLR 98. What did he mean by the phrase ‘Benefit and the measure of it is simply what the court says it is . . .’?
13.4.1 Types of benefit s Financial benefit (usually tax savings; see Pilkington v Inland Revenue Commissioners (1964)); s Moral/social benefit: Cases: Re Weston (1969)
A family applied to vary a trust to move it to Jersey, predominantly for tax reasons. Held Lord Denning refused, stating that moving would have a detrimental effect on the children’s education. Hence here there were competing interests – the financial interests and the social interests. The court held the social interests took precedence.
Re Seale (1961)
The trust was permitted to move to Canada where the family already were domiciled.
Re Tinker’s Settlement Trusts (1960)
A donor had made a trust leaving a fund to child A and child B and intended that their respective issue should inherit when their parent dies. However, due to a drafting error the trust stated that when child A deceased his share would go not to his own children but to the children of child B (their cousins). The family applied to vary the trust to allow child A’s children to inherit his share. Held The court refused the variation as no benefit could be shown to the children of Child B from the arrangement; they would lose their inheritance when their uncle died.
13.4 BENEFIT
s What if the variation goes against the settlor’s intentions?
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Cases: Re T’s Settlement Trusts (1964)
A rather immature young lady was reaching the age of majority when her contingent interest would become vested. The court permitted a variation to increase the contingency until she reached 30. The increase would benefit the beneficiary and allow her to mature.
Re Holt’s Settlement (1969)
A mother (aged about 35) had a life interest in a trust fund with remainder to her children on attaining age 21. She wanted to vary the trust so that her share would be one-half of the life interest and the other half in favour of her children. But she wanted half of the children’s income to be accumulated until age 25 and the contingency on the capital increased until they were aged 30. This would lead to considerable tax savings on death taxes and would give the children income. Held The court approved the variation as it was for the children’s benefit.
s See also the case of Re C.L. (1969) earlier. s Sometimes a trust can be varied in the interest of family harmony: Case: Re Remnant (1970)
A trust was created for the testator’s two daughters with remainder interests to their children. The testator stipulated that if any of her daughters’ children became Catholic or married Catholics then they would not benefit. One of the daughters married a Catholic and the children were brought up as Catholics. Held A variation was approved to remove the antiCatholic stipulation in the interests of family unity (even though this meant that the children of the non-Catholic would inherit less). (Compare with Re Tinker above.)
s Sometimes a benefit can be in an administrative sense usually for geographical reasons:
s
s
13.4.2 Risk The court must consider the risk of the variation not being beneficial to the particular beneficiary: s Re Cohen (1959) – the court applies the ‘consenting adult test’: would an ordinary adult in the position of the beneficiary for whom the court is requested to consent take the risk of the variation? s Re Druce’s ST (1962) – the court should act to the civil standard, so on a balance of probabilities, benefit will occur, then the variation can be approved.
13.4.3 The settlor’s intentions Arguably a variation will be going against the settlor’s intentions. How much weight should the court put on this? Case: Goulding v James (1997)
The testator left the residue of his estate to his daughter for life, remainder to the daughter’s son (the testator’s grandson) contingent on reaching age 40. If the son died before age 40 the money would go to any great-grandchildren living at death of the grandson. A request was made to vary the trust so that 10% of the residue was put into a trust fund for any great-grandchildren and to divide remaining capital between daughter and grandson. What of the testator’s intentions in this matter? Held Testator’s intentions carry very little weight. The court must give paramount consideration to the interests of the beneficiaries on whose behalf it is giving consent. The court approved the variation.
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s
Re Seale (1961) above – the court allowed a variation as the family were already domiciled in Canada. The variation was refused though in Re Weston (1969) above, as the family had only lived in Jersey for three months and it was felt that the tax reasons for moving were outweighed by the educational benefits in remaining in the United Kingdom. Re Windeatt (1969) – here the family had permanently emigrated abroad. The court approved a variation for administrative reasons to move the trust to that country.
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Note: the reason that the 10% of residue was put aside for the great-grandchildren was to show that the arrangement would be of benefit to them. Therefore, if a beneficiary is many times removed (see Knocker v Yule above) and only has a remote chance of inheriting anything, some of the fund must still be set aside for them or there can be no benefit to them from any variation.
13.4.3.1 Removal of the protective trust element However, the situation might be different where the removal of the protective trust is concerned as the variation does not have to benefit the beneficiaries protected by the discretionary trust. s In Re Steed (1960) the court held that the intentions of the settlor carry significant weight. Though in this case the donor had expressly stated that the protective element was there to protect his housekeeper (beneficiary) from being ‘sponged’ upon by her family. s The court refused to remove the protective element.
13.4.4 Variation or complete resettlement? The trust needs to be varied, not re-created. Therefore the trust itself needs to remain in operation for a variation to take place. It is not always easy to determine if a variation is in substance a variation or a complete resettlement. In Re Ball’s Settlement Trusts (1968) the court gave the ‘substratum test’: ‘If an arrangement changes the whole substratum of the trust, it may well be that it cannot be regarded as merely varying the trust. But if an arrangement, while leaving the substratum, effectuates the purpose by other means it may still be possible to regard that arrangement as merely varying the original trusts, even though the means employed are wholly different and even though the form is completely changed.’
(per Megarry J) s So if the change does not affect the substratum or foundation of the trust it will be a variation.
Case: Re T’s Settlement Trusts (1964)
The facts were given earlier and involved an immature beneficiary whose interest was about to become vested which she would no doubt waste. The original arrangement proposed was that the capital would be transferred to trustees on wholly different trusts giving her a protective trust for her lifetime. The court refused to sanction this as it would amount to a complete resettlement. The very substratum of the trust had changed. Instead a new arrangement was proposed where a contingency was inserted allowing her to have a vested interest at the age of 30. The court approved this arrangement.
Checkpoint Item on checklist: I understand s 1(1)(d) of the Variation of Trusts Act 1958. I understand that for s 1(1)(a)(b)(c) of the Variation of Trusts Act 1958 benefit must be shown for the beneficiary for whom the court is consenting by the variation. I understand the different types of benefit available. I understand that the court will apply a test of ‘consenting adult’ to the standard of a balance of probabilities in determining the risk of whether the variation will benefit the beneficiary. I understand the difference between a variation and resettlement.
Done!
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s If it changes the very foundation of the trust, making it into something fundamentally different, it will be a resettlement for which the court does not have power to undertake.
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Potential exam questions 1) Critically evaluate the methods by which the courts will permit a variation of a trust pursuant to the Variation of Trusts Act 1958. 2) Daniel has died and his will leaves £100,000 on protective trust to his wife Elsa for life with remainder to whomever she appointed in her will. If no appointment is made the remainder is to go to his cousins Steven and Robin or if either have predeceased him to their next of kin. Elsa would like to vary the trust to remove the protective element and have a £60,000 capital sum vested in herself and the remaining £40,000 for the cousins. Advise Elsa.
Chapter 14 Breach of trust and remedies This chapter will focus on the liability of trustees and strangers for breach of trust and the remedies available.
14.1 When the trustee is personally liable s A trustee is liable for his own breaches, not those of his fellow trustees (Townley v Sherborne (1643)). s However, the trustee’s personal liability will extend to where the trustee: s leaves a matter to the other trustees without inquiry (Hale v Adams (1873)); s is aware of a breach of trust and just stands by (Styles v Guy (1849)) or takes no steps to obtain compensation (Wilkins v Hogg (1861)); s allows trust funds to remain in the sole control of a co-trustee (English v Willats (1831)). s Generally a trustee is not liable for breaches committed before appointment as trustee where there is no evidence indicating a breach has occurred (Re Strahan (1856)). s After retirement a trustee remains liable for breaches committed by him before retirement. s If trustees commit a breach of trust all of them who committed the breach are jointly and severally liable. If two trustees A and B commit a breach and A goes bankrupt the beneficiaries can claim from B alone the full restoration of the fund.
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14.1.2 Personal remedies available against the trustee Equitable compensation Personal liability
or Account of profits
s Equitable compensation generally involves a duty to make good a loss to the trust. s Account is the forwarding to the beneficiaries of any profits made in breach of trust. s However, the beneficiaries cannot claim both remedies as they would be overly compensated (Tang Man Sit v Capacious Investments (1996)).
14.1.3 How is liability measured? s Difficulties can arise where trust money is used to purchase an asset such as shares which fluctuate in value; when is the relevant date for assessing the level of profits? s In Nant-y-glo and Blaina Ironworks Co. v Grave (1879) it was held that the trustees had to account for when the shares were at their highest value between the time of the breach and the court judgment (£80 each) even though at the time of the judgment the shares had fallen to £1 each. s For breach of trust resulting in a loss the measure is the loss to the trust estate. s However, the breach must have factually caused the loss (Target Holdings v Redfern (A Firm) (1996)). s In other words, ‘but for’ the breach, would the damage have occurred? However, legal causation in terms of remoteness of damage need not be proved. The damages that flow from the loss therefore need not be reasonably foreseeable. s The relevant date for determining the extent of the loss is the date of judgment not the date of the breach (Target Holdings v Redferns (A Firm) (1996)).
