Equity Notes

LAWS313

EQUITY

Lecture Notes – Semester 031

WEEK 1..........................................................................................................................................................................6 THE DEVELOPMENT OF EQUITY........................................................................................................................................6 Development............................................................................................................................................................6 Equitable Jurisdiction..............................................................................................................................................7 Exclusive Jurisdiction..........................................................................................................................................................7 Concurrent Jurisdiction........................................................................................................................................................7 Auxiliary Jurisdiction...........................................................................................................................................................7

EQUITABLE DAMAGES.......................................................................................................................................................7 Distinguish Equitable Damages from Equitable Compensation.............................................................................7 FUSION OF EQUITABLE AND COMMON LAW JURISDICTIONS.....................................................................................................8 The Fusion Fallacy..................................................................................................................................................9 THE MAXIMS OF EQUITY...................................................................................................................................................9 THE NATURE OF EQUITABLE INTERESTS AND RIGHTS..............................................................................10 WHAT IS AN EQUITABLE PROPRIETARY INTEREST IN SPECIFIC PROPERTY?..................................................................................10 The Trust................................................................................................................................................................10 Is an Executor (of a deceased estate) a Trustee? – no..........................................................................................10 Classification of Equitable Rights.........................................................................................................................11 Mere Equity.......................................................................................................................................................................11 Equitable Proprietary Interest.............................................................................................................................................11 Equitable Proprietary Interest in respect of specific property.............................................................................................11 The Personal Equity...........................................................................................................................................................12 The Mere Equity in Specific Property................................................................................................................................12

SUMMARY TUT 1.........................................................................................................................................................13 WEEK 2........................................................................................................................................................................14 TRUSTS DISTINGUISHED FROM OTHER SIMILAR CONCEPTS.......................................................................................................14 Talking Express Trusts..........................................................................................................................................14 Trust and Bailment................................................................................................................................................14 Trust and Debt.......................................................................................................................................................14 Trust and Agency...................................................................................................................................................15 Trust and Contract.................................................................................................................................................16 Summary................................................................................................................................................................16 TRUST TERMS.............................................................................................................................................................16 Fixed Interest Trusts, Trust Powers or Discretionary Trusts and Mere Powers..................................................16 1. Fixed Interest Trust........................................................................................................................................................16 2. Mere Powers (Bare or Collateral)...................................................................................................................................16 3. Trust Powers (Discretionary Trusts)...............................................................................................................................16

General, Special and Hybrid Powers (of appointment)........................................................................................16 General Powers (applies to MP only).................................................................................................................................17 Special Powers (applies to MP or TP)................................................................................................................................17 Hybrid Powers (TP or MP)................................................................................................................................................17

THREE CERTAINTIES REQUIRED FOR THE CREATION OF AN EXPRESS TRUST................................................................................17 1. Certainty of Intention.........................................................................................................................................18 Precatory Trusts (now defunct)..........................................................................................................................................18

2. Certainty of Subject Matter...............................................................................................................................18 3. Certainty of Objects...........................................................................................................................................18 Tests...................................................................................................................................................................................19 1. The List Test for Certainty of Objects............................................................................................................................19 2. The Criterion Test for Certainty of Objects (less stringent)............................................................................................19 Life of a Trust................................................................................................................................................................19 Certainty of objects for fixed trusts....................................................................................................................................20 Application of the Criterion Certainty Test to ‘relatives’...................................................................................................20 Abolition in Queensland of the Rule Against the Delegation of Testamentary Power...................................................21

WEEK 3........................................................................................................................................................................22 THE CONSTITUTION OR CREATION OF VOLUNTARY TRUSTS....................................................................................................22 Voluntary Trusts....................................................................................................................................................22 Steps Required to be taken to Complete a Gift in Equity (ie to complete a voluntary trust).................................22 A settlor must do everything that only he can do. The remaining acts may be performed by another or by others.............22

Gifts of Land Under the Torrens System...............................................................................................................24 1

LAWS313

EQUITY

Lecture Notes – Semester 031

Circularity of Obligation (legal impossibility)...................................................................................................................25 If impossible – may be construed as a release................................................................................................................26 What is Present Property?..................................................................................................................................................26

Assignments of Choses in Action...........................................................................................................................27 S199 PLA – Assigning CIA – does NOT apply to Decl of Trust.......................................................................................27

Gift of Shares in a Company..................................................................................................................................28 A Gift Made by way of Release to Trustee.............................................................................................................28 Schedule 6 - Definition of ‘Disposition’........................................................................................................................28 A Release...........................................................................................................................................................................28

Exceptions to the Complete Constitution Rule......................................................................................................29 The Rule in Strong v Bird (Pure Personalty & Land?).......................................................................................................29 Donatio Mortis Causa (Not to Land in Australia)...............................................................................................................29 The Rule in Dearle v Hall..................................................................................................................................................29

TUT4 WEEK 5................................................................................................................................................................30 WEEK 4........................................................................................................................................................................31 PROPERTY LAW ACT WRITING REQUIREMENTS FOR THE CREATION AND DISPOSITION OF CERTAIN PROPRIETARY INTERESTS (IE LAND) ....................................................................................................................................................................................31 Section 10..............................................................................................................................................................31 Pure Personalty..............................................................................................................................................................31

SECTION 11 (P11 COURSE MATERIALS).............................................................................................................................31 Section 11(1)(a) (Legal & Eq land, made in writing, + agent).............................................................................31 Section 11(1)(b) (decl of trust – land, ev in writing, no agent).............................................................................32 Section 11(1)(c) (disp of eq interest– land & pp, ev in writing, +agent)..............................................................32 Schedule 6 - Definition of ‘Disposition’............................................................................................................................33

Section 11(2)..........................................................................................................................................................33 Section 12(1)..........................................................................................................................................................33 Section 59 (p12 Course materials)........................................................................................................................33 Section 6 (p12 course materials)...........................................................................................................................34 Section 6(d)........................................................................................................................................................................34 Part Performance...........................................................................................................................................................34

Section 12(2)..........................................................................................................................................................34 Leading case re-section 11....................................................................................................................................34 Good summary of the application of section 11....................................................................................................37 Grey Direction (Can only release to trustee)..................................................................................................................37 (Doctrine of Merger of Estates).....................................................................................................................................37

Section 3 – schedule 6...........................................................................................................................................38 Does a disposition include a release? (yes)..........................................................................................................38 (Doctrine of Merger of Estates 2)..................................................................................................................................39

REVOCABLE MANDATE...................................................................................................................................................39 Distinction between a direction to transfer, the “Grey” direction (a misnoma), and a mere revocable mandate to transfer, the “Vandervell” direction (genuine direction).................................................................................39 The sub-trust......................................................................................................................................................................41

Direction to Transfer Legal Interest......................................................................................................................41 Mischief Rule vs Literal Rule............................................................................................................................................42 Vandervell Direction:....................................................................................................................................................42 Dealing by or on behalf of the beneficiary of a resulting trust............................................................................................42 Dennis’ Opposing view to Literal Rule in s11(1)(c) – Position Uncertain..........................................................................43

WEEK5.........................................................................................................................................................................44 CHARITABLE TRUSTS......................................................................................................................................................44 General Charitable Purpose.................................................................................................................................44 Preamble to the Statute of Charitable Uses........................................................................................................................44

Public Benefit – The Four Categories of Legal Charity.......................................................................................44 Meaning of a Section of the Community or Public.............................................................................................................45 Improper Discrimination................................................................................................................................................45 Exception – Trusts for the Relief of Poverty......................................................................................................................46 Public vs Private Trust (in poverty)?..............................................................................................................................46 ‘Proviso’ may cure.........................................................................................................................................................47

1. Trusts for the Relief of Poverty..........................................................................................................................47 Trusts for Relief of the Poor (Def’n of Poverty / Poor?)....................................................................................................47 Trusts for the Benefit of the Aged .....................................................................................................................................47

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LAWS313

EQUITY

Lecture Notes – Semester 031

Trusts for the Benefit of the Sick.......................................................................................................................................47 Trusts for the Benefit of the Impotent................................................................................................................................48

2. Trusts for the Advancement of Education..........................................................................................................48 What constitutes education in the law of charitable trusts?................................................................................................48 Music.............................................................................................................................................................................49 Art.................................................................................................................................................................................49 Law Reports...................................................................................................................................................................49 Physical Education.........................................................................................................................................................50 A charitable trust for the advancement of education must also be for the public benefit....................................................50

3. Trusts for the Advancement of Religion (not any religion in general – deals with particular religions).........50 1. Definition - The Meaning of Religion? .........................................................................................................................50 2. What constitutes the advancement of Religion?.............................................................................................................51 Public Benefit Element Required.......................................................................................................................................52 Trusts for Worship and Prayer.......................................................................................................................................52

4. Trusts for Other Purposes Beneficial to the Community...................................................................................52 Beneficial to the Community.............................................................................................................................................52 Spirit and Intendment of the Preamble...............................................................................................................................53 What about a law change in a foreign country?.............................................................................................................54

Section 103 Trusts Act (recreation and leisure)....................................................................................................54 TRUSTS FOR CHARITABLE AND NON-CHARITABLE PURPOSES...................................................................................................55 Section 104 Trusts Act (cm p13) (severence)........................................................................................................55 THE DOCTRINE OF CY-PRES (= AS NEARLY AS POSSIBLE).......................................................................................55 1. Initial Impossibility............................................................................................................................................56 2. Subsequent Impossibility...................................................................................................................................57 cy-pres extended by: Section 105 Trusts Act (cm p14-15)....................................................................................57 WEEK 7/8.....................................................................................................................................................................59 RESULTING TRUSTS.........................................................................................................................................................59 Automatic Resulting Trusts – Incomplete Dispositions.........................................................................................59 Presumed Resulting Trust......................................................................................................................................60 Express Oral Agreement to receive Property as Trustee = Constructive Trust (NOT Resulting Trust)..........................61

EXAM FLOWCHART – RESULTING TRUST / CONSTRUCTIVE TRUST.........................................................................................63 Defacto Relationship Case (Presumed Resulting Trust).....................................................................................................64 Equitable Charge – where A makes repayments solely despite A & B being ‘joint and several’ ..................................64 No Presumption of Advancement – Defacto Relationship.............................................................................................64 Mortgage Free Investments............................................................................................................................................65 Illustration of the Distinction Between the Conventional Purchase of Land as in Calverley v Green and the Mortgage Free Investment in Land................................................................................................................................................65 Presumption of Advancement (ie. Presumption of Gift).....................................................................................................66 Presumption of Advancement – prevents presumption of resulting trust arising............................................................66 The gratuitous transfer of title to personal chattels does not raise a presumption of resulting trust....................................67

evidence required - Rebutting Either the Presumption of Advancement or the Contrary Presumption of a Resulting Trust.......................................................................................................................................................67 Some Intricate Aspects Concerning the Presumption of a Resulting Trust (rebutting the presumption).............67 Rebutting the Presumption of Resulting Trust – immediate Gift....................................................................................67 Accepted Baumgartner Principle...................................................................................................................................68 Constructive Trusts?..........................................................................................................................................................69 Defacto JV without attributable Blame..........................................................................................................................69

Proprietary Estoppel = constructive trust (inducement – detriment)...................................................................70 JV or Proprietary Estoppel?...........................................................................................................................................70 A New Approach (if unjust – equitable compensation over constructive trust)..................................................................72

Presumption of a Resulting Trust may be Rebutted Either Completely or Only Partially....................................73 De Facto Legislation.............................................................................................................................................73 Resulting Trusts and Illegal Transactions.............................................................................................................73 The Former Position – The Old Law in Australia (still law in UK)....................................................................................73 Illegality.........................................................................................................................................................................73 English Position (not law in Australia)...............................................................................................................................74 The Current Position – The New Law in Australia (Nelson v Nelson – Intention to Defraud)...........................................74 Presumption of Advancement – Mother - Children........................................................................................................75 Remedy – Repay Benefit Received within Specified Time............................................................................................76 Measuring the Unlawfully Derived Benefit........................................................................................................................77 Summary of the Current Position – The Law in Australia..................................................................................................77

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LAWS313 EQUITY Lecture Notes – Semester 031 WEEK 8/9.....................................................................................................................................................................78 CONSTRUCTIVE TRUSTS (RESIDUARY CATEGORY) – NOT BASED ON INTENTION............................................................78 Constructive Trusts Imposed to Prevent the Statutory Writing Requirements from being used as an Instrument of Fraud.................................................................................................................................................................78 Orally Receiving Property subject to Contingent Trust......................................................................................................78 Oral Agreement to SELL land not enforceable..................................................................................................................78

Secret Trusts and Half-Secret Trusts.....................................................................................................................79 Fully Secret Trusts.............................................................................................................................................................79 Half Secret Trusts...............................................................................................................................................................79

Strangers who Receive Trust Property Either with Notice that it is Trust Property in Breach of Trust or Pursuant to Assisting in Another Person’s Breach of Fiduciary Duty and Thereby Making a Profit..................80 Knowing Assistance...........................................................................................................................................................80 Knowledgeable Assistance of a breach of Fiduciary Duty.................................................................................................80 Selangor Test (Test of Reasonable Care).......................................................................................................................81 Carl Zeiss Test (Dishonest + Blind Eye) – More Lenient..............................................................................................81 Honesty – Objective Standard (No Moral Standards Implied).......................................................................................82

WEEK 9........................................................................................................................................................................84 FIDUCIARY RELATIONSHIPS..............................................................................................................................84 The Elements of a Fiduciary Relationship............................................................................................................84 Fiduciary Duties....................................................................................................................................................84 Relationships Giving Rise to Fiduciary Obligations.............................................................................................84 Trustee and Beneficiary.....................................................................................................................................................84 Director and Company.......................................................................................................................................................85 Directors and Corporate Business Opportunities................................................................................................................86 Exoneration from Duty to Account....................................................................................................................................86 Promoter and Company......................................................................................................................................................86 Stockbroker and Principal..................................................................................................................................................87 Partner and Partner.............................................................................................................................................................87 Fiduciary Obligations Prior to the Execution of a Partnership Agreement.....................................................................87 Fiduciary Obligations Continue Following the Dissolution of a Partnership.................................................................87 Banker and Customer (Not, as such, a Fiduciary Relationship)..........................................................................................88 Agent and Principal............................................................................................................................................................89 Joint Venturers...................................................................................................................................................................89 Solicitor and Client............................................................................................................................................................90 Summary of Boardman v Phipps...................................................................................................................................92 Remedies Ordered in Boardman and Phipps..................................................................................................................92 Employer and Employee....................................................................................................................................................92

Other Possible Fiduciary Relationships................................................................................................................93 Manufacturer and Distributor.............................................................................................................................................93 Doctor and Patient – NO in Australia.................................................................................................................................94 Clergy and Parishioner - NO..............................................................................................................................................95 Scope of fiduciary?............................................................................................................................................................95

Bribes Received by a Fiduciary.............................................................................................................................95 REMEDIES.....................................................................................................................................................................95 Injunction...............................................................................................................................................................95 Remedies to Recover Gains Improperly Made by Fiduciaries and to Recoup Losses Improperly Cause to Persons to whom Fiduciary Duties are Owed.......................................................................................................95 Liability not Dependent upon proof of loss........................................................................................................................95 Appropriate Remedy still Uncertain...................................................................................................................................95 Constructive Trust – Proprietary – Not affected by Bankruptcy.........................................................................................95 Bankruptcy – Becomes (Bankruptcy) Trust property – Protected from Creditors..........................................................96 Personal Liability (Equitable Debt) – Equitable Compensation or AoP.............................................................................96 Unsecured Creditor (No Charge over own property) – Not Protected – Dividend only.................................................96 The Relevant Equitable Remedies Compared....................................................................................................................96 (Apply) Liberal Allowance for Expenses, Skill and Effort ...........................................................................................96 If Charge – Protected from Creditors.............................................................................................................................97 Contributory Negligence....................................................................................................................................................97 Remedies Sought must be Mutually Consistent.................................................................................................................97 REMEDY SUMMARY..........................................................................................................................................................98

fiduciary in breach – not bankrupt – deficit..........................................................................................................98 knowing assistance – bankrupt – property excess.................................................................................................98 4

LAWS313 EQUITY Lecture Notes – Semester 031 WEEK 11......................................................................................................................................................................99 TRACING (REMEDY)........................................................................................................................................................99 tracing deficiencies................................................................................................................................................99 TRACING AT COMMON LAW.............................................................................................................................................99 TRACING IN EQUITY (MIXING OKAY)...............................................................................................................................101 Is there a need for an initial fiduciary relationship to allow equitable tracing? –debated – not clear..............101 Rule in Clayton’s Case – First In / First Out......................................................................................................101 Tracing into a Mixed Fund..................................................................................................................................102 New Rule from Hallett’s – Presumption of Honesty....................................................................................................102 Remedy options for Claimant:.....................................................................................................................................103 Presumption of Honesty still applies if balance < aggregate of Trust monies..............................................................103

have to show ownership at start of tracing process............................................................................................103 Clayton’s Case (1st in/out) or Pari Passu (rule of proportionality)?.................................................................103 Refinement of Pari Passu – applies to EVERY withdrawal, not just ultimate balance.....................................................104 Position Uncertain between equally innocent claimants...............................................................................................104

Presumption of Honesty not Confined to Mixing of Different Sums of Money but Applies to any Mixing of Different Items of Pure Personalty by a Fiduciary.............................................................................................104 Mixing by Fiduciaries of their Own Money with Trust Moneys Derived from One or More Sources................105 Claimants can only claim LOWEST balance of account in intermediary period..........................................................105

whether to apply hallett, re-oatway. pari passu or clayton’s?............................................................................106 Competition between Delinquent Fiduciary & Claimant..................................................................................................107 Competition between equally innocent claimants.............................................................................................................107 Where mixture of Fiduciary and innocent claimants........................................................................................................107

conflict - Tracing Compared with a Breach fiduciary (Aop)..............................................................................107 Two Difficult Cases – which preferred Profit Rule..........................................................................................................108

Mixing by Innocent Volunteers............................................................................................................................108 Special Statutory Provision – Section 109 Trusts Act......................................................................................................109 SUMMARY....................................................................................................................................................................110

TRACING TEMPLATE EXAMPLE – TUT 11........................................................................................................110 Process.................................................................................................................................................................110 Answer 1: Clayton’s + Presump of Honesty in relation to LAND....................................................................................111 Answer 2: Clayton’s + Presump of Honesty in relation to SHARES................................................................................111 Answer 3: Pari Passu + Presump of Honesty in relation to LAND...................................................................................112 Answer 4: Pari Passu + Presump of Honesty in relation to SHARES...............................................................................113

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LAWS313

EQUITY

Lecture Notes – Semester 031

WEEK 1 THE DEVELOPMENT OF EQUITY DEVELOPMENT Equity cannot be defined except in a general way as that body of legal principles developed by the former Court of Chancery (The principle court of equity). The common law, which existed before equity, is a complete and independent legal system that could function without equity. However, the common law is both deficient and harsh in some respects (eg. Only CL remedy was damages). Equity therefore has two functions: •

Equity supplements the common law by recognising some rights and remedies which the common law does not recognise such as specific performance.

•

Equity corrects the common law; namely equity intervenes to correct the common law where it is regarded as harsh.

For example, equity recognises the concept of a trust whereas the common law does not. The trust is equity’s most distinguished creation. Whereas the common law regards the owner of property as the holder of common law title, equity would enforce the trust in favour of the beneficiary against the trustee. Equity could not function without the common law, as it must have something to operate on. Indeed, equity is neither a complete nor an independent system; equity depends on the common law for its existence. Equity owes its development to the Lord Chancellor (Sir Thomas Moore 1529) of England. From the 13th century, the Lord Chancellor would entertain petitions from persons not satisfied with the common law positions. Eventually, the Lord Chancellor became the head of the Department of Chancery and later, the Court of Chancery. The Lord Chancellor would act on the conscience of individuals when the common law procedure was considered unconscionable. He would issue a so-called ‘common injunction’ (also order SP) against that individual to stop the enforcement of a common law judgment or prevent the bringing of an action or to prevent a remedy being awarded by a common law Court (CL courts – Kings Bench, Common Pleas, Ex-Chequer). Therefore equity provided superior remedies only if CL damages inadequate. This constant interference by the Lord Chancellor annoyed the common law judges. It came to a head in the 17 th century (1615). In the Earl of Oxford’s Case, the Lord Chancellor issued a common injunction against a common law plaintiff from enforcing a judgment from a common law Court in ejectment. This brought about a dispute between Coke LCJ of the Court of King’s Bench and Ellesmere LC regarding this interference. In 1616, the dispute was referred to King James 1 who resolved the matter in favour of the Lord Chancellor, and thus, from this time onwards, the rules of equity have prevailed over the common law whenever there is conflict. When the common law says one thing and equity says something else, the equitable view will prevail. Section 5(11) of the Judicature Act 1876 (Queensland) embodies this supremacy of the rules of equity over the rules of common law. (Has been relocated in S249 Supreme Court Act 1995 (QLD). CL did not recognise the Trust, so equity introduced the Trust for fairness. 3 types of Trust:

• • •

Express Trust – Express Intentions Implied Trust – Implied Intentions Constructive Trust – no intention at all (ie. imposed by the court)

The following is a standard example of the rules of equity prevailing over the common law in the doctrine of contribution. In a contract of guarantee, the guarantor guarantees that the debtor will pay the creditor. The contract is between the creditor and the guarantor. If there are two or more guarantor’s or surety’s, on default by the debtor, the creditor can call upon one of the surety’s to pay. The common law position is that to claim contribution from his fellow surety’s, a guarantor must have actually paid more than his fair share of the debt. The equitable position is different. In Wolmershausen v Gullick, it was held that in equity, as soon as the creditor claims against the guarantor, that surety is entitled to join the other surety’s to share the obligation to repay the debt. The equitable position is now law. Example: Irrevocable Powers of Attorney. CL = intrinsically revocable. Eq = if valuable consideration given to exercise the power, then it is unfair for donor to revoke the power, therefore irrevocable.

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LAWS313

EQUITY

Lecture Notes – Semester 031

EQUITABLE JURISDICTION There are three categories of equitable jurisdiction: • Exclusive jurisdiction • Concurrent jurisdiction • Auxiliary jurisdiction

Exclusive Jurisdiction The exclusive jurisdiction of equity is exercised where the rights in question are recognised in equity only. The common law has no role to play and common law concepts are excluded. A prime example is the trust, a concept unknown to the common law. When equity enforces a trust, it is an exercise of the exclusive jurisdiction of equity because the most important Fiduciary duty is that of trustee, recognised in equity only and not at common law.

Concurrent Jurisdiction The concurrent jurisdiction of equity arises where there is a violation of a right that is recognised both in equity and at common law. For example, if there is a contract for the sale of land and the purchaser or vendor is in breach of that contract, the common law simply awards damages to the innocent party. The equitable remedy for breach of a contract for the sale of land is specific performance. Specific performance can be ordered against either the vendor or the purchaser as the case may be. If the vendor breaches the contract, equity will direct him to execute the relevant documents and give those documents to the purchaser. The reason why equity orders specific performance against the vendor is that land is considered to be a unique commodity and accordingly, damages will be an inadequate remedy for the purchaser. According to the doctrine of mutuality, the vendor is also able to obtain an order for specific performance against the purchaser. If the purchaser is in breach of the contract, the vendor cannot say that he is deprived of a unique commodity but as the purchaser can obtain specific performance against the vendor, it is only fair that the vendor can obtain specific performance against the purchaser. Although specific performance is normally available with respect to a contract for the sale of land, it is also available in the case of the sale of a unique chattel or more broadly even, a contract for the sale of pure personalty that is unique.

Auxiliary Jurisdiction The auxiliary jurisdiction is exercised only to assist a person in the protection of a purely common law right that has been violated. For example, if a trespass (nuisance) is committed, as trespass is actionable per se, there can be an action at common law for damages against the trespasser. In the case of an apprehended trespass or wrong of another nature, however, damages are not awardable as no damage is done. Thus, no remedy is available at common law. By contrast, equity will issue a quia timet (ie. ‘because he fears’) injunction. The right to the discovery of documents in the course of litigation is an equitable right conferred by the auxiliary jurisdiction. Example: If Creditor sues Debtor, equity would order discovery of documents from the D.

EQUITABLE DAMAGES The concept of equitable damages was introduced by section 2 of the Chancery Amendment Act 1858 (United Kingdom), the so-called Lord Cairns’ Act. This provision was adopted by section 62 of the Equity Act 1867 (Queensland). Section 62, adopting Lord Cairns’ Act into Australia, has since been repealed but its operation has been preserved by section 2(4) of the Statute Law Revision Act 1908 (Queensland). In Barbagallo v Catelan Pty Ltd, MacPherson J noted the common practice to refer to Lord Cairns’ Act jurisdiction as section 62 even though it has been repealed.

DISTINGUISH EQUITABLE DAMAGES FROM EQUITABLE COMPENSATION Equitable damages are often confused with equitable compensation. The concept of equitable damages, derived from Lord Cairns’ Act is to be contrasted with equitable compensation, which is not derived from Lord Cairns’ Act. According to Nocton v Lord Ashburton, equitable compensation is payable for any loss caused by a breach of a fiduciary duty. (Note: Equity has always had this and should not be confused – an inherent power of the court exercising Equitable jurisdiction). There is some argument as to whether before Lord Cairns’ Act was passed, the Court of Chancery did have the power to award equitable damages. This is regarded as an interesting but not 7

LAWS313 EQUITY Lecture Notes – Semester 031 accepted view. The accepted view is that prior to Lord Cairns’ Act the Court of Chancery could award equitable compensation, not equitable damages. Section 2 of Lord Cairns’ Act empowers a Court to award equitable damages to a plaintiff either in lieu of or in addition to an injunction or specific performance provided at the time of the application for the injunction or specific performance, the Court had jurisdiction to entertain the application. Jurisdiction is determined at the time of the application for an injunction or specific performance and the Court may award equitable damages even if at the time the order is made, the Court has lost jurisdiction. It is not immediately clear how jurisdiction may be lost. However, for example, there is a contract for the sale of land subject to a mortgage. The vendor fails to transfer the land to the purchaser and the purchaser sues the vendor for specific performance. At the time of commencement of the action, the Court had the power to grant specific performance. If in the course of the hearing, the vendor defaults in the repayment of the loan to the mortgagee and the mortgagee exercises its power of sale, by the time judgment is given, the Court would have no power to grant specific performance. Nonetheless, the Court could still award equitable damages to the purchaser under Lord Cairns’ Act. In Barbagallo v Catelan Pty Ltd, MacPherson J outlined four propositions with respect to section 62: •

Equitable damages under Lord Cairn’s Act may be awarded even where the plaintiff does not make an express claim for them. For example, if the plaintiff simply claims an injunction or specific performance, the Court may also award equitable damages. Thus, equitable damages may be but need not be expressly claimed.

•

Jurisdiction is determined at the time at which the plaintiff applies for an injunction or specific performance. If at the time of commencement of the action the Court had jurisdiction to entertain the application for specific performance or injunction, equitable damages may still be awarded even if jurisdiction is later lost. Example: Breach of Contract between Vendor and purchaser of a house. But Mee sells the house during the period of the dispute so that SP is no longer available – therefore Eq damages may be awarded.

•

Even if the Court refuses to grant a remedy such as specific performance on discretionary grounds for example if the plaintiff is guilty of laches, namely unconscionable delay or acquiescence, the Court may still award damages in lieu of an equitable remedy.

•

The most interesting point is that as the Court has the power under the legislation to grant damages in lieu of an injunction, damages may be granted even though no damage has yet been suffered. For example, in Leeds Industrial Co-operative Society Ltd v Slack, a split decision of the House of Lords, a quia timet (‘because he fears’) injunction may be granted before the apprehended injury occurs. Accordingly, damages may be awarded even though no actual damage is suffered. If damages are awarded instead or in addition to an injunction, this amounts to the award of equitable damages even though the plaintiff suffers no damage. The dissenting opinions suggested that equitable damages couldn’t be awarded before the damage is suffered. They argue that statute or no statute, it is absurd to grant damages to a person who has not suffered damage. Example: Sue a neighbour because an unsafe wall may collapse on your property (ie no damage yet) – P applies for an IN, but if court assesses that if wall falls only damage is cost of cleaning up then they may award equitable damages to cover this cost.

FUSION OF EQUITABLE AND COMMON LAW JURISDICTIONS Prior to the enactment of the following legislation, separate Courts exercised the equitable and common law jurisdictions. This was highly inconvenient, as if a plaintiff went to the wrong Court, that Court would have no jurisdiction to entertain the application. The Judicature Acts 1873 and 1875 (United Kingdom), which where duplicated in Queensland by the Judicature Act 1876 (QLD), to reduce inconvenience, fused the equitable and common law jurisdictions. This means that the Supreme Court may now exercise both common law and equitable jurisdictions. (But does not mean Eq & CL are fused). The NSW legislation to fuse the jurisdictions was not enacted until 1972. Before this time, it was possible to make an application to the wrong division of the Supreme Court as equity and common law were administered by different divisions of the Court. In Castlereagh Motels Ltd v Davies-Roe, a company director was accused of a breach of fiduciary duty. He was sued in the Common Law Division of the Supreme Court of NSW. The Court had to say that it could not entertain

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LAWS313 EQUITY Lecture Notes – Semester 031 the action, as it should have commenced in the equity division as the matter was heard before 1972. The common law does not acknowledge the existence of fiduciary duties, it is an entirely equitable concept. Section 4 of the Judicature Act fuses the two jurisdictions by providing that the Supreme Court shall administer law and equity by recognising all legal and equitable estates, titles, rights, duties and liabilities in every civil cause or matter. Section 5(11) provides that in the case of conflict between law and equity, the rules of equity shall prevail over the common law rules. (Relocated to s244 SCA 1995 (QLD) – every judge has power to hear equity)

THE FUSION FALLACY A perennial dispute is whether the act simply fuses the two jurisdictions or whether it went further and fused the two systems of law so that it is no longer intelligible to refer to common law and equitable remedies as if they were different. • Those who subscribe to the view that the act only fuses the two jurisdictions accuse the other side of the fusion fallacy. • Those who subscribe to the view that the act fuses the two systems of law accuse the other side of the anti-fusion fallacy. In Salt v Cooper, Sir George Jessel suggested that the act merely fuses the two jurisdictions but leaves the two systems of law separate. This is a superior view because otherwise, section 5(11) would not be required. In Seager v Copydex Ltd, the plaintiff designed and manufactured goods. The plaintiff requested that the defendant market those goods. In the course of the discussions between the plaintiff and the defendant, the plaintiff disclosed confidential business details to the defendant. The defendant refused to market the goods but then copied the confidential details that the plaintiff ha disclosed in a new design. The defendant was guilty of a breach of the duty of confidence, a purely equitable right. The plaintiff applied for an injunction to stop the defendant from continuing to manufacture and sell the copied goods. The plaintiff also claimed damages for the loss suffered by virtue of the defendant’s breach of the duty of confidence or alternatively, the plaintiff claimed an account of profits from the defendant. The English Court of Appeal rejected all three claims. The Court awarded damages to the plaintiff but those damages were not equitable damages based on Lord Cairns’ Act. The Court purported to award common law damages assessed on the basis of reasonably compensating the plaintiff for the defendant’s unauthorised use of confidential information. A further difficulty with the remedy granted is that the damages awarded were not based on the loss suffered by the plaintiff but on the use of the confidential information by the defendant. No injunction, no damages for loss and no account of profits were awarded. The Court purported to award common law damages for the breach of an equitable right, namely the duty of confidence. In Australia, it is most likely that an order for an account of profits would be made. The view taken in Seager v Copydex Ltd is that if a legal or equitable right is breached, the Court may award a legal or equitable remedy. For example, if an equitable right is violated, equitable and common law remedies are available. In English v Dedham Vale Properties Ltd, Slade J referred to Seager v Copydex Ltd in terms of an award of equitable damages under Lord Cairns’ Act but as the damages were not awarded for the loss suffered by the plaintiff, his reasoning is unconvincing.

THE MAXIMS OF EQUITY Due to its haphazard origin, equity is not a complete system but there are certain general principles upon which the Court of Chancery exercised its jurisdiction. Many of these principles are embodied in the so-called maxims of equity. These are not positive laws or rules or principles of equity that will be applied literally and relentlessly in their full width but rather as trends that can be discerned from many of the detailed rules that equity has established. The maxims are broad statements of the equitable approach that describe the result of equitable rules and principles. Further, no logical division of these maxims is possible. The maxims do not cover the whole ground of equity and they overlap. One maxim may contain by implication what belongs to another. Nonetheless, each maxim merits separate consideration, for each embodies some peculiar function of equity. The 12 maxims are as follows: • Equity will not suffer a wrong to be without a remedy. • Equity follows the law. • Where there is equal equity, the law shall prevail. • Where the equities are equal, the first in time shall prevail. • He who seeks equity must do equity. • He comes into equity must come with clean hands. • Delay defeats equities. 9

LAWS313 EQUITY • Equality is equity. • Equity looks to the intent rather than to the form. • Equity looks on that as done which ought to be done. • Equity imputes an intention to fulfill an obligation. • Equity acts in personam.

Lecture Notes – Semester 031

THE NATURE OF EQUITABLE INTERESTS AND RIGHTS WHAT IS AN EQUITABLE PROPRIETARY INTEREST IN SPECIFIC PROPERTY? THE TRUST The trust is the most important institution in equity. Def’n In Hardoon v Belilios, Lindley LJ declared that all that was necessary to create a trust, namely the relation of trustee and beneficiary was to prove that legal title to property vests in one person and that the equitable title to the same property vests in another person. The division of legal and equitable title necessarily results in the creation of a trust. In Baker v Archer-Shee, the House of Lords held that a beneficiary under a trust (=owner of Property) had more than a chose in action to enforce the trust against the trustee. A majority of the House of Lords held that the beneficiary is the owner in equity of the property held in trust for him. The chose in action is merely incidental to equitable ownership. The beneficiary under a trust has the property in equity, not just a chose in action. The beneficial interest of a beneficiary under a trust can form the subject matter of a trust. If someone is the beneficiary under a trust and that person declares himself a trustee of that beneficial interest for a third party, there would be created a sub-trust. The head trustee is the original trustee, the beneficiary of the head-trust is also a subtrustee and there is a sub-beneficiary of the sub-trust. A beneficiary under a trust, because he is the equitable owner of the property, has an equitable proprietary interest in that property but lesser forms of equitable proprietary interests in specific property are possible. A person may have an equitable proprietary interest in specific property even though he is not the equitable owner of that property; for example, the equity of redemption (right to pay off loan and discharge mortgage) possessed by a mortgagor. The mortgagor has an equitable proprietary interest in specific property, namely the equity of redemption in the mortgaged property, but the equitable proprietary interest of the mortgagor is not equitable ownership of the property as the mortgagee is not a trustee for the mortgagor. Also, where a person has a charge on property, they have an equitable proprietary interest in the property charged but the chargee’s equitable proprietary interest is not equitable ownership of property. Thus, there are various forms of equitable proprietary interest in specific property of which the most comprehensive form is equitable ownership. In the case of an absolute owner, there is no division between legal and equitable title. In DKLR Holdings Company Pty Ltd v Commissioner of Stamp Duties, Hope J held that an absolute owner does not hold legal title in trust for himself. This is a legal impossibility because the absolute owner cannot sue himself to enforce the trust. In the same case at High Court level, Aickin J held that an absolute owner of property possessed a legal interest, namely the entire and unqualified legal interest in that property, not qualified by any trust. An absolute owner of property does not own separate legal and equitable interests in that property. As a matter of convenience, the absolute owner may be described as having legal and equitable title to property but this is done simply to show that both equity and common law acknowledge him to be the owner. It does not mean that there are separate estates in law and in equity in the case of equitable ownership.