Research Point
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See also Clough v Bond (1838).
14.1.4 Where there has been fraud by the trustee, liability depends on the type of remedy sought s If the remedy is one of rescission of a contract and account of profits the rules of causation will not apply (Swindle v Harrison (1997)). The fact that the claimant might have acted in the same way anyway is not relevant. s If the remedy is restoration of the trust fund then the court will consider the ‘but for’ causation principles from Target Holdings (Swindle v Harrison (1997); Gwembe Valley Development v Koshy (2004)).
Checkpoint – trustee liability Item on checklist:
Done!
I understand that generally trustees are not liable for other trustees’ breaches of trust. I understand how trustees can be liable for other trustees’ breaches in the situations above. I understand how liability is measured.
14.2 Joint and several liability of trustees 14.2.1 Liability of trustees inter se (among or between themselves) s Liability being several as well as joint gives more opportunity to the beneficiaries to recover the sums lost. s If only one trustee is sued he can claim a contribution or indemnity from the other trustees who are liable.
14.2 JOINT AND SEVERAL LIABILITY OF TRUSTEES
Read the speech of Lord Browne-Wilkinson in Target Holdings v Redferns (A Firm) (1996). Did he give the ‘but for’ test only for commercial cases or does it also include family trusts?
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s Indemnity is where the trustee who was sued can recover the whole amount paid over, amounting to a 100% contribution. s Contribution is where the trustee who was sued is able to claim a portion from the other reprehensible trustee or trustees.
14.2.2 Law before the Civil Liability (Contribution) Act 1978 s A complete indemnity was payable in a number of limited situations: s Where full reliance was placed on one trustee due to their expertise (Re Partington (1887)). s Where one trustee has acted dishonestly and the others are free of guilt (note that this does not mean that if one trustee is less guilty than the others he can gain an indemnity). s Impounding – where a trustee who is also a beneficiary commits a breach of trust, the trustee cannot receive any part of his beneficial interest until he has compensated the whole of the loss to the trust (Chillingworth v Chambers (1896)). s Where a contribution was concerned under the old law it was equal proportions regardless of who was most culpable (Bahin v Hughes (1884)).
14.2.3 New Law: Civil Liability (Contribution) Act 1978 Workpoint Read Civil Liability (Contribution) Act 1978 ss 1, 2(1), 2(2).
So, under the Civil Liability (Contribution) Act 1978: s A trustee, Y, can recover from trustee, X, such contribution as the court deems to be just and equitable. s The court has power to direct that the sum recovered by Y amounts to a complete indemnity. s Most likely the court will be influenced by earlier decisions when a complete indemnity was awarded.
14.3 Liability of agents s See Chapter 11 (Trustee Act 2000 ss 22, 23).
14.4 Criminal Liability
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Checkpoint – liability Item on checklist:
Done!
I understand the principle of joint and several liability. I understand how trustees might be liable to give a contribution or indemnity. I understand the function of the Civil Liability (Contribution) Act 1978. I understand how a trustee can be liable for the acts of an agent and for criminal liability.
14.5 Defences of trustees 14.5.1 Relief under the Trustee Act 1925 s 61 s Section 61 relieves a trustee of liability where he has acted ‘honestly’ and ‘reasonably’ and that he ‘ought fairly to be excused for the breach of trust and for omitting to obtain the directions of the court in the matter in which he committed such a breach’. s The trustee must have acted both honestly and reasonably. s While there is no definition of honesty in this context the trustee must have good motives to further the interests of the trust. ‘Fairly’ would suggest fairness to both the trustee and those beneficiaries affected (Marsden v Regan (1954)). s ‘Reasonably’ suggests being in compliance with the relevant duty of care. s At common law the duty of care was the objective standard of the ‘ordinary prudent man of business’ (Speight v Gaunt (1883)). s Under statute the Trustee Act 2000 imposes the partly objective and partly subjective statutory duty of care, though this does not apply to all aspects of a trustee’s duties and powers (Sched 1 to the Trustee Act 2000 – see Chapter 11).
14.5 DEFENCES OF TRUSTEES
s Theft Act 1968 s 5(1) – a trustee is liable for theft if he ‘dishonestly appropriates property belonging to another with the intention of permanently depriving the other of it’.
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Cases: Perrins v Bellamy (1899)
Trustees thought they had a power of sale over the trust property and sold several leasehold properties and thus reduced the income of the trust. The trustees’ solicitor had advised them that they had a power of sale and were relieved from liability.
Bartlett v Barclays Bank Trusts (1980)
The trustees of a trust, which held 99.5% of the shares in a company, left the management of that company in the hands of its directors, contenting themselves with the information they received at that company’s AGM and not seeking any further information. It was held that the bank had acted honestly but not reasonably. A prudent man of business would have taken more care.
s Reliance on a third party will not automatically absolve a trustee of liability. It all depends on whether the trustee has complied with the relevant duty of care in following the advice. s In Re Turner (1897) the trustee relied on the investment advice of a co-trustee who was a solicitor. The court held that mere reliance on this advice was insufficient; the degree of prudence expected had not been shown (compare with Perrins v Bellamy (1899) above). s Where the trustee is paid for his services the court is less ready to grant relief under Trustee Act 1925 s 61 (Re Pauling’s Settlement Trusts (1964)).
14.5.2 Acquiescence by a beneficiary s It is a defence to show the beneficiary consented or acquiesced in the breach of trust. s The beneficiary must s be an adult, s of sound mind, s not subject to any undue influence (whether actual or presumed) (see Re Pauling’s Settlement Trusts (1964)), s have full knowledge of the circumstances and receive a benefit from the breach.
14.5.3 Impounding under Trustee Act 1925 s 62
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s the beneficiary’s consent is in writing, or s is an oral statement that actually requests or instigates the breach. The court can impound all or part of the beneficiary’s interest by way of indemnity to the trustee who is being sued.
14.5.4 Limitation Under the Limitation Act 1980 s 21(3) a beneficiary has six years from the date of the breach to bring an action. The exceptions to this are if the s breach of trust was fraudulent there is no period of limitation; s action is to recover trust property in the hands of trustees there is no period of limitation; s claimant is under a disability such as being a minor, any limitation will not start to run until the disability is concluded.
14.5.5 Exemption or limitation clauses s In Armitage v Nurse (1998) the Court of Appeal held that an exclusion clause that ‘trustees would not be liable for loss or damage unless caused by their own fraud’ was valid. Hence negligence could be excluded by such a clause but not fraudulent or dishonest behaviour as this would be void as against public policy. s The statutory duty of care in the Trustee Act 2000 can likewise be excluded (Trustee Act 2000 Sched 1, para 7).
Checkpoint – defences Item on checklist: I understand the defences of: s Section 61 of the Trustee Act 1925 s Acquiescence by a beneficiary s Impounding of the beneficiary’s interest s Limitation s Exclusion clauses
Done!
14.5 DEFENCES OF TRUSTEES
This occurs where:
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14.6 Personal liability of strangers (third parties) Sometimes the trustee has given the trust property to someone unconnected with the trust or alternatively the stranger has assisted the trustee in a breach of trust.
14.6.1 Common law claim 14.6.1.1 Money Had and Received s This claim is one of strict liability and hence there is no mental element necessary on the part of the receiver. s It is restitutionary in nature and hence can only put the claimant back in the position before the breach of trust occurred. s It cannot be used to claim any benefits the stranger made on or after receipt of the trust money. The factors necessary for Money Had and Received (Lipkin Gorman v Karpnale Ltd (1991)) s The claimant must have legal title to the funds (beneficiaries who have no legal rights cannot claim under this head). s The stranger must have received the trust funds. s The stranger has been unjustly enriched (this does not mean that they knew it was trust property – it simply means the stranger has received property not belonging to him; it is irrelevant for liability whether the stranger knew this or not). The defences to Money Had and Received a) The stranger was a bona fide purchaser without notice that it was trust property (‘equity’s darling’): s here the stranger has given consideration, rather than being merely a volunteer; s this is a complete defence. b) Substantial change of position: s Here the stranger has substantially altered his situation in reliance on the receipt of the funds, innocently believing the funds belong to him; s there is thus a requirement for an innocent state of mind on the part of the stranger for the defence to operate.
s s
Case: Lipkin Gorman v Karpnale (1991)
The claimants were a firm of solicitors. One of the partners, Mr Cass, stole about £215,000 from the firm’s client account (the firm’s partners being the legal owners of the fund). Mr Cass then went to the Playboy Club of which he was a member paying a fee and gambled the money he had stolen. He lost about £155,000 but won back about £60,000. The firm brought an action against the Playboy Club for Money Had and Received. The Playboy Club raised the defences of bona fide purchaser (by acceptance of the fee and allowing him entry to the club they had given consideration); and that of substantial change of position in Mr Cass winning back £60,000. It would be unfair for the club to have to pay back the £60,000 again should the full £215,000 be awarded. Held The House of Lords rejected the first defence as gambling debts are not valid or sufficient consideration under the Gaming Act 1845. However, the second defence was accepted. By Mr Cass winning back the £60,000, this was a substantial change of position by the club and hence they would not have to pay back the full £215,000 but £155,000.