IS AN EXECUTOR (OF A DECEASED ESTATE) A TRUSTEE? – NO (Note: Administered Estate = has been distributed by Executor, Unadministered Estate = assets not yet distributed) The executor of a will administers the deceased’s estate. The executor is a fiduciary but not a trustee of the assets of the deceased’s estate because in the course of the administration, the executor may have to sell the deceased’s estates assets to answer the debts of the deceased. This contrast is drawn out by the decision of the Privy Council in Commissioner of Stamp Duties (Queensland) v Livingston. Here, Coulson died domiciled in NSW. Her first husband, Livingston, predeceased her. On his death Livingston granted Coulson a one third interest in the residue of his estate in his will. (The residue or a residuary estate refers to that part of the estate remaining after the deduction of debts, expenses, specific bequests of personalty and specific devises of realty, namely the remaining assets.) At the time of Coulson’s death, Livingston’s unadministered estate was unadministered. An unadministered estate 10

LAWS313 EQUITY Lecture Notes – Semester 031 means that the assets of the estate have not yet been distributed to the beneficiaries and the creditors of the deceased. An estate ceases to be unadministered when all the assets in it have been distributed. Livingston’s estate comprised realty and personalty in Queensland and in NSW. The issue was when Coulson died whether she died owing property in Queensland, namely her one third residuary interest in Livingston’s unadministered estate. If so, her estate was subject to Queensland succession duty. It was held that despite the residuary interest, Coulson did not own property in Queensland at the time of her death. The estate was in the course of administration and there was no property on trust for Coulson. The estate may be discovered to be bankrupt and accordingly, there may be no residue. Until the administration of the deceased’s estate is complete, one does not have assets that can be said to form the subject matter of a trust for any beneficiary. Viscount Radcliffe said that in order for there to be a trust, there must be identifiable property capable of forming the subject matter of a trust. The executor of an estate is not a trustee as there is no trust property. The executor of the estate takes title to the deceased estates assets as full owner subject to the duties of administration. If a trust is created by a will, and a person is appointed both executor and trustee, the offices are consecutive and not concurrent. An executor could not be a trustee as no trust property could be identified as there may be no residue after administration. (ie Unadmin Estate = No Trustee) Do not confuse a beneficiary under an unadministered estate with a beneficiary under a trust. In Commissioner of Stamp Duties (Queensland) v Livingston there was no trust as there was no property capable of forming the subject matter of a trust. In Baker v Archer-Shee, the equitable ownership of the property vested in the trustee. In Commissioner of Stamp Duties (Queensland) v Livingston, the residue given to Coulson was not the subject matter of a trust. However, Coulson had an equitable chose in action against the executor’s of Livingston’s estate. This equitable chose in action was itself property and the Privy Council had to decide where that property was located. It was held that as Livingston had died domiciled in NSW and the executor’s of his will resided in NSW, the chose in action was located and should be enforced in NSW. Coulson’s equitable chose in action was not subject to Queensland succession duty (now abolished). In Official Receiver in Bankruptcy v Schultz, the High Court held that the Commissioner of Stamp Duties (Queensland) v Livingston principle applies to all unadministered estates and not merely residues. It is not confined to interests in residuary estates and applies to specific bequests and devises that cannot be the subject matter of a trust as those assets may be sold in the course of administration. Here, there was a specific devise of a house and a specific bequest of the contents. The beneficiary under the will, who held a chose in action, became bankrupt. Section 116(1) of the Bankruptcy Act 1966 (Commonwealth) provides that the chose in action vests in the official trustee in bankruptcy and is distributable. It is devisable inter vivos or by will. The equitable chose in action would include its expected fruits.

CLASSIFICATION OF EQUITABLE RIGHTS There are four categories of equitable rights: • A mere equity in specific property • An equitable proprietary interest in specific property • A equitable proprietary interest in respect of specific property • A personal equity

Mere Equity A mere equity in specific property is a right that must be enforced to acquire an equitable proprietary interest in specific property. It is logically antecedent to an equitable proprietary interest. Per Kitto J in Latec (eg. Right of defrauded Mor to set aside the tfr of title to his land where Mee & purchaser were fraudulent).]

Equitable Proprietary Interest An equitable proprietary interest in specific property is the ownership of an interest in a specific asset, for example; the beneficiary’s interest under a trust or the mortgagor’s equity of redemption.

Equitable Proprietary Interest in respect of specific property An equitable proprietary interest in respect of specific property exists when no ownership in the relevant asset is conferred; for example, the right of the beneficiary under a will when the deceased estate is unadministered. The 11

LAWS313 EQUITY Lecture Notes – Semester 031 beneficiary does not have an interest in specific property as that would make him a beneficiary under a trust. (ie. if enforced, may or may not give you property)

The Personal Equity A personal equity is merely the right in equity to bring a personal action against another person. This right cannot be exercised against any other person and it cannot bind a third party, even when the third party has notice of the existence of the right. This right is purely personal against the person to be sued – it is a personal right in the strict sense. Enforcement of the right may or may not yield an equitable proprietary interest in specific property as the asset may be sold in the course of administration. In National Provincial Bank v Ainsworth, the House of Lords was concerned with what is known as the deserted wives equity. Under the law at the time, a wife had the right against her husband to be provided with accommodation. As the right may exist against the husband one day but not on the next, it is a purely personal right against the husband with no proprietary interest. It fluctuates with matrimonial circumstances. Here, the husband deserted the wife and could not pay the mortgage on the house. The bank elected to take possession of the house. The wife argued that the bank could not take possession as the held the deserted wives equity. The Court held that the bank was entitled to the house on default by the mortgagor even with notice of the desertion and the wives accompanying right against her husband. The wife’s right was purely personal. ** Wilberforce J held that there are four criteria to identify a proprietary right: • Definable • Identifiable by third parties, namely capable of binding third parties • In its nature capable of assumption by third parties, namely assignable • Some degree of permanence or stability The criteria are satisfied by an equitable proprietary interest in specific property, an equitable proprietary interest in respect of specific property, and a mere equity in specific property but the criteria are not satisfied by a personal equity as three criteria are not satisfied. Mason J Toohey approved these four criteria in R v Toohey; ex parte Meneling Station Pty Ltd. The High Court held that a licence to graze stock on crown land was not an interest in that land as the licence could be cancelled with three months notice because the Minister was empowered to cancel, therefore no degree of permanence, stability and not assignable (ie. failing some of the 4 criteria).

The Mere Equity in Specific Property In Latec Investments Ltd v Hotel Terrigal Pty Ltd HCA, Hotel Terrigal was the mortgagor and Latec Investments was the registered mortgagee. Hotel Terrigal defaulted and Latec Investments, as mortgagee, fraudulently exercised its power of sale by selling the property to its subsidiary company, Southern Hotels. The purchaser nonetheless registered a memorandum of transfer. The purchaser gave a floating charge to MLC (another company) for value without notice of the fraud. The floating charge subsequently crystallised and became a fixed charge, namely a full equitable proprietary interest. Hotel Terrigal later sought to have the sale set aside. The High Court held that there would be no difficulty in setting aside the sale if MLC had not been involved because Southern Hotels had been fraudulent and could not rely on the indefeasibility provisions of the relevant act, the Real Property Act, the NSW equivalent to the Land Title Act in Queensland. However, MLC’s fixed charge had intervened. The competition was between Hotel Terrigal, the defrauded mortgagor and MLC, the innocent holder of a charge for value. The Court held that MLC’s charge was prior to Hotel Terrigal’s right in equity to have the fraudulent sale set aside. It was held that as Southern Hotels was fraudulent, all that they obtained was Latec Investments mortgage. Kitto J, (Equitable Proprietary Interest in Property for value & without notice acquires it free of mere equity) applying the reasoning of Westbury LJ in Phillips v Phillips held that the mortgagor’s right to set aside a fraudulent sale was a mere equity, logically antecedent to an equitable interest. The equitable interest was the mortgagor’s equity of redemption. However, this reasoning only applies where a fraudulent purchaser has registered title. The equitable maxim that where equities are equal, the first in time prevails (Rice v Rice) does not apply here as the equities are not equal. MLC has a full equitable proprietary interest whereas Hotel Terrigal only has a mere equity. Taylor J, relying on Stump v Gaby, held that the right of the mortgagor, to set aside the sale, is a proprietary interest in equity. However, after the sale to the fraudulent purchaser, there is an impediment to that equitable interest meaning that MLC’s proprietary interest prevails as the charge was created before the impediment was removed, namely before the sale was set aside. Essentially, Kitto and Taylor JJ are saying the same thing in different terms. A mere equity in specific property is the same thing as an equitable interest subject to an impediment (eg. 12

LAWS313 EQUITY Lecture Notes – Semester 031 Obtaining fraudulent title. Note: an unregistered interest is not an impediment). Menzies J held that the right of the defrauded mortgagor is a mere equity for the purposes of competition between equitable rights but for the purposes of an inter vivos transfer of succession, it was to be regarded as an equitable interest. In the above circumstances, sale refers to a sale completed by the registration of the purchasers title. Indeed, in Latec Investments Ltd v Hotel Terrigal Pty Ltd, the fraudulent purchaser had become registered. If the purchaser had not registered its title, however, the situation would be different. In Victoria the position is clear Swanston Mortgagee Pty Ltd v Trepan Investments Pty Ltd, the Full Court of the Supreme Court of Victoria held that even where the purchaser’s title was not registered, the contract of sale itself between the vendor and the purchaser meant that the mortgagor had a mere equity. Therefore, the mortgagor could not lodge a caveat. Unjustifiably, due to factual differences, the Court purported to follow the reasoning in Latec Investments Ltd v Hotel Terrigal Pty Ltd. In Queensland the position is unclear, Ryan J held in Re McKean’s Caveat that where the purchaser had not registered its title, the defrauded mortgagor had an equitable proprietary interest sufficient to support a caveat under section122(1)(a) of the Land Title Act. This decision is now embodied in section 122(1)(c) of the Land Title Act, which allows a registered owner to lodge a caveat. Still Unsettled law – Forsyth v Blundell per Walsh J at 497 implied a Defrauded Mor (Purchaser not registered) had a mere equity. At 498 implied the Defrauded Mor had an Equitable Proprietary Interest. In McKean v Maloney, (Breach of Mee selling when not taking reasonable care to achieve market value) MacPherson J made obiter dicta comments to the effect that if the mortgagee exercises the power of sale mala fides and the purchaser has not yet registered an instrument of transfer, the mortgagor would have to show that (1) the mortgagee had acted mala fides (bad faith) and (to retain your eq prop interest) arguably (2) had to show that the purchaser had notice of the mortgagee’s fraud at the time of purchase. (ie. If you have to show notice then you have a mere equity, and if you then show notice you retain your equitable proprietary interest and Rice v Rice applies) It is unclear in a situation where the purchaser has not registered its title whether the defrauded mortgagor has a mere equity or an equitable proprietary interest. Under the Land Title Act, the mortgagor retains legal title but the equitable position is of concern here. If the mortgagor retained an equity of redemption, namely a full equitable proprietary interest, despite the fraudulent sale in a case where the purchaser had not registered its title, there would be no need for the mortgagor to show that the purchaser had notice of the mortgagee’s fraud because the mortgage would prevail. The mortgagor would prevail because, as according to Rice v Rice, when the equity’s are equal, the first in time prevails. If the mortgagor has a mere equity, Phillips v Phillips applies and the purchaser will prevail without notice of the mortgagee’s fraud.

SUMMARY TUT 1 Jane has an Equity of Redemption (Equitable Proprietary Interest). Trevor defrauded Jane. Margaret has an Equitable FS (Equitable Proprietary Interest) on signing the K and has no notice and has not registered. Normally Jane would seek compensation under s85(3) PLA. Under s78(2)(c)(2) LTA the registered Mees remedies is the right to foreclose on Mor to redeem the mortgage lot. Therefore the Mor retains Equity of Redemption and registered ownership. Jane retains the Equity of Redemption as in Dennis’ eyes, no one can explain why it should be lost and reduced to a Mere Equity. As between Albert and Christine – Normally Albert would acquire an EFS on signing of the K (in this case a K for the future), but in this case he obtains an requitable Chose in Action (ECIA). Christine also acquires an ECIA, therefore applying Rice v Rice – Albert wins Christine may claim that Albert didn’t lodge a caveat so he fails – but this is incorrect as (1) Albert couldn’t lodge as he has no equitable interest as required under s122(1)(a) LTA, and (2) Prejudice as Albert paid valuable consideration whilst Jane’s was a gift.

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WEEK 2 TRUSTS DISTINGUISHED FROM OTHER SIMILAR CONCEPTS TALKING EXPRESS TRUSTS Express Trusts can be created by:

•

Transfer – Transfer of Property Transferred to one/more persons for so as expressly to impose on transferees an obligation enforceable only in equity to hold for another person or persons of whom the transferees may be or for charitable purposes.

•

Declares – himself Trustee of Property that before declaration he or she owns.

The concept of a trust is to be contrasted with other similar concepts at common law. There is no definition of trust commanding universal acceptance. Basically, there are two types of trusts: • Trusts for the benefit of individuals, namely a trust with human individuals as the object of the trust. A trust of imperfect obligation, for instance a trust with specific animals as the object of the trust, cannot be enforced, even though it may be carried out. • Trusts for the promotion of charitable purposes or charitable trusts. Such trusts are purpose trusts. Human individuals are not the objects of such trusts (although money will ultimately benefit individuals) Generally, a trust arises whenever title to property is vested in one or more person so as to impose upon that person or upon those persons an obligation enforceable in equity to hold that property for the benefit of another person or for the benefit of several persons which may include but must not comprise the trustee or trustees or for a charitable purpose. The trustee cannot be the sole beneficiary. It is possible for someone to be a trustee and a beneficiary so long as he is not the sole beneficiary. If the trustee is the sole beneficiary, there is no trust, as the trustee cannot sue himself to enforce the trust.

TRUST AND BAILMENT •

A bailment involves a transfer of possession from the bailor to the bailee. An express trust is not concerned with the transfer of possession but the transfer of title to the person who takes that title as trustee or declaration of trust over property.. An express trust can also be created by an absolute owner declaring himself trustee of the property for another person, the beneficiary.

•

The subject matter of a bailment can only be a personal chattel. It is not possible to have a bailment of other types of property. The subject matter of a trust may be any form of property such as land, personal chattels or choses in action provided that there is no statutory prohibition.

•

A bailee is under an obligation to redeliver the personal chattel to the bailor or to the bailor’s nominee upon termination of the bailment. A bailment is created by delivery and is terminated by redelivery. Throughout the bailment, the bailor retains legal title to the personal chattel. The bailee is obliged to take reasonable care of the property during the bailment. A trustee is the legal owner of the relevant property and there is no obligation to redeliver possession to the beneficiary. The trustee’s obligation is to hold the property for the beneficial enjoyment of the beneficiaries under the trust. (Equity regards the beneficiary the owner)

•

Bailment is a common law concept. The trust is an equitable concept.

•

The bailor or the bailee may enforce a bailment. Only its beneficiaries may enforce a trust, unless the settlor of the trust reserves to himself a power to enforce the trust. The settlor is the person who has created a trust with property owned by him immediately before the trust is created.

The concepts of trust and bailment are, however, similar, in that they can be created either gratuitously or for value. For example, a bailee requiring payment for storage of a personal chattel is a bailment for value. If payment is made to the settlor for the creation of the trust, the trust is created for value.

TRUST AND DEBT •

A debt is created where one person, the debtor, is placed under a common law obligation to pay another person, the creditor, a specific sum of money. The debtor’s obligation, unlike the trustee’s obligation, is exclusively 14

LAWS313 EQUITY Lecture Notes – Semester 031 personal. The debtor does not hold any property for the creditor. The creditor has a right to sue the debtor for money. In the case of a secured debt, the creditor can sell to recover debt but the proceeds still go to the debtor. (The concept of debt is wider than a loan, eg. Credit Card purchase = a debt not a loan) •

This distinction is crucial in cases of bankruptcy. If a debtor becomes bankrupt and his estate is insufficient to pay his debts in full, by virtue of section 108 of the Bankruptcy Act 1966 (Commonwealth), his creditor’s will only be able to claim from his estate a ratable proportion of what is owed to them by the debtor. For example, the creditors will receive two cents in the dollar. This is unsatisfactory for the creditors. If the debts are adequately secured, it is a different matter as the creditors may realise the security but this does not always happen. (Book p 486) If a trustee is declared bankrupt, that bankruptcy will not prejudice the beneficiary under the trust by virtue of section 116(2)(a) of the Bankruptcy Act. Property held in trust by the bankrupt person is not divisible amongst his creditors. This section embodies the position under the general law. Only property beneficially owned by the bankrupt is divisible amongst his creditors. A beneficiary’s property is, in the event of the trustee’s bankruptcy, protected. Section 58(5) Bankruptcy Act – secured debt can be enforce security not withstanding the bankruptcy of the debtor. Note: Bankruptcy is a term used for natural persons only (not Corps).

•

Summary: Creditors prejudiced by Bankruptcy (unless secured). A beneficiary is not.

Re Kayford Ltd (Book p23) illustrates the importance of the contrast between a debtor and a trustee in practice. Here, a trading company experienced trading difficulties. Fearing insolvency, the company decided to protect its customers by opening a customers trust deposit account and paid all money received from customers who ordered goods from the company into that account. The company would then receive money for orders as trustee. The company would withdraw the purchase price from the account when the delivery was made. The company went into liquidation and the liquidator claimed the money in the account belonged beneficially to the company and should be used to pay its creditors. The customers claimed that the trust account contained money that was held on trust for them in respect of unfulfilled orders. Megarry J held that the money in the trust account belonged to the customers as the company received the money as trustee and not as debtor. The insolvency of the company did not affect the account as those funds were held in trust for the customers (equitable ownership of the money was the customers). Megarry J drew an important distinction between someone declaring a trust over his own property and someone who receives property as trustee (in this case the company did not declare trust over property). The voidable transaction or voidable preference rule, which states that an insolvent company cannot preference certain creditors to others under company law, is irrelevant here. The money was not the company's in equity. The customers were not creditors. The company did not prefer certain creditor’s to others.

TRUST AND AGENCY •

An agent is given authority by another person, the principal, to act on behalf of them. A trustee does not act as agent but as principal. To everyone in the world except the beneficiaries under the trust, the trustee is the owner of the relevant property. It is only as between the trustee and the beneficiary in equity that the trustee is not regarded as the owner.

The following is an uncertain area of the law. When an agent receives money in the course of the agency, does the agent receive that money as debtor to the principal or as trustee for the principal? Whether the agent receives that money as debtor or trustee is a matter for the express or implied intention of the principal and agent. The authority for this proposition is Walker v Corboy (Book p7), a decision of the NSW Court of Appeal, where it was held that the agent was intended to account to the principal (farmers) as debtor only. Here the agent sold the farm produce of a number of principals, subsequently becoming insolvent. The Court said that there was no trust because it would be impractical for an agent to hold the funds of so many principals’ on trust. To avoid commercial inconvenience, the agent was to account as debtor and not as trustee. •

The principal may give directions to the agent. In Re Brockbank, (Book p51) it was held that the beneficiary under a trust couldn’t give directions to the trustee as to how the trust could be executed. They may elect to terminate the trust if in combination they own the entire beneficial interest but until they do so, the trustee is not bound if they purport to give directions.

•

Agency is terminated by the death of either the principal or the agent. The trust is not terminated by the trustee’s death or by the death of one or more beneficiary. Maxim = A Trust never fails for want of the trustee.

•

The trust is an equitable concept. Agency is a common law concept.

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TRUST AND CONTRACT •

A contract is an agreement made between two or more parties either supported by sufficient consideration or made under seal. The contracting parties do not become trustees or beneficiaries for each other.

•

Contract is a common law concept. The trust is an equitable concept.

Nonetheless, the benefit of the contract as distinct from the burden may be held in trust according to Lloyd’s v Harper (Book p170). The Courts are reluctant to find the intention to hold the benefit of a contract in trust. Readily inferring such an intention will blur the distinction between trust and contract.

SUMMARY The common law concepts of bailment, debt, agency and contract are recognised in equity even though they are not equitable concepts. However, the common law does not recognise the trust or any other equitable concept.

TRUST TERMS FIXED INTEREST TRUSTS, TRUST POWERS OR DISCRETIONARY TRUSTS AND MERE POWERS It is important to distinguish between the following terms:

1. Fixed Interest Trust A fixed trust or a fixed interest trust is a trust where the interests of both the various beneficiaries and the identities of the various beneficiaries themselves are specified. For example, a trust for A, B and C in equal shares is a fixed interest trust. (The trustee has no power to select beneficiaries or their interests).

2. Mere Powers (Bare or Collateral) A mere power, a bare power or power collateral is the power to appoint property that does not have to be exercised. The person in whom the power vests is not obliged to exercise it. A person who confers the power of appointment whether a mere power or a trust power is a donor. The person given the power is the donee. This concept of a donee is to be contrasted with donee’s who receive property as the result of the exercise of a power. The donee of a mere power may either be a trustee or someone who is not a trustee. If a mere power is given to someone who is not a trustee, subject to good faith, that person may elect not to exercise the power. In exercising that power, he need not consider the merits of individuals. When a mere power is given to a trustee, it remains a mere power but the trustee is bound to carefully consider whether or not the power should be exercised and should consider the merits of potential beneficiaries if he decides to exercise the power. (Note: Difference Mere Power & Trust Powers = Trust Powers bind trustees to exercise power, Mere Power trustees have a choice to exercise or not).

3. Trust Powers (Discretionary Trusts) In Re Gulbenkian’s Settlements, Reid LJ noted that the Courts use the terms trust power and discretionary trust interchangeably. A trust power or a discretionary trust must be given to a trustee (and not a non-trustee). Property is vested in the trustee and then a trust power to distribute that property is conferred on the trustee. The trustee has an obligation to exercise the trust power, as it is not a mere power. The trustee is obligated to select the beneficiaries from a class of persons designated by the donor of the power, namely the testator or the settlor as the case may be. This power is accompanied by the power to determine the amount of property to be given to the selected beneficiaries although this is not essential for a trust power. Upjohn LJ in Re Gulbenkian’s Settlement held that the Court may compel a trustee to exercise the power or be replaced.

GENERAL, SPECIAL AND HYBRID POWERS (OF APPOINTMENT) It is important to distinguish between the following terms. Powers of Appointment are further divided into general, special and hybrid powers. Testamentary powers are conferred by will. Power’s main also be conferred inter vivos by deed, namely between the living. (Eg. Have a Testamentary or Inter Vivos GP, SP, HP) 16

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Lecture Notes – Semester 031

General Powers (applies to MP only) A general power is a power to appoint property to any person or persons in the world. It is truly general as they may appoint all the property to themselves without considering the merits of other people. This power is a mere power because it is so comprehensive in scope. The conferment of the general power of appointment of property is so wide that it is often described as the conferment of title to property. However, there is one important distinction. Someone given a general power may choose not to exercise the power when they are alive or by will in which case, on their death, the general power lapses and no property will have been appointed under it (and therefore the property remains with the original owner). The person may vest the power in himself or choose someone to exercise the power. A person under a Mere Power can selfishly appoint property to themselves, therefore General Powers are never given to a trustee.

Special Powers (applies to MP or TP) A special power of appointment may be either a mere power or a trust power that exists where the power is to appoint the property to one or more persons from a class of persons designated by the donor of the power. It is sometimes a difficult question as to whether the special power is a mere power or a trust power. There is, however, a point of clarity on that issue. If the special power is followed by a gift over in default of appointment, the special power is necessarily a mere power as the donor of the power is contemplating the possibility that the power may not be exercised. (A gift over is where the property is given to someone with the power of appointment and if the special power is not exercised or is not fully exercised then the property will be solely given to another person - (eg. X appoints Y for children A,B,C in equal shares, and if they don’t then to his sister Z – If children are passed over then Z gets a gift over)). Where there is no gift over, the position is unclear. Whether the special power is a mere or trust power depends on the terms of the instrument as a whole and the circumstances surrounding the conferment of the power. In reality, it is often difficult to be certain but the Court must ultimately decide.

Hybrid Powers (TP or MP) Hybrid or intermediate powers enable the property to be appointed to anyone in the world except particular persons or classes of persons. It is a hybrid power, as it resembles both general and special powers. It resembles a general power because the class of potential beneficiaries is not defined by means of any criteria. It resembles a specific power in that the donee of the power is restricted as to whom he may appoint the property to. Re Manisty’s Settlement (Book p75) is an example of a hybrid mere power conferred inter vivos. Horan v James (Book p80-82) is an example of a hybrid trust power conferred by will, if Hybrid Power = Hybrid Trust or Mere Power then trustees are impliedly excluded unless expressly included.. Old judicial authority suggested that a hybrid power was a special power as the class of persons could be defined by way of exclusion or by way of inclusion but this view has been judicially abandoned. Where exceptions exist, ask: 1. Is the exception valid? (if not then can’t be enforced), and 2. if exception is proven to ‘not mean anything’ then is the rest of the statement valid?

THREE CERTAINTIES REQUIRED FOR THE CREATION OF AN EXPRESS TRUST • • •

An express trust is a trust created by express intention. A resulting trust or an implied trust is created by implied intention. A constructive trust is not a trust created by intention. It is imposed by a Court to avoid the consequences of unconscionable conduct, designed to prevent people from benefiting from their own unconscionable conduct.

In Knight v Knight (Book p61), an express trust was held by Lord Langdale MR to have three certainties: • Certainty of intention to create trust • Certainty of subject matter of trust, namely certainty of the trust property • Certainty of objects, namely certainty of the beneficiary or beneficiaries under the trust although this is not applicable to charitable trusts which do not have objects or human beneficiaries. If any one of the three certainties is missing, then there is no express trust. A constructive trust has certainty of objects and certainty of subject matter. There is no requirement for certainty of intention. A resulting trust has certainty of object, certainty of subject matter and certainty of implied intention. An automatic resulting trust may exist where no intention is required although this is controversial.

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LAWS313

EQUITY

Lecture Notes – Semester 031

1. CERTAINTY OF INTENTION Certainty of intention is confined to express and implied trusts. It does not extend to constructive trusts. In Lambe v Eames (Book p64), a 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’. The Court regarded those words as showing an intention not to impose any (obligation) trust. The widow took the estate as absolute beneficial owner. In Re Williams, a testator bequeathed the residue of his estate to his widow in the fullest confidence that she would carry out his wishes in the following particulars. The English Court of Appeal held that the words were not imperative and the widow that did not take the property as trustee. An open and purported declaration of trust that can be shown not to have been genuine will mean that no trust has been created. Thus, the declaration of trust must be manifested and genuine and mere words purporting to create a trust are insufficient if those words are not genuine. In Commissioner of Stamp Duties (Queensland) v Jolliffe (rare & unique facts), Jolliffe could only get interest for one bank account. He purported to set up a trust account for the benefit of his wife for the sole purpose of getting interest payable on more than one account. There was an apparent declaration of trust for this purpose. His wife died and the Commissioner relied on the declaration of trust to say that as the wife had died with money in the account, she had to pay succession duties. Jolliffe who was the administrator of his wife’s deceased estate, namely in his personal capacity as his deceased wife's personal representative, argued (ie. ‘I lied and never intended to be trustee’) that no duty was payable as there was no trust as he had never intended to create a trust in favour of his wife. Knox CJ and Gavan-Duffy J held 2:1 that no trust had been created, as there was no intention to create a trust despite the apparent declaration of a trust. A trust cannot be created contrary to the real intention of the person alleged to have created it. Isaacs J dissented.

Precatory Trusts (now defunct) There was a time when words of precation (has not reoccurred since Re Williams above), namely earnest request, were too easily construed in context to be imperative words. The doctrine of precatory trusts prescribes that words which literally mean express request or hope to the voluntary transferee of property may, when construed by reference to their context, denote imperative words, so as to disclose an intention to create a trust in which the voluntary transferee will be the trustee. This is conceptually unsatisfactory and while a precatory trust may exist it is not of practical importance today. Mussoorie Bank Ltd v Raynor (Book p63) identified the precatory trust.

2. CERTAINTY OF SUBJECT MATTER The certainty of subject matter requirement applies to all types of trusts. In Palmer v Simonds (Book p66), it was held that a purported trust for the ‘bulk of my estate’ did not have sufficient certainty to constitute trust property. The trust failed for uncertainty of subject matter. (But it did have certainty of intention) In Sprange v Barnard, a testatrix gave property to her widower ‘for his sole use’ provided the remainder is distributed to certain persons. The phrase remainder was not certain, therefore no trust was created. In Hunter v Moss (Book p66) court was very lenient, the defendant owned 950 identical shares except for the serial numbers out of a possible 1000 shares. He declared himself a trustee by way of gift of 5% of the issued share capital of the company, namely 50 shares in favour of the plaintiff. The defendant later changed his mind but the Court of Appeal said that as the shares were identical, it did not matter which ones where held in trust. The trust did not fail for uncertainty of subject matter. Although this decision is common sense, it is conceptually flawed as the 50 shares were not identified by serial numbers. Thus, there can be no trust without trust property. However, there is a trend in the US whereby the term constructive trust is not used as a term that requires the existence of trust property.

3. CERTAINTY OF OBJECTS In the case of non-charitable trusts, namely trusts for human beneficiaries, there must be certainty of objects. This was made clear in Morice v Bishop of Durham – List test applies to fixed interest trusts (Book p68) - A testatrix gave the residue of her estate to ‘such objects of benevolence and liberality, as the Bishop in his discretion shall most approve of’. The disposition was held void for uncertainty of objects. Benevolence and liberality are not technical legal terms.

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LAWS313 EQUITY Lecture Notes – Semester 031 Now, section 104 of the Trusts Act 1973 (Queensland) would allow the actual wording of the gift to be severed (and can be enforced). Note: s104 does not apply to individuals – ie. can severe non-charitable purposes (not individuals) from charitable purposes and can enforce the charitable purposes.

Tests There are two competing tests for ascertaining certainty of objects applying to mere and trusts powers and fixed trusts. • The List Certainty Test (Fixed Trusts – but see West v Weston (NSW)) as ‘un/equal’ division requires all members to be known • The Criterion Certainty Test (Mere Powers and Trust Powers)

1. The List Test for Certainty of Objects This strict test requires that every member of a class of beneficiaries must be identifiable before there is the requisite certainty. It requires the trustee to compile a complete list of beneficiaries.

2. The Criterion Test for Certainty of Objects (less stringent) Lord Wilberforce in McPhail v Doulton - This less strict test is satisfied if the trustees can say with certainty who is and who is not a member of the class. There will be certain cases where it requires the compilation of a complete list of beneficiaries. Sometimes called the ‘in/out’ or ‘yes/no’ test. Reid LJ and Upjohn LJ held in Re Gulbenkian’s Settlements that the time to apply the test is the time that the instrument takes effect, namely when the deed is executed or when the testator dies. In that case, the Court discussed the certainty tests for mere powers. A trust was created for three persons. It was impossible to compile a complete list of persons in the class. The House of Lords held that with respect to a mere power, the criterion certainty test only need be met but it was not sufficient for the trustee only to be able to identify one person as in the class. But see:In McPhail v Doulton (Book p72), the House of Lords held that the criterion certainty test not only applies to mere powers but also to trust powers, overruling the Court of Appeal decision in IRC v Broadway Cottages Trust (Book p73). Lord Wilberforce held that the criterion test for certainty of objects is the same for mere and trust powers but there are important differences between a trust power and a mere power. The Court will not compel a trustee to exercise a mere power but the Court may execute a trust power if the trustees do not do so. A Court may execute a trust power by: • Appointing a new trustee, • Requesting that a scheme of distribution be prepared or • Directing the existing trustees. In the case of a mere power, the survey of the range of objects by the donee need not be as wide as in the case of the donee of a trust power. This is acceptable but not convincing. Wilberforce LJ made three additional points (3 types of uncertainty): • Linguistic or semantic uncertainty is fatal rendering the gift void. • Evidential uncertainty as to the existence or whereabouts of members of the class need not make a gift void as the trustees could apply to a Court for directions to remove the uncertainty. This point has been subsequently misunderstood. • If the wording is clear but the class is so hopelessly large that the trust is administratively unworkable, the test is not satisfied. (eg ‘all residents of greater london’) – Not valid according to Dennis It is suggested that this view is incorrect or there could be no hybrid power concerning everyone in the world except particular persons. In Horan v James, (a Hybrid Trust case) Mahoney J appeared to agree with Wilberforce LJ. Certainty can be gained by a ‘Special Dictionary Meaning’. Re Gulbenkian’s Settlements ‘my old friends’ prima facie is void, but if a Special Dictionary Meaning (ie. proof of what that meant to him) can be found – eg. ‘a group of my previous class mates’ then it becomes certain.

Life of a Trust

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LAWS313 EQUITY Lecture Notes – Semester 031 The Preparatory Period of a trust was = (CL) life or lives in being + 21yrs. Now extended by a Statutory provision S209 PLA authorises testator to specify a period up to 80 years (except charitable trusts which are indefinite)

Certainty of objects for fixed trusts In West v Weston (NOT a QLD Case, therefore not bound. A widely condemned and controversial case), throws doubt on the list test for Fixed Interest Trusts, (‘All descendants of living Grandparents at death = small class) clause four of a will created a trust to divide property equally amongst certain people. All other authority suggests that the test would have been the list certainty test, as one cannot make an equal division amongst a class unless all members are known. Young J of the Supreme Court of NSW held that as the testator had no statutory next of kin and the money would have gone to the crown as bona vacantia or ownerless property, the trust did not fail. Young J said that in the case of a fixed trust, the test for certainty of objects (even for fixed trusts) is satisfied if within a reasonable time after the gift comes into effect, the Court can be satisfied on the balance of probabilities that a substantial majority of the beneficiaries have been ascertained and that no reasonable inquiry could be made to improve the situation (ie. to identify more of them). Therefore the larger the ‘class’ the harder this is to apply. This decision is contrary to authority and academic opinion. The position in Queensland is now uncertainty although this decision is inconsistent with the hybrid power recognised in Horan v James. Young J was improperly influenced by the consequences of his decision. According to Dennis, West v Weston has 3 defects in the judgment of Young J: 1. time to apply the trust was a reasonable time after and not the time of effect (goes against Re Gulbenkian’s Settlements) 2. Property can be distributed to a smaller class than that directed by the testator (this disobeys the testator) 3. Distribute property to a substantial majority of the class (what is a substantial majority of an unknown number?)

Application of the Criterion Certainty Test to ‘relatives’ In Re Baden’s Deed Trusts (No 2) (Book p76), the House of Lords held that the criterion test applies to trust powers. The issue was whether the term ‘relatives’ satisfies the criterion certainty test. In application of the test, the English Court of Appeal looked at the term’s dependants and relatives. Sachs J held that dependants are those people who depend on another for the ordinary necessities of life. The majority held that the term relative meant ‘legal’ descendants from a common ancestor. Section 3 of the Status of Children Act 1978 (Queensland) states that the construction of an instrument must not discriminate against illegitimate children. The word legal would have to be deleted. Therefore accounting for children out of wedlock an issue for traceability through ‘births, deaths, marriages’. Counsel for the executors said that the test is whether a person can be said with certainty to be a member of the class. It was argued that one could say with certainty that a large number of persons were members of the class but could not say with certainty that another group were not members. This argument is conceptually good but the Court unanimously rejected it. Sachs LJ held that the term relatives is conceptually certain. If someone could not prove that he was a relative, he was outside the class (Book p78). He argued that evidential uncertainty is not fatal (but conceptual uncertainty could be), misconstruing the comments of Wilberforce J (Note this changes the McPhail v Doulton test as it waters down certainty as ‘not proved within the class’ does not definitely mean they are outside the class). Megaw LJ held that the executors argument must be wrong as if it was correct, the criterion test would require the compilation of a complete list of potential beneficiaries to satisfy the test. This is not convincing as counsel’s argument exposed a contradiction. In some situations, the two tests are identical, for example with respect to relatives. He also said that one needs to be able to say with certainty that a substantial number of persons (relatives) were members of the class even though one could not say that other persons were not members of the class Therefore larger classes of relatives like ‘12th cousins’ is difficult to apply (Note this changes the McPhail v Doulton test – Megaw is more lenient as some members don’t have to prove certainty). Stamp LJ agreed with counsel for the executor’s except that he had a different meaning for the term relatives, namely – ‘must construe as nearest blood relations’. (eg. 9th cousins hard to construe as nearest blood relations) Although the trust was upheld, there is no ratio decidendi and so this case is not useful, as no legal principle is extractable from the decision. Justice Stamp said that relatives meant ‘blood relatives’ + have to satisfy list and criterion tests. 20

LAWS313 EQUITY Lecture Notes – Semester 031 In Re Manisty’s Settlement, Templeman J upheld the hybrid power created inter vivos applying the criterion test. The hybrid power is a special power. This view is not accepted in Australia.