Checkpoint – Money Had and Received Item on checklist: I understand the common law claim of money had and received. I understand that liability is strict and is not dependent on the state of mind of the third party. I understand the defence of change of position and its requirements.
Done!
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It can be either a complete or partial defence. It is a relatively modern defence for Money Had and Received only being recognised as such by the House of Lords in 1991.
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14.6.2 Claims in equity against third parties s If either of the two claims below are successful the stranger is treated as a constructive trustee even though they might no longer have the property in their possession or as in dishonest assistance might never have had possession of the trust property in the first place. s If the stranger is a constructive trustee then they are personally liable for either of the remedies of account and equitable compensation.
14.6.2.1 Knowing receipt Here the stranger has received trust property knowing that it is in fact trust property. The factors required are (El Ajou v Dollar Land Holdings plc (1994)): s a breach of trust by the trustee in disposing of the claimant’s property; s receipt of the said property by the stranger which is traceable by the claimant; s knowledge that it is trust property by the stranger. Most litigation deals with what is meant by ‘knowledge’. There are several types of knowledge: s actual knowledge – where the stranger is actually told that it is trust property; s constructive knowledge – where the stranger’s knowledge is such that it would put a reasonable man on inquiry that the property does not belong absolutely to the trustee (‘don’t ask me where this came from’). Which ‘knowledge’ is necessary for ‘knowing receipt’ of trust property by the stranger? There have been considerable differences of opinion in case law: s Re Montagu’s Settlement Trust (1987) held that what is required is actual knowledge by the stranger that it is trust property. s Agip (Africa) v Jackson (1991) held (obiter) that all the beneficiary need prove is that the stranger had constructive knowledge. s The Court of Appeal in BCCI v Akindele (2001) appears to confuse the issue further by stating that the test was whether ‘it would be unconscionable for the third party to retain the benefit of the receipt’.
s
s
s Lord Justice Nourse in Akindele felt that the categories of ‘actual’ and ‘constructive’ knowledge were unhelpful and did not allow flexibility for different situations; hence a test of unconscionability rather than blanket categories. s The judgment in BCCI v Akindele has been approved in the more recent case of City Index v Gawler (2007).
Research Point What approach does Lord Nicholls, writing extra-judicially in ‘Knowing Receipt: The Need for a New Landmark’, in W.R. Cornish (ed.), Restitution Past, Present and Future (Hart Publishing 1998), 231, argue for when it comes to the state of mind of the third party in knowing receipt claims?
14.6.2.2 Dishonest assistance Here the stranger has not necessarily received trust property but has ‘assisted’ in the breach of trust. The standard is not one of negligence but of ‘dishonesty’ – a much higher threshold. The factors for dishonest assistance are as follows (Baden Delvaux v Societe General (1983)): s the existence of a fiduciary obligation; s a breach of fiduciary duty by the trustee; s assistance by the stranger in the breach of trust; s dishonesty by the stranger. There is no requirement for dishonesty by the trustee. If there was, then a dishonest stranger could escape liability merely by proving that the trustee was not dishonest (Royal Brunei Airlines v Tan (1995)).
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s
Hence rather than decide which head of knowledge is applicable the court has introduced a new test of unconscionability. This most likely covers all actual knowledge situations, but does it cover constructive knowledge also? Would a statement by the trustee to the stranger, ‘take this property; don’t ask me where it came from’, be sufficient to make it unconscionable for the stranger to retain the property?
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What is meant by ‘assistance’? s Assistance has to be ‘active’ not merely passive. s With dishonest intention to defeat the trust (Brinks Ltd v Abu-Saleh (1995)). What is dishonesty? s The courts have had problems, though, in interpreting ‘dishonesty’. s In Royal Brunei Airlines v Tan (1995) the Privy Council (per Lord Nicholls) held that the test was a sole objective test. s However, he did appear to slightly ‘muddy the waters’ by stating that there is a degree of subjectivity. s He appeared to suggest that the reasonable man in considering dishonesty must look at the characteristics of the defendant – his age, experience, qualifications, etc., in determining if that defendant had been dishonest. s However, the test is still solely objective. The matter came before the House of Lords in Twinsectra v Yardley (2002) (also important with regard to ‘Quistclose’ trusts). Case: Twinsectra v Yardley (2002) HL
Twinsectra was to make a loan to Yardley for the sole purpose of Yardley using the funds for the purchase of property only. Twinsectra transferred the money to a solicitor Sims who gave an undertaking that the money would be used only for the intended purpose. Sims then transferred the money to Yardley’s solicitor Leach, who knew of the undertaking by Sims but still released the funds to Yardley to use for purposes other than the purchase of property. The question was whether Leach had dishonestly assisted Sims in a breach of trust. Held The House of Lords held by majority decision that Leach was not liable for dishonest assistance; he did not believe that his actions were dishonest by the standards of the reasonable man though he had closed his mind to the possibility.
s the ‘Robin Hood’ standard – where the stranger transgresses his own standards of dishonesty; s the purely objective standard – where the stranger’s conduct is dishonest by the ordinary standards of reasonable and honest people; s the combined standard – which combines an objective and subjective test; the defendant’s conduct was dishonest by the ordinary standards of reasonable and honest people (objective) and he himself realised by those standards that his conduct was dishonest (subjective). (Note that with the combined standard the second limb is not ‘did the defendant think he was being dishonest’; but rather ‘did he think he was being dishonest by the ordinary standards of reasonable and honest men’.) s Lord Hutton adopted the third approach – the combined test which appears to be very similar to the test for dishonesty in crime (R v Ghosh (1982)). s Lord Hoffmann and a majority of the court agreed with Lord Hutton’s judgment and found Leach not liable for dishonest assistance as he did not realise that by the standards of the reasonable man he was being dishonest. s Lord Millett gave a significant dissenting judgment in Twinsectra v Yardley (2002). He stated that Lord Nicholls’ approach in Tan was solely objective. s There was no separate subjective test but the objective test would have subjective elements: ‘would a reasonable and honest person think that that defendant (with his age, qualifications and experience) was dishonest?’ The matter was examined again by the Privy Council in Barlow Clowes v Eurotrust International (2005). s Lord Hoffmann who agreed the combined test in Twinsectra appeared to ‘backtrack’. s He stated that neither he nor Lord Hutton in Twinsectra meant that there were two separate tests; the test is one of objectivity only but with some subjective characteristics – the age, qualification and experience of the stranger.
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The main speeches of the majority were given by Lords Hutton and Hoffmann. Lord Hutton appeared to differ from Lord Nicholls in Royal Brunei Airlines v Tan (1995) who had stated that the test was solely objective though with some subjective characteristics. Lord Hutton referred to three standards of dishonesty:
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s There is no requirement to consider whether he thought he was being dishonest by the standards of reasonable and honest people. The Court of Appeal in Abou-Rahman v Abacha (2006) held that the sole objective test from Tan was the correct law. s Subsequent cases such as Statek Corporation v Alford (2008) and Pulvers (A Firm) v Chan (2007) and more recently Starglade Properties v Nash (2010) have likewise followed the sole objective approach.
Checkpoint – knowing receipt and dishonest assistance Item on checklist:
Done!
I understand the personal remedies in equity of knowing receipt and dishonest assistance. I understand that both require a state of mind on behalf of the recipient with knowing receipt the recipient must have such knowledge as to make it unconscionable for him to retain the benefit. With dishonest assistance: s There is no requirement that the trustee be dishonest. s The third party must know of the trust and actively assist. s The third party must be dishonest according to a sole objective test but taking into account subjective factors such as his age, qualifications and experience.
14.7 Proprietary claims – tracing Tracing is not a claim or a remedy (Boscawen v Bajwa (1996) – per Millett LJ). Rather it is an evidential tool for: s proving the trust funds were used to purchase an identifiable asset; s following the beneficial ownership into that asset; s allowing the claimant to claim title under a constructive trust; s or alternatively (usually where the asset has reduced in value) to allow the claimant to claim a lien or charge over the asset to the value of the loss. The burden will be on the claimant to show that the relevant asset has been purchased with the trust funds.
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s This grants beneficial ownership ahead of any creditors of the defendant and allows the claimant to take advantage of any increases in value. Note that property can be traced to an innocent volunteer.
14.7.2 Tracing at common law The requirements for tracing at common law (Trustees of FC Jones & Son (a firm) v Jones) (1997)): s The claimant has legal title to the property. s The property is identifiable. s The funds have not been mixed (mixing of funds in a bank account is fatal to a claim here) – see Agip (Africa) v Jackson (1990). Note: Common law tracing does not permit automatic retrieval of the relevant property. s The defendant has an option to either part with the property itself or to give a monetary equivalent sum. s While the tracing process is used as an evidential tool to identify the asset, the actual remedy is personal not proprietary in nature.
Checkpoint – tracing at common law Item on checklist: I understand the principle of tracing and following. I understand the factors required for tracing at common law. I understand that tracing at common law if successful results in the return of either the property itself or its monetary value.
14.7.3 Tracing in equity In Re Diplock (1948) there are two requirements:
Done!
14.7 PROPRIETARY CLAIMS – TRACING
s The claimant can claim the proprietary remedy of the constructive trust or an equitable lien over the property.
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s an equitable proprietary interest in the property being traced; s a fiduciary relationship. Note that there is no requirement that the property be unmixed – hence equity will permit tracing into a mixed bank account. s Lord Millett in Foskett v McKeown (2000) doubted the need for the existence of a fiduciary relationship and saw no logical justification for this requirement it being unnecessarily restrictive. (Such as a thief who uses stolen money to purchase an asset?)
14.7.3.1 Tracing into unmixed funds s If the property is unmixed the claimant can trace the funds into the new format claiming full or part beneficial ownership depending on what proportion of the trust funds have been used to purchase the item. Case: Foskett v McKeown (2000)
Mr Murphy took out a life assurance policy in 1986 which involved paying annual premiums of £10,220. He transferred the policy to trustees on behalf of his family. Meanwhile he set up a company that claimed to sell plots of land in southern Portugal. Prospective purchasers were invited to send funds to purchase plots of land in the Algarve. Murphy dissipated most of the funds apart from the sum of £20,440 which he used to pay the insurance premium instalments for 1990 and 1991. Hence in terms of proportion the premiums for 1986, 1987 and 1988 were paid for out of Mr Murphy’s own money. For 1990 and 1991 it was the purchaser’s money (which was held on trust by Mr Murphy). Mr Murphy committed suicide in 1991 and his insurers paid out over £1 million to the trustees. The purchasers claimed that their money that was used to pay two of the five annual premiums had been converted into the insurance payout. So rather than claiming merely £20,440 – their actual loss – they claimed under the proprietary remedy of constructive – namely two-fifths of the proceeds, being about £400,000. Held
The House of Lords held in favour of purchasers. Their beneficial interest in the money supplied to Mr Murphy could be traced into the beneficial interest in the insurance premium and then into the beneficial interest in the proceeds. Lord Millett gave the illustration of the winning lottery ticket. If trust money was used to purchase a ticket that won, it would be absurd to say that all the beneficiaries could obtain was the cost of the ticket. Clearly the beneficial interest in the money has been converted into the ticket, and then converted into the winnings.
s If the property purchased with the trust funds decreases in value it would be advantageous to have a lien or charge over the property to the value of the loss. s Any shortfall on sale of the asset can then be made up by a personal remedy against the trustee.
14.7.3.2 Tracing into mixed funds Where a trustee has mixed the trust funds with his own funds: s The general principle is that the trustee is acting to preserve the trust funds and hence a presumption of honesty (Foskett v Mckeown (2000)). s The claimant has the right to an equitable charge (lien) over the mixed fund (Re Hallett’s Estate (1880)) and so gives priority over other creditors. s If the trustee has dissipated some of the funds then the funds remaining belong wholly or primarily to the trust. The trustee is deemed to spend his own money first (Re Hallett’s Estate (1880)). When Re Hallet will not work: s The Re Hallet rule can work hardship if a tangible asset is purchased with the funds – applying Re Hallett this would belong to the trustee wholly or primarily. s Hence the rule in Re Oatway (1903) and Re Tilley (1967) (affirmed in Foskett v McKeown (2000)) that the claimant can instead claim a proportion of the property corresponding to his contribution to the purchase from the mixed fund.
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Foskett v McKeown (2000) (continued)
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s So if 60% is trust money and 40% the trustee’s own money, any property purchased will be owned 60% by the trust and 40% by the trustee. When the trustee pays in his own funds later: s This is not presumed to be repayment of the trust fund unless a clear intention to do so is shown (Roscoe v Winder (1913)). s The trustee is likely to have other creditors and it would be unfair to exclude these. Where a trustee has mixed the funds of two or more trusts in a bank account: s Until recently the law was the rule in Clayton’s Case (1816) – ‘first in first out’. s So if Trust A’s money was first in then this was deemed to go out first. s This can work hardship or be advantageous depending on the use of the funds. s Where the money withdrawn is dissipated that will be trust A’s money, hence the money left in the account is likely to belong predominantly to trust B. s If an asset is purchased with the withdrawn funds it is trust A’s money that has been used predominantly to buy it and hence the asset belongs wholly or mainly to trust A. A change: s In Barlow Clowes International v Vaughan (1992) the subject matter was a common investment fund – where contributors would send money in to be jointly invested along with other investors. The court held that s the rule in Clayton’s Case did not apply as the intentions of the contributors were to share all profits and losses. s Clayton’s Case would not apply where it would be impractical or work injustice to the parties giving a wide range when Clayton would no longer apply. s The claimants therefore shared the funds in proportion to their contributions. s Barlow Clowes v Vaughan (1992) was approved in Russell Cooke Trust Company v Prentis (2002) and appears now to be of general application.
Tracing into a debt (backwards tracing):
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s The Court of Appeal in Boscawen v Bajwa (1996) held that s with a secured debt such as a mortgage the claimant could ‘subrogate’; that is, take over the rights of the lender who had been paid off with the trust money. s the claimant now had a secured charge over the property to the value of the claim. The claimant therefore ‘stands in the shoes’ of the earlier lender. s Therefore with a secured debt tracing will be permitted followed by subrogation.
Research Point In Boscawen v Bajwa (1996) the whole of the mortgage had been discharged. Consider whether subrogation is possible if only part of the mortgage is discharged.
Checkpoint – tracing in equity Item on checklist:
Done!
I understand the principles of tracing in equity. I understand that this can lead to a constructive trust being declared over the property. I understand that mixing the funds will not prevent a tracing claim in equity. I understand the principles of tracing into an unmixed fund and a mixed fund.
14.8 Loss of the right to trace The right to trace is lost in the following circumstances: s Property has been dissipated. If the property has been spent on a holiday or restaurants there is no identifiable property remaining. s Consideration is given by a bona fide purchaser without notice that the property is trust property (see Chapter 2).
14.8 LOSS OF THE RIGHT TO TRACE
s A debt is not identifiable property and hence tracing cannot be made into a debt (Re Tilleys Will Trusts (1967)).
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s Where it would be inequitable to allow tracing. s In Re Diplock (1948) executors of a will wrongly distributed funds to a number of different charities. Some of the charities had used the funds to improve their existing properties. The court held that if tracing and constructive trust were permitted then the charities would have to sell these properties and therefore this would be unfair or inequitable and as such was refused. The beneficiaries still had a right to a personal claim against the executors. s An unclear area is the extent to which the change of position defence applies in equitable tracing. Millett LJ stated obiter in Boscawen v Bajwa (1996) that a defendant in an equitable tracing action should be able to raise the defence of change of position.
14.9 Diplock personal action Re Diplock (1948) (sub nom Minister of Health v Simpson): s It applies only where an estate of a deceased person has been wrongfully administered. The beneficiaries can claim against any overpaid recipient of the property even if the property has been dissipated. s The action is personal in nature and not proprietary and hence the existence of the property is not relevant. s There is as yet no defence to this claim.
Checkpoint Item on checklist:
Done!
I understand how the right to trace can be lost. I understand how a bona fide purchaser could obtain better title to the trust property. I understand the personal action in Re Diplock.
Potential exam questions 1) Critically evaluate the extent to which the state of mind of a third party is relevant to liability where a breach of trust has occurred.
She kept £1,000 for herself and gave £9,000 to her boyfriend Dave who used it to open a new bank account out of which he withdrew £4,000 to purchase shares in Delta plc and then £5,000 to pay for a holiday. Rebecca gave the remaining £40,000 to her brother Daniel for his birthday. Daniel put the money into his bank account, which was at that time almost empty. Daniel later added £15,000 of his own money to the account, but then paid £40,000 out of the account to pay various debts. Last month Daniel was declared bankrupt: his only substantial asset is £15,000 remaining in his bank account. Joe has now discovered the above facts; he has notified the beneficiaries of the trust. The shares in Delta plc are now worth £10,000. Advise Joe and the beneficiaries as to the availability of any personal or proprietary claims and against whom they might be brought.
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2) Rebecca and Joe are trustees of the Jones family trust. Twelve months ago, Rebecca stole £50,000 by way of a fraudulent cheque from the trust bank account held at Binckley’s Bank. The chief cashier at Binckley’s Bank where the trust fund was held cashed the £50,000 cheque in Rebecca’s behalf.
Chapter 15 Equitable remedies 15.1 Introduction This chapter will consider four equitable remedies: s specific performance s injunction s rescission s rectification. Equitable remedies are discretionary, and not available as of right. The claimant seeking an equitable remedy has to demonstrate they have a case for the remedy.
15.2 Specific performance s This orders a party to carry out positive obligations under a contract. s It is mandatory in nature not prohibitory. s It is a full trial remedy. s The key question is whether damages are adequate as a remedy. s It is a remedy in personam (against the person) rather than against the property. If the subject matter is outside the jurisdiction the person within the jurisdiction can be compelled to comply with the order granted (Penn v Lord Baltimore (1750)). s Damages can be awarded either in substitution or in addition to specific performance (Senior Courts Act 1981 s 50).