Abolition in Queensland of the Rule Against the Delegation of Testamentary Power General Power can be given by Will – Tatham v Huxtable Special power – valid by Will if complete list – Horan v James In Queensland, section 64 of the Succession Act 1981 (Queensland) (p14 materials) abolished the rule against the delegation of testamentary power to the extent if a MP or TP is valid when conferred inter vivos it will also be valid if conferred by Will. (Therefore need to ensure power is valid inter vivos, then s64 comes in to extend the reasoning in McPhail and Re Gulbenkian’s to testamentary trusts) So what does s64 really mean? In QLD if MP or TP is conferred by Will and that power would have been valid inter vivos then it would also be valid by testamentary (ie. you are not delegating a testamentary power as you can’t delegate a Will making authority to anyone) Note: Valid inter vivos for HTP = beneficiaries under will selected by testator not executor This rule that said that if a trust was created by will, the trust would only be regarded as valid if the list certainty test was satisfied. In England, Hopman LJ held in Re Beatty’s Will Trusts (Book p80), that there was no longer a rule against the delegation of testamentary power. This was upheld in Horan where a hybrid power created by will, applying Tatham v Huxtable was struck down by the rule for failing to satisfy the list test. In Queensland, in the case of a testamentary trust or power, the power or trust is valid if the criteria test is satisfied. Under section 64, the test is the same for powers or trusts created by will or inter vivos. The position in NSW and Queensland is different with respect to testamentary trusts or powers and the question of certainty of objects. See Gregory v Hudson 1998 45 NSW 30- doubted Horan, CoA avoided the issue of disposition of money HP created inter vivos. *** IN QLD – Horan v James – A Hybrid Trust Power created inter vivos is valid + then apply s64 which means it is also valid Testamentary

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LAWS313

EQUITY

Lecture Notes – Semester 031

WEEK 3 THE CONSTITUTION OR CREATION OF VOLUNTARY TRUSTS A voluntary trust is a trust created without the giving of valuable consideration to the settlor (or testator) by the beneficiaries of the trust. A trust can be created voluntarily or for value. Once the trust is completely constituted, the beneficiaries under the trust may enforce it even though no consideration has been given for the creation of the trust. It is necessary to be careful of the equitable maxim that ‘equity does not assist a volunteer.’ This only refers to the fact that equity will not assist a volunteer to complete an incomplete trust or gift. Once the gift is complete, equity will assist the volunteer – once complete, the donee is no longer a volunteer. A voluntary trust is to be contrasted with a trust created by the giving of valuable consideration, for example, Chang v Registrar of Titles (Book p482). Where there is a specifically enforceable contract for the sale of land, there is a constructive trust, which arises upon the contract being entered into. That constructive trust is a conditional constructive trust. It is subject to defeasance by a condition subsequent, namely the failure of the intended transferee or purchaser to pay the intending transferor or vendor the purchase price at the agreed time. If the purchaser fails to pay, the condition subsequent occurs and the constructive trust is terminated. If payment is made at the agreed time, the condition subsequent becomes impossible. The constructive trust ceases to be conditional and becomes a constructive trust simpliciter, namely a constructive trust no longer subject to condition. A constructive trust arising under a specifically enforceable contract for the sale of land is a constructive trust sub modo (under condition) or a constructive trust under condition.

VOLUNTARY TRUSTS Valuable consideration in equity is not the same as sufficient consideration under the law of contract. Equity, according to Windeyer J in Norman v Federal Commissioner of Taxation (Book p154), equity will not specifically enforce a contract under seal with no valuable consideration, namely a mere voluntary promise. The common law would say a contract made under seal is valid and one can dispense with the need for consideration. Paul v Paul assumed that the beneficiary under a voluntary trust may enforce that trust. (ie. has given no consideration for the creation) Where the trust is voluntary, the settlor, according to Mallott v Wilson, cannot revoke the trust once created unless a power of revocation is reserved by the settlor. In Middleton v Pollock, it was held that a trust could be constituted without the beneficiaries thereunder being informed of its existence. In Mallott v Wilson, the settlor transferred land to a trustee to be held in trust. The trustee retransferred the land to the settlor who purported to revoke the trust despite not having reserved a power of revocation when he created the trust. It was held that the trust was in existence and had not been terminated by the retransfer. The settlor received the land back as trustee. It was also held that a trust never fails for want of a trustee. Once a trust is created, it will not fail because the trustee dies or disclaims the trusteeship.

STEPS REQUIRED TO BE TAKEN TO COMPLETE A GIFT IN EQUITY (IE TO COMPLETE A VOLUNTARY TRUST) In Milroy v Lord, Turner LJ declared that there is no equity to perfect an imperfect gift. Making a gift in equity is the same as creating a voluntary trust. 2 Propositions: (1) There is no obligation to make a gift or to complete the steps required to make a gift (ie. if the steps are not completed, there will be no gift). (2) One cannot compel someone to make or complete a gift by completing the remaining steps (ie. if incomplete, donee cannot make donor complete the steps (No obligation))

A settlor must do everything that only he can do. The remaining acts may be performed by another or by others. In Milroy v Lord, Medley purported to transfer 50 bank shares to Lord to be held in trust for Milroy. Lord, the intended trustee, had agreed with Medley that he would hold those 50 shares on trust for Milroy. Medley, by deed, purported to transfer those 50 shares to Lord to be held in trust by him for Milroy as agreed. It was held that the trust was not completely constituted, as the transfer to Lord was ineffectual. There can be no trust without trust property. 22

LAWS313 EQUITY Lecture Notes – Semester 031 Here, there was no trust property and no trust. Lord had no property to hold in trust. The bank was a company and the bank shares were therefore company shares. The bank had its own constitution and the transfer had failed to comply with that company constitution, as Medley had not executed a memorandum of transfer to be registered with the company. Milroy was a mere volunteer. Milroy did not have the beneficial ownership of the shares. Milroy could not compel Medley to complete the gift. The bank transfer had failed to comply with the company constitution. M did not have beneficial ownership of the shares. Medley’s intention was to make Lord trustee. It was not his intention to make himself trustee. The trust failed and Milroy missed out on the Bank Shares. However, dividends from the shares were paid to Milroy and were used to buy other shares. It was held that with respect to the dividends, a complete gift had been made to Milroy because the dividends were money handed over to Milroy and there was a complete gift of those dividends. (Anning v Anning (p164) HCA confirms transfer of dividends valid) Turner LJ held that there is no equity to perfect an imperfect gift. To constitute voluntary settlement, namely to make a gift, there are three methods: •

1. The settlor could transfer title (ie. assign) to the property to the donee, a complete gift. (No Trust)

•

2. The settlor could transfer title to the property to a trustee for the purposes of the trust, namely transfer the property in trust for the donee. (Trust created)

•

3. The settlor could declare himself trustee of the property for the purposes of the settlement. Declaration of Trust. (Trust created)

Under method one, no trust is created. Trusts are created using methods two and three. Under method two, the property is completely transferred to the trustee who holds it in trust whereas under method three, the settlor retains title and holds it in trust for the beneficiary. ** Important: If the settlor ‘intended’ to use a particular method, and the gift is incomplete under that method, the gift is invalid and cannot be upheld under any other method. This is not to say that if one method fails, it cannot be upheld under another method. If method one is intended, a trust cannot be upheld under method two. (Therefore ‘intention’ is the discriminator as to whether or not a gift can be held valid under another method) ** Note: 1st Method must be ‘legally possible’ to deny a party with ‘intention’ to be upheld under a different method. Ie. If 1st method ‘impossible’ then can be upheld under another method. To transfer title to pure personalty, in this case a personal chattel, by way of gift, there are two methods: •

1. Deliver the personal chattel to the intended donee with the intention of making a gift thereto and thereof.

•

2. Execute and deliver a deed of gift in favour of the donee.

Method one was purportedly used in Milroy v Lord. The other shares belonged to Milroy. Cochrane v Moore (Book p164) gave implicit approval of the two types of transfer of title of personal chattels by way of gift. This case was not cited in Anning v Anning (Book p164) but the principles that it espouses were approved. In Jones v Lock 19th Century, the father and payee received a cheque for 900 pounds and gave it to his baby son saying ‘Look you here, I give this to baby.’ When the executor of his estate cashed the cheque, it was argued that a valid trust in favour of the son had been created and that the father had made a gift of the cheque. Cransworth LJ held that it was not intended to transfer title (ie. no gift), as the cheque had not been endorsed. There was no intention to declare a trust; the action was merely symbolic. It was arguably a declaration of trust but the Court refused to rely on loose words. Today, an Australian Court would say that there was a declaration of trust in favour of the son. The problem is that when the donor uses equivocal words, it is difficult to determine whether there has been a transfer of title or the declaration of a trust intended by the donee. In Richards v Delbridge (a case of the wrong method of making a gift was used), a trust was held not to have been created. Delbridge intended to transfer to Richards the lease on his business premises and the stock and trade of that business. However, he used the wrong method. A deed was not used. He wrote a ‘memorandum’ (ie. ‘I am transferring lease and stick to my Grandson’) on the deed of lease and therefore, the lease was not transferred (as he should have executed a deed of transfer). There was also no delivery of the stock and trade as chattels so there was no gift of that stock and trade. It was argued that Delbridge’s action was a declaration of trust. Sir George Jessel MR applied Milroy v Lord and said that because Delbridge had intended to transfer the assets to Richards (Method 1 23

LAWS313 EQUITY Lecture Notes – Semester 031 from Milroy), no trust contrary to this could have been intended (Therefore the gift is invalid and cannot be upheld under any other method. The intended method failed and Delbridge had not intended to declare himself trustee. He need not have said that ‘I declare myself trustee’ but he must do something equivocal to it by using expressions with the same meaning. It is often difficult to decide whether the intending donor has intended to declare himself trustee or to make a transfer or assignment. A liberal approach was taken in Paul v Constance (Book p65). Constance and Paul lived together as de facto husband and wife. Before Constance’s death, he had received compensation, which was paid into a bank account opened solely in his name. Paul was given written authority to make withdrawals from the money in the account and it was treated by them as jointly owned. On several occasions, Constance had said to Paul that the ‘Money in the account is as much yours as it is mine.’ Constance died and the administrator of his estate said that the money belong to the estate as the account was solely opened by Constance. Paul said that the money was jointly owned. Scarman LJ admitted that it was a borderline case of a declaration of trust and although he held that a trust existed, he could not decide when the trust was created. It is likely that the trust was created on the first occasion that the account was treated as jointly owned. It was held that the money in the account was held under a tenancy in common and not a joint tenancy. Paul was entitled to half the money in the account.

GIFTS OF LAND UNDER THE TORRENS SYSTEM In Corin v Patton HCA (Book p142), the definitive case, Mr and Mrs Patton were registered as joint tenants of land in NSW. Mrs Patton was terminally ill. Mrs Patton did not want her husband to have the right of survivorship when she died. The correct method to achieve this would have been for Mrs Patton to declare herself trustee of her interest in writing for her children in equal shares. If she had done so, the joint tenancy and the right of survivorship would have been dissolved. The children would have beneficial interests. Instead, the elaborate procedure that she undertook was ineffectual. Mr Patton succeeded to the land absolutely by the right of survivorship. A complicating factor was that it was unclear whether the solicitor who visited Mrs Patton was her solicitor, namely whether he acted as her agent. Mrs Patton planned to sever the joint tenancy. She planned to transfer her interest in the land to Corin (her Brother). Corin would hold that interest in the land on trust for Mrs Patton. Her will would then provide for the estate to be divided equally amongst her children. Pursuant to this end, three documents were executed: •

1. A memorandum of transfer (held by Solicitor) to Corin which was not made for value and was subject to a bank mortgage. (NO CT delivered)

•

2. Corin made a declaration that the interest to be taken by him was held on trust for Mrs Patton. (Declaration of Trust over ‘interest’ received for Mrs Patton)

•

3. Mrs Patton left her estate to her children in equal shares (Combined = ½ property on trust for her children)

Corin and Mr Patton lodged caveats on the title claiming an interest in the land and both took action to remove each others caveat. In order to decide whose caveat should be removed, one had to decide whether the trust purportedly established was effective or not. If the requirements for making a gift of Torrens title land had been satisfied, Mrs Patton had alienated her interest. She would have severed the joint tenancy and Mr Patton would lose. A majority of the High Court held that there had been no effective gift in favour of Corin. There were four judgments, Mason CJ and McHugh J delivered a joint judgment. Mason CJ and McHugh J held that the view of Dixon J in Brunker v Perpetual Trustee Co Ltd (Book p142) that if a registrable memorandum of transfer is given to the donee, the donee would acquire a statutory right to be registered as against the donor but the donee would not acquire any equitable interest in the land is wrong. They concluded that Two Propositions (p143): (1) if an intending donor of property had done everything necessary for him to do to affect the transfer of legal title, equity recognises that the gift is complete. So long as the donee has been equipped by the donor to obtain legal ownership of the property, the gift would be complete in equity. This means that pending the vesting of the legal title in the donee, the donor hold that legal title as a constructive trustee for the donee. This finding was made in Re Rose. The decision in Corin v Patton modifies Milroy v Lord where it was said that in order to complete a gift in equity, all steps that need to be taken must be taken otherwise there is no gift. Corin v Patton says that all that needs to be done is for the intending donor to do all those things that only he can do.

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LAWS313 EQUITY Lecture Notes – Semester 031 Mason CJ and McHugh J then dealt with the situation of (2) completing a gift of Torrens title land. Whether or not the production of the certificate of title is necessary to obtain registration of a transfer under the Torrens system, Test: a gift is not complete unless the (a) intending donor authorises the production of the certificate of title for the purposes of registration. This means that if the intending donor has authorised the production of the certificate of title, that (b) coupled with the giving of ownership of the instrument of transfer (ie. Memo of Transfer), is sufficient. Summary: A gift of Torrens title land is complete in equity if the intending donor gives to the intended donee the ownership of a memorandum or instrument of transfer and the authority to use the certificate of title to register that memorandum or instrument of transfer. When that is done, the donor has done all that only he can do and need do nothing more. ** Important: •

IT have to confer ‘ownership. Cope v Keene HCA which recognised that one of the conditions is that ownership of the memorandum of transfer be given to the donee

•

CT have to ‘authorise use’

Therefore: if IT given to donee’s Solicitor, then this normally = ownership. But if with instructions to ‘deliver at earliest convenience’ and ‘revoked’ (Vandervell) then can argue no ownership. If given to donor’s Solicitor then no ownership. If given to Agent of donor, then attorned to donee, and donee becomes legal owner of IT. Similarly, if CT given to donee’s Solicitor then = authorised – but if with ‘hold on my behalf’ then donee’s Solicitor becomes a bailee for the donor and CT not authorised. If given to Agent of donor, then attorned to donee, and donee becomes legal owner of CT. In Corin v Patton, Mrs Patton did not give the mortgagee bank the authority to release the certificate of title to Corin to enable him to register the memorandum of transfer. This was fatal to Corin’s claim that a gift had been made to him as the Bank held the CT and Mrs Patton did not tell the bank to release & no authorisation given to Corin. It is uncertain whether even if the other requirements for the completion of a gift of Torrens title land had been fulfilled, namely even if the certificate of title had been given, the gift was complete as it was not clear whether Corin had ownership of the memorandum of transfer as it was not clear whether the solicitor who took the memorandum of transfer from Mrs Patton was acting on her behalf or on behalf of Mr Corin. If the solicitor had been acting on behalf of Mrs Patton, Corin would not even have received ownership of the memorandum of transfer. In Queensland, a memorandum of transfer is called an instrument of transfer under section 60(1) of the Land Title Act. Section 62(1) provides that upon registration of the instrument of transfer, all the rights, powers, privileges and liabilities of the transferor in relation to the lot vest in the transferee. Sections 181 and 182 are to similar effect. Section 42(1) provides that the registrar must issue a certificate of title if the registered owner requests in writing that he do so. The mortgagee’s consent is also required if the lot is subject to a registered mortgage. Brennan J was the only judge who continued to believe in the view expressed by Dixon J in Brunker v Perpetual Trustee Co Ltd that if a registrable memorandum of transfer is given to the donee, the donee would acquire a statutory right to be registered as against the donor but the donee would not acquire any equitable interest in the land.

Circularity of Obligation (legal impossibility) Deane J held that even if the memorandum of transfer is not registered, it is no help to Corin, as he would still hold it as trustee for Mrs Patton. He agreed with Mason CJ and McHugh J and held that no gift had been intended to be made to Corin. (Under Document 2) He was intended to take the property as trustee only. Deane J held that the arrangement between Corin and Mrs Patton was that Corin would take the property as trustee. It would stand the intended relation on its head to hold that Mrs Patton was trustee for Corin. For Corin to show that the gift to him was complete, he would have to show that Mrs Patton held her interest on constructive trust for him Deane J said this ‘circularity of obligation’ is impossible (ie. no trust at all as property remained with P as can’t have a circular obligation). The arrangement was that he was trustee for her. Corin’s position could not be better than the position he would be in had the memorandum of transfer been registered. No gift was made, as Mrs Patton did not intend to make a gift to Corin. He was intended to be trustee only. Mason CJ and McHugh J cited Cope v Keene HCA which recognised that one of the conditions is that ownership of the memorandum of transfer be given to the donee 25

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Lecture Notes – Semester 031

If impossible – may be construed as a release ** If Circularity makes it impossible then can be construed as a release ( see release p 26). See Re-Schar (Book p 158) ‘intention must have been a release if circularity makes it impossible’ If an intending donor of property has done everything, which it is necessary for him to have done to effect a transfer of legal title, then equity will recognise the gift. Thus, in order to complete such a gift of Torrens title land, the intending donor must give to the intended donee the ownership of the instrument of transfer as well as enable the intended donee to use the certificate of title for the purpose of registering that instrument. Costin v Costin NSW introduces uncertainty. Father & Son (Joint Tenants) – Father wanted to gift memorandum of transfer to other son Nicolas (donee). The issue was whether the CT could be used by Nicolas. The father gave directions to the Solicitor to produce the CT for Registration, therefore applying Corin the gift would be complete as father did everything he could have done. However NSW CoA: It is not enough to complete a gift of ownership of Torrens title land for ownership of the memorandum of transfer to be given to the intended donee and the custodian of the certificate of title to be instructed to produce it. No actual production of CT, therefore gift failed = contrary to Corin. This is impossible to reconcile with Corin v Patton and it is inconsistent with the view that once the donor does all that he needs to do, then the gift is complete in equity, and there is no mention of actual production of CT required. Until the certificate of title is actually produced for the purposes of registration, the instruction given by the intending donor to enable the memorandum of transfer to be registered could be revoked. The gift could not be said to be complete. Costin v Costin is wrong in asserting that the gift is not complete despite authorisation of the production of the certificate of title. Does NOT APPLY where the donee has legal ownership of the CT. In Motor Auction Pty Ltd v John Joyce Wholesale Cars Pty Ltd – Confusing (Book p148), Santow J held that the purported gift of Torrens title land failed because the intending donor had not directed the mortgagee to release the certificate of title for the purposes of registration of the memorandum of transfer. Obiter dicta comments were made to the effect that it may not be enough, even with ownership of the memorandum of transfer and it if directions are given to release the certificate of title. The direction must be acted upon and the certificate of title must actually be delivered before the gift is complete. The Court was, however, bound by Costin v Costin. In Queensland, section 200 of the Property Law Act is inconsistent with Costin v Costin and would overcome Costin. Section 200 is a provision dealing with the completion of gifts in equity in general. It provides that a voluntary assignment of property shall be effective in equity and complete when the assignor has done everything necessary to be done by him to transfer the property to the assignee provided anything remaining to be done may be done without intervention or assistance of assignor. There is an issue as to whether authorisation of the production of the certificate of title and ownership of the memorandum of transfer is sufficient to complete the gift in equity or whether there must be actual production of the certificate of title and ownership of the instrument of transfer.

What is Present Property? (Note: Contingent Interest = eg ‘X receives a fixed gift at age 21’, Mere Expectancy = eg ‘If I win lotto I will give all winnings to C’ Voluntary trusts concern gifts of present property, as one cannot make an immediate gift of future property, namely property that is not yet existing. Only gifts of present property can be made. What, then, is meant by the term is present property? In Williams v Commissioner of Inland Revenue, Williams had a life interest in a trust which entitled him to all the income from the trust during his lifetime. By deed of gift, he purported to assign for a future period of four years the first 500 pounds of the income from each one of those four years (ie future income). The New Zealand Court of Appeal held that the assignment was ineffectual, the income remained Williams’ property and he had to pay income tax. The assignment was ineffectual because the income for a future period of four years was future property. Future property could not be immediately assigned voluntarily, namely without valuable consideration. One cannot have a gift of future property, as there may have been no income. Williams’ right to the income was present property and he could assign the whole of that right to that interest or a part thereof but he did not do that either. Williams’ purported to assign part of his future income that was a mere expectancy. North and Turner JJ made it clear that one cannot assign a mere expectancy voluntarily. The right to income can be immediately assigned by way of gift , The future income cannot be assigned immediately as it is a mere expectancy and has no existence as property.

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LAWS313 EQUITY Lecture Notes – Semester 031 In a loose sense, it is sometimes said, as noted by Windeyer J Norman v Federal Commissioner of Taxation, that a mere expectancy, namely future property, can be assigned for value as the equitable title to the property vests in the assignee as soon as it materialises. (ie. If assignees had of given valuable consideration, then as soon as the income came into existence, then W would have had title to income as trustee for the assignees) This statement is not literally true. According to Tailby v Official Receiver (P159) and Re Lind (p159), this type of vesting is not based on the doctrine of specific performance. In Shepherd v Federal Commissioner of Taxation (Book p164), Shepherd owned a patent with respect to certain goods. He gave a licence to a third party to manufacture and sell those goods in exchange for royalty payments to be made to him. A licence is a contractual right, namely a chose in action against that third party for the payment of royalty’s. Shepherd assigned 90% of his contractual right to income for three years. The High Court, per Barwick CJ and Kitto J, held that Shepherd could not be taxed with respect to that part of the right (as right is present property) that he had assigned. The income from the 90% of the right that he assigned was no longer his income. When the income materialised, it automatically vested in the assignee and not in Shepherd. It is important not to confuse Shepherd’s right to the income, which is present property, and the income itself which is a mere expectancy. Shepherd could not assign the income but he could assign part of his right to that income. In dissent, Owens J said that Shepherd had purported to assign part of his future income. Kitto J: ‘The tree not the fruit existed at the time of assignment’ In Norman v Federal Commissioner of Taxation (Book p161), it was held by the High Court that a voluntary assignment of future dividends payable on company shares was ineffectual, as those dividends may never be declared. Therefore, the dividends were future property and the assignment was ineffectual. This only applies to voluntary assignments, namely assignments made without value. The Court also held that future interest on a loan repayable without notice is future property. If the assignment had been made for value (said loosely), the position would be fundamentally different.

ASSIGNMENTS OF CHOSES IN ACTION (CL CIA -> Credit/Debt balance): ½ of remaining debt = part CL CIA, entire remaining debt = entire CL CIA. (Eq CIA -> Interest of a beneficiary under a trust, right of a beneficiary under a will for an Unadministered estate, the right of a person to trace his property in equity, right of a beneficiary under a will) Note: FCT v Everett - In Australia the term ‘Legal CIA’ includes Eq CIA. Therefore to remove doubt call true ‘Legal CIA’ = CL CIA. (Book p121-123)

S199 PLA – Assigning CIA – does NOT apply to Decl of Trust. Section 199 Property Law Act allows legal and equitable choses in action to be assigned provided that: •

1. There is an absolute assignment of the chose in action, not by way of charge only. In Tancerd v Delagoa Bay and East Africa Railway, it was held that an assignment by way of mortgage is regarded as an absolute assignment.

•

2. The absolute assignment must be of the entire chose in action. According to Re Steel Wing Co Ltd (Book p156, 157), part of a common law or equitable chose in action cannot be assigned under section 199. Section 199 is not saying that a part of a chose in action cannot be assigned. If one wishes to assign an entire chose in action, at law, section 199 must be used. Section 199 cannot be used to assign a part of a chose in action. Section 199 is not saying that a part of a common law chose in action cannot be assigned. It says that a part of a common law or an equitable chose in action cannot be assigned under section 199.

•

3. The absolute assignment must be made in writing signed by the assignor.

•

4. Express written notice of the assignment must be given to the person liable (Creditor or other person liable) under the chose in action. Either the assignor or the assignee may give such written notice. Note: HC says s199 ‘may’ apply and not ‘must’ apply – therefore if assignment (eg. Of loan repayment) satisfies s11(1)(c), then complete & s199 would be superfluous.

Note: s200 PLA includes Choses in action but is not confined to Choses in action. The assignment takes effect from the date of the giving of notice. In Grey v Australian Motorists and General Insurance Co Pty Ltd (Book p154), it was held that notice need not be given to the assignee. In Brice v Bannister

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LAWS313 EQUITY Lecture Notes – Semester 031 (p154), it was held that when the debtor receives notice of the assignment, he must regard the assignee as the new creditor. If he pays the assignor after receiving written notice, the assignee may demand payment from the debtor. 3 very important points: In (1) Olsson v Dyson (Book p153), it was held that an entire common law chose in action cannot be orally assigned without valuable consideration either at law or in equity. According to Windeyer J in Norman v Federal Commissioner of Taxation (Book p157) and Kitto J in Shepherd v Federal Commissioner of Taxation (Book p157), (2) part of a common law chose in action may be assigned orally without valuable consideration in equity. (3) An assignment made under section 199 takes effect subject to equities having priority over the assignee’s right. Someone taking a common law chose in action for value under section 199 cannot plead bona fide purchaser for value of the legal estate without notice of the prior inconsistent equitable interest. In Federal Commissioner of Taxation v Everrett, the High Court confused matters by observing in obiter dicta remarks that section 199 applied even to the assignment of an equitable chose in action as well as CL equitable choses in action. An equitable chose in action could have been assigned before section 199 was enacted. Section 199 is only one method of assigning an equitable chose in action. Entire common law choses in action must be assigned under section 199 but may be assigned other ways. According to Colonial Bank v Whinney, although company shares are choses in action, they are not assignable under section 199. Thus, an entire common law chose in action must be assigned under section 199. An entire equitable chose in action can be assigned under section 199 or outside section 199. Parts of common law and equitable choses in action can only be assigned in equity. A gift of part of a common law chose in action has effect as the assignment of an equitable chose in action.

GIFT OF SHARES IN A COMPANY The position is different with respect to company shares: •

Section 1071(B)(2) of the Corporations Act 2001 provides that notwithstanding anything in its constitution, a company shall not register a transfer unless a proper instrument of transfer has been delivered to the company.

•

Section 1070(A)(1) provides that subject to the company’s constitution, equitable interests in shares may be created, dealt with and enforced in the same was as other personal property. Section 1070(3)(b) – equitable interests in shares may be created / dealt with and enforced as with other personal property.

A GIFT MADE BY WAY OF RELEASE TO TRUSTEE Note: ‘I am giving you the other half of my interest’ = a release.

Schedule 6 - Definition of ‘Disposition’ Section 3 of the Property Law Act schedule 6: defines disposition inclusively but not exhaustively as a conveyance (conveyance includes an assignment), a vesting instrument, a declaration of trust, a disclaimer, a release and every other assurance of property by instrument except by will and also a release, devise, bequest or appointment of property contained in a will. Therefore release = disposition for purposes of section 11, see Week 4 page 30.

A Release Release to a (new) trustee. ‘I am now giving you’ my one half of the sub-beneficial interest in the credit balance, to be held by you in equal shares for A, B and C respectively. = Release on terms. ‘I am now giving you my interest in the vase’ = Release. Crichton v Crichton – A release of a legal interest must be made by deed. (at 563) A beneficiary under a trust may release his interest by way of gift according to Crichton v Crichton. Such a release would have to be evidenced in writing because it is a disposition (release = disposition, see previous) of an existing equitable interest under section 11(1)(c) of the Property Law Act. A release is not technically an assignment because the pre-existing beneficiary is not assigning his equitable interest to the new beneficiaries. The initial beneficiary is conferring that interest in the new beneficiaries via the trustees. Thus, the direction given in Grey v Inland Revenue Commissioner’s is not technically an assignment. A release is 28

LAWS313 EQUITY Lecture Notes – Semester 031 really an oral direction to the trustee on the terms that the released interest should be held for the new beneficiaries. Such a release would have to be evidenced in writing because it is a disposition of an existing equitable interest. When the beneficiaries interest is released, the former trustee holds an absolute interest in that property. The trustee cannot be a trustee for himself solely. A release made to a trustee by way of gift will cause the trustee’s legal estate in the property to merge with the trustee’s estate therein. The trustee gains an absolute interest in that property or an unqualified legal interest according to Aickin J in DKLR Holding Company (No 2) Pty Ltd v Commissioner of Stamp Duties (NSW). Crichton release = simplicitor (unconditional) Grey release = release on terms

EXCEPTIONS TO THE COMPLETE CONSTITUTION RULE The Rule in Strong v Bird (Pure Personalty & Land?) Four conditions must be satisfied for the rule in Strong v Bird (p164-165) to apply. Kitto J stated these conditions in Cope v Keene (p164). •

1. The testator must have purported to make an immediate gift of specific property to another person in his lifetime.

•

2. Owing to a failure to comply with the formalities required for making a gift, the purported gift did not take effect during the testator’s lifetime.

•

3. Up to the time of his death, the testator continued to treat the gift as having been effectively made at the time he purported to make it.

•

4. The testator appointed the intended donee as one of the executors of his deceased estate.

It is uncertain whether the rule in Strong v Bird applies to purported gifts of land but in Benjamin v Leicher (p165), Cohen J held that in principle, the rule in Strong v Bird can apply to pure personalty and to land, at least in NSW. Where these conditions are satisfied the purported donee takes the property free from the dispositions of the will, as the testator intended it to be, and therefore holds it (as against the beneficiaries under the will) for his own benefit.

Donatio Mortis Causa (Not to Land in Australia) This doctrine is an exception to the rule that a person may only make a disposition of property to take effect on death if he makes such a disposition by will. In the case of donatio mortis causa, the second exception to the rule that a gift must be completely constituted, three conditions must be met: •

1. The gift must be made in contemplation of the donor’s death.

•

2. The gift must be conditional on the donor’s death.

•

3. There must be actual or constructive delivery of the subject matter of the gift.

In Bayliss v Public Trustee (p172) , it was held that the principle of donation mortis causa does not apply to land in Australia. In the UK, the principle of donatio mortis causa applies to land by virtue of the decision in Sen v Headley (p172).

The Rule in Dearle v Hall The rule in Dearle v Hall - an exception to Rice v Rice - states that priority between two or more equitable assignments of pure personalty is determined, not be the chronological order in which the equitable assignments have been made, but the chronological order in which the assignees gave notice of their respective equitable assignments to the trustee or other fundholder, provided that a later assignee can only thus obtain priority over an earlier assignee if the later assignee is an assignee for value and had no notice of the earlier assignment when he received his own assignment. This rule expressed in cases such as Marchant v Morton Down and Co + Ward v Dunbcombe (p173) is

29

LAWS313 EQUITY Lecture Notes – Semester 031 to be compared with Rice v Rice. In Rice v Rice, it was held that where the equities are equal, the first in time prevails. Later assignee wins where: 1. Valuable consideration (whether or earlier assignee had), and 2. Gave notice of assignment where earlier assignee had not – notice MUST be to trustee or Fund Holder, and 3. gave consideration where he had no notice. Note: All three must be satisfied.

TUT4 WEEK 5 (a) 1st Trust, words ‘This Instrument is yours as of now’ = Paul v Constance, arguable that a Trust of Instrument of Transfer created (express Trust) = personal chattel, do not apply s11(1)(b). 2nd Trust words ‘Greenview is now yours’ = declaration of 2nd Trust – therefore needs to be evidenced in writing s11(1)(b), it was nor, therefore not a valid declaration of trust. A Vandervell Direction ? Revocable Mandate = ‘direction to withhold’. Gift fails. (b) Answer = UNCERTAIN. Argue LITERAL rule and opposing view. ‘Holding’ = sub-trust (not assignment). Under LITERAL Rule – sub-trust invalid as disposition s11(1)(c) requires ev in writing, did not therefore failed. See opposing view at end week 4. (c) ‘X, I am holding one half of my interest in the company shares (X already trustee over shares), and I am giving you the other half …’. ‘Holding’ = sub-trust (in this case) circularity of obligation – Corin v Patton = invalid, therefore really a ‘release’ so apply section 11(1)(c) needs to be evidenced in writing, it was not therefore still invalid. ‘Giving’ = release, section 11(1)(c) again. (d) William does not get the benefit of the rule in Dearle v Hall for 2 reasons: 1.

Gave no value, and

2.

Gave no notice as he gave notice to the wrong person.

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Lecture Notes – Semester 031

WEEK 4 PROPERTY LAW ACT WRITING REQUIREMENTS PROPRIETARY INTERESTS (IE LAND)

FOR THE CREATION AND DISPOSITION OF CERTAIN

Sections 10, 11, 12 and 59 of the Property Law Act specify the writing requirements for the creation and disposition of certain proprietary interests. These sections are derived from the Statute of Frauds (Imperial) 1677, which introduced the writing requirements for certain, transactions. The statutory objectives are to prevent fraud and to prevent false claims with respect to transactions involving proprietary interest, particularly transactions in relation to land. The Statute had 2 mischief’s: 1. To stop people who have entered into oral transactions from denying those transactions, and 2. from stopping people claiming they have agreed to a transaction when in fact they hadn’t. These sections are not concerned with the formalities of making a will. That issue is dealt with by section 9 of the Succession Act (Queensland) 1981. The relevant sections of the Property Law Act are concerned with inter vivos transactions. (S9 deals with succession / Testamentary provisions, book p139) ‘Made in writing’ = writing must create the instrument ‘Evidenced in writing’ = transaction may be made orally but subsequently evidenced in writing. (retrospective to oral date)

SECTION 10 Section 10 is concerned solely with legal interests in land. Section 10(1) provides that no assurance of land is valid unless it is made by deed or in writing and signed by the person making the assurance. Section 10(2) prescribes some exceptions that are not presently relevant. Section 176 of the Land Title Act provides that a registered instrument operates as a deed so that a registered instrument complies with section 10(1) of the Property Law Act. Although the term land is not defined in either Act, it includes realty and leases (leases are ‘chattels real’) ie. transfers of land and legal title only (not equity).

Pure Personalty Any form of property, which is not land, is pure personalty, comprising personal chattels and choses in action.

SECTION 11 (P11 COURSE MATERIALS) The paragraphs in section 11 linguistically overlap with each other but they cannot be applied concurrently because they specify different writing requirements. A particular transaction may fall within more than one paragraph of section 11, but only one paragraph can be applied. In Queensland, the two types of requirements laid out in section 11 are not the same. Section 11(1)(a) requires that the transaction be made in writing. Sections 11(1)(b) and 11(1) (c) require only that the transaction be evidenced in writing. The position is different in other states. The sections equivalent to sections 11(1)(a) and 11(1)(b) are the same as in Queensland but the sections equivalent to section 11(1)(c) are different, requiring the transaction to be made in writing. In Grey v Inland Revenue Commissioners, Viscount Simonds held that a failure to comply with these writing requirements would render the transaction void as distinct from unenforceable.