15.2.1 When available s Land contracts – damages are not an adequate remedy, each piece of land being unique (Sudbrook Trading Estate v Eggleton (1983)).
s Contractual licences relating to land where there is no other land available (Verrall v Great Yarmouth Borough Council (1981)).
s If an order is granted for land it will also be granted for chattels on that land that are the subject of a separate contract of sale (Record v Bell (1991)). s Shares in a private company (Neville v Wilson (1997)).
15.2.2 Where it will not be granted s Personal property unless unique (see above). s Contracts to pay money such as by loan as damages are an adequate remedy (Locabail International Finance v Agroexport (1986)).
Research Point Check the following for exceptions when specific performance can be awarded for contracts to pay money: s Beswick v Beswick (1968) s Contracts (Rights of Third Parties) Act 1999 s 1(5) s Companies Act 2006 s 740.
s A contract of service (employment contract) (Trade Union and Labour Relations (Consolidation) Act 1992 s 236). s Contracts for personal services (using an independent contractor) (Provident Financial Group v Hayward (1989)). s Contracts requiring a significant degree of supervision to ensure performance (Co-operative Insurance Society Ltd v Argyll Stores (Holdings) Ltd (1997).
15.2 SPECIFIC PERFORMANCE
s Specific performance is not usually available for contracts for the purchase of personal property as damages are considered to be adequate. s The main exception to this is if the item of personalty has a quality of uniqueness about it (such as a rare artefact or priceless item (Falcke v Gray 1859)). s In Behnke v Bede Shipping Company Ltd (1927) the sale of a ship was regarded as a unique item and the order was granted. s Note that the Sale of Goods Act 1979 s 52 gives the court power to award specific performance in sale of goods situations; though this is rarely exercised without the quality of uniqueness.
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s However, there are exceptions which appear to centre on the inadequacy of damages and whether the order is to require the defendant to carry on an activity (no order made) or to achieve a result (order made). Cases: Cooperative Insurance Society Ltd v Argyll Stores (Holdings) Ltd (1997) HL
This case involved a business lease with a ‘Keep Open’ covenant demanding the store remain open at certain times. The landlord applied for an order of specific performance to enforce the covenant. Held The House of Lords held that s due to the difficulty of enforcing such an order, s the possibility of oppression caused by the threat of contempt proceedings, and s the potential for injustice where a defendant’s loss in having to continue trading might be greater than the loss caused to a plaintiff through breach of the covenant, then the court will not enforce such a covenant to keep open a business. The order would merely have achieved an activity not a result.
Posner v Scott-Lewis (1987)
Under a lease the landlord had to employ a resident porter for general maintenance of the premises. Held The court granted specific performance; the actual employment itself was a ‘one-off ’ and would not require constant supervision; the order achieved a result not an activity.
s Lack of mutuality – one party cannot get specific performance if the other party cannot get specific performance against him (Flight v Bolland (1828)).
15.2.3 Defences to specific performance An order for specific performance may also be the subject of the defences of s vitiating factors such as mistake or misrepresentation;
15.2.3.1 Vitiating factors of mistake or misrepresentation s A mistake or misrepresentation by the claimant might not lead to the termination of a contract and hence specific performance will be ordered in the areas previously discussed. s In Bashir v Ali (2011) specific performance was ordered where the parties made a common mistake as to whether a studio flat was included in the sale. s In Tamplin v James (1880) an inn was offered for sale but the buyer mistakenly believed this included some land at the rear of the property; the plans made no reference to the land and the buyer did not consult these. Specific performance was awarded. s The key exception is that if the mistake or misrepresentation causes undue hardship then the courts will usually refuse specific performance. s In Watkin v Watson-Smith (1986) specific performance was not ordered where an elderly person mistakenly offered a property for sale at £2,950 instead of £29,500. s In Webster v Cecil (1861) the vendor of a property mistakenly offered it for sale by letter at £1,250 instead of £2,250 and immediately gave written notice to the buyer of the error; specific performance was refused.
15.2.3.2 The conduct of the claimant (see Chapter 1) s The claimant must have performed his side of the contract and come with ‘clean hands’ (Cornish v Brook Green Laundry (1959)).
15.2.3.3 The doctrine of laches (see Chapter 1) s Generally time is not of essence in equity and hence specific performance may be ordered even after the date of performance has passed (United Scientific Holdings v Burnley Borough Council (1978)). s However, ‘delay defeats equity’ (see Chapter 1): if there is no time bar on bringing an action then if the claimant unreasonably delays the remedy will not be granted. With specific performance there is no limitation period (Limitation Act 1980 s 36(1)(2)).
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s the conduct of the claimant not having ‘clean hands’: s laches or delay; s where it would cause a party undue hardship (Patel v Ali (1984).
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s The factors for refusing the order under this ground include s if the subject matter of the contract has a speculative or frequently changing value; s whether cross-examination of one or both parties is still possible (in Heath v Heath (2010) one of the parties had died); s whether it would now be unconscionable for the claimant to assert his rights (Lazard Bros. v Fairfield Property Company (Mayfair) (1977)). Case: Williams v Greatrex (1957)
The claimant had taken possession of land under a contract ten years previously but had not had the legal title vested in him. Held Specific performance was ordered as the contract that created the interest was not in issue; plus the actual occupation of the claimant did not create any undue hardship for the defendant.
15.2.3.4 Where the order would grant hardship to either of the parties or a third party s See Webster v Cecil and Watkin v Watson-Smith earlier where the order was refused. s Note that hardship must be substantial in nature and not merely trivial. s In Patel v Ali (1984), the seller and her husband co-owned the family home and made a contract with the claimant to sell the property. The husband’s bankruptcy caused severe delay to the process plus the seller later had to have a major operation involving amputation of a limb. She then had two more children. The vendor spoke little English and relied on nearby friends and relatives for help. She claimed this would caused substantial hardship if she had to move away. The court therefore refused the order for specific performance.
15.2.3.5 Where there has been a misdescription of the property making it substantially different from that agreed s The essential element for refusal of specific performance is that the property is different in substance from that in the contract.
Checkpoint – specific performance Item on checklist:
Done!
I understand the general principles of specific performance. I understand when specific performance will be granted. I understand the circumstances when specific performance will be refused. I understand the defences to specific performance.
15.3 Injunctions An injunction is a court order which either compels a person to act (mandatory), or stops a person from doing something (prohibitory) (Senior Courts Act 1981 s 37(1)). An injunction might be: s final (perpetual) or s interim or interlocutory (temporary). s A perpetual injunction will be granted at the final hearing, whereas an interim injunction is awarded at an early stage of proceedings in order to preserve a position before the full trial. Additionally, an injunction might be awarded with or without notice. An injunction will be ‘with’ notice, where it is awarded after a hearing of both sides of the argument. In contrast, an injunction without notice will be awarded where only the applicant is present.
15.3.1 Interim injunctions s There are four main types of interim injunction: s interim prohibitory injunction s interim mandatory injunction s freezing order s search order.
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s This will be a question of fact and degree in each case (Re Fawcett and Holmes’ Contract (1889)). The question appears to be whether without the misdescription the buyer might have entered into the contract at all (Flight v Booth (1834)).
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s The claimant is normally required to give an undertaking in damages if the claimant loses at trial or if the injunction is granted without good cause. s The undertaking is to the court not to the defendant and hence breach is contempt of court (Hussain v Hussain (1986)).
15.3.1.1 Interim prohibitory injunction s Sometimes there might be a long delay between the cause of action and the main court hearing. s Often intellectual property rights are involved such as a breach of copyright or infringement of a patent or design. s This delay can lead to substantial losses for the owner of the right and hence the owner can apply for an interim or interlocutory injunction before the main hearing. s An interim prohibitory injunction is awarded by reference to the ‘American Cyanamid guidelines’ (American Cyanamid v Ethicon (1975)). The guidelines are: a) The court must be satisfied that the claimant’s case is not frivolous or vexatious and that there is a serious question to be tried. b) If the above threshold is reached, the court then goes ‘on to consider whether the balance of convenience lies in favour of granting or refusing’ the interim injunction. In effect, the court engages in a balancing exercise to minimise the risk of doing injustice. The court considers whether either party could be adequately compensated by an award of damages. 1) Adequacy of damages: (i) Would the claimant be adequately compensated by damages for any loss caused by the defendant’s actions prior to trial? If so the injunction is refused. (ii) Would the defendant (if he wins at full trial) be adequately compensated by the claimant’s undertaking in damages for any loss caused by the granting of the interim injunction? If so the injunction is granted. 2) Other factors: s The court may also consider other relevant matters affecting the balance of convenience in deciding whether to grant the injunction. These include: s loss of employment (Fellows and Son v Fisher (1976)); s damage to the goodwill of a business (Associated Newspapers plc v Insert Media Ltd (1991));
3) There may also be special factors to be taken into consideration in the balance of convenience in the particular circumstances of the individual case. c) Where the balance of convenience does not clearly favour one party or the other, the deciding factor will be the preservation of the ‘status quo’. This is generally the state of affairs before the last change and would thus generally favour the granting of the injunction as the ‘last change’ is usually the commencement or commission of the alleged wrong (Garden Cottage Foods Ltd v Milk Marketing Board (1948)). However, this is not conclusive.