SECTION 11(1)(A) (LEGAL & EQ LAND, MADE IN WRITING, + AGENT) Section 11(1)(a) is derived from section 3 of the Statute of Frauds. It provides that no interest in land can be created or disposed of except by writing, signed by the person creating or conveying the same or by the person’s agent, lawfully authorised in writing, or by will, or by operation of law. A creation or disposition of an interest in land by operation of law occurs independently of the intention of any party. This is an example of the distinction between an express and a constructive trust. •

Unlike section 10, section 11(1)(a) applies to legal and equitable interests in land only. Section 10 has nothing to do with equitable interests in land or indeed with equitable interests. It is not as critical as section 11(1)(a), which deals with legal and equitable interests.

•

The interest must be created or disposed of by writing and not merely evidenced in writing.

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LAWS313 EQUITY Lecture Notes – Semester 031 • The instrument must be signed by the person creating or disposing of the interest or by his agent lawfully authorised by him in writing. Otherwise, the interest may only be created or disposed of by will or by operation of law. An oral authorisation to the agent will not suffice (must be authorised in writing). •

Section 12(1) provides that a failure to comply with the writing requirements of section 11(1)(a) results in the interest created being an interest at will (ie. Can be removed and have interest terminated from the land after being given reasonable notice) only. This means that the person so creating the interest can terminate it at any time with reasonable notice, either expressly or by conduct inconsistent with the continuance of the interest at will.

There is a conflict between section 11(1)(a) and section 11(1)(c) regarding some transactions. This conflict only arises in Queensland because the relevant provisions in other states both require the transactions to be made in writing. Section 11(1)(c) merely requires the transaction to be evidenced in writing.

SECTION 11(1)(B) (DECL OF TRUST – LAND, EV IN WRITING, NO AGENT) Section 11(1)(b) is derived from section 7 of the Statute of Frauds. It provides that a declaration of trust respecting any land must be manifested and proved by some writing, signed by some person who is able to declare such trust or by the persons will. •

Section 11(1)(b) applies only to declarations of trust respecting land. Declarations of trust with respect to pure personalty are not covered. Declarations of trust over legal and equitable interests in pure personalty fall outside section 11(1)(b). Section 11(1)(b) applies to declarations of trust with respect to legal and equitable interests in land and includes sub-trusts.

•

Section 11(1)(b) does not require the trust to be declared in writing. It merely requires the declaration of trust to be evidenced in writing. For example, an oral declaration of trust respecting land may be made on day one and the evidence in writing may be made on day two. The trust takes effect on day one and not on day two although the written evidence occurs on day two. The trust was validly declared because it was subsequently evidenced in writing. This is the distinction between trusts made in writing and trusts evidenced in writing. An oral declaration is valid if it is subsequently evidenced in writing.

•

The written evidence of the declaration of trust must be signed by the person able to declare the trust or the written evidence must appear in the person’s will. It is not sufficient, unlike section 11(1)(a), for the written evidence of the declaration of trust to be signed by an agent. An agent of that person cannot sign the written evidence under section 11(1)(b), whether or not that agent is purportedly authorised in writing. In this respect, section 11(1)(b) is more stringent than section 11(1)(a).

•

A grey area exists if a Power of Attorney is given to declare a trust. This can be solved by regarding the person with the Power of Attorney as not an agent, but as acting as the donor. Therefore by virtue of a Power of Attorney you can declare a trust in section 11(1)(b).

SECTION 11(1)(C) (DISP OF EQ INTEREST– LAND & PP, EV IN WRITING, +AGENT) Section 11(1)(c) is derived from but is wider than section 9 of the Statute of Frauds. It provides that a disposition of an equitable interest or trust subsisting at the time of disposition must be manifested and proved by some writing, signed by the person disposing of the same, or by the person’s agent lawfully authorised in writing, or by will. •

Unlike section 11(1)(a) and section 11(1)(b), section 11(1)(c) is not confined to land. It applies to land and to pure personalty.

•

Section 11(1)(c) only applies to dispositions of existing equitable interests whether in land or in pure personalty.

•

Quite unlike its counterparts in the other states, the Queensland section merely requires the disposition to be evidenced in writing and not made in writing.

•

The document containing the written evidence must be signed by the person with the power to dispose of the interest or by his agent with written authority to do so. In this respect, section 11(1)(c) is the same as section 11(1)(a). The written evidence may be found in the person’s will. An oral authorisation of an agent will not suffice.

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LAWS313 EQUITY Lecture Notes – Semester 031 • Section 11(1)(c) is wider than section 9 of the Statute of Frauds is wider than the section from which it is ultimately derived. Section 9 does not extend to all dispositions of equitable interest but is confined to grants and assignments of any interest in a trust, namely of an existing equitable interest. According to Grey v Inland Revenue Commissioner (book p105), the term disposition is wider than the term grants and assignments. •

However, as the term disposition includes a declaration of trust, there is a conflict between section 11(1)(b) and section 11(1)(c), which requires dispositions of existing equitable interests to be made in writing. Whereas section 11(1)(b) implies that declarations of trust over pure personalty do not need to be evidenced in writing, section 11(1)(c) combined with section 3 would require a declaration of trust over an equitable interest in pure personalty to be evidenced in writing. For example, if there was a declaration of trust of an existing equitable interest in pure personalty, such as a sub-trust, in Queensland, the section 3 definition of disposition combined with section 11(1)(c) would require written evidence. It is clear, according to Paul v Constance, that a declaration of trust over a legal interest in pure personalty is not subject to any writing requirement. Thus, the more accepted view is that a declaration of trust over an equitable interest in pure personalty does not fall within section 11(1)(c).

•

Section 11(1)(b) expressly addresses declarations of trust respecting land. Therefore, the term disposition in section 11(1)(c) should be construed to exclude declarations of trust. Otherwise, the intention of section 11(1)(b) to restrict the requirements of written evidence to trusts respecting land would be frustrated by section 11(1)(c).

Schedule 6 - Definition of ‘Disposition’ Section 3 of the Property Law Act schedule 6: defines disposition inclusively but not exhaustively as a conveyance (conveyance includes an assignment), a vesting instrument, a declaration of trust, a disclaimer, a release and every other assurance of property by instrument except by will and also a release, devise, bequest or appointment of property contained in a will. In Queensland and NSW, the phrase declaration of trust is included in the definition of the term disposition. In other states, the term declaration of trust is not included in the definition of the term disposition. Note: Disposition is dependant upon the ‘intention’ of the relevant person whereas constructive trust is not.

SECTION 11(2) Section 11(2) is derived from section 8 of the Statute of Frauds. It provides that this section does not apply to the creation or operation of resulting, implied or constructive trusts. Such trusts bypass section 11(1) in that they do not have to be made or evidenced in writing.

SECTION 12(1) All interests in land created by parol and not put in writing signed by the person so creating the same, or by the person’s agent lawfully authorised in writing, shall have, despite consideration having been given for the same, the force and effect of interests at will only.

SECTION 59 (P12 COURSE MATERIALS) Section 59 provides that no action may be brought upon any contract for the sale or other disposition of land or any interest in land unless the contract upon which such action is brought, or some memorandum or note of the contract, is in writing, and signed by the party to be charged, or by some person by the party lawfully authorised. •

Section 59 only applies to contracts for the sale or other dispositions of land . It does not apply to actual dispositions of land.

•

Under section 59, an agent may sign if he is authorised to do so. The agent does not have to be authorised in writing. An oral authorisation to sign will suffice.

•

Unlike sections 11(1)(a), 11(1)(b) and 11(1)(c), failure to comply with section 59 simply makes the contract unenforceable. It does not make the contract void. If land is transferred pursuant to an unenforceable contract, the transfer is valid and effective because it has been done under a valid albeit unenforceable contract. Failure to comply with section 11(1) makes the purported disposition void.

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Lecture Notes – Semester 031

SECTION 6 (P12 COURSE MATERIALS) Section 6 provides that nothing in section 10 to 12 or 59: (a) invalidates any disposition by will; or (b) affects any interest validly created before the commencement of the Act; or (c) affects the right to acquire an interest in land because of taking possession; or (d) affects the law relating to part performance; or (e) affects a sale by the Court.

Section 6(d) Section 6(d) provides that nothing in sections 10, 11, 12 or 59 affects the law relating to part performance. Nothing of the writing requirements espoused in the sections specified in section 6(d) affect the doctrine of part performance.

Part Performance The doctrine of part performance provides that where there is an oral contract for the sale or other disposition of land, even if that oral contract is not later evidenced in writing, the contract will be specifically enforced in equity if the party seeking to enforce it has performed acts which are unequivocally referable (ie. Moves into occupation of land) to some such contract as that alleged. In McBride v Sandland, a purchaser taking possession of land was an example of part performance.

SECTION 12(2) Section 12(2) provides that nothing in the Act shall affect the creation by parol (orally) of a lease taking effect in possession for a term not exceeding three years, with or without a right for the lessee to extend the term for any period which with the term would not exceed three years. Although there is no writing requirement if the lease is for a period less than three years, writing is advisable. Section 12(2) includes oral interest taking effect in possession, which contain a right to renew the lease, provided that the aggregate of the original and subsequent terms does not exceed three years. Section 12(2) only applies to leases taking effect in possession.

LEADING CASE RE-SECTION 11 Adamson v Hayes HCA (Book p126) is the leading case with respect to the various paragraphs of section 11. There is no clear ratio decidendi. The case is useful by analogy only. It dealt with section 34 of the Property Law Act (Western Australia) 1969, which is equivalent to section 11 of the Property Law Act (Queensland). In that case, Adamson, Hayes and Freebairn each acquired several mineral claims. The mineral claims were held to be interests in land. Each was a trustee of his various mineral claims for himself as well as for other beneficiaries. Some mineral claims were held absolutely. All of these three persons, namely the three trustees and all of their respective beneficiaries, including themselves in their capacity as beneficiaries entered into an oral agreement between themselves. That oral agreement provided for two matters and was not evidenced in writing. •

The beneficial interest were to be divided amongst certain persons. This agreement is known as the pooling arrangement because it purported to divide the beneficial interests into specified percentages. It did not purport to be a mere agreement to do something in the future. The total of all the mineral claims were to be pooled beneficially as follows: 44% for Hayes and Freebairn and 56% for Adamson and all other original beneficiaries except Hayes and Freebairn.

•

The second matter was the options agreement. Adamson and the other beneficiaries granted options to purchase their legal and equitable interests in the mineral claims to Hayes and Freebairn or to their nominees. The effectiveness of the options agreement was dependent on the effectiveness of the pooling arrangement.

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LAWS313 Facts Summary:

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Oral Agreement (over mineral claims in WA which court held = interests in land) Owners of claims: - Absolute owners - Trustees for themselves and others 1. Pooling Arrangements (Eq. Interest) 44% of Eq Interest to H and F 56% to A and associates

2. Options Agreement A gave option to purchase interests of A and associates (ie 56%) to H and F

However, when a company was eventually so nominated, Adamson and his other beneficiaries refused to transfer the interests pursuant to that oral agreement. The High Court held that the oral agreement was ineffective for failure to comply with section 34 of the Property Law Act (Western Australia) which is the counterpart of section 11 of the Property Law Act (Queensland). The second part of the agreement was the option agreement. If the pooling arrangement was ineffective then the option agreement to purchase the interest created by the pooling arrangement would necessarily also have been ineffective because there would have been no interest to purchase. The entire agreement was oral and was not subsequently evidenced in writing. The mineral claims were interests in land within the meaning of the Property Law Act (Western Australia). Barwick CJ in dissent (not important) held that the oral agreement did not purport to change the original trusts, because these trusts had not been intended to be changed until Hayes and Freebairn had found a partner and formed a mining partnership. No such partnership had yet been formed. There was no intention for an immediate disposition of the beneficial interests. A mineral claim is not an interest in land. Menzies J (not a crucial judgment) held that section 34(1)(a) was confined to the creation or disposition of legal interests in land (wrong according to Dennis). Otherwise, sections 34(1)(b) and 34(1)(c), equivalent to sections 11(1)(b) and 11(1)(c) in Queensland, would not have been necessary. In his view, sections 34(1)(b) and 34(1)(c) respectively deal with the creation and disposition of equitable interests in land. If section 34(1)(a) is not confined to the creation of legal interests than they would not be overlapping with sections 34(1)(b) and 34(1)(c) and therefore (b) and (c) would be superflous. Although this is a minority view and is not law, it is not unpersuasive. According to the view of Menzies J, section 34(1)(c) is confined to disposition of equitable interests in land, even though the terms of section 34(1)(c) do not confine it in such a way. The judgment of Menzies J has two features: •

Section 34(1)(a) should be confined to the creation and disposition of legal interests in land. 3 Js rejected this view in Adamson v Hayes.

•

Section 34(1)(c) should be confined to the disposition of existing interests in land. This view is supported by the decisions in PT Ltd v Maradona Pty Ltd. In addition Menzies J rejected Menzies view

If section 34(1)(a) is not confined to legal interests in land, the view of Menzies J cannot be valid. As the three other judges did not agree with Menzies J, his judgment is wrong in two respects: •

It is wrong to suggest that section 34(1)(a) is confined to legal interests in land. The better view is that it applies to both legal and equitable interests in land.

•

It is wrong to suggest that section 34(1)(c) is confined to equitable interests in land because the better view is that it applies to equitable interests in land as well as to equitable interests in pure personalty.

Reasoning of Menzies J then analysed the pooling arrangement – which he said were declarations of trust. He noted that all the mineral claims were held in trust and were therefore beneficial interests in existence with respect to these claims. The pooling arrangement purported to alter the pre-existing beneficial interests in land. This purported alteration could have been achieved in one of two ways. •

Firstly, by declarations of trust made by the existing beneficiaries so that such declarations had to comply with section 34(1)(b) as the mineral claims were interests in land. Not having complied with section 34(1)(b) because the declarations of trust were not evidenced in writing, the declarations were ineffective.

•

Secondly, by a disposition in compliance with section 11(1)(c).

However, he did say in the alternative (ie. If he were wrong) that if no new trusts had been declared then there would have been dispositions (ie. Assignment) of the existing beneficial interests from the old beneficiaries to the new 35

LAWS313 EQUITY Lecture Notes – Semester 031 beneficiaries such as to attract section 34(1)(c). The mineral claims were interests in land and since the dispositions had not been made in writing, they were ineffective. Menzies J held that since the pooling arrangements were ineffective, the options to purchase were also ineffective since there was nothing to purchase. The result would be slightly different in Queensland. Section 11(1)(c) requires dispositions to be evidenced in writing whereas section 34(1)(c) requires the dispositions to be made in writing. Menzies J did not distinguish between the absolute owners and beneficial owners; according to Dong – in the case of the absolute owners, he should of said that it was a declaration of trust. In the case of the beneficial owners, it should have been classed as an assignment. Walsh J took the view that the pooling arrangement came within section 34(1)(a) as it applies to both legal and equitable interests in land (this is the majority view). The pooling arrangement, being an agreement to alter the original beneficial interest in the claims, involved the creation and disposition of an existing equitable interest in land. The pooling arrangement was therefore ineffective to comply with section 34(1)(a) as it was made orally and not in writing. Since the pooling arrangement was ineffective, the options agreement was also ineffective. Walsh J did not say which part of the arrangement created and which part disposed of interests, ie. A problem of which were creations and which were dispositions? Gibbs J held that section 34(1)(c) was not confined to dispositions of equitable interests in land. It extended to dispositions of equitable interest in pure personalty. He also noted that section 34(1)(a) was not confined to legal interests in land but extended to equitable interests in land. Gibbs J held that the pooling arrangement was a declaration of trust and not a disposition of an existing equitable interest. Section 34(1)(b) therefore applied and not (c). The declaration of trust was therefore required to be evidenced in writing. Section 34(1)(c) did not apply because the declaration of trust was not a disposition of an existing equitable interest but the creation of a new equitable interest. The pooling arrangement was ineffective because it had not complied with section 34(1)(b), as there was no written evidence. The options agreement created rights but those rights were not declarations of trust. The options, as distinct from the pooling arrangement, fell outside section 34(1)(b). Gibbs J noted that the options were not dispositions (he used a very narrow view of dispositions – ie. Confined to assignments) of existing equitable interests and therefore the options also fell outside section 34(1)(c). However, the options created equitable interests in land and therefore fell within section 34(1)(a). Not having been granted in writing, the options were ineffective. (Note: we cannot cite Gibbs J to resolve the ‘Declaration of Trust’ falling within (c) as WA definition is narrow. Only in QLD & NSW does a ‘disposition’ include a declaration of trust) Stephen J held that the pooling arrangement declared trusts of land and therefore fell within both section 34(1)(a) and section 34(1)(b). The problem with this approach is that section 34(1)(a) and section 34(1)(b) cannot both be applied because they have different writing requirements. (Note: now resolved by James in that if (a) and (b) apply, then apply the less stringent (b)). Section 34(1)(a) requires the creation or disposition if interests in land to be made in writing. Section 34(1)(b) requires declarations of trust to be evidenced in writing. Stephen J took the view that a declaration of trust fell within section 34(1)(a) because it created an interest in land. A declaration of trust fell within section 34(1)(b) because it was a declaration of trust respecting land. If the pooling arrangement had not only created an interest in land, but had additionally disposed of an existing equitable interests in land, then that would constitute another ground for applying section 34(1)(a). For an unexplained reason, Stephen J did not apply section 34(1)(c) to such a disposition of an existing equitable interest in land. Stephen J simply said that the pooling arrangement had failed to comply with sections 34(1)(a) (no writing) and section 34(1)(c) and was therefore ineffective. In summary, two out of the five judges, Walsh and Stephen JJ held that section 34(1)(a), the equivalent to section 11(1)(a), applied to the pooling arrangement. Three out of the five judges, Barwick CJ, Menzies and Gibbs JJ, held that section 34(1)(a) did not apply to the pooling arrangement, although they had different reasons for doing so. Thus, a majority of the Court rejected the application of section 34(1)(a) to the pooling arrangement and to the options agreement. A majority of three out of the five judges, Menzies, Gibbs and Stephen JJ held that section 34(1)(b) applied to the pooling arrangement. Thus, the ratio decidendi of the case is that the pooling arrangements purported to be declarations of trust respecting land. Two out of the five judges, Barwick CJ and Walsh J held that section 34(1) (b) did not apply to the pooling arrangement. Only one out of the five judges, Menzies J, applied section 34(1)(c) to the pooling arrangement. The Court rejected the applicability of section 34(1)(c) to the pooling arrangement. In Secretary, Department of Social Security v James, (Book p96) Lee J held that a declaration of trust of land fell within section 34(1)(b) but did not fall within section 34(1)(a). Such a declaration of trust over land merely had to be evidenced in writing in compliance with section 34(1)(b) and did not have to be made in writing. Otherwise, section 34(1)(b) would be superfluous. Section 34(1)(a) has limited scope. Where there is conflict between the writing requirements, the less stringent requirement will be applied (ie. If both (a) and (b) apply, apply (b)) . This implicitly 36

LAWS313 EQUITY Lecture Notes – Semester 031 rejects the view of Stephen J in Adamson v Hayes that section 34(1)(a) applied to a declaration of trust respecting land. Lee J further held that the evidence in writing required by section 34(1)(b) did not have to come from a single document but could be based on a combination of documents capable of being read together.

GOOD SUMMARY OF THE APPLICATION OF SECTION 11 It could be argued by way of analogy with the judgment of Lee J that where a disposition of an existing equitable interest in land fell within section 11(1)(b) it would fall outside section 11(1)(a). Otherwise, a disposition of an equitable interest in land, which falls within section 11(1)(c) but not section 11(1)(a), would be ineffectual. This issue only arises in Queensland where section 11(1)(a) requires the creation or disposition to be made in writing. Section 11(1)(c) only requires it to be evidenced in writing. In other states, this problem does not arise because the counterparts to section 11(1)(c) require the disposition to be made in writing. If there is a disposition of an existing equitable interest in land and it is evidenced in writing but not made in writing, it would comply with section 11(1) (c) and would be effective. The problem of overlap between section 11(1)(a) and section 11(1)(b) is so acute that (a) has very limited scope. When section 11(1)(a) conflicts with a less stringent requirement, namely section 11(1) (b) or section 11(1)(c), the less stringent requirement is applied. If a transaction is literally with sections 11(1)(a) and 11(1)(b) or within sections 11(1)(a) and 11(1)(c), apply sections 11(1)(b) or 11(1)(c) because, otherwise, these sections would be superfluous with respect to such a dispute. Something can be created orally and can later be evidenced in writing. If it is made in writing, it is therefore evidenced in writing. If a transaction falls under both sections 11(1)(a) and 11(1)(c), section 11(1)(c) should be applied and not section 11(1)(a) to avoid an impossible situation, namely a situation where a transaction need be made in writing and merely evidenced in writing. The conflict between sections 11(1)(a) and 11(1)(c) is impossible to avoid with respect to some transactions.

Grey Direction (Can only release to trustee) In Grey v Inland Revenue Commissioners, Hunter was the beneficial owner (Beneficiary) of 18,000 shares in a company. He orally directed his trustees (which was really a ‘release on terms of the new trust’) to hold his entire beneficial interest in the shares in equal parts for the beneficiaries (B1) of six existing settlements or trusts. After this oral direction, the trustees executed a written declaration of trust, which referred to the oral directions, and their acceptance of the new trusts. (Hunter purported to confirm in writing that he had given the oral direction). Hunter then signed these declarations to confirm that he had given the oral direction earlier. The Inland Revenue Commissioners assessed the written declarations of trust for stamp duty, on the ground that the earlier oral direction was ineffective (as it is a disposition and ineffective under (c)) to dispose of Hunter’s beneficial interest and that beneficial interest was only disposed of by the written declarations of trust. Those written declarations of trust were therefore liable to stamp duty. It is a fundamental principle that stamp duty is not levied as such but on instruments. An oral transaction is not an instrument. The Commissioner’s case depended critically on the argument that the oral direction was ineffective for failure to comply with section 53(1)(c) of the Law of Property Act (United Kingdom) 1935, a counterpart to section 11(1)(c) of the Property Law Act. However, it is not an exact counterpart. Whereas the United Kingdom section requires the disposition to be made in writing, the Queensland section merely requires the transaction to be evidenced in writing. The Commissioner’s argued that the direction was a disposition of an existing equitable or beneficial interest. It was not made in writing and was therefore ineffective under section 53(1) (c). By contrast, the trustees who wished to avoid stamp duty argued that because section 9 of the Statute of Frauds, from which section 53(1)(c) is derived, used the phrases grants and assignments. The trustees argued that the word disposition in section 53(1)(c) should be read synonymously with grants and assignments. As the oral direction was neither a grant nor an assignment, it would therefore fall outside section 53(1)(c). The House of Lords rejected the trustee’s argument. It was held that the term disposition should be given its ordinary meaning and should not be restricted to grants and assignments . Given its ordinary meaning, disposition included an oral direction by a beneficiary to his trustees to immediately hold his beneficial interest for other persons. The Court did not explain what the ordinary meaning of disposition was, except to say that it was wider than grants and assignments. Commissioner Won.

(Doctrine of Merger of Estates) It is likely that Hunter’s action was a ‘release of his beneficial interest to the trustees on the terms of the new trust’. That release was not unconditional; it was a release on terms. There could have been no assignment made to the trustee’s, as the beneficiary cannot assign to the trustees owing to the doctrine of merger of estates. The House of Lords decision necessarily means that the direction was not an assignment. 37

LAWS313 EQUITY Lecture Notes – Semester 031 SUMMARY: In Grey v Inland Revenue Commissioner’s, the direction to the trustees was to hold Hunter’s beneficial interest immediately for other persons. The meaning of this phrase is not absolutely clear. Dennis: It seems that such a direction is analytically a release of the existing beneficial interest to the trustees, such that the beneficial interest so released is held in trust for the new beneficiaries. Grey v Inland Revenue Commissioner’s would not be decided in the same way in Queensland. In Queensland, section 11(1)(c) merely requires the disposition to be evidenced in writing. The oral direction in Grey v Inland Revenue Commissioner’s was subsequently evidenced in writing when Hunter signed the trustee’s declarations of trust. It is unclear what the nature of a direction by the sole beneficiary of a trust to the trustee to immediately hold the entire beneficial interest for another person is. A further issue is whether such a direction falls within section 11(1) (c), even where the property is not land but pure personalty? According to Grey v Inland Revenue Commissioners, such a direction constitutes a disposition of an existing equitable interest. In Queensland, such a direction would fall within section 11(1)(c).

SECTION 3 – SCHEDULE 6 In Queensland, section 3 (Schedule 6) of the Property Law Act provides that for the purposes of the Act, a disposition includes a conveyance, vesting instrument, declaration of trust, disclaimer, release and every other assurance of property by an instrument, except by a will. It proceeds to include a release, devise, bequest or appointment of property by will. This definition is inclusive and not exhaustive. Something, which has not been specified, may still fall within the definition. It is not a useful definition as certain things that may constitute a disposition are not included in the definition. Queensland and NSW are the only states where the definition of disposition includes a declaration of trust. This creates a problem. Section 11(1)(b) confines the written evidence requirement to declarations of trust respecting land. By necessary implication, if a declaration of trust is made over pure personalty, there would be no written evidence requirement. However, as the term disposition includes a declaration of trust, there is a conflict between section 11(1)(b) and section 11(1)(c), which requires dispositions of existing equitable interests to be made in writing. Whereas section 11(1)(b) implies that declarations of trust over pure personalty do not need to be evidenced in writing, section 11(1)(c) combined with section 3 would require a declaration of trust over an equitable interest in pure personalty to be evidenced in writing. For example, if there was a declaration of trust of an existing equitable interest in pure personalty, such as a sub-trust, in Queensland, the section 3 definition of disposition combined with section 11(1)(c) would require written evidence. It is clear, according to Paul v Constance, that a declaration of trust over a legal interest in pure personalty is not subject to any writing requirement. Thus, the more accepted view is that a declaration of trust over an equitable interest in pure personalty does not fall within section 11(1)(c). Section 11(1)(b) expressly addresses declarations of trust respecting land. Therefore, the term disposition in section 11(1)(c) should be construed to exclude declarations of trust. Otherwise, the intention of section 11(1)(b) to restrict the requirements of written evidence to trusts respecting land would be frustrated by section 11(1)(c). If a declaration of trust respecting land is evidenced in writing in compliance with section 11(1)(b), it would be effective. A declaration of trust over pure personalty would not have to be evidenced in writing, even though the section 3 definition of disposition includes a trust. The specific provisions in section 11 prevail over section 3, a general definition section applying throughout the Act. Section 3 is not specifically addressed to the section 11 situation. One cannot use a general provision such as section 3 to blur the distinction between the specific provisions in section 11. The supported view is that a declaration of trust over an equitable interest in pure personalty does not fall within section 11(1)(c). However, Evans argues that such a declaration of trust must be evidenced in writing. Evans suggests that this writing requirement is to be applied by using the equivalent to the section 3 definition of disposition to include a declaration of trust. It is argued that to adopt such an approach and to include a declaration of trust over an equitable interest in pure personalty in section 11(1)(c) would create difficulties.

DOES A DISPOSITION INCLUDE A RELEASE? (YES) In Grey v Inland Revenue Commissioner’s, Radcliffe LJ took the view that a declaration of trust of an equitable interest, namely a declaration of a sub-trust, is also a disposition of an existing equitable interest, falling within section 53(1)(c). Under section 9 of the Statute of Frauds, a release was not within the phrase grants and assignments. However, this approach is inconsistent with the view of Gibbs J in Adamson v Hayes where he held that a declaration of a sub-trust was not within section 34(1)(c) but was within section 34(1)(b). In Australia, the view of Gibbs J should be followed. 38

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(Doctrine of Merger of Estates 2) In Crichton v Crichton, Dixon J dealt with the nature of a release. For example, if there is a legal and equitable interest holder in the same property such as a trustee and a beneficiary, the beneficiary may transfer or assign his interest to a third person but owing to the doctrine of merger of estates, the beneficiary must release his interest to the trustee. A beneficiary cannot assign his interest to the trustee. A release is an assignment in every respect except that it does not create a merger of estates. The section 3 – schedule 6 definition of disposition includes a release. ** Therefore: If ‘circularity of obligation’ see Corin v Patton makes sub-trust ‘impossible’ then apply as a release and look under section 11(1)(c) for evidence in writing.

REVOCABLE MANDATE DISTINCTION BETWEEN A DIRECTION TO TRANSFER, THE “GREY” DIRECTION (A MISNOMA), AND A MERE REVOCABLE MANDATE TO TRANSFER, THE “VANDERVELL” DIRECTION (GENUINE DIRECTION) If the direction given to the trustees is not a release like the direction in Grey v Inland Revenue Commissioner’s (see previous pages), but it is a mere revocable mandate given to the trustee, that revocable mandate is not a disposition. In Comptroller of Stamps (Victoria) v Howard-Smith, Dixon J held that a revocable mandate is not itself a disposition, because it is merely an authority given to the trustees to transfer the mandator’s beneficial interest to another person. A distinction is to be drawn between a declaration of trust and an assignment of an equitable interest. With a revocable mandate, no transfer occurs unless that authority is exercised. Before the authority is exercised, it may be revoked. A revocable mandate has no immediate effect. Vandervell Direction: Therefore, a revocable mandate, unlike a direction, is not within the term disposition and is outside section 11(1)(c). Only the execution of the mandate is a disposition. (Can orally withdraw) Grey v Inland Revenue Commissioner’s would not be decided in the same way in Queensland. In Queensland, section 11(1)(c) merely requires the disposition to be evidenced in writing. The oral direction in Grey v Inland Revenue Commissioner’s was subsequently evidenced in writing when Hunter signed the trustee’s declarations of trust. Important Case: In Oughtred v Inland Revenue Commissioner’s, (a case re- para (c)) – has no ratio Trustees

Peter (in remainder) Successive Eq Interest

Stage (1): Constructive Sub-trust Sub Modo Stage (2): after consideration received Constructive Sub-trust Simpliciter

Mrs O (for life) Successive Eq Interest

Specifically enforceable oral K to sell Ps Eq remainder (Not disputed)

Issue: Transfer in favour of Mrs O Was it liable for ad volarem stamp duty? (for stamp duty – had to receive something of value)

O There was a trust of 200,000 shares in which Oughtred held a life interest and her son Peter held the remained. Oughtred also owned absolutely another 72,700 shares. Oughtred orally agreed with Peter that she would transfer to him her 72,700 shares in consideration for him making her the absolute beneficial owner of the 200,000 shares. This 39

LAWS313 EQUITY Lecture Notes – Semester 031 transaction was a release of Peter’s interest in exchange for the other shares. The oral agreement was to be performed on a date specified by the agreement. When this date arrived, three documents were executed: •

A deed of release stated that the 200,000 shares were then held in trust for Oughtred absolutely and that it was intended to transfer the legal title to the shares to her.

•

An instrument of transfer from Oughtred to Peter’s nominees of her 72,700 shares in exchange for express but nominal consideration of 10 shillings.

•

An instrument of transfer from the trustees to Oughtred of the 200,000 shares for express but nominal consideration of 10 shillings.

Equity would regard the agreement as purely voluntary. The question was whether given that the interest agreed to be sold is an equitable interest and given that this equitable interest is held on a constructive sub-trust sub modo, namely under condition for the purchaser, does this constructive sub-trust entail that the intending seller of the equitable interest has by virtue of the constructive subtrust made a disposition of an equitable interest within the meaning of section 11(1)(c)? In principle, the answer is no because the constructive trust means that the intending seller has retained his equitable interest and holds it under sub-trust for the purchaser. This third document was assessed by the Inland Revenue Commissioners to ad valorem stamp duty, namely according to value. This transfer was treated by the Commissioners as a conveyance or a transfer on sale under the Stamp Act. The Commissioners argued that Peter’s equitable interest in a remainder of the 200,000 shares was an existing equitable interest, which required a written disposition under section 53(1)(c) of the Law of Property Act, equivalent to section 11(1)(c). The oral agreement was not a written disposition, so Peter’s equitable interest did not pass to Oughtred under the oral agreement but under the instrument of transfer of the shares. The Commissioners said that until the transfer to Oughtred was made, Peter retained his interest in the shares. The issue was whether the instrument of transfer was such a conveyance. If Peter’s interest was extinguished at the time of the transfer, the transfer was a conveyance and was dutiable. There was a constructive trust between Oughtred and Peter as the contract was specifically enforceable. Under the UK equivalent to section 11(2) of the Property Law Act, this constructive trust need not comply with the writing requirements. By a majority of 3:2, the House of Lords upheld the Commissioners submission. None of the three documents referred to the agreement between Oughtred and Peter. That agreement was never evidenced in writing. As the agreement was never evidenced in writing, a majority would have decided the case in the same way, even if section 11(1)(c) had applied, since the disposition was not evidenced in writing. The oral agreement with respect to the 200,000 shares was assumed to be specifically enforceable. Not being an agreement to sell or otherwise dispose of land, it did not have to comply with the equivalent to section 59 of the Property Law Act. If this assumed, Peter thereby became a constructive sub-trustee of his equitable interest for his mother. His mother thereby became a constructive sub-beneficiary of Peter’s equitable interest. A trust of an equitable interest creates a sub-trust. This constructive sub-trust did not require writing to validate it, because of section 53(2), the equivalent of section 11(2), which excludes resulting, implied or constructive trusts from the writing requirements. As Peter was a constructive sub-trustee of his equitable interest, he necessarily retained that equitable interest as sub-trustee. Peter’s equitable interest, as distinct from his mother’s interest under the constructive sub-trust, was an equitable interest under section 53(1)(c). Peter’s interest was not an interest arising by way of constructive trust. Neville v Wilson approved in principle the proposition that a person in Peter’s position was a constructive sub-trustee. The transaction was the document removing Peter’s interest and there for the Court was correct to find that the documents were subject to stamp duty. Denning LJ held that the oral agreement was ineffective to dispose of (ie. ‘release’) Peter’s interest for failure to comply with section 11(1)(c). (Dong likes Dennings reasoning – simple). By s11(2) constructive sub-trust doesn’t have to be evidenced in writing. But Denning bought in s11(1)(c) due to the reasoning that Ps interest was disposed of (execution of documents and not oral agreement) before the constructive trust was established. When dealing with ‘release’ constructive sub-trusts do not do away with s11(1)(c) – disposition of existing equitable interest – therefore s11(1)(c) applies. Jenkins LJ held that the documents were dutiable. He assumed that a constructive sub-trust arose in favour of Oughtred and exempt under s11(2). The transfer of the legal title of the shares was achieved; giving Oughtred

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LAWS313 EQUITY Lecture Notes – Semester 031 something of value such as the right to vote which mere equitable ownership could not give. Note: Jenkins LJ did not mention para (c). (Minority below:) Cohen LJ and Radcliffe LJ confused the notion of a constructive sub-trust with a release. In dissent, Radcliffe LJ held that there was a constructive sub-trust sub modo arising under a specifically enforceable contract. That condition ceased when the consideration was paid to Peter. Oughtred became the effective owner of the entire equitable interest at Stage 2 (Peters interest extinguished at Stage 2) in the 200,000 shares. As Oughtred was the effective owner, thus it was correct to say she was also the absolute owner in equity. (Dong – this is a weakness in his argument: Trustees holding directly and solely for Mrs O is different from the entire Eq interest as P still holds as constructive sub-trustee. This is a conflicting speech by Radcliffe which is cited on both sides of legal argument). Peter no longer had an equitable interest when the instrument of transfer was executed. Cohen LJ agreed, holding that when Peter received the consideration, he could not dispute Oughtred’s title. Therefore, his interest disappeared at that stage. The transaction did not transfer Peter’s interest. Cohen LJ added as Peter had a subsisting Eq interest, he had to dispose of it under (c). However after that at Stage 2, Peter could no longer dispute Mrs Os Eq ownership of shares (But still means Peter holds something) = worthy of something – not dutiable.

The sub-trust Comptroller of Stamps (Victoria) v Howard-Smith deals with the nature of a sub-trust.