Reflection Point Note that the ‘American Cyanamid guidelines’ are not considering the merits of the case but which is most convenient to either party.
The American Cyanamid guidelines do not apply in all situations where consideration of the merits is necessary, such as: s Trade Disputes (TULRA (Consolidation) Act 1992 s 221(2)); s where no trial is likely to take place (Cayne v Global Natural Resources (1984)); s Human Rights Act 1998 (Freedom of Expression): s where the court is satisfied that publication should not be allowed (s 12(4)). The section uses the phrase that the claimant would be ‘likely to succeed’ at trial and hence the merits need to be considered; s mandatory injunctions (see below).
15.3.1.2 Interim mandatory injunction s Some kind of activity is ordered to be carried out rather than being preventative. s It is similar to specific performance in contracts. s The court is far more reluctant to grant a mandatory injunction than a prohibitory injunction.
247
15.3 INJUNCTIONS
s closing down of a business (Potters-Ballotini Ltd v Weston-Baker (1977)); s preserving a substantial investment (Catnic Components Ltd v Stressline Ltd (1976).
EQUITABLE REMEDIES
248
s In Locabail International Finance Ltd v Agroexport (1986), it was stated that the court must feel ‘a high degree of assurance that at the trial it will appear that the injunction was rightly granted’. s In Locabail, the Court of Appeal stated that the Cyanamid guidelines would not apply and the merits would have to be considered. s Generally the injunction will be granted in situations where personal rights have been infringed: s reinstating someone wrongfully evicted (Parsons v Nasar (1991)); s returning passports wrongfully detained by the police (Ghani v Jones (1970)); s to compel a landlord to comply with his leasehold covenants (Hart v Emelkirk Ltd (1983)). s An interim mandatory injunction might be granted in preference to an order for specific performance where the remedy is needed more quickly than specific performance. The effects are similar; however, the injunction will not be granted if specific performance could not have been granted. Cases: Page One Records Ltd v Britton (1968)
The claimant who was the manager of The Troggs, a pop group, applied for an interlocutory mandatory injunction to force the group from instructing any other manager. Held The court refused the injunction; the injunction was tantamount to compelling the group to continue to employ the claimant which would in effect be an order compelling him to specifically perform his services. This is not an applicable situation for specific performance and hence a mandatory injunction could not be awarded either.
Sky Petroleum v VIP Petroleum Ltd (1974)
The claimant had a contract that the defendant would supply it with petrol; the contract was terminated by the defendant and the claimant had no alternative supply. Held As there was no alternative supply damages would not be adequate and the claimant would be put out of business. An injunction was granted as specific performance would also have been available due to the inadequacy of damages.
s A freezing order is an order which prevents an individual from dealing with their assets before trial (Civil Procedure Rules 1998 rule 25 (1)(f)). s The order does not freeze the assets of the individual, and it does not give the claimant a priority creditor status. s ‘The ownership of the assets does not change. All that changes is the right to deal with them’ (per Lord Bingham in Customs and Excise Commissioners v Barclays Bank plc (2006)). s In order to obtain a freezing order, the claimant must demonstrate: a) he has a good arguable case; b) the defendant has assets within the jurisdiction (or without, where an extra-territorial order is sought); and c) there is a real risk that they will be removed or dissipated. s The claimant must make a full and frank disclosure of all material matters and, in a ‘without notice’ application, he should fairly state the points made by the defendant against his claim (Third Chandris Shipping Corpn v Unimarine SA (1979)). s As ancillary to the order, the court may grant an order requiring disclosure of the defendant’s assets and their whereabouts – a ‘Shapira Order’. s A freezing order might also have extra-territorial effect (Re BCCI SA (No 9) (1994)).
15.5 Search order A search order is a mandatory injunction compelling an individual to give another access to their property to search for documentation, and other evidence which is at risk of destruction. Statutory recognition is given by Civil Procedure Act 1997 s 7 and by the Civil Procedure Rules 1998 rule 25. s Failure to comply with the order is a contempt of court. s The order tends to be used in cases of piracy and for breaches of intellectual property rights. s The three conditions for granting such an order are: a) an extremely strong prima facie case (this is a much higher standard than for ordinary mandatory interim injunctions); b) very serious damage, potential or actual to the claimant;
249
15.5 SEARCH ORDER
15.4 Freezing order (formerly known as a Mareva injunction)
EQUITABLE REMEDIES
250
c) clear evidence that the defendant has incriminating documents or items in his possession and that there is a real possibility that he may destroy them (a ‘fishing’ expedition to find out what the defendant has will not be allowed). Because of the draconian nature of the remedy, there are certain safeguards. These are: s The order must be served and carried out in presence of a ‘supervising solicitor’ who is experienced in such matters, is not a member of the firm representing the claimant and who must explain things to the defendant in a fair and accurate manner. s Entry must generally take place between 9.30 a.m. and 5.30 p.m. so the defendant can seek legal advice. s The search must take place in the presence of the defendant or a responsible employee. s A list must be made of any items to be removed and the defendant given an opportunity to check it. s If the premises are likely to be occupied by a woman alone, one member of the party should be a woman. [The orders might be said to breach the European Convention on Human Rights.] Cases: EMI v Pandit (1975)
The defendant was suspected of breaching the claimant’s copyright. Held A search order was granted to allow the claimant’s solicitors to search the premises and to inspect and photograph and remove relevant material.
Anton Piller KG v Manufacturing Processes Ltd (1976)
Claimants in their electrical equipment business instructed the defendants to be their agents. The claimants believed the defendants were selling confidential secrets to competitors. Held The Court of Appeal permitted the order allowing the claimant’s solicitors to enter and inspect the defendant’s premises.
15.6 Quia timet injunction
s Where the injunction is granted to prevent the wrong then it is clearly prohibitory in nature; s where, though, the claimant having been compensated now maintains that the defendant’s earlier actions might lead to future causes of action. There must be s a strong case of probability; s proof of imminent danger; s that damage if allowed to happen will be very substantial. Case: Redland Bricks v Morris (1970) HL
The claimant and defendants owned neighbouring land. The defendants were excavating on their land near the claimant’s boundary and caused landslips to the claimant’s land that they used as a market garden. The land affected was worth about £10,000; however, the cost of remedying the defect was £30,000. At first instance the claimants were awarded damages plus a prohibitory injunction to restrain further activities causing the landslip and a mandatory injunction that the defendants ‘take all necessary steps to restore support within six months’. Held The House of Lords allowed the defendant’s appeal with regard to the mandatory injunction mainly through uncertainty.
The conditions for the Quia Timet mandatory injunction was set out in Redland Bricks v Morris (1970) as follows: s The jurisdiction must be exercised sparingly and with caution but in the right case, without hesitation.
15.6 QUIA TIMET INJUNCTION
This is a sort of hybrid injunction as it can be prohibitory or mandatory, interlocutory or final. It is available where there has been no actual infringement of the claimant’s rights but where it is feared or threatened.
251
EQUITABLE REMEDIES
252
s The claimant must show a very strong probability that grave damage will accrue in the future. s Damages will not be an adequate remedy should such damage happen. s The cost to the defendant to do the works to prevent or reduce the likelihood of the wrong must be taken into account. s If the defendant has acted wantonly and unreasonably he may be ordered to do the work even if the cost is not proportionate to the value of the advantage accrued by the claimant. s If the defendant has acted reasonably the cost of remedy is most important to determine if the injunction is granted. s The terms of the injunction must be certain; the defendant must know exactly what he has to do.
15.7 Rescission Rescission is the right of a claimant to have a contract set aside and be restored to his former position, usually where a misrepresentation has been committed. Rescission can arise for the vitiating factors of mistake, misrepresentation and undue influence.
15.7.1 Mistake s Where a voluntary disposition is made the donor cannot have this set aside merely because the consequences were not as intended (Pitt v Holt (2011) [no longer following the principle in Re Hastings-Bass]). s Dispositions with unforeseen tax consequences are therefore not able to be rescinded. s A voluntary disposition though can be set aside when the mistake is as to the legal effect of the disposition rather than the consequence. Case: Re Walton’s Settlement (1922)
A beneficiary of a settlement had power to revoke the settlement. She was advised that if she did this the fund would fall into her estate. She revoked the settlement only to find that the fund reverted on resulting trust back to the donor’s estate. Held The disposition could be set aside for mistake. This mistake was to the legal effect of the disposition and not to its consequence.
253
Case: A life tenant was advised to surrender his life interest as this would then allow his children’s remainder interests to inherit immediately. Unfortunately his life interest was ‘protected’ (see Trustee Act 1925 s 33) and hence a discretionary trust came into being instead. Held This was a mistake as to effect and hence could be set aside.
s Where a contract is concerned it would normally have to be induced by fraud or misrepresentation, or undue influence for it to be rescinded (Bell v Lever Brothers Ltd (1932); Barclays Bank v O’Brien (1994)). Cases: Great Peace Shipping Ltd v Tsavliris Salvage (International) Ltd (2003)
The claimant and defendant contracted for a ship to be hired to escort a damaged ship into port. Both parties made a common mistake thinking that the two ships were in close proximity. When the defendant discovered the mistake it repudiated the contract and argued that the original contract had been rescinded for common mistake. The claimant demanded payment of the cancellation fee. Held The Court of Appeal held that there was no jurisdiction to rescind for common mistake and hence the cancellation fee was payable.
Barclays Bank v O’Brien (1994)
A wife acted as guarantor for her husband’s loan with Barclays Bank secured on his share of the house; the guarantee being her share of the house. He defaulted on his payments and the bank attempted to enforce the guarantee against the wife and receive her share of the house. Held The arrangement of guarantor gave no advantage to the wife and hence led to the presumption of undue influence. The bank was put on notice of this presumption but failed to take the necessary steps to rebut the presumption. The guarantee was set aside and could not be enforced against the wife.
15.7 RESCISSION
Gibbon v Mitchell (1990)
EQUITABLE REMEDIES
254
15.7.2 Loss of the right to rescind s under the Misrepresentation Act 1967; s affirmation; s where restitutio in integrum is impossible; or s where a third party acquires an interest in the property.
15.7.2.1 Misrepresentation Act 1967 s 2(2) s Permits damages to be awarded in lieu of rescission in a case of innocent misrepresentation when it would be equitable to do so. s Usually this will apply where the contract has already been executed.
15.7.2.2 Affirmation s The party with the right to rescind knows of the facts giving this right and his legal rights. s He continues to take the benefit of the contract. Then he will be deemed to have waived the right to rescind. s Waiver can be by words or conduct such as laches (delay) (Alec Lobb (Garages) Ltd v Total Oil (1985)).
15.7.2.3 Where restitution is not possible s The parties for rescission must be able to be restored to their original position. s However, this requirement is not absolute but is to restore ‘as far as possible’ (Spence v Crawford (1959)).
15.7.2.4 Where a third party has acquired an interest s If the third party is a bona fide purchaser for value without notice then the maxim ‘where the equities are equal the law prevails’ applies and rescission is not possible. s If the third party is a volunteer then rescission is still possible.
15.8 Rectification s This remedy permits a written contract to be modified where it does not reflect the agreement reached between the parties (Mackenzie v Coulson (1869)).
15.8.1 Common mistake
s The claimant has, therefore, to show that the written document did not accurately reflect the actual terms made between the parties before the written document was entered into. s Hence there must be a prior agreement though not necessarily legally enforceable (Joscelyne v Nissen (1970)). s The question is what an objective observer would have thought their intentions to be (Chartbrook Ltd v Persimmon Homes Ltd (2009)).
15.8.2 Unilateral mistake s Rectification will be rarely ordered for unilateral (one-sided) mistake. s As Slade LJ explained in Agip SpA v Navigazione Alta Italia SpA (The Nai Genova) (1984) it will not be granted: ‘unless the defendant had actual knowledge of the existence of the relevant mistaken belief at the time when the mistaken plaintiff signed the contract.’
Reflection Point Consider the consequences if rectification for unilateral mistake was allowed: s Likely to be very serious for the non-mistaken party. s The order would amend the contract, probably to their disadvantage, s when they had no awareness that there was ever anything wrong with the written contract.
s To obtain an order for rectification for unilateral mistake, the claimant must show that the defendant knew of the mistake when entering into the written agreement. s In Commission for the New Towns v Cooper (Great Britain Ltd) (1985), it appears that actual knowledge of the mistake was required. s But this could also include some constructive knowledge such as the defendant shutting its eyes to the obvious or wilfully or recklessly omitting to do what an honest and reasonable person would have done (George Wimpey v V.I. Construction Ltd (2005)).
15.8 RECTIFICATION
s This usually involves a common misunderstanding – where the agreement does not reflect the intentions of both parties.
255
EQUITABLE REMEDIES
256
s It appears that a high burden of proof is required on the party seeking rectification; merely proof of unconscionable conduct appears not to be enough (George Wimpey UK Ltd v V.I. Construction Ltd (2005)).
Checkpoint – rectification Item on checklist:
Done!
I understand that to order rectification for unilateral mistake: s X wrongly believed that the document to be rectified contained a particular provision. s That Y was aware of the mistake and that it was due to X’s error. s That Y omitted to draw the mistake to X’s attention. s The mistake was one calculated to benefit Y.
s The defences are similar to those for rescission.
Potential exam questions 1) Critically evaluate the law relating to the grant of interlocutory injunctions. 2) Meroks plc is a well-known medical research company and has patented its new blood substitute, ‘Erythrosan’. It has recently come to its attention that a rival company, Montes-Swift, is marketing its own blood substitute infringing Meroks’ patent. Advise Meroks: i) Whether they can obtain an immediate injunction against Montes-Swift stopping the sale of their blood substitute; ii) Whether they can examine Montes-Swift’s business records held at their London headquarters; Meroks are concerned that Montes-Swift will destroy their records if they know of the litigation; iii) Whether they can prevent Montes-Swift from removing their assets to their main headquarters in New York. 3) Critically evaluate the factors that the court will take into consideration when determining whether to make an order for specific performance.
Index
account (personal remedy) 148–9 acquiescence, evidence of 7 agents appointment of 187 duties of 188 liability of 222 anomalous exceptions 74–7 appointment of agents 187 power of 20–4, 41, 42, 165 of trustee 12, 163–6 balance of convenience 246, 247 bankruptcy appointment of trustee 12 of beneficiary 12 bare trust 18 beneficiaries balance the interests 184 definition of 48 fiduciary duties of trustees towards 58 under a fixed trust 12 gifts to a class of 40–1 interest of, under discretionary trust 13–14 payments of income to adult beneficiaries 193 minor beneficiaries 191–3 rights under discretionary trust 15 right to appoint trustees 165 Saunders v Vautier (1841) 14–15 TOLATA 1996 s 19 168–9
beneficiary principle exceptions to anomalous exceptions 74–7 commercial trusts 79–84 gifts to unincorporated associations 85–9 Re Denley’s Trust Deed (1969) 77–9 Bills of Exchange 56 breach of trust 47, 135, 139, 219, 228 criminal liability for 223 defences of trustees for 223–5 Diplock personal action 238 joint and several liability of trustees 221–2 liability of agents for 222 personal liability of strangers for 226–32 proprietary claims for 232–7 when trustee is personally liable 219–21 bribes 135–7 capital advancement of general principles 195–8 Trustee Act 1925 s 32 195 benefit or advancement 197 difference with income 16 prior interest, effect of 196 trust instrument 196
INDEX
258
certainties, of valid express trust capriciousness and 49–50 conceptual uncertainty 41 rectification of 47–8 evidential 41 intention 28–31 determining 28 inter vivos (lifetime gifts) 30–1 precatory and imperative words 29–30 wording 29 object 38–48 discretionary trusts 42–3 fundamental concepts 38 gifts 39 McPhail v Doulton (1971) 43 power of appointment 41, 42–3 problems of construction 40 Re Baden’s Trust Deeds (No. 2) (1973) 43–7 tests for 39–41 subject matter 33–4 approach for curing of 36–7 beneficial interest, extent of 36 of property left on trust 33 special note 34 charities for advancement of amateur sport 111 animal welfare 112 arts, culture, heritage or science 111 citizenship or community development 111 education 109–10 environmental protection or improvement 111 health or the saving of lives 110 human rights, conflict resolution and equality 111 religion 110 advantages of 102 analogous purposes of 113–14
charitable purposes, meaning of 107–8 Charities Acts 2006 and 2011 102–6 purposes recognised under the law before 113–14 definition of 107 for prevention or relief of poverty 108–9 for promotion of efficiency of armed forces 112 police, fire and rescue services 112 regulation of 102 relief given by 112 chattels 56, 63, 241 claims common law 226–7 in equity against third parties dishonest assistance 229–32 knowing receipt 228–9 Money Had and Received 226–7 proprietary 232–7 commercial trust 79–84 commission/fees, unauthorised 139 common intention 138 compensation 149 conceptual uncertainty 41 rectification of 47–8 conflict of interest 154–60 constitution beneficial interest, transfer of 57–8 contract which is being transferred for value 61–3 if beneficiary wants entire legal and beneficial title 60–1 Property Act 1925 s 53(1)(b) and (c) 59–60 declaration of trust and legal title all other types of property 57 land 56 exceptions to the rule in Choithram v Pagarani (2001) 67 donatio mortis causa (‘death-bed’ gift) 66–7