DIRECTION TO TRANSFER LEGAL INTEREST Issue: Does section 11(1)(c) apply to oral direction given by beneficiary to trustee to execute transfer vesting in transferee absolute interest (legal and equitable) in property to be transferred? No see: In Vandervell v Inland Revenue Commissioners HL, Vandervell was the beneficiary of a parcel of shares. He was not the legal owner. He gave an oral direction to the trustee of the shares to execute a legal transfer of those shares in favour of the Royal College of Surgeons, intending the College to have the absolute title to the shares, namely both the legal and equitable interests in the shares concurrently. The trustee, pursuant to this oral direction, executed this transfer in blank. Vandervell’s lister then handed the blank transfer to the College, which completed and registered the transfer with the company. The College concurrently granted to Vandervell’s family trustee company an option to purchase the shares. The company declared dividends which it then paid to the College as the registered owner of the shares. In substance but not in law, this was a gift of the dividends to the College. Later, the family trustee company exercised the option to purchase the shares and in due course became the new registered owner of the shares. Vandervell was assessed to surtax. The assessment was made on the basis that Vandervell had not divested himself absolutely of his interest in the shares. He had some sort of interest left, taxable on their value. A bare majority of the House of Lords held that the family trustee company held the option on a resulting trust for Vandervell so that he had not divested himself absolutely of his interest in the shares. On that ground, Vandervell was held liable to pay surtax. However, the Commissioners had attempted to rely on another ground to show that Vandervell’s equitable interest had not been divested from him. They argued that as his direction to his trustee was oral, he had failed to comply with section 53(1)(c), the equivalent to section 11(1)(c), in making a disposition of his existing equitable interest because it was not evidenced in writing. The House of Lords unanimously rejected this argument. Upjohn LJ with Pierce LJ concurring held that the object of section 53(1)(c) was to prevent hidden oral transactions in equitable interests in fraud of those truly entitled to them. Section 53(1)(c) did not apply to a situation where the equitable owner was in a position to direct the trustee to transfer the legal as well as the equitable title to the shares to the transferee. Such a transfer would not be a hidden oral transaction because the transfer would be in writing and section 53(1)(c) would not apply to it. Therefore the direction is valid. Thus, section 53(1)(c) and section 11(1)(c) do not apply where the person with the equitable interest directs the trustee to transfer both the legal and equitable title to the transferee, and the trustee acts upon that direction and executes a transfer in favour of the transferee.

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Lecture Notes – Semester 031

Mischief Rule vs Literal Rule This reasoning is an illustration of the triumph of the mischief rule over the literal rule of statutory interpretation. If the literal rule had been applied, then because there was no written evidence of the disposition of the beneficial interest, the purported disposition would have failed under section 53(1)(c). The mischief rule, however, was applied. The mischief that section 53(1)(c) was designed to remove was hidden transactions with respect to equitable interests. As the transfer was written, the execution of the transfer meant that there would be no hidden oral transaction. Therefore, Vandervell was permitted to avoid section 53(1)(c) because he was able to confer on the transferee both the legal and equitable title to the shares concurrently. Upjohn LJ held that since the instrument of transfer would have been in writing, there would have been no need for additional writing to transfer the equitable interest. The purpose of the predecessor to section 53, namely section 9 of the Statute of Frauds was to prevent hidden oral transactions in equitable interests in fraud of those truly entitled to them.

Vandervell Direction: If a beneficiary directs the trustee to execute a legal transfer to the donee, with the intention that by the legal transfer, the donee should get both legal and equitable interests, then the beneficiary under the trust can arrange for the transfer of both the legal and equitable interests to the donee without using section 11(1)(c). A beneficiary with an equitable interest can dispose of that equitable interest without complying with section 11(1)(c) if he arranges things such that the donee gets the legal and equitable title at the same time.

Dealing by or on behalf of the beneficiary of a resulting trust In Re Vandervell’s Trusts (No 2), it is necessary to sharply distinguish between the three stages: •

The first period is that period before October 1961. This was the period when the option to purchase the shares was held by the family trustee company on a resulting trust for Vandervell, namely the option stage.

•

The second period was between October 1961 and 1965. In October 1961, the family trustee company exercised the option to purchase the shares. From there onwards, the dividends declared on the shares were paid to the new owner of the shares, the family trustee company. This is known as the shares stage.

•

The third period is from 1965 onwards. In 1965, Vandervell executed a deed of transfer in which he transferred to the trustee company all of his rights, if any, to the option, the shares and the dividends. This is known as the disclaimer stage.

All the relevant parties accepted that after this disclaimer, Vandervell ceased to have any interest in the shares. The issue then was who was the equitable owner of the shares and therefore of the dividends, during October 1961 to 1965, the shares stage? At first instance, Megarry J held that as the option belonged to Vandervell in equity, so did the shares that came with the exercise of that option. Therefore, he held that both the shares and the dividends belonged to Vandervell during that stage. Vandervell was liable to pay tax on the dividends during the shares stage. However, the Court of Appeal reversed this decision. The Court principally relied on a letter written almost contemporaneously with the exercise of the option in which the family trustee company states to the revenue authorities that the shares would thenceforth belong to the family trust and therefore, not to Vandervell. This reasoning is most unconvincing. The option, as the House of Lords found in Vandervell v Inland Revenue Commissioners, was Vandervell’s property in equity; namely the option to purchase belonged to Vandervell in equity. That option was therefore an existing equitable interest, which Vandervell would only have disposed of under section 53(1)(c). However, Vandervell never transferred his equitable interest, either in the option or the shares until 1965, the disclaimer stage. The question then is how did he lose that interest between October 1961 and 1965. Logically, the shares resulting from the exercise of the option should have belonged to Vandervell until he disclaimed them in 1965. The Court of Appeal ruled that Vandervell’s equitable interest in the shares was extinguished by the family trustee company’s declaration of trust in its letter to the revenue authorities and that there was no basis for suggesting that Vandervell needed to use section 53(1)(c) to dispose of his interest.

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LAWS313 EQUITY Lecture Notes – Semester 031 This reasoning is mysterious. How could the trustee company, by a purported declaration of trust, deprive Vandervell of his equitable interest in the option and later in the shares, when the trustee company itself had no equitable interest in either the options or the shares? One can only declare himself trustee of property if he owns the property either absolutely or in equity. It is not clear why the Court of Appeal regarded the declaration of trust made by the family trustee company as relevant. Denning LJ held that Vandervell had consented to the trustee’s declaration of trust in November 1961. He consented to giving up his equitable interest in the shares to the beneficiaries of the family trust. In effect, this means that Vandervell would be estopped because he consented to the declaration of trust. However, in November 1961, when the trustee’s made their declaration of trust, and when Vandervell was supposed to have concurred in that declaration, Vandervell did not know that he had an equitable interest. How could someone consent to give up something when he thought that he did not have it? Vandervell did not know about his equitable interest in the shares to exercise the option until the Court may such a finding in Vandervell v Inland Revenue Commissioners that there was a resulting trust of the option in his favour. Denning LJ had a curious explanation as to why there was no need to comply with section 53(1)(c). He said that the interest in a resulting trust may cease to exist without being disposed of in writing. This statement is contrary to section 53(1)(c) itself, which requires that dispositions of existing equitable interests be made in writing. Section 11(1)(c) would have required the disposition of Vandervell’s equitable interest in the shares, acquired through the exercise of the option by the family trustee company, to be evidenced in writing. If there is an interest created by a resulting trust, it is an existing equitable interest. It could not have been disposed of without being made in writing in the UK or evidenced in writing in Queensland. Vandervell’s executors also put this argument to the Court of Appeal. It was suggested that Vandervell had retained an interest in the shares at stage 2 but the Court rejected the argument. It is unlikely that this decision would be followed in Australia. An Australian Court would be likely to follow the reasoning of Megarry J.

Dennis’ Opposing view to Literal Rule in s11(1)(c) – Position Uncertain 1.

Declaration of Trust over a legal interest in Pure Personality – does not have to be evidenced in writing : Paul v Constance.

2.

Where section 11(1)(b) restricts to land and is required to be ev. in writing, it by analogy excludes pure personality. Therefore by logic pure personality does not need to be evidenced in writing.

3.

More detailed: If (c) were to apply to a declaration of trust over an equitable interest there would be an irreconcilable conflict between (c) and (b) because: an Agent can make a disposition in writing under 11(1) (c), but not under (b). Therefore (c) okay, but under (b) cannot be done. Therefore if within (c), there becomes a conflict between (b) & (c) as you cannot split the word disposition, it applies to either: Gibbs J in Everton v Hayes & Maradona – so to avoid conflict Dennis says 11(1)(c) does not apply to declaration of Trust over an equitable interest in land or PP. (So position is unclear)

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Lecture Notes – Semester 031

WEEK5 CHARITABLE TRUSTS Indefinite Trusts will be invalid unless shown to be Charitable due to perpetuity period. Charity has a special meaning in the law of trusts and not all types of public benevolence are considered to be charitable. (Section 104 Trusts Act requires severance of non-charitable purposes). The meaning of legal charity is artificially narrow because it is derived from the charitable purposes enumerated in the Preamble to the Statute of Charitable Uses (England) 1601 (Statute of Elizabeth I), which stated a number of charitable purposes. It was not the purpose of the Statute to define the meaning of legal charity. The Statute was enacted to reform the administration (streamline) of charitable trusts. However, the Preamble listed a number of charitable purposes, which the Courts have adopted and extended the purposes by way of analogy (or directly within the spirit of the Preamble – ie. not either in Statute or by analogy). Although the Statute of Charitable Uses was repealed by the Trusts Act (Queensland) 1973, section 103(1) p12 CM provides that the repeal by this Act shall not effect the established rules of law relating to charity. The preamble survives. By their nature, charitable trusts enjoy two advantages: •

Most charitable trusts are exempt from income and land tax as they are considered to be beneficial to the community.

•

Charitable trusts are not subject to the rule against perpetual trusts unlike other forms of trust. Charitable trusts may exist for an indefinite period. Non-charitable trusts may not endure beyond the perpetuity period. However, the property intended to be vested in a charitable purpose trust must still vest in the trustees for the charitable trust within the perpetuity period. For example, a charitable trust can last 500 years but it cannot be said that a charitable trust will be created 500 years in the future.

GENERAL CHARITABLE PURPOSE A charitable trust must have a general charitable purpose and it must fall within the spirit and intendment of the Preamble to the Statute of Charitable Uses. The accepted starting point in determining whether a trust is for legally charitable purposes is determining whether the purposes of the trust fall within the spirit and intendment of the Preamble to the Statute of Charitable Uses, either by way of analogy with the original purposes or as directly perceived. Some judges have preferred to rely directly on the spirit of the Preamble, rather than accept the process of extending the list of purposes in the Preamble by way of an analogy, an entirely fictitious approach. The guidance provided by the Preamble is in no way definite. Judges who rely directly on the spirit of the Preamble are simply those that do not accept the process of analogy.

Preamble to the Statute of Charitable Uses Whereas lands, tenements, rents, annuities, profits, hereditaments, goods, chattels, money and stocks of money, have been heretofore given limited appointed and assigned, as well as by the Queen’s most excellent Majesty, and her most noble progenitors, as by sundry other well disposed persons, some for relief of aged, impotent and poor people, some for maintenance of sick and maimed soldiers and mariners, schools of learning, free schools and scholars in universities, some for repair of bridges, ports, havens, causeways, churches, sealarks, and highways, some for education and preferment of orphans, some for or towards relief stock or maintenance for houses of correction, some for marriage of poor maids, some for supportation aid and held of young tradesman, handicraftsmen and persons decayed, and others for relief or redemption’s of prisoners or captives, and for aid or ease of any poor inhabitants concerning payment of fiteens, setting out of soldiers and other taxes; which lands, tenements, rents, annuities, profits, hereditaments, goods, chattels, money and stocks of money nevertheless have not been employed according to the charitable intent of the givers and founders thereof, by reason of frauds, breaches of trust and negligence in those that should pay deliver and employ the same.

PUBLIC BENEFIT – THE FOUR CATEGORIES OF LEGAL CHARITY To be rendered a valid charitable trust, the purpose of the trust must fall within the spirit and intendment of the Preamble to the Statute of Charitable Uses and must confer a benefit on a section of the community or public. The purposes falling expressly or by analogy within the Preamble have been redefined by Lord MacNaughten in Commissioners for Special Purposes of Income Tax v Pemsel. Book p271 Charity in the legal sense is now

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LAWS313 EQUITY Lecture Notes – Semester 031 regarded to comprise four principal heads. Prima facie, a valid charitable purpose trust will fall within one of the four established heads of charity. •

Trusts for the relief of poverty,

•

Trusts for the advancement of education,

•

Trusts for the advancement of religion,

•

Trusts for other purposes beneficial to the community, not falling under any one or more of the preceding heads but nonetheless falling within the spirit of the Preamble. However, not all other purposes beneficial to the community are charitable. (must be beneficial + fall within spirit of Preamble)

Except for trusts for the relief of poverty, all charitable trusts are required to benefit at least a section of the community or public.

Meaning of a Section of the Community or Public In deciding whether a purpose is public, one does not merely look to the number of people who have benefited although this may be of assistance. Rather, one must look to the factor, which distinguishes the possible beneficiaries from the rest. It is clear that the class of recipients can be considerably limited and the trust can still be charitable. There may be an enormous number of beneficiaries and the trust may not benefit a section of the public. (Case re- ‘benefiting Public’) In Oppenheim v Tobacco Securities Trust Company Ltd, Book p288 an attempt was made to set up a trust of income to provide for the education of a group of children. Prima facie, the trust was charitable as it was a trust for the advancement of education but the issue was whether the intended beneficiaries were sufficiently defined to constitute a section of the community. In order for the trust to be valid and exempt from the rule against perpetual trusts, that trust had to be charitable. Otherwise, it would fail. The intended beneficiaries were the children of employees or former employees of a group of companies. The House of Lords held that although this class of beneficiaries was extremely numerous (110,000), Authority for 2 propositions: (1) it did not constitute a section of the public because they were identified by reference to a group of employers. A group of employers or companies would simply be a group of individual persons. Simonds LJ held that a group of persons could not comprise a section of the community if the nexus between them was their personal relationship to an individual or individuals. Even though the class of persons was numerous, that did not make it a section of the public (can’t rely on size alone). However, (2) if a group of persons was too small (negligible), it could not be a section of the public (must not be numerically negligible). Oppenheim v Tobacco Securities Trust Company Ltd approved the earlier Court of Appeal decision in Re Compton. In that case, a trust was established to provide for the education of the descendants in perpetuity of three named persons. It was held that there was not a sufficient public purpose. Lord Greene indicated that the common quality, which unites the potential recipients in a class must essentially be an impersonal one. In Re Income Tax Acts (No 1), Lowe J held that a group of persons with the power to exclude members of the public according to some arbitrary test will be a private group of individuals and not a section of the public. In Thompson v Federal Commissioner of Taxation HCA, Book p 288 an attempt was made to set up a trust for the provisions of funds to schools attended by the children of the brethren and deceased brethren of the Masonic Order in NSW. The executor’s of the deceased estate claimed exemption from estate duty on the ground that the trust was for (public) educational purposes. The High Court rejected this claim. In doing so, the Court had to define a section of the public. Dixon CJ held that the Masonic Order was not a section of the public because it was a voluntary association of private members in to which members were admitted by the election made by the existing members. Therefore, the claim for exemption failed because it was held that the trust was not one for the advancement of public education purposes. The children could therefore not be a section from the public. There was no exemption from estate duty.

Improper Discrimination (Not as convincing as Thompson) In Davies v Perpetual Trustee Company Limited, Book p 303 a trust was purportedly created to establish a college for the education of the youth of Presbyterians who were descendants of Presbyterians who had settled in NSW from the north of Ireland. The trust was for education and was prima facie charitable. The question was whether the persons intended to be benefited were a section of the public. It was held that the trust failed because the youth’s in question were not a section of the public, since their qualifications were 45

LAWS313 EQUITY Lecture Notes – Semester 031 wholly irrelevant to the educational object. They were a fluctuating group of private individuals. Presbyterian youth descended from immigrants from England or Scotland would have been equally deserving but had been excluded from the class of beneficiaries. This decision is not easy to explain because it is difficult to see why a section of Presbyterian youth, even though they had to descend from the north of Ireland, could not constitute a section of the public and not private individuals (Dennis thinks they could be a section of the Public). Presbyterians are not defined by reference to an individual or individuals. It is however, accepted as good authority. It could be argued that the decision could be defended on the ground that although the Presbyterian youth were a section of the public, there was no benefit to a section of the public. The trust was not defined for the benefit of a section of the public. This case represents an ill-defined qualification of public benefit as even though the trust benefits a section of the public, it discriminates against other sections and is therefore not for the public benefit. Perceived Alternate Ratio: The Privy Council held, however, that the trust was not a valid charitable trust as the selection of beneficiaries was dependent upon a purely personal element (improper discrimination) that was wholly irrelevant to the educational objective. See also IRC v Baddeley – confined to Methodists (see later)

Exception – Trusts for the Relief of Poverty The major exception to this public benefit requirement is that of trusts for the relief of poverty in which gifts for the benefit of particular persons have traditionally been upheld. In Dingle v Turner, Book p 279 a trust to pay the pensions to the poor employees of a company was established. It was clear that if the Oppenheim v Tobacco Securities Trust Company Ltd test for ascertaining public benefit had been applied, the trust would have failed because the gift was made to the employees of a company. The issue therefore was whether this test applies to trusts for the relief of poverty. It was held that the Oppenheim v Tobacco Securities Trust Company Ltd test did not apply to trusts for the relief of poverty. It had long been established that a trust for poor relations was a charitable trust although the poor relations of a person were not a section of the public. Cross LJ observed that even in Oppenheim v Tobacco Securities Trust Company Ltd, the House of Lords had recognised that there was an exception to the Re Compton rule in the case of the poor relations of a benefactor . The other exception relating to the poor employees of a benefactor was of a more recent origin. He noted the argument that this second exception, because it was relatively new, should not be allowed to continue such that the only exception, it was argued, should be the poor relations exception and not the poor employee’s exception. However, the Court took the view that it would be illogical to draw a distinction between cases of poor employee’s and cases of poor relatives. Thus, the Re Compton rule for trusts for the relief of poverty has been abolished. Such trusts need not benefit a section of the public. All trusts for relief of poverty need not benefit a section of the public. However, a trust for the relief of poverty, although no longer required to benefit a section of the public is still a public trust and is not a private trust. All charitable trusts are public trusts by definition and are therefore enforced not by individuals but by the Attorney General acting on behalf of the Crown.

Public vs Private Trust (in poverty)? Given that a trust for the relief of poverty does not have to benefit a section of the public, but given also that it remains a public trust (definition of Charitable Trust), how does one distinguish between a trust for the relief of poverty, a public trust, and a private trust for the benefit of a person’s poor relations? (Caused difficulties) The distinction between the two concepts in relation to trusts for the relief of poverty was drawn in Book p 276 Re Scarisbrick: •

A trust for the relief of poverty was a trust for the relief of poverty among a particular description (class) of poor people. = Charitable Trust

•

A private trust was a gift to particular poor persons and the relief of poverty among them was the motive of the gift. (also in Dingle v Turner)

To illustrate this elusive distinction, the following example is given. If a gift by will of $100,000 is given to X in trust to distribute in his absolute discretion in such amounts as he shall think fit to such of the poor persons at Y living at my death, it could be argued that the trust was a private trust because it refers giving sums of money to particular poor persons. Such a private trust would not be exempt from succession duty, as it was not a public charitable trust for the relief of poverty. Alternatively, it could be argued that poor persons at Y was not a reference to particular poor persons but to a particular description of poor people.

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LAWS313 EQUITY Lecture Notes – Semester 031 If a trust was established to give $100,000 to X to help poor persons, that would be a trust for the relief of poverty, namely a public trust, among a particular description of poor people, because the relief of poverty as the purpose of the trust is made clear by the phrase ‘to help.’

‘Proviso’ may cure Re Segelman (deceased) Book p 278 attempted to make this distinction (unconvincingly). In that case, there was a testamentary gift of the residue of the estate to the poor and needy among a list of family members with the proviso that if any of them should predecease the testator or die within 21 years of his death with issue, then such issue should replace the deceased person specified on the list. If the trust was charitable, namely a trust for the relief of poverty notwithstanding the list of beneficiaries subject to the proviso, it would be exempt from succession duty. Had there been no such proviso, the gift would have been for particular poor persons. Chadwick J held that the gift was for the relief of poverty amongst a particular class of poor persons. A such it was a public trust, because the proviso meant that unknown issue might be added to the class, such that the gift was not confined to the particular poor persons named in the testator’s list. This reasoning is not convincing because the unknown issue was still particular persons (ie they were listed by name), even though they were unknown at the time of the testator’s death and there is no reason why this trust should have received relief from income tax.

1. TRUSTS FOR THE RELIEF OF POVERTY Aged, impotent (sick), poor in Preamble – words can be read disjunctively (ie. Separate) In Re Glyn’s Will Trusts, it was held that the phrase actually used in the Preamble referring to the “relief of aged, impotent and poor” should be read disjunctively, otherwise, the poor could not be the objects of a valid charitable gift unless they were also aged and impotent or sick as well. Therefore, a trust for the aged is charitable even though it does not benefit the sick or all of the poor. A trust that excluded all of the poor would not be charitable. A trust that excluded all of the poor would not be charitable. Thus a trust for old people, sick people or people would be valid. However, a trust for old and rich people or sick and rich people would be invalid. These principles are well established.

Trusts for Relief of the Poor (Def’n of Poverty / Poor?) In Book p 274 Ballarat Trustees Executors and Agency Company Limited v Federal Commissioner of Taxation, Kitto J held Definition of Poverty: that a person is in necessitous circumstances if his financial resources are insufficient to enable him to obtain all that is necessary for a modest standard of living in the Australian community, namely a poor person. Note: definition not required if Trust itself uses the words ‘poverty’ or ‘poor’ Trusts for the relief of poverty do not have to benefit a section of the public.

Trusts for the Benefit of the Aged Trusts for the benefit of the aged are prima facie charitable if the purpose is the relief of needs attributable to old age. However, gifts limited to the wealthy aged will destroy the charitable nature of the gift. Note: aged not defined in Preamble – so when are you aged unless for aged home? Trusts for the benefit of the aged, regardless of whether the recipients are poor or not are valid. In Trustees of Church Property of the Diocese of Newcastle v Lake Macquarie Shire Council, Hutley JA held that a trust to maintain a village settlement for the aged so that it is apparent that the aged are to be brought together for their mutual support and companionship is a charitable trust for the relief of the aged.

Trusts for the Benefit of the Sick In Le Cras v Perpetual Trustee Company Ltd, Book p309 a gift was upheld for the purposes of a private hospital providing medical care for the sick and impotent, even though some patients were rich. This case is also authority for the proposition that the phrase in the preamble should be read disjunctively as above. In that case, a trust was established for the general purposes of St Vincent’s Hospital. The issue was whether the general purpose of the hospitable were charitable under this category. Further issues were whether the general purpose of the hospital was prima facie within the spirit of the Preamble and did those purposes benefit a section of the public? If these concerns were not satisfied, the trust would not be charitable.

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LAWS313 EQUITY Lecture Notes – Semester 031 Wilberforce LJ said that a gift for the purposes of a hospital, namely one that was non-profit making was prima facie a charitable gift. It was charitable because the presence of the word impotent in the preamble meant that the relief of the sick was a purpose expressly recognised as charitable in the Preamble. The provision of medical care for the sick in modern times is directly within the spirit of the Preamble. A hospital operating for commercial profit would not be a charitable institution. Commercial profit means profit distributed to a body of persons, it does not mean that the hospital cannot make a profit and still be charitable. A hospital that did not benefit a sufficiently large section of the public could not be charitable. If the purposes of a hospital were otherwise charitable, those purposes would not cease to be charitable merely because the patients in it were required to pay for the services that they received. The Court rejected the submission that the services of the hospital in question did not benefit the public. The argument was that the poor were excluded from the hospital because it only catered to the wealthy. The phrase ‘aged, impotent and poor’ in the Preamble did not confine the relief of the sick to the poor and the sick, so long as one did not have a hospital that only catered to those who were sick and rich. So long as the poor were not entirely excluded, a trust for the relief of the sick is charitable. The hospital in question was accessible to the rich and the poor. The poor were not excluded merely because of the reason of expense, the medical facilities were only available to persons of some means. As long as some poor people can benefit, the trust is charitable. A trust cannot be charitable if it excludes all of the poor. If it only excludes some of the poor, it is charitable. Here, only some of the poor were excluded, falling into three categories: •

Those who had not contributed sufficiently to a medical benefits scheme,

•

Those who needed to stay longer in the hospital than their benefit could cover and

•

Those who could not get a redemption of or an exemption from the charges. (Dong – not at all convincing).

The facilities of a private hospital conferred a public benefit because it brought relief to the general, namely the public hospital. This is because the use of the private hospital meant that the public hospital would have more available beds. The standard of medical care in the public hospital was improved by its juxtaposition to the public hospital. It was easier to get specialists to go to the public hospital because they would be visiting the private hospital anyway. In Hilder v Church of England Deaconess Institution Sydney, Book p308 a trust providing homes for elderly people was upheld as charitable. A trust for aged millionaires would not be valid. In Trustees of Church Property of the Diocese of Newcastle v Lake Macquarie Shire Council, Moffitt P held that the relevant purpose, to be charitable, must be for the relief of the aged, cannot exclude the poor. A gift limited to millionaires probably would not benefit a section of the public. Thus, a trust for an old people’s home, provided that it was not confined to the rich, would be valid as charitable. The issue of what degree of exclusion of the poor would render the trust non-charitable was left open.

Trusts for the Benefit of the Impotent Trusts for the physically weak, disabled or helpless such as the blind and deaf will be upheld as charitable. Thus, gifts to hospitals and convalescent homes will be valid. However, an exception arises where individuals will benefit from the application of surplus income and or capital for their benefit. Such trusts are not charitable.

2. TRUSTS FOR THE ADVANCEMENT OF EDUCATION What constitutes education in the law of charitable trusts? Education has been construed widely by Hailsham LC in Inland Revenue Commissioners v McMullen Book p 276 to denote Definition of Education: a balanced an systematic process of instruction, training and practice containing spiritual, moral, mental and physical elements. In that case, a trust to encourage pupils at schools and students and universities to play games and sports so as to ensure that they received physical education and mental development was upheld as a trust for the advancement of education. Education is not limited to the advancement of education in general, but extends to education in a specific field such as the promotion of education in particular subjects. Under the traditional view, the validity of a trust for the advancement of education depends on knowledge not merely having been accumulated but also imparted by means of instruction. In Book p 281 Re Shaw (deceased), a 48

LAWS313 EQUITY Lecture Notes – Semester 031 disposition for the purposes of inquiring into the possibilities and advantages of introducing a new alphabet (compared 2 alphabets to see which was better) failed because although the sum total of knowledge may have been increased, it would not necessarily have advanced knowledge nor was there any element of instruction. Harman LJ held that the testator’s purpose was merely something tending to increase public knowledge (mere increase in knowledge) with no element of teaching or education combined with it (ie. Not educational). Dennis believes his reasoning is difficult in two respects: •

It was not true to say that no teaching was involved . The contemplated debate as to whether the new alphabet would be more beneficial than the existing alphabet would have possessed a teaching element for those who engaged in that debated and for those who would have listened to it or read about it.

•

Even if Harman LJ was right in saying that no teaching was involved, he was wrong in saying that teaching was a necessary element in education because in Book p 282 Inland Revenue Commissioners v Royal Choral Society, the United Kingdom Court of Appeal had held that teaching was not a necessary element in trusts for the advancement of education. Probably not good law in Australia, but we cannot ignore the case.

In Book p 287 Re Hopkins Will Trusts, Wilberforce LJ was unwilling to treat the judgment in Re Shaw (deceased) as meaning that the promotion of academic research is not a charitable purpose unless the researchers were engaged in teaching or education within the conventional meaning. Wilberforce LJ upheld the validity of a trust for the benefit of the Bacon Society which had as its aim the goal of disproving the accepted authorship of Shakespeare’s plays, reasoning that the view in Re Shaw (deceased) was incorrect if it said that the promotion of academic research was not a charitable purpose unless the researchers were engaged in teaching or educating in the conventional sense. Wilberforce LJ suggested that for research to be charitable, it must have educational value to the researcher, or be so directed as to lead to something which will pass into the store of educational material or improve the sum of communicable knowledge. The trust in question was educational because the discovery of the original manuscripts of England’s greatest dramatist would be of the highest value to history and to literature. Therefore, the search for such manuscripts was a charitable purpose. Furthermore, the discovery of even one of the manuscripts would contribute decisively to the identification of the author of the manuscripts and therefore the attempt to find the author was itself an educational purpose. The trust was educational (2nd category) and was a trust for other purposes beneficial to the community (4th category). If ‘aim’ = improvement then educational and trust valid. Note: actual improvement occurring is irrelevant.

Music In Inland Revenue Commissioners v Royal Choral Society, it was held that a purpose can be educational notwithstanding the fact that it does not involve any teaching. For example, the appreciation of music be listening to the playing of musical instruments in concerts makes the concerts educational. In Book p 287 Re Delius, a trust to promote the work of a particular composer was held to be charitable.

Art In Inland Revenue Commissioners v Royal Choral Society, a gift to encourage artistic pursuits and appreciation of art is charitable. The formation of a choir was an educational purpose, even though there was no formal teaching. In Re Pinion (deceased), a testator purported to set up a trust to endow museums with his worthless personal possessions. Harman LJ had no hesitation in concluding that the purpose of the purported trust was not educational and therefore, it failed because it was a non-charitable purpose trust. Only charitable purpose trusts are allowed because of the beneficiary principle. There was no educational benefit in viewing the testator’s possessions.

Law Reports In Book p 282 Incorporated Council of Law Reporting (Queensland) v Federal Commissioner of Taxation, the Council’s purpose was the production of law reports. It was a non-profit organisation - Its profits were distributed to its shareholders. The issue was whether it was a charitable institution so as to exempt it from income tax. All three judges of the High Court held that the purpose of producing law reports, otherwise than for profit, was charitable. The judges, however, disagreed as to the reason for that purpose being charitable, namely under what category.

49

LAWS313 EQUITY Lecture Notes – Semester 031 Barwick CJ and McTiernan J held that the Council was charitable under the fourth category, namely other purposes beneficial to the community. They held that it was not an educational purpose because law reports are merely informative. (Dennis does not agree with their reasoning as ‘reading’ law reports is part of the educational chain) The better view was expressed by Windeyer J. He held that the purpose of producing law reports otherwise than for profit was a purpose for the advancement of education. He said that the purpose that the council serves is a purpose of public utility, the advancement of legal learning by publishing reports. The publication and dissemination of reports of judicial decisions is a purpose beneficial to the community and it makes a significant contribution to the sound development, administration and knowledge of the law. Preparation of law reports could be regarded as being for the advancement of education since their purpose was to record in an accurate manner the development and application of case law and thereby disseminate knowledge of the law in a way which was essential to the study of it.

Physical Education Games and sports that are provided to promote physical education and mental development are educational, whether or not they are offered by educational institutions. However, mere sport is not charitable. In Book p 284 Re Nottage, it was held that a trust to establish a prize for an annual yacht race was held not to be charitable. If such a prize was connected with schooling, it would be valid. Now, however, a purpose may be educational even if it does not involve any teaching. Nottage probably bad law today The following are examples of trusts that have been upheld as charitable trusts for the advancement of education in relation to physical education or recreational activities: •

A trust to provide prizes for athletics in a school is a trust for the advancement of education : Re Mariette Book p 285

•

A trust to promote the playing of chess because it provides intellectual stimulation : Re Dupree’s Deed Trusts Book p 285

A charitable trust for the advancement of education must also be for the public benefit. If the public benefit element is absent then the trust will fail. Even if the purpose is charitable for the advancement of education, the trust will fail if the other requirement is not met. The general rule in Oppenheim v Tobacco Securities Trust Company Limited is that if the nexus between the possible recipients is a relationship to a named person the public element would not be satisfied. In Re Compton, the gift was for the education of the descendants of three named persons. The Court of Appeal held that consistent with a general rule, since the beneficiaries were defined by reference to named persons, the trust was merely a family trust, lacking the requisite public benefit element. The Court further held that the ‘poor relations’ exception to the public requirement under trusts for the relief of poverty should not be extended unless poverty was present. These principles were confirmed by the House of Lords in Oppenheim v Tobacco Securities Trust Company Limited where the gift was for the education of children of employees or former employees of specified companies. The trust failed because of the absence of the public element, even though the number of people involved was very large. Thus, a trust for the education of the descendants of named persons or for the children of employees of a particular company is not valid.

3. TRUSTS FOR THE ADVANCEMENT OF RELIGION (NOT ANY RELIGION IN GENERAL – DEALS WITH PARTICULAR RELIGIONS) The only matter expressly listed in the Preamble relevant to religion is the repair of churches. However, many other religious purposes have subsequently been held to fall within the spirit and intendment of the Preamble.

1. Definition - The Meaning of Religion? The leading statement on the definition of religion for the purposes of the law on charitable trusts is that of Mason ACJ and Brennan J in Book p 292 Church of the New Faith v Commissioner of Pay Roll Tax (Victoria). The Church of the New Faith was seeking an exemption from payroll tax on the basis that it was a charity. To do this, it was necessary to establish that there was a religion. The issue in that case was whether scientology is a religion. Mason ACJ and Brennan J prescribed two criteria for religion: 50

LAWS313 EQUITY • 1. A belief in a supernatural being, principle or thing and •

Lecture Notes – Semester 031

2. The acceptance of canons of conduct in order to give effect to that belief (ie. Must manifest your belief).

It may be that instead of purporting to recognise different phenomena in the spiritual or supernatural sphere, that reference merely should have been made to supernatural phenomena. (Dennis prefers this judgment) Mason ACJ and Brennan J specifically rejected the view of Dillon J in Re Southplace Ethical Society Book p 293 where it was said that religion was confined to a faith in a God and worship of the God. Mason ACJ and Brennan J said that the relevant belief was not limited to a supernatural being but extended to a thing or principle. Murphy J held that any body which claimed to be religious and offered to find meaning and purpose in life was religious. This view is extremely wide, as it does not require belief in a supernatural element. This was not accepted by any other judge and it is not law in Australia. Wilson and Deane JJ held that there were no criteria to identify a religion although there are five indicia, none of which is decisive in itself: (Dennis criticises this as not providing clear guidance) •

A belief in the supernatural.

•

The belief in a relationship between people and supernatural things.

•

The adherence of that belief, and they acceptance that particular codes having supernatural significance should be observed.

•

The adherence of that belief must be an identifiable group of persons.

•

The adherence must regard the relevant collection of ideas and or practices as constituting a religion.

Wilson and Deane JJ held that it was unlikely that any collection of ideas and or practices would be a religion if it lacked all or most of these indicia. Four out of the five judges held that there must be a belief in the supernatural and there must be a group of persons who would behave in a manner such as to indicate that they believe in this supernatural thing. All five judges held that the Church of the New Faith was a religion because it involved a belief in reincarnation, the supernatural. Scientology espouses the belief that a person’s immortality is achieved by that person’s sole or spirit undergoing an infinite series of reincarnation. (p142 of the CLR). Ie. Scientologists believe in the Supernatural, and the FCT lost. Technically, there is no majority and no ratio decidendi from this case but it can be assumed as a practical matter that no pursuit of any collection of ideas would be regarded as a religion in Australia unless it embodies a belief in the supernatural and the acceptance of codes of conduct in order to give effect to that belief.