initial failure 120–3 subsequent failure 123–4 damages 19, 240 discretionary trusts 25 certainties of 42–3 gift as 22 interest of a beneficiary under 13–14 other rights of beneficiaries under 15 Saunders v Vautier (1841), rule in 14–15 dishonest assistance 229–32 donatio mortis causa (‘death-bed’ gift) 66–7 as conditional gift 66–7 subject matter 67 when donor is contemplating death 66 equitable remedies 3, 6, 8 injunctions freezing order (Mereva injunction) 249 interim injunctions 245–8 quia timet 251–2 rectification 254–6 rescission 252–3 search order 249–50 specific performance conduct of the claimant 243 defences to 242–5 laches, doctrine of 243–4 lack of mutuality and 242 misdescription of the property 244–5 when available 240–1 where it will not be granted 241–2 types of 240 equitable rights, in land 9
259
INDEX
Milroy v Lord 63–7 Pennington v Waine (2002) 68–70 Re Rose (every best effort rule) 63–4 Strong v Bird (1874) 64–5 inter vivos (lifetime) trusts and gifts Bills of Exchange 56 chattels 56 copyright 55 land 55 shares 55 proper constitution 52 consequences of 53 help from equity 53–4 legal title of donor 53 of proprietary estoppel 70–1 testamentary trusts and gifts 54 constructive trust 61–3, 81, 127, 131, 134–41, 149 types of 141–4 contracts employment 241 enforceable 19 legally binding 141 for personal services 241 remedy for breach of 19 requiring significant degree of supervision 241 for sale of land 140 shares 140 of services 241–2 termination due to misrepresentation 243 trusts and 19 copyright 55 breach of 246 Court of Appeal 46, 81, 83, 137, 143, 158, 173, 232, 248 Court of Chancery 1–3 cy-pres doctrine Charities Act 2011, effect of 124–5
INDEX
260
equity contributions of equitable remedies 8 equitable rights in land 9 maxims 4–7 trust 9–10 development of 2–3 historical 2 equitable principles 3 maxims of 3, 4–7 origins of 2–4 problems with 3 common law 2 resolution to 3–4 estoppel, proprietary see proprietary estoppel evidence, of acquiescence 7 express trusts bare trust 18 certainties of importance of 27 intention 28–31 object 38–48 subject matter 33–4 discretionary trusts interest of a beneficiary under 13–14 other rights of beneficiaries under 15 Saunders v Vautier (1841), rule in 14–15 fixed trusts 11–12 bankruptcy of the beneficiary 12 beneficiaries under 12 other types of 18 protective trust 16–18 fiduciary duties general rules regarding commission fees 160 conflicts of interest and unauthorised profits 154–60 directors’ fees 160
express authorisation 152–3 fair-dealing 161–2 Lord Herschell rules 151–2 profits 152 self-dealing 161 remedies for breach of 148–50 fiduciary relationships importance of 148–50 instances for imposing 147–8 meaning of 147 and trusteeship 176 types of 147 fixed trusts 11–12 bankruptcy of the beneficiary 12 beneficiaries under 12 fraud 221 freezing order 245, 249 gifts for charitable benevolent purposes 106 public purposes 106 to a class of beneficiaries 40–1 in contemplation of suicide 66 in default of appointment 23–4 as discretionary trust 22 donatio mortis causa (‘death-bed’ gift) 66–7 individual and class 39–40 lifetime 30 precatory and imperative words 29 for public benefit 103 testamentary trusts and 54 that involve a life interest 34 to unincorporated associations 85–9 implied trusts 18 constructive trust causes of 135–41 features of 134–5 institutional 141 remedial 142–3 types of 141–4
knowledge meaning of 228 types of 228
laches, doctrine of 7, 243–4 land contract for the sale of 140 declaration of trust of 56 deeds 55 Land Registration Act 2002 55 registration 55 lease, renewal of 138 lien 149, 232, 233, 235 loan 19 maxims 3, 4–7 Mereva injunction see freezing order misrepresentation 242, 243, 252, 254 mistake 243 common 255 rescission 252–3 unilateral 255–6 patents, infringement of 246 possession trusts, interest in 18 precedent, doctrine of 3 profits authorised 152 of fiduciary 152 secret 155–9 unauthorised 154–60 property certainty of property left on trust 33 where bulk of property is involved 34–5 control of 25 co-owners as joint tenants 94 tenants in common 94 misdescription of 244–5 personal 129, 131, 241 real 131 transfer of 52 voluntary conveyance and 129–30
261
INDEX
resulting trust automatic 132–4 causes of 127 classification of 127–34 presumed 128–9 purchase money, provision of 131 quantum under 134 voluntary conveyance 129–30 income accumulated 193–4 destination of 190–3 difference with capital 16 payments to adult beneficiaries 193 minor beneficiaries 191–3 statutory power to pay 191 injunctions freezing order (Mereva injunction) 249 interim injunctions 245–8 quia timet 251–2 rectification 254–6 rescission 252–3 search order 249–50 intellectual property rights 246, 249 interest, in possession trusts 18 interim injunctions balance of convenience and 246 interim mandatory injunction 247–8 interim prohibitory injunction 246–7 search order 249–50 types of 245–6 inter vivos (lifetime gifts) 30–1 investment diversification of 180–1 ethical 184 meaning of 177
INDEX
262
proprietary estoppel formalities for creating 97 fully secret trust 92 general principles 92–4 half-secret trust 92 burden of proof 100 elements of 99 miscellaneous points for 100 requirements of 99–100 intestacy rules 93 standard of proof for 93 Wills Act 1837 breach of 96–8 requirements of 97–8 shares certificates 55 contract for the sale of 140 registration of 55 transfer of 55 specific performance conduct of the claimant 243 defences to 242–5 laches, doctrine of 243–4 lack of mutuality and 242 misdescription of the property 244–5 when available 240–1 where it will not be granted 241–2 taxation 25 tracing advantage of 233 at common law 233 in equity 233–7 as evidential tool 232 loss of the right to 237–8 into mixed funds 235–7 into unmixed funds 234–5 trust accumulation and maintenance 189–90 administratively unworkable 48 for advancement of education 103–4 religion 105
capriciousness and 49–50 commercial 79–84 constructive 149 contingent 189 and contracts 19 declaration of trust of land 56 destination of the income of payments of income to minor beneficiaries 191–3 statutory power to pay income 191 trust instrument 190 express see express trusts functions of 25 of imperfect obligation 74–7 implied see implied trusts origins of 9–10 and powers 20–4, 31 for purposes beneficial to the community 105 for relief of poverty 103 variation of benefit of 212–15 complete resettlement 216–17 court consent for 205–6 Knocker v Yule decision, analysis of 208 methods of 202–4 reasons for 201–2 risk associated with 215 settlor’s intentions and 215–16 Trusts Act 1958 205–12 where property is involved 34–5 trustee appointment of 12 order of 163–4 person nominated for 164–5 power of the court for 165–6 rules about 166 under TOLATA s 19 (1996) 165 capacity as 163 challenging decisions of 169–74 claims see claims
criminal 223 joint 221–2 measurement of 220 personal liability 219–21 number of 163 payment of income accumulated income 193–4 to adult beneficiaries 193 to minor beneficiaries 191–3 statutory power 191 trust instrument 190 personal liability of strangers (third parties) claims in equity 228–32 common law claim 226–7 power of delegation investment and 186–8 under Trustee Act 1925 186 under Trustee Act 2000 186–7 when appointing the agent 187 powers of appointment 20–4 to compound liabilities 199 to insure 199 to sell 198–9 within a trust 20 removal of power of court for 167 under TOLATA s 19 (1996) 167 under Trustee Act 1925 s 36(1) 166 renewal of a lease 138 retirement of by beneficiaries under TOLATA 1996 s 19 168–9 order of the court for 168 power in trust instrument for 168 powers in Trustee Act 1925 for 168 use of trust fund for personal benefit 139
263
INDEX
defences of acquiescence by a beneficiary 224 exemption or limitation clauses 225 impounding under Trustee Act 1925 s 62 225 limitation 225 relief under Trustee Act 1925 s 61 223–4 Diplock personal action 238 discretion to determine beneficiaries 13 duties towards the beneficiaries 19, 169 to act in best interests of the trust 183–4 to invest 177–8 to properly balance the interests 184 under Trustee Act 2000 178 under Trustee Investments Act 1961 178 fiduciary position of 176 fraud committed by 221 general power of investment to acquire land 185–6 common law duties 183–4 duty to obtain and consider proper advice 181–2 duty to review 181 need for diversification 180–1 standard investment criteria 179–81 statutory duty of care 182–3 suitability (Trustee Act 2000 s 4(3)(a)) 180 under Trustee Act 2000 178–86 trust instrument and 179 liability of 187 under Civil Liability (Contribution) Act 1978 222
INDEX
264
Trusts of Land and Appointment of Trustees Act 1996 s 19 (TOLATA) for appointment of trustee 165 for removal of trustee 167 for retirement of trustee 168–9 unincorporated associations category 2 rules 86–7 characteristics of 85 different types of trust made for purposes 90 dissolution of 88 distribution of funds
after winding up of association 88–9 amount received by each member 89 gifts to 85–9 rules on formalities 88 voluntary conveyance personal property 129 and real property transfers 129–30 wills, mutual 139–40 writ system 2
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