2. What constitutes the advancement of Religion? In Book p 297 Roman Catholic Archbishop of Melbourne v Lawlor, the testator purported to establish a trust to create a ‘Catholic Daily Newspaper.’ The issue was whether that purpose was religious, namely whether the term ‘Catholic Daily Newspaper’ advanced a religious purpose. The High Court was evenly divided. The decision of the Full Court of the Supreme Court of Victoria (remains decisive) that the purpose was not religious prevailed by virtue of section 23(2)(a) of the Judiciary Act (Commonwealth) 1903. Dixon, Starke and Rich JJ held that the purpose was not religious. In order for a purpose to be religious, it was not sufficient for the purpose to be conducive to the good of religion. The purpose itself must be religious. This approach adopts the distinction drawn by the Privy Council in Book p 294 Dunne v Byrne. The phrase ‘Catholic Daily Newspaper’ and the term Catholic embraced much more than the purposes of religion. This is a poor distinction. When spelt with a capital C, the word Catholic only describes attributes of the Catholic faith. Dixon J held that the conduct of a Catholic newspaper was at most conducive to religion, and not advancement of religion. Gavan-Duffy CJ, Evatt and McTiernan JJ held that the purpose was religious.. There was no difference in principle between spreading the Catholic faith by giving sermons and spreading the faith through the circulation of a Catholic newspaper

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Public Benefit Element Required Valid trusts for the advancement of religion are governed by the general public benefit requirement. Must satisfy the Public Benefit test.

Trusts for Worship and Prayer In (Case re- Public Benefit element) Crowther v Brophy, a trust of income for public prayer and the saying of masses for the souls of designated persons was upheld (ie. Passed the public benefit test). The bequest was charitable for the advancement of religion, following the decision in Neelan v Downes. In obiter dicta remarks, the correctness of the decision in Gilmour v Coats was doubted. However, the principal authority is the House of Lords decision in Gilmour v Coats. In that case, a trust of income in favour of Roman Catholic order of nuns who engaged solely in intercessory prayer was not charitable because there was no proof that such prayer was beneficial to the public. The Court drew a distinction between intercessory prayer and trusts for the saying of mass. This view is questionable because proof could never be available. Lord Simonds said that the efficacy of intercessory prayers, intended to benefit the community, was not susceptible to proof and that the Court would assume a burden which it could not discharge if now for the first time it admitted into the category of public benefit something so indirect, so remote, imponderable and controversial as the benefit which may be derived by others from the examples of pious livers (No proof of Public Benefit). Lord Simonds misunderstood the basis of religion, which is a belief in the supernatural. He applied an inappropriate test. The question should not be whether such prayers were effective but whether they gave comfort and peace of mind to those who believed in there efficacy. Gilmour v Coats was accepted by the Privy Council in Book p316 Leahy v Attorney General. It is uncertain whether purely contemplative religious orders are religions, namely whether a trust for such an order is a trust for the advancement of religion that will satisfy the public benefit requirement.

4. TRUSTS FOR OTHER PURPOSES BENEFICIAL TO THE COMMUNITY Not all trusts that are beneficial to the community are charitable trusts because not every purpose that is beneficial to the community is a charitable purpose. To fall under the category of trusts for other purposes beneficial to the community, the purpose of the trust must not only be for the public benefit but that purpose must also fall within the spirit and intendment of the Preamble to the Statute of Charitable Uses. The category of trusts for other purposes beneficial to the community requires the Preamble to be reduced to specific charitable purposes. There is a large area of uncertainty in this category. The spirit of the Preamble is to be ascertained by (1) analogy with the purposes specified in the Preamble (not always a convincing process) or by (2) the direction perception of the spirit of the Preamble (even more fictitous). Thus, dispositions under this category must satisfy a two-stage test as a prerequisite of validity according to Royal National Agricultural and Industrial Association v Chester. Book p306 In that case, it was held that whilst the breeding of pigeons for racing might be described as being beneficial to the community in a general way, there was no justification for deciding that it was a purpose instanced in the spirit of the Preamble either by analogy with the listed purposes or by a direct appeal to the Spirit. Public benefit alone is not sufficient to bring a purpose within this category. The gift purportedly setting up a trust of income for improving the breeding and racing of homer pigeons was not a trust for a charitable purpose. HC: Public Benefit yes – for recreation + scientific study + …, however was not within spirit of Preamble. (Dong – not satisfactory, could be arguable that it falls under education – scientific study). The alternative view is that every purpose for the benefit of the community is a charitable purpose unless there is a compelling reason for excluding it. This was the view expressed by Russell LJ and Sachs LJ in Incorporated Council of Law Reporting for England v Wales v Attorney General. Book p307. Although this is appealing as an honest approach, it is technically inaccurate. It was rejected by the High Court in Royal National Agricultural and Industrial Association v Chester. (Dong – on doctrine of Precedent – HCA did the right thing)

Beneficial to the Community In Inland Revenue Commissioner’s v Baddelay, the House of Lords dealt with the public benefit requirement for trusts for other purposes beneficial to the community. In that case, there was a trust for the promotion of the religious, social and physical well being of persons resident in a particular part of London. Provision was to be made 52

LAWS313 EQUITY Lecture Notes – Semester 031 for facilities for religious activities, social training, physical training and recreation for such of those residents who were members or who were likely to become members of the Methodist Church of sufficient means to otherwise enjoy these types of activities. Viscount Simonds held that such a trust could only be charitable if it fell within the category of trusts for other purposes beneficial to the community. The Court suggested that for such a trust to be valid under this category, it must be open to enjoyment by all members of the public who from the nature of the trust are capable of enjoying it. Here, the class was restricted to impecunious Methodists and that was not a sufficient section of the community. Thus, to fall within this category, a trust must both be for the public benefit and for a purpose beneficial to the community.

Spirit and Intendment of the Preamble The trust must also fall within the spirit and intendment of the Preamble. The ascertainment of the spirit of the preamble is an entirely fictitious exercise. The identification of a purpose as one falling within the spirit and intendment of the Preamble will depend upon whether the purpose in question can be fitted directly or by analogy with the purpose listed or otherwise as a purpose since recognised as falling within the spirit and intendment. The process of analogy is illustrated by Scottish Burial Reform and Cremation Society v Glasgow Corporation. Book p301 (case on ‘Polished Fiction’) In that case, the issue was whether the practice of cremation was a charitable purpose within the meaning of this category. By a process of analogy with a purpose originally found in the preamble, the House of Lords determined that the practice of cremation was a charitable purpose. Reasoning: •

The Court selected the phrase ‘repair of churches’ from the preamble, which is certainly a charitable purpose.

•

This phrase was extended by analogy to the maintenance of burial grounds in a churchyard.

•

2nd extension by analogy - The maintenance of burial grounds in a cemetery is also a charitable purpose. By this stage, there was no longer any link with the original purpose (very tenuous).

•

3rd - There could be a further extension by analogy to cremation, as cremation and burial are both methods of disposing of the dead.

Thus, it is possible to extend the phrase ‘repair of churches’ by analogy to any method of disposing of the dead. Dong - This approach is accepted as law but it is not convincing. Wilberforce LJ argued that there was no deed to use the process of analogy. Cremation falls directly within the spirit of the preamble because of its public utility. This approach is also unconvincing because of the decision in Royal National Agricultural and Industrial Association v Chester that public utility is insufficient to make a purpose charitable. In National Anti-Vivisection Society v Inland Revenue Commissioners, Book p305 the object of the society was the total suppression of vivisection, namely the experimentation with live animals in the interests of medical science. The society sought exemption from income tax on the ground that the purpose of the society was a charitable purpose only, namely the society was formed for a charitable purpose only. The House of Lords rejected the society’s application. In that case, there were two issues: •

Was there prima facie any public benefit in the societies purpose? If there was no such public benefit, the society could not be charitable. If yes then:

•

Even if a public benefit could otherwise be established, was that purpose a political purpose such that it could not be brought within the category of trusts for other purposes beneficial to the community? A political purpose in the law of charity means a purpose to change in the law.

Lord Simonds Book p306 held that in the case of the other categories of charitable trusts, there was a presumption of public benefit unless the contrary was shown. In this category there is no such presumption. He then said that a trust for the total suppression of vivisection is not for the public benefit, namely it is to the public detriment (Public disadvantage does not = Public Benefit). The trust failed as a charitable purpose on this ground. Further, the abolition of vivisection requires a change in the law and therefore, a change in the law necessarily could not be for the public benefit because the law could not condemn itself by saying that it was in the public interest for the law to change (logical as law is precluded from saying that law is bad). The society was established for a political purpose. (If new and not established – then have to show within Public Benefit) In National Anti-Vivisection Society v Inland Revenue Commissioners, the law that was to be changed was the law in the United Kingdom. However, suppose there is a trust established to change the law in a foreign country, would 53

LAWS313 EQUITY Lecture Notes – Semester 031 the political purpose argument apply. The answer is that the political purpose argument would not apply but the public benefit argument would apply.

What about a law change in a foreign country? Thus, although not condemning the domestic law, a trust to change the law in a foreign country would not be for the municipal public benefit and would not fall within this category according to McGovern v Attorney-General. There are, however, exceptions. In Lander v Whitbread, a trust was established to benefit a community in a foreign country. It was held that a benefit to a foreign community was charitable, even though it did not benefit the local community. So long as this purpose was not harmful to the local community, or contrary to local public policy, it would be valid. (Dong – dubious decision) In Inland Revenue Commissioners v Baddelay, Book p303 the House of Lords held that the purposes (religious services and instruction + recreation …) (1) were too wide to be exclusively charitable. Viscount Simonds held that the purpose was to establish a community centre where discrete festivity would go hand in hand with religious observance. The religious observance (religious services and instruction) was charitable but the discrete festivity and recreation was not. Even if the purpose had been exclusively charitable, (2) the trust lacked the element of public benefit because the recreational facilities were to be restricted (only to Methodists). This sort of discrimination (against other members of the community) would make the trust non-charitable. This part of the case has been reversed as it could be protected by section the Recreational Charities Act (in England), namely that the terms social and physical training and recreation could be severed and the term religious activities could be preserved. In the United Kingdom, legislation makes recreation a charitable purpose provided that certain conditions are met. The counterpart in Queensland is section 103 of the Trusts Act.

SECTION 103 TRUSTS ACT (RECREATION AND LEISURE) The provisions of section 103(2) of the Trusts Act are to be noted in this regard. Section 103(2) provides that notwithstanding any rule of law to the contrary, it shall be and be deemed always to have been (retrospective) charitable to provide, or to assist in the provision of, facilities for recreation or other leisure time occupation, if the facilities are provided in the interests of social welfare. Section 103(3) provides that the requirement of section 103(2) that the facilities are provided in the interests of social welfare shall not be satisfied unless: (a) The facilities are provided with the object of improving the conditions of life for the persons for whom the facilities are primarily intended; and (b) Either (i) those persons have need of such facilities by reason of their youth, age, infirmity or disablement, poverty or social and economic circumstances or (ii) the facilities are available to the members or to the male members or to the female members of the public at large. Section 103(4) provides that nothing in this section shall be taken to derogate from the principle that, in order to be charitable, a gift, trust or institution must be for the public benefit (ie. abide by Compton rule). Thus, in the case of a recreational trust, there is still a public benefit requirement. If Inland Revenue Commissioners v Baddelay arose in Queensland today, the trust would not be charitable. Even though the recreational facilities can be charitable, the public benefit test is not satisfied. A trust to establish recreation facilities for Catholics only would not be charitable. For example, if a bridge was constructed purely for Methodists to use, that purpose would not be charitable, even though the Methodists are a section of the public. There would be no public benefit. Section 103 of the Trusts Act was applied in QLD in Re Samford Hall Trust. Book p312 In that case, the purpose of the hall was the benefit and recreational use of the local community. Any member of the local community could use the hall. It was held that the local tennis club that regularly held meetings at the hall was a section of the public. The Masonic Lodge also held meetings at the hall but that was not enough to deprive the trust of its public benefit as there were there as members of the community. If Freemasons used the hall only, it would not have been charitable. Macrossan CJ held that where the purposes of a charitable trust are not set out in writing (except in relation to land), they can be established by the evidence of usage.

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TRUSTS FOR CHARITABLE AND NON-CHARITABLE PURPOSES Under the general law, a trust for charitable and non-charitable purposes would fail because if there was such a trust, all the money could be spent on the non-charitable purpose. For a trust to be charitable under the general law, all of its purposes must be charitable. Unless one can say that the non-charitable purposes are a purely incidental purpose to the charitable purpose, the trust is invalid as a charitable trust. In Australia, statute allows the non-charitable purpose to be severed so that the remaining purpose will be exclusively charitable and the trust will be upheld.

SECTION 104 TRUSTS ACT (CM P13) (SEVERENCE) Section 104(1) provides that no trust shall be held to be invalid by reason that some non-charitable and invalid as well as some charitable purpose or purposes is or are or could be deemed to be included in any of the purposes to or for which an application of the trust property of funds or any part thereof is by such trust directed or allowed. Section 104(2) provides that any such trust shall be construed and given effect in the same manner in all respects as if no application of the trust property of funds or any part thereof to or for any such non-charitable and invalid purpose had been or should be deemed to have been so directed or allowed. There is an issue as to whether section 104 could be applied to a single (composite) expression containing charitable and non-charitable purposes. It was once thought that the purpose had to be expressed in different sentences to allow severance of the non-charitable phrases. A single expression embodying charitable and non-charitable purpose may not be severed and section 104 does not apply. For example, if there was a trust for charitable and political purposes, one could sever the phrase political purposes. However, if the phrase philanthropic purposes was used, section 104 could not be applied as philanthropic purposes was a single phrase, even though it includes charitable and noncharitable purposes. Law now (common sense) – can sever non-charitable purposes from single (composite) expression): see In Leahy v Attorney General, it was held that a Court can sever a composite expression so that only the charitable purposes remain. In that case, the trust was to provide amenities to such ‘orders of nuns’ as the trustees select, including both active and contemplative orders. Following the decision in Gilmour v Coats, it was assumed that contemplative orders were non-charitable and only active orders were charitable. The issue was whether the contemplative orders could be severed from the active order of nuns. Under the NSW counterpart to section 104, one could sever the non-charitable purposes from a composite expression. Viscount Simonds held that if the expression had been ‘such orders of nuns’ whether active or contemplative then one could sever the phrase ‘or contemplative.’ The composite expression was simply a brief way of saying that such order of nuns whether active or contemplative. Therefore, it would be absurd not to allow severance where the phrase was a composite expression including both charitable and non-charitable purposes. However does create some problems in composite expressions that include both charitable and non-charitable purposes where the charitable purpose seems insignificant. If the phrase was not sufficiently charitable, there could be no severance. For example, in Re Hollole Book p317, property was given in trust to someone ‘to be disposed of by him, as he may deem best’. The phrase included charitable and non-charitable purposes but it would not attract section 104 because the phrase did not sufficiently indicate a charitable intention although it is linguistically possible for all money to go to charity. (Dong – grey area) There will be marginal cases where a composite expression did not significantly indicate a double intention. An expression which did not significantly indicate a charitable intention may or may not attract section 104. Although a phrase may not significantly indicate a charitable intention, it must sufficiently indicate a charitable intention. A Court will not invoke section 104 to convert an invalid trust which was intended into something that may be valid but was not intended by the settlor.

THE DOCTRINE OF CY-PRES (= AS NEARLY AS POSSIBLE) Sometimes, a Court will not literally apply a charitable trust will do so cy-pres, namely as nearly as possible to the specified purpose. Note: Trust must be held to be Charitable first – then maybe apply CY-PRES. Under the general law, a charitable trust may be applied cy-pres in two situations (in addition to s105 Trust Act): 55

LAWS313 • Initial impossibility •

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Subsequent impossibility

1. INITIAL IMPOSSIBILITY The first situation is initial impossibility. It occurs where it is impossible or impracticable to carry out the purpose specified in the trust from the outset. There is no issue of initial impossibility unless the trust is charitable. If the trust is non-charitable, it will fail. The issue arises where the purpose of the charitable trust cannot be carried out at the outset. For example, a trust for the eradication of small pox in Queensland is a charitable trust for the relief of the sick. However, it fails for initial impossibility, as there is no small pox in Queensland. One then asks whether the testator or settlor, namely the person who has established the trust, has shown a paramount general charitable intention wider than the intention shown in the specific purposes of the trust. The Court may use the trust money or property cy-pres, namely apply it as nearly as possible to the purpose specified in the trust. If there is no paramount general charitable intention, and initial impossibility, the trust would fail because it could not be applied cy-pres. (Dong – need to find wider general intention or trust will fail) In Attorney General (NSW) v Perpetual Trustee Company Limited, (Milly Milly case) there was initial impossibility and the question arose as to whether or not there was a paramount general charitable intention. In that case, there was a gift of a farm to be held on trust to be used as ‘a training farm for orphan lads being Australians’. Presumably, the trust was for the advancement of education. The property given for the farm was impractical and unsuitable. Thus, the trust failed for initial impossibility as it was not suitable for training. The issue was whether the testatrix had exhibited a general charitable intention. The High Court Majority, per Dixon, Rich, Evatt and McTiernan JJ concluded that the testatrix had exhibited a general charitable intention. The intention that the farm be the actual place of training was not an essential part of the plan. In dissent, Latham CJ and Stark J (in dissent) held that there was no general charitable intention. ** Important Dixon and Evatt JJ held that if a literal execution of a charitable purpose is initially impracticable, the issue raised is whether the directions in the trust are essential to the purpose of the trust. If, based on the words used in the instrument and the surrounding circumstances, the Court concludes that the literal execution of the trust was essential, and the trust is initially impossible, the trust will fail. In the absence of a general charitable intention, the trust cannot be applied cy-pres. If, on the other hand, the specific directions in the trust are non-essential but are the means to achieve a wider purpose, the Court will apply the purpose of the trust cy-pres if that wider purpose is dominant. In order to find the charitable purpose, one must find a wider purpose (terms + extrinsic circumstances) than that indicated by the words of the trust and one would have to find that the wider purpose was a dominant purpose. As the Court leans in favour of charity, once it finds in favour of the wider purpose, it will almost invariably find that the wider purpose is the dominant purpose. The Court reached the conclusion that the testatrix did not intend that the use of the property as a training farm was an indispensable condition. As other charitable bequests were made, the property was devoted to the benefit of the community generally indicating a general charitable intention. A general charitable intention does not mean an intention to benefit charity generally. It simply means an intention that is wider that the charitable intention disclosed in the literal terms of the trust. (Dong – not precise as court can find a wider purpose if it wants to and not if it doesn’t want to – fiction) In dissent, Latham CJ held that one can always derive a general charitable intention by the process of abstraction. This is logically correct but if one were to adopt this approach, there can never be a general charitable intention which is not express. For example, if a testator specifies charitable purposes A, B and C, one cannot imply charitable purpose Z also. Dong - The exercise is necessarily fictitious (Double fiction: 1 – find wider purpose, and 2 – find that it was dominant) and the problem of discovering what the general charitable intention is remains. In Re Goodson (deceased), (House given to refined elderly ladies – but completely unsuitable) the Court decided that there was no general charitable intention, a rare result. The trust that failed for initial impossibility was not rescueable by a cy-pres scheme. In that case, the testatrix purported to create a trust of her house for refined elderly ladies. However, the house was totally unsuitable for that purpose and the trust failed for initial impossibility. The issue was whether the testatrix had exhibited a general charitable intention. 56

LAWS313 EQUITY Lecture Notes – Semester 031 Adam J held that whether there was a general charitable intention was a matter of construction of the will. The testatrix had strong sentimental attachments to the house and she had specified that its future use was of predominant importance to her. ** Good decision – but reasoning not compelling In Re Lysaght (deceased), Book p323 a testatrix set up a trust to be administered by the Royal College of Surgeons to provide scholarships for British born students not of the Jewish or Roman Catholic faith. The College was not prepared to accept the trusteeship unless the discriminatory proviso was removed (found it offensive). The issue was whether the discriminatory proviso was essential to the purpose. If it was, the trust would fail for initial impossibility because the College would not accept it and it was essential that the College be trustee. Buckley LJ held that it was not essential (not convincing) to the purpose. It was essential that the College act as trustee. That meant that the trust failed for initial impossibility because the College was not prepared to act as trustee. Therefore, the offending proviso was removed. If the College accepted the trust, it would have been held to be charitable, subject to the proviso regarding improper discrimination. The purpose was applied cy-pres, namely without the purpose.

2. SUBSEQUENT IMPOSSIBILITY This arises when the charitable purpose is initially possible but subsequently impossible. For example, it would arise where a trust was established to eradicate a particular disease and then that disease subsequently disappears. The trust would fail for subsequent impossibility. In the case of subsequent impossibility because the trust property has already effectively vested in equity in the beneficiaries, there is no need under the general law to show a general charitable intention. If the original purpose was initially possible, the subsequent failure of the purpose will mean that the money will be applied cy-pres.

CY-PRES EXTENDED BY: SECTION 105 TRUSTS ACT (CM P14-15) CL position above has been preserved – s105 just adds to it. The above is the general law. Cy-pres schemes have been modified by statute. Section 105(1) provides that subject to subsection (2), the circumstances in which the original purposes of a charitable trust can be altered to allow the property given or part of it to be applied cy-pres shall be as follows: (a) where the original purposes, in whole or in part (i)

have been as far as may be fulfilled; or

(ii)

can not be carried; or

(iii)

can not be carried out according to the directions given and to the spirit of the trust:

(b) where the original purposes provide a use for part only of the property available by virtue of the trust; (c) where the property available by virtue of the trust and other property applicable for similar purposes can be more effectively used in conjunction, and to that end can suitably, regard being had to the spirit of the trust, be made applicable to common purposes; (d) where the original purposes were laid down by reference to an area which then was but has since ceased to be a unit for some other purpose, or by reference to a class of persons or to an area which was for any reason since ceased to be suitable, regard being had to the spirit of the trust, or to be practical in administering the trust; (e) where the original purposes, in whole or in part, have, since they were laid down: (i)

been adequately provided for by other means; or

(ii)

ceased, as being useless or harmful to the community or for other reasons, to be in law charitable; or

(iii)

ceased in any other way to provide a suitable and effective method of using the property available by virtue of the trust, regard being had to the spirit of the trust.

Section 105(2) provides that subsection (1) shall not affect the conditions that must be satisfied in order that property given for a charitable purpose may be applied cy-pres except insofar as those conditions require a failure of the original purposes. Thus, if the conditions are met, the purpose may be applied cy-pres, even if there is no initial or 57

LAWS313 EQUITY Lecture Notes – Semester 031 subsequent impossibility. Under the general law, where there is no initial impossibility, a charitable trust cannot be applied cy-pres but it can be applied cy-pres under section 105. Where there is either initial or subsequent impossibility, the relevant property may also be applied cy-pres. Section 105 makes an essential change. A charitable purpose may be applied cy-pres even where there is no initial impossibility. The original purpose of a charitable trust where there is no initial impossibility may only be changed in limited circumstances. For example, section 105(1)(c) provides that where property is given to a trust and property is given by another trust for similar purposes, and the property can be effectively be used in conjunction with one another, this will occur. For example, such a situation will arise if there is one trust to eradicate influenza and another trust to eradicate tuberculosis. By virtue of section 105(2), the original purpose, where there is no initial impossibility cannot be applied cy-pres unless there is a paramount general charitable intention. For example, such an intention can be seen in the trusts to eradicate tuberculosis and influenza. If there is no general charitable intention in either trust, they cannot be combined. Where there is subsequent impossibility under the general law and under section 105, the original property may be applied cy-pres.

58

LAWS313

EQUITY

Lecture Notes – Semester 031

WEEK 7/8 RESULTING TRUSTS Arguably, there are two categories of resulting trusts: •

Automatic resulting trust

•

Presumed resulting trust

Whereas some analysts say that there is no such thing as an automatic resulting trust, no one doubts whether there is such a thing as a presumed resulting trust. The CREATION of a resulting trust does not have to be made or evidenced in writing by virtue of section 11(2) of the Property Law Act. However, once the equitable interest is created by the resulting trust, a disposition of that equitable interest will have to comply with section 11(1)(c) and if that equitable interest is respecting land, then a declaration of sub-trust over that interest will have to comply with section 11(1)(b). Although there is an issue as to whether there is such a category of trust as an automatic resulting trust, it will be assumed that there is.

AUTOMATIC RESULTING TRUSTS – INCOMPLETE DISPOSITIONS An automatic resulting trust arises by operation of law and is not created by the intention of parties whose conduct created the trust. The automatic resulting trust is created automatically (and can be contrary to the intention of the parties). Where a persons transfers property to another in trust, but does not completely dispose of the entire equitable interest created thereby, the remaining equitable interest, namely that part of the equitable interest which the express trust has failed to dispose of, automatically results to the transferor so that it vests in the transferor, simply because the express trust has not dealt with the entire equitable interest. According to those who prescribe to the view that there is such a thing as an automatic resulting trust, they insist that this automatic resulting trust will exist whether the transferor intends it to exist or not. Thus, a automatic resulting trust arises where there is an incomplete disposition, namely where the settlor transfers property but does not effectively dispose of his beneficial interest or in the case of a purpose trust, a surplus arises after the original purpose has been satisfied or ceases to exist. Auto Resulting Trust Transfer in trust of FS A

Eq reversion in FS (trust) = Auto resulting trust

B (as trustee only – ie. No beneficial interest) Trust

C (For life)

One view: even if A says I do not want any reversionary interest – the resulting trust still exists. This view may be seen as contradictory and his wishes should be disregarded. For example, A, the absolute owner, transfers a block of land to B, the trustee, to be held in trust for C for C’s life. B is the trustee and C has a beneficial life interest by the express terms of the trust. There is a resulting trust of the equitable remainder in fee simple for A, because A has only disposed of an equitable life interest to C. The equitable remainder in fee simple which A has failed to dispose of, cannot vest in B, because B has taken the land as trustee and he cannot take any beneficial interest. The equitable fee simple remainder cannot vest in C because C is intended to take a life interest only. Therefore, as that equitable remainder cannot vest in B or C, it therefore automatically results to A. 59

LAWS313 EQUITY Lecture Notes – Semester 031 Although this analysis is popular, particularly in England, and it is gained currency, it is not unassailable. It is arguable that when A transfers the land to B in trust for C for life, A intended C to have an equitable life interest and therefore necessarily intended himself to retain the equitable remainder in fee simply. Thus, it could be argued that the so-called automatic resulting trust is based on the intention of the parties. This is because a person who intends only to dispose of part of any equitable interest, it could be argued, intends necessarily to retain the remainder for himself. This is not generally accepted.

PRESUMED RESULTING TRUST A

B Conditions that must be satisfied: -

B gives no consideration (ie. A voluntarily transfers to B)

-

No presumption of advancement in favour for B (ie. not a gift)

-

A does not say expressly whether B takes as trustee or beneficiary.

= presumption of resulting trust for A (B Trustee), rebuttable presumption. If rebutted – B takes absolutely. Occurs also in another situation: Vendor Transfer B

Purchaser ‘A’

Directs vendor to transfer to B called a transfer by direction (as Purchaser doesn’t take title)

= presumption of resulting trust for purchaser, if rebutted B takes absolutely. If not rebutted B holds a presumed resulting trust for A. A presumed resulting trust is based on the presumed intention of the relevant person, namely the persons whose conduct created the trust. A presumed resulting trust arises where (1) A gratuitously or voluntarily transfers property to B in circumstances where (2) no presumption of advancement operates in favour of B and (3) where A is silent as to whether he intends B to take the property as trustee or beneficiary. There is a presumed resulting trust if there is a presumption of a resulting trust that is not rebutted by contrary evidence. For a presumption of a resulting trust to arise, there must be no presumption of advancement or gift. Where this occurs, there is a rebuttable presumption that A intends B to hold the equitable title on a resulting trust for A as B has the legal title. A is presumed to intend such a resulting trust. The presumption is rebuttable. If B can show that A has intended to make a gift of the property to him, B carries the burden of rebutting the presumption of a resulting trust for A. It is said that in the case of a presumed resulting trust, the intention of the transferor is mandatory. For example, where A gratuitously transfer part of the title to his land to B. Where there is no presumption of advancement in favour of B and A is silent as to whether he intends B to take the property as trustee or beneficiary, a resulting trust arises. Another example of a presumed resulting trust is where A pays for property and directs the vendor to transfer it to B where B has not provided consideration to A and the presumption of advancement does not operate in B’s favour. To rebut the presumption of a resulting trust, B may adduce evidence. For example, B may suggest that the other circumstance’s indicate that a gift to B from A was intended. If this is proved, the trust is rebutted and the property was transferred as a gift. If B is unable to prove this, B holds the property on a presumed resulting trust for A. The fundamental question is whether the settlor has given away everything in terms of the beneficiary interest in the property and has that intended gift been completely constituted? If the answer is no, there is a resulting trust and the property results back to the settlor.

60

LAWS313 EQUITY Lecture Notes – Semester 031 Megarry J in Re Vandervell’s Trusts (No 2) Book p 378 first drew the distinction between the two types of resulting trusts. Although his comments were obiter dicta, and were not legally binding, they seem to have prevailed. In that case Megarry J first identified the existence of the automatic resulting trust. The Court of Appeal with approving or disapproving of the obiter dicta in question reversed his decision. Now there is a higher authority. In Westdeutsche Ladnsebank v Islington London Borough Council, Book p 338 Lord Browne-Wilkinson with Lord Slyn and Lord Lloyd concurring, said he was not convinced that the observations of Megarry J were correct in suggesting the concept of an automatic resulting trust (ie. Doesn’t exist). Lord BrowneWilkinson said that all resulting trusts are created by the intention of the persons whose conduct regarding the property created the trust. If this is correct and there is no automatic resulting trust (Dongs view), the crucial distinction between express trust and resulting trust is that the express trust is created by express intention and the resulting trust is created by implied intention. In DKLR Holding Company (No 2) v Commissioner of Stamp Duties, Book p382 a majority of the High Court was of the opinion that that it was impossible for someone to transfer a bare legal estate, namely an empty legal title, to another person. The three judges who expressed this view were Gibbs CJ, Aickin and Brennan JJ. The two judges who said that it was possible to transfer a bare legal estate were Stephen and Mason JJ. An equitable interest can be transferred in trust, namely a sub-trust, and absolute title can be transferred in trust, namely a trust but the bare legal estate cannot be transferred. Re the Trusts of the Abbott Fund: Smith v Abbott is an example of the so-called presumed resulting trust. In that case, subscribers contributed to a fund held on a discretionary trust for two handicapped women. The sisters used the money to supplement their income. After their deaths, there was a dispute concerning the money remaining in the fund, namely the surplus. There was an issue as to the ownership of the surplus in the fund after the death of the women. The next of kin argued that he was entitled to the money and that the money was intended to be a gift. The question for the Court to determine was whether there was a resulting trust of the balance of the funds in favour of the donor. Stirling J held that the surplus was on a resulting trust for the subscribers to the fund (but did not say there was an automatic resulting trust). There was no intention that the women were to become absolute owners of the money. It was given with the intention of support for life and that limited purpose was fulfilled upon their death, Therefore, a resulting trust arose in favour of the donors. This trust should not be regarded as an automatic resulting trust because the subscribers intended that the surplus should be returned to them. The distinction between a resulting trust and a constructive trust is less clearly established in the UK because of the decision in Hodgson v Marks which is an example of a doubtful resulting trust. It is of doubtful validity. In that case, a widow gratuitously transferred her house and land to her lodger under an oral agreement that she would retain the beneficial ownership thereto (lodger wanted to swindle her). The lodger relied on his legal title to dispute the widow’s interest. The Court of Appeal held that the lodger held the property under a resulting trust for the widow. Thus, the lodger took the house as trustee. (would be a constructive trust in Australia) W

L (agreed orally to take as trustee only) Resulting trust

Express Oral Agreement to receive Property as Trustee = Constructive Trust (NOT Resulting Trust) This is an anomalous conclusion because the property was transferred to the lodger under an express oral agreement (therefore an express trust). It is not immediately clear how an express agreement to take something on trust can produce a resulting trust. Except for the fact that the agreement was not evidenced in writing, it would have been an express trust.

Constructive Trust vs Resulting Trust An express trust of land that is not evidenced in writing but where the intended trustee or transferee has accepted the transfer as trustee will operate as a constructive trust and not as a resulting trust according to 61

LAWS313 EQUITY Lecture Notes – Semester 031 Bannister v Bannister. This is good law in Australia because it was applied by the High Court in Bahr v Nicolay (No 2). If the facts of Hodgson v Marks occurred in Australia today, a constructive trust would be said to exist rather than a resulting trust because the property transferred under the express agreement that provided that the lodger receives the property in trust for the widow. The oral agreement did not mean that there was no express agreement. The trust created was express (but failed for writing requirements) and it cannot be a resulting trust because a resulting trust is an implied trust = constructive trust in Australia. In Australia, where land is transferred expressly in trust but not in writing, the trust arising is a constructive trust because it would be dishonest for the trustee to rely on the lack of writing to claim to be the equitable owner of the property. In Bannister v Bannister, it was held that the trust thus created is a constructive trust.

62

LAWS313

EQUITY

Lecture Notes – Semester 031

EXAM FLOWCHART – RESULTING TRUST / CONSTRUCTIVE TRUST 1.

PURCHASE STAGE

•

Presumption of Advancement? (Brown v Brown and Nelson v Nelson) – Precludes Presumption of Resulting Trust

•

Rebutting the Presumption?

Not Rebutted

Rebutted apply Calverley v Green

Transferor = 0

Resulting Trust

Others = Initial Interest + Div of Transferors Interest

Equitable TiC in shares Prop to Contributions

Note: Nelson v Nelson – If reason for transfer of title was ‘to intentionally defraud’ then this rebuts the Presumption of Advancement 2.

‘RECOGNISE INCREASE’ LOOK FOR PROPRIETARY ESTOPPEL •

Explain INDUCEMENT / DETRIMENT (Detriment is not getting Benefit Promised) Agnew Case

•

Where Proprietary Estoppel = constructive trust, therefore S59 PLA (in writing) therefore does NOT apply see Last v Rosenfeld per Hope J.

•

Therefore person ‘induced’ has there interest increased by a constructive trust through Proprietary Estoppel. (Interest acquired at purchase can be varied subsequent by way of a Constructive Trust (eg. Renovation – as it was not part of purchase price)

•

The others hold there interest on a resulting trust

•

Does a right to Charge apply? – see Calverley v Green

•

Does Guimelli apply? Note: not the norm – equitable compensation only in special circumstances

3.

AFTER FRAUD ON THE CTH •

Note: always consider Fraud last as repayment not decided until Court Order made.

•

Nelson v Nelson

If Repaid – No Change in Interest

If not repaid within specified time Deduct defrauded amount from defrauder’s interest Allocated defrauded amount to others in proportion to their interest

• • 4.

Insert considerations as to why no windfall at expense of Cth (3 points later) Finish argument by stating: the trust will be enforced provided that the person enforcing it is made to surrender the illegally obtained benefit (and there is no statute that prohibits enforcement of trust.) WHAT IF APPLY PRINCIPLE OF JV? – DOES INTEREST CHANGE

•

Note: If find Proprietary Estoppel – Don’t need JV

•

Buamgartner Principle = intention is crucial. Criticised for finding JV too easily

•

Difference: JV interest based on contributions, PE depends on nature of promised amount 63

LAWS313

EQUITY

Lecture Notes – Semester 031

Defacto Relationship Case (Presumed Resulting Trust) Stat provisions to allow courts to adjust property of defacto couples = PLA PART 19, s285, s286(1), s260(1) (not considered in this course) Calverley v Green is an example of a presumed resulting trust. House

$27,500 (M & W legal JTs) Had intended to share ownership at time of purchase.

Deposit

$9,500 (paid by M)

Balance

$18,000 (paid by joint loan to M & W but M paid the mortgage instalments to lender (not vendor))

Dispute arose because couple broke up. In that case, a man and a woman in a de facto relationship purchased a house that was transferred to them as legal joint tenants at law under the Real Property Act (NSW). The purchase price was $27,500. The man paid the deposit of $9,500. The balance of $18,000 was raised by means of a loan secured by a mortgage of the house for which they made themselves jointly and severally liable. This means that the man and the woman equally owed $18,000. The man made the repayments on the mortgage only. The parties subsequently terminated the relationship. There was a dispute as to the ownership of the property. The woman claimed that she owned one half of the property. She claimed that the property should be sold and the proceeds should be divided equally between the parties. The man claimed that he was the sole owner of the property in equity because the legal title must yield to contrary equitable title. Legal title is not conclusive. He argued that the woman had made no financial contribution to the purchase price. The High Court disagreed. The preliminary issue was whether the woman had made any financial contribution towards the purchase price of the property because the man had paid the deposit and had made all the repayments on the loan. The High Court held that the woman had made a financial contribution because she had made herself jointly and severally liable for the repayment of the loan. Mason and Brennan JJ emphasised that it was erroneous to regard the mortgage repayments as completing the payment of the purchase price because the purchase price of the house was paid by means of the deposit and the money obtained under the loan. By contrast, the mortgage repayments were not made towards the purchase price, but to repay the loan and thereby secure the discharge of the mortgage. The mortgage payments were not made to the vendor but to the lender. Since the man and the woman were jointly and severally liable for the loan of $18,000, it meant that the woman had contributed $9,000 of the $27,500 purchase price. The man’s contribution was $18,500, namely the deposit of $9500 and one half share of the liability under the loan. Having determined the respective contributions of the parties, the High Court simply applied the law of resulting trusts. Mason and Brennan JJ observed that in the absence of a presumption of advancement, where two or more purchasers contribute unequally to the purchase of property that as transferred to them as joint tenants in law, there is an equitable presumption that the legal title to the property is held by them on a resulting trust for themselves as equitable tenants in common in shares proportionate to their contributions. This presumption is rebuttable. Mason and Brennan JJ confined their proposition to unequal contributions because in the case of equal contributions, applying the maxim equality is equity, equity will presume an equitable joint tenancy to reflect the legal joint tenancy. This presumption is also rebuttable.

Equitable Charge – where A makes repayments solely despite A & B being ‘joint and several’ Since the contributions here were unequal, there was a resulting trust as tenants in common in shares proportionate to their contributions. However because the man had made the mortgage payments, he was therefore entitled to claim equitable contribution from the woman for her share of the payments. He was entitled to an equitable charge over her equitable interest in the land to secure the making of her contribution to the repayments.

No Presumption of Advancement – Defacto Relationship 64

LAWS313 EQUITY Lecture Notes – Semester 031 Mason and Brennan JJ held that it would be wrong to apply in favour of the woman the presumption of advancement. That presumption is raised in favour of a wife against her husband but since the parties were not married here, the presumption did not arise in favour of the woman. As the purchase was made jointly, both parties contributed to the purchase price jointly, irrespective of the fact that the male paid to the mortgage instalments. There is no presumption of advancement for de facto relationships. Where there is unequal contribution to the purchase, the presumption of resulting trust for each other in proportion to their contributions as tenants in common arises. The mortgage repayments should be seen as releasing the charge, not payments of the purchase price. Thus, the man obtained proportionate ownership of the land and an equitable charge over the woman’s equitable interest in the land to secure the payment to him of the woman’s share of the mortgage repayments. There was no presumption of advancement in favour of a de facto.

Mortgage Free Investments The Court also examined an exceptional situation, where the parties bought a property but intend that the property shall be a mortgage free investment. Unlike the facts of the case before the Court, a property may be acquired as a mortgage free investment. This occurs that the respective shares of the parties to the property are intended to be determined by the percentage of the deposit paid and the money paid to the discharge of the mortgage. If there is a mortgage free investment, Calverley v Green cannot be applied because in such an exceptional case, the person making the mortgage repayment would be able to increase or decrease his share of the equitable tenancy in common. As the only actual payments of money made towards acquiring the mortgage free investment would determine the shares respectively held by the parties in the mortgage free investment, Calverley v Green cannot be applied. In Bloch v Bloch, for example, the mortgage repayments were considered necessary to the acquisition of the property as a mortgage free investment.

Illustration of the Distinction Between the Conventional Purchase of Land as in Calverley v Green and the Mortgage Free Investment in Land For example, A and B purchase land as legal joint tenants in law for $100,000. No presumption of advancement arises. Each contributed $5,000 for a deposit of $10,000 and the parties make themselves jointly and severally liable for the debt of $90,000. A makes all of the mortgage repayments. Situation One – Calverley v Green A and B would own the land as tenants in common in equal shares in equity because they would have contributed equally to the purchaser price. A would have a charge of $45,000 on B’s share of the property to secure A’s right of contribution against B. Situation Two – The Mortgage Free Investment If it can be shown that A and B intended to acquire the property as a mortgage free investment, namely after the mortgage has been discharged, A will own 95% of the land and B will own 5% as tenants in equity. A’s repayment of the loan would be regarded as a contribution towards the acquisition of the mortgage free investment, namely $95,000. Although B was jointly and severally liable on the loan, he has paid nothing to discharge that loan. He has only paid $5000. For further example, if A contributes $4,000 and B contributes $6,000 to a $10,000 deposit. A and B then make themselves jointly and severally liable for the balance of the purchase price which is $90,000. Disregarding interest, A then makes all the repayments. If a conventional purchase and not a mortgage free investment was intended, A and B would own the land as tenants in common in equity in share’s proportionate to the respective contributions to the purchase price. A’s share would be $4,000 and $45,000, namely a total share of $49,000 and a charge on B’s share to secure B’s contribution of $45,000 due to A. B’s share would be subject to an equitable charge of $45,000 in favour of A. His share would be $6,000 and $45,000, namely $51,000. B’s liability to contribute to A would be $45,000. If a mortgage free investment was intended, A’s share would be considerably larger. A’s share would be the deposit of $4,000 and the balance of $90,000, namely a total balance of $94,000. B’s share would be the $6,000 deposit only as he has not made any contribution to the mortgage instalments. B is not liable to A for contribution.

65

LAWS313 EQUITY Lecture Notes – Semester 031 A’s repayment of the entire loan is reflected in A’s almost entire ownership of the house. He is not given a charge over B’s share of the property but B only owns $6,000, namely 6% of the property.

Presumption of Advancement (ie. Presumption of Gift) In Brown v Brown, a widowed mother contributed almost one half of the purchase price of a house, the title to which passed to her two sons who contributed the balance of the purchase price. Before this case was decided, there was no doubt that the presumption of advancement arose in respect of property given by a father to his children , although the presumption is rebuttable. (If unrebutted = gift, if rebutted = resulting trust). The issue in this case was whether a similar presumption of advancement arose if a mother gave property to her children. When there is a gift, there is no presumption of a resulting trust. The Court held that there was such a presumption of advancement from a mother to her children. Therefore, the mother was rebuttably presumed to have made a gift of her contribution to the purchase price to her two sons. The mother who was able to show that she had no intention of making such a gift to her sons rebutted this presumption. The property was in the sons names for convenience only. The mother died in the course of the proceedings. Her personal representatives obtained a declaration that the sons held the legal title to the property in a resulting trust for themselves and their mother’s estate proportionately to their contributions to the purchase thereof. When a husband transfers property to his wife, there is a presumption of advancement in favour of the wife, although the converse does not apply, Where a wife gives property to her husband, a resulting trust is presumed in favour of the wife. No gift is presumed. In Brown v Brown, Kirby J became the only judge in Australia to say that the presumption of advancement should apply where a wife gives property to her husband. This is not law. Thus, where there is a presumption of advancement, there is no presumption of a resulting trust. The presumption of advancement does not rebut the presumption of a resulting trust.

Presumption of Advancement – prevents presumption of resulting trust arising ** The presumption of advancement prevents the presumption of a resulting trust from arising. If the presumption of advancement is rebutted, there is a resulting trust (for the party who has rebutted) but not a presumption of a resulting trust. If the presumption of advancement is not rebutted, there is a gift. In Wirth v Wirth Book p344, Dixon CJ said that the presumption of advancement would apply in favour of a woman who was engaged to be married in respect of property given to her by the person to whom she was engaged. This decision followed and applied the UK decision in Moate v Moate. However, if no marriage occurs, the presumption of advancement lapses (but how do you deal with time? – eg engaged for 8 yrs) and the presumption of a resulting trust replaces it according to Jobson v Beckingham Further, the presumption does not work the other way around. The presumption of advancement precludes the presumption of a resulting trust. It arises in the following situation: •

A transfer of property by a husband to his wife: Martin v Martin

•

A transfer of property from a father to his children

•

A transfer of property from a mother to her children Brown v Brown

•

A transfer of property from someone in loco parentis, namely in the position of a parent, to someone to whom the property is given, the transferee: Ebrand v Dancer Book p359

•

A transfer of property by a man to a woman to whom he is engaged, provided that if the marriage does not occur, the presumption is replaced by the presumption of a resulting trust: Wirth v Wirth

A presumption of advancement does not arise where: •

Property is given by a de facto husband to his de facto wife: Napier v Public Trustee (Western Australia) Book p359

•

Property is given by a step-parent to a step-child because a step-parent is not in loco parentis: Re Bulankoff Book p359 (except if step parent in loco parentis as above)

•

Voluntary transfer of personal Chattels 66

LAWS313 EQUITY Lecture Notes – Semester 031 A voluntary or gratuitous transfer occurs where no valuable consideration is given by the transferor to the transferee. The transactions of some types of property do not raise the presumption of a resulting trust. Instead, a voluntary trust raises a rebuttable presumption of advancement. For example, the gratuitous or voluntary transfer of title to personal chattels does not a raise a presumption of a resulting trust in favour of the transferor. The voluntary transferor is rebuttably assumed to make the transfer to the voluntary transferee. In the case of a voluntary transfer of land, however, there is a presumption of a resulting trust.

The gratuitous transfer of title to personal chattels does not raise a presumption of resulting trust In Joaquin v Hall Book p345,6 - the Court held that the payment of money (cash or cheques) to a stranger did not raise the presumption of a resulting trust, therefore presumption of gift (advancement). However, it was not clear whether the money was cash or a cheque. A cheque is not only a chose in action. It is also a person chattel and thus can be transferred without creating the presumption of a resulting trust. If the presumption of a resulting trust applies to transfers of choses in action, it can easily be rebutted. The burden of proof lies on the payor. The payor would have to rebut the presumption that a gift to the payee was intended to show that a trust or a loan was intended. In Heydon v Perpetual Executors, Trustees and Agency Company (Western Australia) Ltd, Book p345,6 it was held that the narrow exception of annuities raises a presumption of a resulting trust following the decision in Fowkes v Pascoe. Thus, a voluntary transfer of annuities to a stranger raises a presumption of a resulting trust. In the case of land, the burden is on the voluntary transferee to rebut the presumption of a resulting trust and show that a gift was intended. The payment of money to a stranger is to be contrasted with the payment of money by way of contribution to the purchase price of land.

EVIDENCE REQUIRED - REBUTTING EITHER THE PRESUMPTION OF ADVANCEMENT OR THE CONTRARY PRESUMPTION OF A RESULTING TRUST In Charles Marshall Pty Ltd v Grimsley, Book p361 a father had allotted shares in a company controlled by him to his two daughters. The presumption of advancement applied in their favour. The Court further held that the father who had died had failed to rebut the presumption of advancement so that the daughters held the shares beneficially due to an unrebutted presumption of advancement. As the father retained the share certificate, it was evidence of the fact that no gift was intended. The High Court followed Shepherd v Cartwright and held that acts and declarations of the parties before or at the time of the transaction or occurring so immediately thereafter that they form part of the transaction were admissible in evidence either for or against the party who did the act but made the declaration. However, subsequent act or declarations by the parties are admissible only as evidence against the party doing the act or making the declaration (otherwise subject to fraud – good rule according to Dong). The proposition of law was presumed to be correct in Calverley v Green by Mason and Brennan JJ. Napier v Public Trustee (Western Australia) – can have a partial rebuttable and not entire.

SOME

INTRICATE ASPECTS CONCERNING THE PRESUMPTION RESULTING TRUST (REBUTTING THE PRESUMPTION)

OF

A

The following High Court decision concerns the raising and the rebutting of the presumption of a resulting trust. There is, however, no Court ratio decidendi as opposed to the ratio decidendi within each judgment. However, a majority of judges, namely Gibbs CJ, Brennan and Dawson JJ said that there was no constructive trust and all judges said that there was no resulting trust. However, the finding that there was no resulting trust is not consistent with the order granted.

Rebutting the Presumption of Resulting Trust – immediate Gift In Muschinski v Dodds, Book p473 a man and a woman in a de facto relationship purchased a cottage property and were registered as tenants in common in equal shares in respect thereof. Their legal title was as legal tenants in common in equal shares. (This is to be contrasted with the situation in Calverley v Green. Unlike a joint tenancy, with a tenancy in common, there is no right of survivorship.) The female was to provide $20,000 from the sale of her 67

LAWS313 EQUITY Lecture Notes – Semester 031 house and the male was to pay the costs of construction and improvement from the $9,000 he would receive from the finalisation of his divorce and from loans. Therefore, the woman contributed about 90% of the total costs. The female paid the whole purchase price and the renovation cost. Thus the woman paid 10/11 of the total cost and the man paid 1/11. The man had said at the time of purchase that he would set up a pre-fabricated house on the property. HCA: This promise to construct a pre-fabricate house did not induce the woman to make the purchase, namely it did not induce the woman to make a gift to the man in equity of one half of her legal share. The parties intended to convert the cottage into an arts centre for the woman to run. None of these plans eventuated and the relationship came undone. Three out of the five High Court judges, Gibbs CJ, Mason and Deane JJ held that no resulting trust arose in the female’s favour. The woman had intended that the man would have an immediate and unconditional beneficial interest in his legal half share in the property. The gift of that beneficial interest was immediate and unconditional. (Normally this would be the end of the matter – but case proceeded on a more complicated basis) This intention rebutted the presumption of a resulting trust in the woman’s favour that was raised by her having paid the entire purchase price of the land. It was their shared intention that, from the time of purchase, each should take a full one half beneficial and legal interest in the property. Two out of the five, namely Brennan and Dawson JJ, held that the intended gift was immediate but conditional. It was conditional upon the construction of the pre-fabricated house and the man’s assistance in setting up the arts centre. Gibbs CJ Book p475 said that because the woman had intended the man to have an immediate and unconditional interest in the property, there was not occasion for a resulting trust to arise as the woman’s ascertained intention had rebutted the presumption of a resulting trust which had originally been raised in her favour. Also, because the gift was unconditional, there could not be a constructive trust in favour of the woman as there was not injustice. Gibbs J thought that the woman and the man had both contracts with the vendor to pay the purchase price and as the woman had solely paid the purchase price, she was entitled to contribution from the man in respect of what she had paid. Dong - This overlooks the finding that the woman had intended to make a gift to the man and a person who makes a gift cannot claim contribution of the value of the gift from the person to whom the gift is made. On this point, the other four judges of the Court rejected the reasoning of Gibbs CJ. Gibbs J disagreed with Deane J but he accepted the order proposed by Deane J. Mason J agreed with Deane J. This meant that Gibbs CJ, Mason and Deane JJ formed the majority of this High Court decision but because Gibbs CJ propounded a different line of reasoning, his approach is not supported by a majority of the Court. Thus, a majority of the Court was in favour of the order but there was no majority reasoning in favour of that order. Gibbs J further held that there had been no fraud or impropriety on the part of the man as the gift was not improperly induced. The finding that the gift was immediate and unconditional is inconsistent with the finding that the man was obliged to pay for the gift. Gibbs J said that there was no constructive trust but then agreed with the order proposed by Deane J who said that there was a constructive trust. Deane J agreed that the woman had intended to make an immediate and unconditional gift of the beneficial interest of his legal half share of the property to the man and this intention precluded any resulting trust in favour of the woman. However, unlike Gibbs CJ, Deane J said that notwithstanding the immediate and unconditional gift, there was a constructive trust imposed on the man for the benefit of the woman. This conclusion was rejected by Gibbs CJ, Brennan and Dawson JJ so it is not the ratio decidendi of the Court. Deane J reached the conclusion that there was a constructive trust because he projected another concept into the reasoning.

Accepted Baumgartner Principle He said that where the parties had engaged in a joint venture that had failed without attributable blame which precludes the man from retaining his beneficial share as it would be unconscionable for him to do so. Deane J said that the property should be sold and the party’s respective contributions should be returned to them. (ie. If a JV goes bad and dissolves – you get back what you put in) Surplus? However, if there was a surplus, it should be divided equally between the parties. Thus, the injustice did not extend to the surplus (Dong – why did surplus not get divided proportionately?). Deane J used authorities relating to the legal consequences of the failure of joint ventures which show that money paid on the basis of a joint venture which fails should be returned to the contributors but these authorities do not consider cases where there is an unconditional gift. These cases should not apply. (Dong – Deane’s reasoning should not apply to gifts)

68

LAWS313 EQUITY Lecture Notes – Semester 031 It is difficult to see why it was unconditional for the man to retain his interest when the woman made an immediate and unconditional gift to him. There was no fraud, undue influence, or other impropriety. Deane J found that the gift was unconditional but then seems to say that it was conditional on the continuance of the joint venture. As opposed to the order, this reasoning was only supported by Mason J. It is the minority reasoning. Brennan and Dawson JJ said that the woman was not entitled to a remedy. As the gift was immediate, there was no room for a resulting or constructive trust because it was inconsistent with that gift. They dissented from the order proposed by Deane J. They held that they gift was immediate but conditional upon a condition subsequent that was a personal obligation. Usually, an interest was terminated by the occurrence of the condition subsequent. Here, however, the condition subsequent did not terminate that interest but imposed a personal obligation upon its occurrence. That personal obligation was to give the woman monetary compensation. His interest was not terminated. The woman had claimed a proprietary interest in land and not compensation. She was therefore not entitled to a remedy. This reasoning is not convincing. They said that there are two types of condition subsequent, namely forfeiture and personal obligation. In this case, it was a condition subsequent not involving forfeiture in the man and the breach merely entitled the woman to equitable compensation. She did not ask the Court for compensation so she got nothing. Thus, although there were three lines of reasoning, none of those lines of reasoning were convincing. It is now accepted that there is a principle of joint venture in de facto relationships that fail without attributable blame. However, acceptance of this principle does not mean that it would apply where one of the parties intended to make an immediate and unconditional gift to the other. The Courts have subsequently applied the principle of joint venture but on the facts, Deane J was not entitled to do so.

Constructive Trusts? Defacto JV without attributable Blame Baumgartner v Baumgartner deals with constructive trust. Technically it is not a case addressing resulting trusts but it useful to consider here as it is similar to Muschinski v Dodds. Although it is the law, the reasoning is unsatisfactory. A man and a woman lived together in a de facto relationship for four years in a house purchased solely in the man’s name. The man paid the deposit on the house only and the man raised the balance of the purchase price only. The man raised those funds through a loan secured by the house. He was the sole borrower. The woman was not a party to the loan contract. Legal title to the house was transferred to the man. Thus, the man paid the deposit and obtained the loan solely. However, the parties had pooled their earnings, the man contributing 55% and the woman contributing 45%. All household expenses including the mortgage repayments were paid from this pooled fund. The relationship ended and each party claimed the ownership of the house. This dispute regarding the ownership of the property was to be resolved by answering the question as to whether the woman had acquired a beneficial interest in the house. The High Court held that the woman possessed a beneficial interest in the house. By way of a constructive trust imposed on the man insofar as the pooled fund was used to pay the mortgage instalments, the woman had no intention of making a gift to the man of her share of the fund. The pooled fund was established for the purposes of their joint relationship, which had failed without attributable blame. It would be unconscionable for the man to claim that the property was his as it was a joint venture. The High Court divided the property and awarded 55% to the man and 45% to the woman, reflecting the proportions of their contribution to the pooled fund. The woman in fact got less because of adjustments. Subject to those adjustments, the beneficial ownership of the house was divided as per the pooling arrangement. The Court said that although the property was in the male partner’s name, the fact that the parties had pooled their earnings together for the purposes of their joint relationship meant that the male partner’s assertion that he held the title to the property by himself was unconscionable. Note: Baumgartner has been heavily criticised as the HCA too easily found a JV between the partners – and only found a JV because they didn’t find Proprietary Estoppel The High Court reached that conclusion by recourse to the concept of joint venture. It is difficult to reconcile this case, Baumgartner v Baumgartner, with Calverley v Green. In Calverley v Green, the Court was forced to assert that the mortgage repayments did not pay off the purchase price, rather, the mortgage repayments were to repay the mortgage. Further, there was no joint venture. In the present case, however, there was a joint venture that had been terminated without attributable blame. If the Court had followed Calverley v Green, they would have been forced to say that the repayment of the mortgage instalments contributed by the woman had nothing to do with contributions to 69

LAWS313 EQUITY Lecture Notes – Semester 031 the purchase price. However, the High Court held that there was a joint venture so that the mortgage repayments would be considered. The finding in Baumgartner v Baumgartner that the woman had not intended a gift, following Calverley v Green, would not give her a share in the house. It would simply mean that she made a loan to the man not entitling her to proportionate ownership of the house. It is possible that Calverley v Green may apply to the earlier stages of the relationship and the Baumgartner v Baumgartner principle (=collapse of JV without attributable blame) can be applied to the latter stages of the relationship. Overtaken by Part 19 PLA but may still apply to other than defacto relationships. It is difficult to know when to apply the cases dealing with commercial situations, namely joint ventures, to de facto relationships. The difficulty is how to link the woman’s contribution to her beneficial part ownership of the house. When is a de facto relationship a joint venture? This is an uncertain are of the law. Both cases depending on the finding that a joint venture had been entered into and this approach was followed in Hibberson v George.

PROPRIETARY ESTOPPEL DETRIMENT)

=

CONSTRUCTIVE

TRUST

(INDUCEMENT

–

Where promisor (LO) to promisee refrains from doing acts promised by INDUCEMENT, promisee acquires interest in land if acts to their DETRIMENT. (ie. Proprietary estoppel applies). (Note: detriment is not getting the land promised p474 Book – Detriment is not getting benefit promised, see Agnew Case) Therefore it makes it unnecessary to rely on failure of a JV without attributable blame. Baumgartner principle and Proprietary Estoppel should not be confused. Ie. If find Proprietary Estoppel – do not have to consider failure of a JV. Important: Where Proprietary Estoppel = constructive trust, therefore S59 PLA (in writing) therefore does NOT apply see Last v Rosenfeld per Hope J. In Green v Green p486/468? Book, a de facto husband induced his de facto wife not to return to her native country by promising that she would obtain a proprietary interest in the house (ie. Inducement) in which they were living. The wife acted to her detriment (in reliance of the promise) by returning to husband and not returning to her native country. He then persuaded her to move to another house by promising that she would have a proprietary interest in the second house. It was their common intention that the wife should have a proprietary interest in the second house. It is unclear if this interest was given to her in exchange for her interest in the first house. A majority of the NSW Court of Appeal applied the doctrine of proprietary estoppel, a form of constructive trust the result was that a trust was imposed on the legal owner of the property, namely the husband, to hold the property on trust for the claimant, his wife. The Court held that the woman held a beneficial joint tenancy with her husband in the second house. That second house was registered in the name of the third party, who initially held it as trustee for the husband. On his death, the wife succeeded to the entire beneficial ownership by way of the right of survivorship as an equitable joint tenant. Thus, when the husband died, the registered owner held the property in trust for the wife of the deceased. The Court did not decide what proprietary interest the woman might have had in the first house. This decision was reached by way of a majority of the Court. The majority consisted of Gleeson CJ and Priestley J. Mahoney JA held in dissent that the woman suffered no detriment because she would not have returned to her native country, even if the man did not promise to her that she would have a proprietary interest in the house. The majority decision is regarded as good law.

JV or Proprietary Estoppel? If find Proprietary Estoppel then don’t have to consider JV as JV does not preclude Proprietary Estoppel (and HCA could be said to have created a fictitious JV to satisfy the case at hand) Look to Intention of the Parties? – Intention crucial for this principle The Baumgartner v Baumgartner principle provides an alternative route for the claimant. The claimant can show that there was the failure of a joint venture without attributable blame. Alternatively, the claimant could claim proprietary estoppel, a branch of promissory estoppel. There is proprietary estoppel if the Court, as a result of the promisee having been acted upon to his or her detriment upon the inducement held out by the promisor, gives to the promisee a proprietary interest in the relevant property. The nature of the proprietary interest depends on the nature and content of the promise.

70

LAWS313 EQUITY Lecture Notes – Semester 031 If there is no proprietary estoppel or joint venture or resulting trust (or unjust enrichment), a mere financial contribution made by the claimant to the household budget or the provision of domestic support will not confer upon the contributor an equitable interest in the property as against the legal owner. In Allen v Snyder , the man promised to give the woman an interest in a house if they married each other. The house was purchased in the man’s name with his money. There was no marriage. The NSW Court of Appeal held that since the parties did not intend the woman to have any interest, and as there was no marriage, the woman could not say that she acted to her detriment in reliance on the man’s promise. It was assumed that a party who has not contributed to the purchase price can only obtain an interest in the house as against the legal owner by way of proprietary estoppel in the absence of an enforceable contract. This case was decided before Baumgartner v Baumgartner and the joint venture principle was established. Both Allen v Snyder and Calverley v Green should be read in the light of Baumgartner v Baumgartner. Grant v Edwards Book p464 is a case similar to Green v Green. In that case, a de facto husband purchased a house jointly with his brother as legal joint tenants. The brother did not claim any beneficial interest in the house and may be disregarded for current purposes. The de facto husband had said to his de facto wife that the only reason why he had not put her name on the title to the house was to avoid prejudice to her in the matrimonial proceedings between her and the husband to whom she was legally married, namely not her de facto husband. This explanation was not true (he lied) The Court of Appeal said that the parties had a common intention that the man and the woman would share the title to the house equally. Indeed, the man’s false explanation to the woman would not have been necessary if he had not shared with the woman the common intention that they should own the house equally. Due to this common intention and because the woman’s name was not on the certificate of title, the man had given her this false explanation. The Court further found that the woman had acted to her detriment in reliance on the common intention by contributing to the general household expenses, thereby enabling the man, who paid the deposit, to pay the mortgage instalments also. The Court was of the view that it would be unconscionable for the man to claim the sole ownership of the house when the woman had made a substantial contribution of the basis of their common intention. The Court therefore held that the parties owned the house equally on the basis that there was a proprietary estoppel raised against the man. The man’s common intention with the woman, that she would have a half interest in the house, had induced her to act to her detriment. The house was owned equally in equity. Grant v Edwards was applied in Green v Green. Bryson v Bryant Book p472, however, is an example of the claimant failing. In that case, there was a married couple. After 60 years, the wife predeceased her husband. The executor and sole beneficiary of the wife’s estate, her brother, claimed that although the matrimonial home had been acquired solely in the husbands name and paid solely for by him, the wife owned a beneficial part share. This claim was based on the fact that the wife had performed domestic tasks and had contributed to household expenses. It was argued that she was entitled to a one half share. This argument was based on a resulting trust, a constructive trust and unjust enrichment. The NSW Court of Appeal majority, Shellar and Samuels JJ concluded that the wife had made no financial contribution to the acquisition of the house. No resulting Trust - Her estate therefore had no claim to ownership of the house. There was no proprietary estoppel, as the wife had not been induced to do what she did by her husband promising her an interest in the house. Further, the Baumgartner v Baumgartner principle did not apply and no constructive trust. Even if married life was a joint venture in the commercial sense, it had ended in the way that the parties had intended, namely by the death of one of the parties. The joint venture did not collapse. Thus, the wife acquired no interest in the house and could not claim the following. She could not claim that a resulting trust arose because she had not made any financial contribution to the purchase price of the house and thus, Calverley v Green could not apply. She could not claim proprietary estoppel, as her husband had not promised her an interest in the house in exchange for what she did. There was no collapse of a joint venture without attributable blame. There was no unjust enrichment because there were no grounds for saying that the husband had been unjustly enriched . On known legal principles, there was no injustice. Kirby P dissented. The wife’s financial contribution to the domestic budget gave her a one half interest in the house either on the basis of a constructive trust or unjust enrichment. This dichotomous view is wrong because if the wife was entitled to a beneficial interest as against her husband on the basis of unjust enrichment, there would be a constructive trust as the man would have held the legal title on trust for the woman. There is no Baumgartner v Baumgartner principle in the UK. In Eves v Eves Book p472, the defendant was a de facto husband who had misled the plaintiff, his de facto wife, by saying to her that the reason why her name was not on the certificate of title was that she was less than 21 years of age. The plaintiff believed herself to have a beneficial 71

LAWS313 EQUITY Lecture Notes – Semester 031 interest in the house. She worked to improve the property on the basis of this inducement made to her. The Court of Appeal awarded her a one-quarter interest in the house based on proprietary estoppel. In Cooke v Head , a woman was induced by her de facto husband to act to her detriment on the implied promise that she would be given a share in the land that he had purchased in his own name. They planned to build a house on the land and the woman substantially assisted in the construction of that house and the demolition of an old building on the site. The Court held that the woman had thereby acquired a one third share in the house on the basis of proprietary estoppel, a species of constructive trust. The result ultimately depends on the circumstances raising the proprietary estoppel as to what share the person relying on the promissory estoppel is to obtain. Proprietary estoppel in this type of situation does not always result in equal beneficial ownership of the property. All of these cases above imposed a constructive trust on the legal owner, but see:

A New Approach (if unjust – equitable compensation over constructive trust) Note: Giumelli is NOT the norm. The norm is imposing a constructive trust In Giumelli v Giumelli HCA, a son called Robert received a promise from his parents, the registered owners of a parcel of land, that he would be given ownership of a portion of the land if he agreed to stay on the land and plant the orchard on the portion promised to him. Relying on that promise, Robert declined an offer of work made to him by his father in law. He duly planted the orchard, having been induced to do so by his parents. Robert and his parents argued over his proposed re-marriage following his divorce. The parents said that he had to choose between marriage and continuing to work on the property. Robert chose to marry and he left the property. On the basis of proprietary estoppel, Robert made a claim. He commenced an action in the Supreme Court of Western Australia, claiming that as against his parents, they should subdivide the land and transfer the promised lot to him on the basis that there was a constructive trust in his favour by virtue of proprietary estoppel. The Full Court of the Supreme Court of Western Australia granted Robert the remedy that he sought. The parents successfully appealed to the High Court, conceding that he was entitled to some equitable relief. The parents argued that Robert was not entitled to have a constructive trust imposed on the promised lot. The High Court agreed and held that the son was not entitled to the remedy of a constructive trust although it declared that prima facie, he was entitled to a constructive trust. High Court introduced a qualification of prima facie That prima facie entitlement gave way because it could not exceed the requirement of conscientious conduct by the party estopped. If Robert was given more than was required by conscientious conduct on the part of the parties estopped, it would be unjust. It would be unjust to grant a constructive trust to Robert. The parents could give him something less than ownership of the promised lot without being unconscionable. In the circumstances, the imposition of a constructive trust on the parent would be unjust. The High Court declared that Robert was entitled to payment to him by the parents of a sum of money representing the value of the promised lot at the time of judgement. Therefore the son got equitable compensation vs constructive trust. This sum of money would be charged on the entire parcel of land. The High Court said that it would be unjust to impose a constructive trust because it would be unfair to the other members of the family who had made improvements to the promised lot. It would be particularly unfair to another son called Stephen and his family who had begun living on the promised lot after Robert had left the property. The High Court said that in the circumstances, the remedy pointed to was the award of equitable compensation to Robert, a monetary sum. There was no evidence that Stephen was promised an interest in the promised lot. If Robert had been awarded a constructive trust, any injustice could have been compensated for by the parents. Qualification by High Court: Thus, the High Court overturned the decision of the Western Australia Supreme Court. However, the High Court decision is not logically superior. With respect to estoppel concerning property, the prima facie rule is that the promised property must be transferred to the promisee, namely a constructive trust, but where such a transfer would lead to injustice to other parties, including the estopped party, then the remedy to be awarded to the party successfully raising the estoppel will be equitable compensation and not a constructive trust. The difficulty with the decision is the finding that a constructive trust would have been unjust. A number of cases have since distinguished, see: Dept of Social Security v Agnew 2000 FCR 357 at 362. FC said circumstances in Guimelli were not present therefore constructive trust imposed. Court applied prima facie position. 72

LAWS313

EQUITY

Lecture Notes – Semester 031

PRESUMPTION OF A RESULTING TRUST MAY BE REBUTTED EITHER COMPLETELY OR ONLY PARTIALLY The presumption of advancement or the presumption of a resulting trust is rebuttable by contrary evidence. The presumption of a resulting trust may be rebutted only partially in some cases. The consequence is that insofar as there is a rebuttable presumption of a presumed resulting trust, there will be a gift of the relevant part of the part of the property. In respect of that part of the presumption that was not rebutted, there will be a presumed resulting trust. Thus, the person receiving the property would get a partial beneficial interest and hold the remaining beneficial interest on a resulting trust for the transferor. The transferor doe not have to transfer the property directly to the transferee. The transferor can make a purchase and direct the vendor to transfer the property to the transferee. This would also raise a presumption of a resulting trust. The authority for this proposition is Napier v Public Trustee (Western Australia). In that case, a de facto husband purchased land and directed the vendor to transfer the title therein to his de facto wife, intending her to have only a beneficial interest. After the woman died, it was held that her executor had rebutted the presumption of resulting trust, only to the extent of showing that she had a beneficial life interest. With respect to the equitable remainder in fee simple, the presumption of a resulting trust was not rebutted and it resulted to the man. At the woman’s death, the beneficial fee simple vested in the man in possession. This case also illustrates the proposition that a presumption of a resulting trust will arise not only when, in the absence of a presumption of advancement, property is transferred gratuitously by one person to another, but also when it is gratuitously transferred to the transferee by the transferor pursuant to a direction given to the transferor by the equitable owner of the property. In such a case, there will be a presumption of a resulting trust in favour of the directing person, not the transferor.

DE FACTO LEGISLATION In NSW, the De Facto Relationships Act, now called the Property (Relationships) Act (NSW) 1984, has, in a sense, superceded the case law. Under the legislation, which covers all relationships, not only de facto relationships, the Court may distribute property on any basis that it considers just. In Queensland, however, there is no such legislation dealing with the distribution of property between de facto couples. The above cases regarding resulting and constructive trusts in de facto relationships are still good law in Queensland.

RESULTING TRUSTS AND ILLEGAL TRANSACTIONS The Former Position – The Old Law in Australia (still law in UK) The law in Australia with respect to resulting trusts and illegal transactions used to be as follows: •

If a claim to a resulting trust could be formulated in such a way so as to avoid a reference to an illegal transaction, the claim will not be defeated by a defence alleging that such a trust was illegally formed and executed, even if the parties engaged in an illegal transaction. This is known as the procedural approach.

•

However, if reference to the illegal transaction cannot be avoided in formulating the claim, then the claim would not have been permitted.

Illegality Only applies where an illegality exists that COULD have been done legally. Cannot argue where complete ‘intentional defrauding’ exists In Martin v Martin Book p390, a husband paid for the purchase of a block of land, the legal title to which he directed to be transferred to his wife. A presumption of advancement is raised in respect of a gift made by a husband to his wife. The husband argued that the presumption of advancement was rebutted because he had no intention of making a gift of the land to his wife, and that his reason for directing it to be transferred to her was to evade federal land tax. (ie. Illegal) HCA: It was equivocal for the husband to assert that his purpose was to avoid tax because it could be avoided legally by the husband making a gift to his wife, strengthening rather than rebutting the presumption of advancement (ie. If gift intended then no illegal purpose). Alternatively, the husband illegally intended to avoid land tax, in which case 73

LAWS313 EQUITY Lecture Notes – Semester 031 the resulting trust for the husband was formed for an illegal purpose. If the second alternative is preferred, the further question is whether the illegal purpose of the husband has been wholly or partly carried out. In its findings, the High Court made the following statements, one of which is still good law. •

The husband intends the property as a gift to his wife because that is the only was in which he can lawfully avoid tax. If this is the interpretation given to his action, then not only is the presumption of advancement not rebutted, but it is in fact confirmed. This is still good law.

•

The husband intends thereby to avoid tax unlawfully, in which case it must be asked further whether the unlawful purpose has been carried out. If the unlawful purpose has been wholly or partly carried out, then the law will not allow him to enforce the resulting trust. However, if such a purpose has not been carried out, and he repents of his unlawful purpose, then he will be able to enforce the resulting trust in his favour. This second point is no longer good law in the light of the recent High Court decision in Nelson v Nelson.

The first alternative was preferred by the High Court because it said that there was no definite liability to pay tax on the part of the husband and therefore it was likely that he had made a gift to his wife merely to avoid the possibility that he might otherwise have to pay tax. There was no illegal purpose on his part. The High Court held that the husbands real intention was to avoid the payment of land tax lawfully, namely, he intended to make a gift to his wife. The true explanation of what the husband had done did not rebut the presumption of advancement. As the presumption was not rebutted, the wife received the land beneficially, so that there was no resulting trust in favour of the husband. In Blackburn v YV Properties Pty Ltd, the Supreme Court of Victoria applied by the procedural approach. This is good law in England but not in Australia.

English Position (not law in Australia) There is a divergence between the English position and the Australian position. The English position was lucidly stated in Tinsley v Milligan Book p389. In that case, the appellant and the respondent were assumed to have contributed equally to the purchase of a lodging house in which they and the lodgers lived. The purchase was completed by transferring the legal title to the house solely to the appellants. This was done to enable the respondent to make false benefit claims to a government department. The respondent made these claims over a number of years. The illegal purpose was implemented. The parties eventually disagreed and the appellant moved out of the house. Relying on her legal title, she sought to evict the respondent. The respondent counter claimed for a declaration that the appellant held her legal title for both of them as equitable tenants in common in equal shares. The Court dismissed the applicants claim and allowed the respondent’s counter claim, based on a resulting trust in her favour. The majority said that the respondent could prove a presumption of a resulting trust in her favour, simply by showing that she had contributed to the purchase price of the house, without having to plead the illegal approach. When parties contribute to the purchase price of a house, the legal owner was subject to a presumption of a resulting trust in favour of the other party. The Court thus adopted the procedural approach. Since the presumption was not rebutted, there was a resulting trust of half of the beneficial title for the respondent. The Court held that the respondent had a beneficial half share in the property. The dissenting minority took the view that as the unlawful purpose had been carried out, it was contrary to the policy of the law to allow respondents to rely on the presumption of a resulting trust. In Tribe v Tribe, the English Court of Appeal held that if a party was only able to rebut a presumption of advancement by disclosing an executed illegal purpose in which he participated, a Court would not allow him to rebut that presumption, following Tinsley v Milligan. However, in Tribe v Tribe, the illegal purpose was not carried out. Thus, the above comments are obiter dicta and are not good law in Australia. The English position is strange because it distinguished between a presumption of advancement and a presumption of a resulting trust.

The Current Position – The New Law in Australia (Nelson v Nelson – Intention to Defraud) If the trust was formed to carry out an illegal purpose and that purpose is carried out, then notwithstanding that the illegal purpose was carried out, the trust will be enforced provided that the person enforcing it is made to surrender

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LAWS313 EQUITY Lecture Notes – Semester 031 the illegally obtained benefit (and there is no statute that prohibits enforcement of trust.) If the illegal purpose behind the trust has not been wholly or partly carried out (ie. Exists in intention only), the trust will be enforced. Note: Finish argument by stating: the trust will be enforced provided that the person enforcing it is made to surrender the illegally obtained benefit (and there is no statute that prohibits enforcement of trust.) Thus, subject to conditions, the person who has implemented the unlawful purpose may still enforce the resulting trust. It is no longer crucial to decide whether the unlawful purpose has been carried out, rejecting the decision in Tinsley v Milligan. ** Very Important – clear. In Nelson v Nelson HCA House 1

House 2

Paid for by Mrs N

Wanted to buy – applied for loan subsidy from Cth Gov (< interest)

Transfer

(Granted provided did not own other house)

Tx to Son & Daughter

(Mrs N fraudulently denied owning any dwelling – ie. House 1)

(paid no money)

(Therefore obtained loan subsidy – illegally)

(registered tenants) Later Sold (House 1 - Dispute arose over net proceeds of sale)

(No dispute over ownership of House 2)

Note: Son did not dispute, Daughter did – she wanted half. A mother, Mrs Nelson, paid for a house that was, pursuant to the purchase, transferred into the joint names of her son and her daughter. The house was later sold and there was a dispute as to ownership of the proceeds of sale of the house. The first issue was whether there was a presumption of advancement in favour of the children in relation to the house.

Presumption of Advancement – Mother - Children The High Court unanimously held that when a mother transfers property to her children, there is a presumption of advancement. It would be illogical to hold that the presumption applied when a father transferred property, but not a mother. The second issue was if there was such a presumption in favour of the children, whether that presumption could be rebutted by the mother, given that she had put the title to the house in her children’s name to enable her to subsequently and successfully but illegally apply for a defence service home loan to pay for the second house. Mrs Nelson was able to obtain the loan by saying that she did not have an interest in another house. The defence service home loan had a much lower interest rate than the commercial rate. This was the benefit derived by Mrs Nelson in relation to the second house. The purchase of the first house was made with money provided solely by Mrs Nelson. After this was done, she applied for a subsidised defence services home loan on the fraudulent basis that she did not have an interest in another house at the time of application. On this basis, she obtained a subsidised home loan, namely a home loan with an interest rate lower than the standard. She used the money obtained in the loan, as part of the purchase price of the second house but the ownership of this property was not in issue. The son did not dispute Mrs Nelson’s claim. He did not rely on his legal title to dispute his mother’s beneficial interest. The daughter, however, said that she owned her interest in the house legally and beneficially. She attempted to rely on her legal title to deny her mother’s beneficial interest. Since the house had been sold, the litigation concerned the ownership of the proceeds of sale of the house. The High Court accepted Mrs Nelson’s argument that the purpose of the Act, under which she obtained the loan, was sufficiently served by the penalties that the Act imposed on her for breach of the act and that denial of a resulting trust in favour of Mrs N would prejudice her in favour of her daughter without furthering the objects of the legislation. (ie. Suffer penalties under Act but don’t allow daughter half) The High Court agreed with Mrs Nelson that the imposition of the additional sanction, namely, her inability to enjoy the proceeds of what otherwise was her beneficial ownership of the house, would not be an appropriate adjunct to the legislative scheme. (ie. She was beneficial owner of house 2)

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Remedy – Repay Benefit Received within Specified Time For Exam: Consider Intention to Defraud last as repayment does not have to be decided until Court Order made. The majority, Deane, Gummow and McHugh JJ formulated a remedy for Mrs Nelson. They said that if she repaid to the Commonwealth an amount equal to the sum of the benefit received in respect of her purchase of the second house (by a specified date), then her children’s solicitors would hold the whole balance of the proceeds of sale of the property, together with any interest earned thereon, upon trust for her. This means that if Mrs Nelson was to repay the amount of the illegal benefit to the Crown, she could rebut the presumption of advancement and a resulting trust would exist in her favour. •

The balance of the proceeds of sale comprised the proceeds of sale after payment had been made to discharge the mortgage on the property.

•

The Court further ordered that the money so held by the children’s solicitors should be paid to Mrs Nelson.

Thus, the result was that a resulting trust arose and Mrs Nelson could rebut the presumption of advancement. This was conditional upon Mrs Nelson disgorging her illegally obtained benefits to the Commonwealth before she could obtain the remedy. Failure to Repay – Deduct from Her Interest and Divide Proportionately to others The Court further declared that if Mrs Nelson failed to pay the specified amount by a specified date, the children’s solicitors should hold that specified amount for Mrs Nelson’s daughter and the remainder of the balance of the proceeds of sale for Mrs Nelson. (ie. amount obtained held for daughter) Thus, if Mrs Nelson did not repay that amount to the Crown, the amount that should have been paid will be held to be payable to the daughter and only the remainder should be paid to Mrs Nelson. The Court further ordered that in that event, those two sums of money should be paid respectively to Mrs Nelson and to her daughter. Thus, Mrs Nelson would get a resulting trust in both circumstances. However, she would get a diminished resulting trust if she did not repay the sum of money illegally obtained back to the Commonwealth. If Mrs Nelson did not repay the Crown, her daughter would get a windfall. That windfall is less than the windfall she would have received if Tinsley v Milligan had been applied. If the procedural tests had been applied, the daughter would have received a windfall without vindicating the policy of the Act because that policy was to allow the Commonwealth, in the case of any improperly obtained benefit, to recover the value of the subsidy, or such smaller amount as the Commonwealth saw fit. Thus, either way, Mrs Nelson would not get the benefit of her illegal conduct. The problem is that the second alternative is unduly favourable to her daughter. Dawson and Toohey JJ dissented as to the terms on which that remedy should be awarded to Mrs Nelson. They tended to be more generous that the majority of the Court. They held that the resulting trust in favour of Mrs Nelson should not be made subject to conditions. Whether or not the Commonwealth decided to recover the benefit of the subsidy from Mrs Nelson under the relevant Act was a matter for the Commonwealth. The Court should not order Mrs Nelson to pay the benefit that she had illegally received back to the Crown, if the Crown chose not to recover it back from her. Does daughter (or others) get a windfall at the expense of the Cth? – NO Reasoning: 1.

Cth did not contribute a single cent to either purchase (or renovation if applicable)

2.

Benefit held for others comes from a reduction in the defrauders interest

3.

Defrauders interest was not acquired with Cth money

In summary: •

The majority view is preferable because the minority view would reward Mrs Nelson for her breach of the Act in the event that the Commonwealth elected no to recover the benefit of the subsidy from her.

•

The majority and minority decisions of the High Court unanimously rejected the view expressed in Tinsley v Milligan.

•

The ratio decidendi of the case is as follows. A person may vindicate a right even where that right is tainted by the implementation of an unlawful purpose, so long as the vindication of that right is reduced by depriving that person of the benefit specifically derived by him or her from the implementation of the unlawful purpose. 76

LAWS313 EQUITY Lecture Notes – Semester 031 If the facts in Tinsley v Milligan were subject to the law in Nelson v Nelson, the respondent would have been deprived of the illegally obtained benefit but still would have obtained a resulting trust.

Measuring the Unlawfully Derived Benefit A likely area of uncertainty, following the decision in Nelson v Nelson, is the measure of the unlawfully derived benefit in a particular case. The unlawful benefit was simple to quantify in that case but it will be more difficult in other cases.

Summary of the Current Position – The Law in Australia A resulting trust may still be established, even by the disclosure of the execution of an unlawful purpose engaged in by the resulting beneficiary, provided the latter is derived of the benefit obtained by recourse to the unlawful position.

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WEEK 8/9 CONSTRUCTIVE TRUSTS (RESIDUARY CATEGORY) – NOT BASED ON INTENTION A constructive trust, other than in the context of a de facto relationship, is a trust that is neither an express trust nor a resulting trust. A constructive trust is imposed whenever equity considers it unconscionable for the legal owner of property to deny another persons partial or entire beneficial interest therein. Unlike an express trust or a presumed resulting trust, but arguably like an automatic resulting trust, a constructive trust is not created by the intention of any party. The intention may be one element in deciding whether or not a constructive trust should be imposed, but the intention of a party is not decisive in the creation of a constructive trust. Constructive trusts are thus imposed on the legal owner of property when equity considers it otherwise unconscionable. Also applies to someone with equitable interest only, see Oughtred Basically, there are three types of constructive trusts: •

Constructive trusts imposed to prevent the statutory writing requirements from being used as an instrument of fraud (s11 and s59 PLA) CM p12

•

Secret trusts and half-secret trusts

•

Strangers who receive trust property either with notice of a breach of trust or pursuant to assisting in another person’s breach of fiduciary duty

CONSTRUCTIVE TRUSTS IMPOSED TO PREVENT THE STATUTORY WRITING REQUIREMENTS FROM BEING USED AS AN INSTRUMENT OF FRAUD A constructive trust will be imposed whenever someone attempts to rely on the absence of writing to give himself an unconscionable benefit.

Orally Receiving Property subject to Contingent Trust In Last v Rosenfeld Book p461, it was held that section 59 of the Property Law Act cannot be used as an instrument of fraud. In that case, the plaintiff and the defendant were half joint owners of a house. Pursuant to an oral agreement, the plaintiff sold and transferred his half share of the property to the defendant , on the condition that if the defendant did not, within 12 months of the sale, live in the house, the defendant would re-transfer the half share to the plaintiff at the price at which the plaintiff sold to the defendant. The agreement related to land and was oral. It was therefore in breach of the NSW counterpart to section 59. Instead of observing the oral agreement, the defendant (in breach) sold the house to a third party for a cash payment and a mortgage back to themselves to secure the payment of the balance of the purchase price. The plaintiff sought a declaration that they were entitled to one half of that cash, and a one half interest in the mortgage given by the third party purchaser. Hope J granted the plaintiff the declaration that he sought. He explained that the defendant had received the property in trust and held one half of the property on trust for the plaintiff. It was a defeasible trust that would be terminated if the defendant had commenced living in the house within 12 months. The trust was a contingent trust to re-transfer to the plaintiff their half share of the property if the defendant failed to live in the house within 12 months of the sale, and if the plaintiff paid the price which they had paid the plaintiff under the agreement of sale. Having received the property subject to this contingent trust in favour of the plaintiff, the defendant would not be permitted to rely on the absence of writing and thereby use the Statute of Frauds as an instrument of fraud. If the plaintiff had not initially transferred his half share to the defendant, the defendant could not have enforced that oral agreement by virtue of the section 59 writing requirement.

Oral Agreement to SELL land not enforceable The defendant, having taken title to the land in trust is a case different from the case of an absolute owner of land making an ineffectual voluntary oral declaration of trust. This case was also different from an oral agreement to sell land. It must not be thought that an oral agreement can be made to sell land. It is only if property is received in trust or upon a contingent trust that the Statute of Frauds cannot be relied upon. An oral agreement to sell land cannot be enforced because of section 59 unless the doctrine of part performance is applicable. The doctrine of part

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LAWS313 EQUITY Lecture Notes – Semester 031 performance, by virtue of section 6(d), is an exception to the writing requirements in section 11(1). According to section 11(1)(b) and Wratten v Hunter, a voluntary declaration of trust respecting land is ineffectual and void.

SECRET TRUSTS AND HALF-SECRET TRUSTS Fully Secret Trusts A fully secret trust arises where, on the face of a will, a beneficial disposition of property is made to a person who has orally agreed with the testator that he would accept the property given to him under the will on trust for some other person. This will occur where a testator gives property by will to a beneficiary and says that the property is given in trust but the will does not say as that the gift is under trust. The beneficiary of the will, having taken the property and attempting to deny the existence of the trust, is required to hold that property as trustee for the benefit of the trust, despite the absence of writing. This oral trust is enforced, notwithstanding that the will makes no reference to it. It will be enforced because the beneficiary under the will, as distinct from the beneficiary under the secret trust, induced the testator to make the gift in the belief that the beneficiary under the will would take the property as trustee. It would be unconscionable for the legatee or devisee to rely on the writing requirements of testamentary dispositions to deny the existence of the trust. The beneficiary under the will cannot say that because section 7 of the Succession Act has not been complied with and therefore there is no trust. A legatee is a person who takes personalty under a will. A person who takes realty is a devisee. Ottoway v Norman is an example of a fully secret trust. In that case, a testator made three dispositions to H. Those dispositions were his house, a legacy of 1500 pounds and half of his residuary estate. After the testator’s death, H made a will, giving all of her property to the plaintiff. Subsequently, H revoked her will to make a new will in which she devised the house to the executor of her will, namely the defendant. After H’s death, the plaintiff sought a declaration that the defendant executor held the house absolutely for the plaintiff. Brightman J granted the declaration. He said that H had received the house pursuant to a fully secret trust in favour of the plaintiff. H, the secret trustee, was the primary donee and the beneficiary of the trust was a secondary donee. He held that there are three essential elements in a secret trust: •

The testator’s intention that the primary donee under the will be subjected to an obligation in favour of the secondary donee,

•

Communication of that intention to the primary donee,

•

Acceptance of that obligation by the primary donee, either expressly, by implication or by acquiescence.

It was held that there was no secret trust in respect of the items of property other than the house left by the testator to H because H had intended to take those other items beneficially. This criteria was applied in Blackwell v Blackwell Book p464. Although the trust in that case was half-secret, the House of Lords, by way of obiter dicta, gave approval of the fully secret trust.

Half Secret Trusts A half secret trust arises where the terms of the will make it clear that the beneficiary takes the property in trust but the terms of the trust are not spelled out in the will. A half-secret trust is in all respects the same as a fully secret trust except that the legatee or devisee is identified in the will as the trustee. However, the trust is half-secret because the beneficiaries are not identified in the will

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STRANGERS WHO RECEIVE TRUST PROPERTY EITHER WITH NOTICE THAT IT IS TRUST PROPERTY IN BREACH OF TRUST OR PURSUANT TO ASSISTING IN ANOTHER PERSON’S BREACH OF FIDUCIARY DUTY AND THEREBY MAKING A PROFIT A stranger is someone who has not been expressly appointed as a trustee.

Knowing Assistance If one was to knowingly assist a trustee or a fiduciary to breach his duties, and in giving that assistance he acquired property or made a profit, he would hold the property or profit on trust for the person to whom the duty was owed. In Barnes v Addy, Book p400 the respective solicitors of the two trustees (Barnes and Addy) of a trust prepared the necessary documentation to transfer the trust property held by one trustee to the other. The trustee (Barnes) to whom this trust property was subsequently transferred embezzled the entire trust fund. The issue was whether either of the two solicitors had knowingly assisted the defaulting trustee (Addy) to commit his fraudulent breach of trust – breach of trust (Addy) and embezzlement (by Barnes). It was held that neither solicitor knew or had reason to believe (no suspicion) the fraudulent design of the defaulting trustee (ie. Didn’t know Barnes would embezzle – did not knowingly assist Barnes embezzle, but according to Dong did assist Addy as they were solicitors and should have known about the trust instrument). Lord Selborne said that in this context, there were to classes of strangers to a trust who would be made constructive trustee: •

Persons who had obtained title to trust property with notice of the trust, purportedly for their own benefit. In that case, the constructive trustee would have to disgorge the trust property, or if that trust property had been dissipated, they would have to compensate the person to whom the duty was owed for the dissipation.

•

Persons who may not obtain title to trust property, but who knowingly assisted the trustee to commit his breach of trust. This, if the stranger assists in causing loss to the person to whom the duty was owed, that person so assisting the defaulting trustee would have to compensate the trust for such loss.

If the trust property was so received, the stranger would become a constructive trustee thereof. If no trust property was so received, but loss was caused, the stranger would be liable to repay that loss.

Knowledgeable Assistance of a breach of Fiduciary Duty ** Key Case - A very important case in the law concerning the knowledgeable assistance of a breach of fiduciary duty is Consul Development Pty Ltd v D.P.C. Estates Pty Ltd. DPC (Company) Grey (Defacto Director = fiduciary) (But acted for himself not DPC) Property Speculator (Buy, Renovate and resell) Entered agreement with Consul (thru Clowes – MD) (Agreement was to purchase Property for resale and share profits – in breach of fiduciary duty to DPC) (Property purchased in Consul name but Grey & Consul to share in profits) Therefore Consul assisted Grey to breach the fiduciary duty Crucial Q: Did Consul (thru Clowes) knowingly assist Grey? (Factual assistance not disputed) HCA split 3:1 (Mc Tiernan Dissent) In that case, there is no ratio decidendi but the High Court decision is useful. There, Grey was a de facto director of the plaintiff, D.P.C. As a de facto director, Grey owed a fiduciary duty to the company. In breach of this fiduciary duty to DPC, Grey, without informing the plaintiff, entered into an agreement with the defendant company, Consul Development, to purchase land. The plaintiff was also interested in acquiring that land. Thus, there was a conflict of interest between Grey’s personal interest and D.P.C.’s interest, the company to whom he owed a fiduciary duty. He was competing with someone to whom he is supposed to subordinate his interest. The agreement between Grey and Consul Developments was through the defendant’s managing director, Clowes. 80

LAWS313 EQUITY Lecture Notes – Semester 031 The issue was whether given that Grey was undoubtedly acting in breach of his fiduciary duty to the plaintiff, did the defendant, through its managing director, knowingly assist in that breach? If that was the case, Consul Developments would have to account to D.P.C. for the benefit obtained by Clowes assisting Grey to breach his duty. A sub-issue was therefore the meaning of the concept knowledgeable assistance. Gibbs J said that the Barnes v Addy principle of liability extended to knowledgeable assistance, not only in cases of breach of trust, but also in all other cases of breach of fiduciary duty. The Barnes v Addy principle was limited to a breach of trustees duty, namely a case where a stranger had knowingly assisted a person in fraudulent breach of trust. That principle would not apply if there had been no fraudulent conduct. He said that a person who derives a benefit by knowingly assisting a fiduciary to breach his duty is liable to account for that benefit to the person to whom the fiduciary duty is owed. He did not say what type of knowledge was required in holding that there had been no assistance with knowledge. Without deciding the issue,

Selangor Test (Test of Reasonable Care) Gibbs J said that he was prepared to assume that a stranger would have the relevant knowledge where the breach of fiduciary duty would have been discovered by him on inquiry, and an honest and reasonable person would have made such an inquiry. This test was first propounded in Selangor United Rubber Estates v Cradock (No 3). It is known as the Selangor test. Applying this test to the facts, Gibbs J said that Clowes did not have the relevant knowledge because Grey had persuaded him (ie. Lied) that owing to financial constraints, the plaintiff (DPC) was not interested in purchasing the property that he and the defendant had proposed to acquire – Consul not liable. If D.P.C. had in fact no interest in making the purchase, Grey was not in breach of his duty to D.P.C. by making the purchase himself.

Carl Zeiss Test (Dishonest + Blind Eye) – More Lenient Barwick CJ concurred with Stephen J. They rejected the Selangor test and said that the relevant knowledge was (Carl Zeiss Test) either actual knowledge of facts, which themselves would tell of fraud or breach of fiduciary duty to a reasonable person; or abstention from inquiry for fear of learning the truth. They held that the Selangor test is too strict on the stranger. The test of knowledge that they applied is narrower than the Selangor test and is more lenient towards the person accused of assisting the breach of fiduciary duty. Even though Barwick CJ and Stephen J applied a different test, they nonetheless reached the same conclusion as Gibbs J. That conclusion was that Clowes had no knowledge of Grey’s breach of duty because Grey had misled him into thinking that the plaintiff was not interested in the property, thereby removing these properties from the ambit of Grey’s fiduciary duty. The test that Barwick CJ and Stephen J applied was first propounded in Carl Zeiss Stifting v Herbert Smith and Company (No 2). It is known as the Carl Zeiss test – test of honesty (not test of reasonable care – Selangor). 2 arms to test: 1.

Would an honest person recognise a breach of duty (ie. Dishonest conduct); OR

2.

Was there abstention from inquiry for fear of learning the truth (The Blind Eye test).

As Consul Development’s managing director did not have the requisite knowledge, this requisite knowledge could not be imputed to Consul Developments, the defendant, itself. The tests are theoretically different but in practice, the result will often be the same. McTiernan J dissented. Like Gibbs J, he applied the Selangor test, but unlike Gibbs J, he found that Clowes, the managing director of Consul Developments, had undermined Grey’s loyalty knowingly to the plaintiff, D.P.C – therefore Consul liable. Thus, of the four judges, two applied the wider and therefore stricter Selangor test. Those judges were Gibbs and McTiernan JJ however they reached a different result. The other two judges applied the narrower and more lenient Carl Zeiss test. Those judges were Barwick CJ and Stephen J. The majority of the Court concluded that whichever test was applied, the result would be the same. There is uncertainty in Australia today as to whether to apply the Selangor test or the Carl Zeiss test. The result of this debate is not absolutely clear. The balance of authority appears to favour the Carl Zeiss test. For example, in United States Surgical Corporation v Hospital Products International Pty Ltd, acting on the assumption that a fiduciary duty existed and had been breached, an assumption later reversed by the High Court, the NSW Court of

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LAWS313 EQUITY Lecture Notes – Semester 031 Appeal declared its support for the Carl Zeiss test. In the absence of binding High Court authority, the answer in unclear. In Agip (Africa) Ltd v Jackson, a ‘knowing assistance’ case: the plaintiff (a company) had been defrauded by its chief accountant, the defendant, who, in respect of the relevant cheque, had removed the name of the lawful payee and had substituted (fraudulently) as payee the name of a company of which he was the controlling director. Although the litigation related to this one cheque, the defendant had done the same thing with other cheques on previous occasions. Q: did the controlling Directors (of the recipient company – and not the actual recipients) knowingly assist the fraudulent accountant in his fraud? It was held that the defendant and his company were liable as constructive trustees of the amount of the cheque, because they were aware that the plaintiff had been defrauded and they had dishonestly failed to inquire further into the matter. The Court applied the Carl Zeiss test. The defendant company had knowingly assisted the accountant to breach his fiduciary duty. (If equitable compensation then in the case of insolvency, just line up with other unsecured Creditors and may get dividend like 5c in $, but if deemed Constructive Trustee then can take all the money owed to you – therefore distinction crucial) In Royal Brunei Airlines v Tan a ‘knowing assistance’ case: Royal Brunei Travel agent (Trustee for money for Tickets) (Travel Agent misappropriated Trust money for agency purposes) Tan (MD of Travel Agent) – Tan was sued for knowing assistance by Royal Brunei (Note: Tan was NOT accused of receiving money) (Tan was not accused of any breach of fiduciary duty because he owed no such duty to Royal Brunei) the plaintiff was an airline company and the defendant was both the managing director and the principle shareholder of a travel agent company. There was an agreement between the airline and the travel agent requiring the travel agent to hold the airlines money in trust for the airline. In breach of this agreement, the travel agent used the airline’s money for its own purposes. The plaintiff airline terminated the agreement when the travel agent’s payments to it fell into arrears. As the travel agent company was insolvent, the airline sued Tan personally for the unpaid money on the ground that he had knowingly assisted the travel agent company in its fraudulent breach of trust. The Brunei Court of Appeal held that the travel agent company had been badly mismanaged but the company had not been guilty of fraud by using the airlines money for its own purposes. This finding is not convincing – they made a mistake.

Honesty – Objective Standard (No Moral Standards Implied) The issue before the Privy Council was whether in the case of liability imposed for knowledgeable assistance of a breach of trust, the breach must also be fraudulent. The question was whether assistance in innocent breach of trust would attract liability. Royal Brunei Test – Honesty: The Court held that the breach of trust did not have to be fraudulent to attract liability. To ground liability, it was enough that the defendant, namely the person assisting the breach of trust, had behaved dishonestly (+ no reasonable inquiry) and that standard of honesty is an objective standard (no moral standards implied). Assistance in any breach of trust, as far as the Privy Council is concerned, is sufficient to ground liability. Dong thinks this is the same as the Carl Zeiss test. The Court made an important point by fundamentally rejecting the relevance of the tests of knowledge and lamented that this test all too often led to tortious convolutions. The Court said that the test to apply is whether the stranger has behaved dishonestly in assisting the relevant person to act in breach of trust. That person has acted fraudulently if they have acted in breach of trust. For good measure, the Privy Council held, by way of an alternative ratio decidendi, that the travel agent’s breach of trust was dishonest because the dishonesty of the managing director must be imputed to the company, thus overturning the decision of the Brunei Court of Appeal. This finding inadvertently rendered the Court ’s decision that the trustee’s breach of trust need not be fraudulent into mere obiter dicta.

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LAWS313 EQUITY Lecture Notes – Semester 031 In Consul Development Pty Ltd v D.P.C. Estates Pty Ltd, the High Court assumed that the knowledge test was relevant. The test proposed in Royal Brunei Airlines v Tan, is in practice, indistinguishable from the test proposed by Stephen J in Consul Development Pty Ltd v D.P.C. Estates Pty Ltd. In summary, given that the High Court lucidly applied the test of knowledge in Consul Development Pty Ltd v D.P.C. Estates Pty Ltd, it remains to be seen whether the High Court will accept the view propounded in Royal Brunei Airlines v Tan that the test of knowledge should be discarded, and one should simply ask whether or not it there was dishonest assistance of the breach of the trust. •

The UK position is whether or not there has been dishonest assistance in the breach of a trust.

•

The Australian position is whether that assistance was with knowledge in the breach of any fiduciary duty.

It is likely before Courts in the UK that any assistance of a breach of fiduciary duty will suffice. In New Zealand, in Cigna Life Insurance New Zealand Ltd v Westpac Securities Ltd, the trusted servant of the plaintiff had fraudulently deposited the plaintiff’s cheques into his own account with the defendant company. Greig J adopted the test of dishonest propounded in Royal Brunei Airlines v Tan, namely the Carl Zeiss test, with respect to liability based on assistance with knowledge in breach of trust. Royal Brunei Airlines v Tan is law in New Zealand. In that case, the plaintiff had not alleged that the defendant had behaved dishonestly and as there was no evidence that the defendant had behaved dishonestly, the defendant was not liable to the plaintiff as constructive trustee for the money fraudulently deposited with it. Greig J stated that if he was wrong regarding the requirement of dishonesty, and mere constructive knowledge sufficed to make the defendant liable, on the facts there was no constructive knowledge on the part of the defendant of the plaintiff’s servants fraud because the servant was a trusted servant to the plaintiff, known to the defendant as such. He held that there would be no liability if the Selangor test had been applied. In Australian Securities Commission v A.S. Nominees Ltd, Deane J applied the test of knowledge concerning Barnes v Addy liability. He did not decide whether Royal Brunei Airlines v Tan was correct or which case to apply.

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WEEK 9 FIDUCIARY RELATIONSHIPS There is no generally or universally accepted definition of a fiduciary relationship. The following is a workable definition.

THE ELEMENTS OF A FIDUCIARY RELATIONSHIP A fiduciary relationship is a relationship of trust and confidence. Usually, the parties in such a relationship will exhibit unequal bargaining power, disadvantage or vulnerability. A fiduciary relationship is a relationship where one person undertakes to act in the interest of another. In United States Surgical Corporation v Hospital Products International Pty Ltd, the NSW Court of Appeal espoused a two limb test. 1st Limb: The Court said that a fiduciary is a person who undertakes to act in the interest of another person and the 2nd limb: not to act in his own interest in the matter to which the undertaking relates. That undertaking may be express or implied. Satisfaction of the first limb is not sufficient. Requires the fiduciary to subordinate his interest to the interest of the person to whom the duty is owed. There is a duty imposed on a fiduciary not to place himself in a position where those duties conflict. The law in Australia is that the fiduciary needs to avoid conflict where there is a real possibility of conflict between interest and duty. With the informed consent of the person to whom the duty is owed, the matter is removed from the scope of the fiduciary duty.

FIDUCIARY DUTIES •

No person in a fiduciary position may use the position to obtain a private advantage. The consequence is that liability will attach to any profits derived by reason of knowledge or opportunities acquire through that fiduciary position.

•

No person in a fiduciary position may enter into an engagement in which his personal interest conflicts with his duty.

•

In order to impose liability on the fiduciary, there does not have to be actual conflict demonstrated. A real possibility of conflict, if it arises, is sufficient to ground liability.

In Queensland Mines Ltd v Hudson, Book p455 the Privy Council said that a fiduciary must not place himself in a situation where there is a real possibility of conflict between his duty and his interest. However, the fiduciary may avoid what would otherwise constitute such conflict if he obtains (1) the informed consent of the person to whom the fiduciary duty is owed to what he proposes to do or (2) enter transaction beyond scope of fiduciary. It is always a defence to say what he did was done with the informed consent of the person to whom the duty was owed.

RELATIONSHIPS GIVING RISE TO FIDUCIARY OBLIGATIONS There is no exhaustive list of fiduciary relationships. The following are some examples of fiduciary relationships.

Trustee and Beneficiary The relationship between a trustee (is always a fiduciary) and a beneficiary is the archetypal fiduciary relationship. Clay v Clay 2001 – Guardian is a fiduciary but not trustee – ie. HCA: Not all fiduciaries are trustees The seminal case is Keech v Sandford. In that case, the trustee of a lease renewed the lease in his own name where the lessor had refused to renew the lease in favour of the trust estate. The lease was the subject matter of the trust. Lord King LC held that it was a rule that should be strictly pursued and not in the least part relaxed, that a trustee who obtains a renewal of a lease for himself holds the interest in the renewed lease as part of the trust estate. He held that the trustee held the new lease on a constructive trust for the beneficiary, as the trustee had a duty to account to the beneficiary for the profits arrive thereby. Although it was harsh, the trustee could not obtain a lease of the land. It would be wrong to allow him to renew the lease for himself because if a trustee could renew a lease for himself after failing to renew it for the benefit of the trust, he might not do his best to renew the lease for the trust. There was a real possibility of conflict. The trustee was the only person in the world who could not renew the lease. He could not derive a benefit where there was a real possibility of conflict between interest and duty. 84

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This case established the principle that a trustee must not use his position to make a gain for himself. Subsequently, it has been held to apply generally to all cases where one person stands in a fiduciary relationship to another.

Director and Company Company directors are subject to a legal obligation not to profit personally from their position as directors and not to allow conflict to arise between their duty as director and their own self-interest. Moreover, directors who choose to participate in the management of the company and exercise powers on its behalf owe a duty to act bona fide in the interest of the company. The leading case is the House of Lords decision in Regal (Hastings) Ltd v Gulliver. Book p439. Although the decision in that case was harsh, it is still law as it is yet to be overruled. A more flexible approach would be adopted today. In that case, Regal (Hastings) Ltd formed a subsidiary company to purchase two cinemas. The capital of the subsidiary company comprised 5000 one-pound shares. Regal (Hastings) Ltd strove to avoid a third party buying shares because that would reduce the control that it had over the subsidiary company. Unfortunately, Regal (Hastings) Ltd was only able to subscribe for 2000 shares of the 5000 shares (as they did have enough money). Four directors of Regal (Hastings) Ltd, in view of the company’s inability to acquire the remaining shares, subscribed for 2000 (ie. 500 shares each) of the remaining 3000 shares. At the request of the other directors, the company solicitor subscribed for 500 of the shares. The last 500 shares were subscribed by two other companies, which were not involved in the subsequent litigation. The subsidiary company purchased the cinemas. The shares in Regal (Hastings) Ltd and the subsidiary were subsequently sold. The sale of those shares netted large profits for the directors and the solicitor. As the shares in Regal (Hastings) Ltd itself had also been sold, the company acquired a new board of directors. The new board sued the former directors and the former company solicitor respectively for an account of profits made by them. There was nothing wrong with the directors owning and selling shares in Regal (Hastings) Ltd. The directors were sued for an account of profits made from the sale of shares in the subsidiary company. The HoL held that the former directors of Regal (Hastings) Ltd were liable to disgorge their profits. The Court held that the company solicitor, although a fiduciary, was not liable because he had taken the shares at the request of the directors. He had therefore done so with the informed consent of the company. The two bases of liability discussed remain today and either line of reasoning is sufficient to impose liability. The Court, however, could not agree as to which approach to adopt. The two approaches to liability are not invariably present in every breach of fiduciary duty. It is possible to have one type of breach of duty without the other. Since this decision, Courts have decided that both bases of liability (ie. 2 lines of reasoning) are to be attributed to a fiduciary. 1st line: Conflict Rule - Lord Sankey VC held that the principal liability of the directors was based on the proposition of law that a fiduciary in a position where duty conflicted or might possibly have conflicted with his interest was liable to account to the person to whom the fiduciary duty was owed for any profit resulting from such a conflict or possibility of conflict. This is known as the conflict rule. 2nd line: Profit Rule - Lord Russell held that the directors were liable to account for profits as fiduciaries because they had made a profit only by reason of the fact that they were directors in the course of the execution of that office. This reasoning is narrower than the above. He adopted the so-called profit rule. He did not refer to the conflict rule. If the directors had obtained the informed consent of the company, they would not have been liable to account for their profit. The solicitor had purchased the shares with the companies consent. Lord Russell held that the directors could have obtained the informed consent of the company through a resolution at a general meeting. The facts are unclear as to whether the directors held the majority of shares in the company and the Court did no address this matter. If there was no majority, the directors could not get the consent of the company. If there was a majority, the directors could not use the consent of that majority for their advantage. This is significant because in Cook v Deeks, the Court found that directors who own a majority share holding could not use that majority shareholding to obtain the company’s consent (ie. To get consent you can’t vote at the meeting – consent must be genuine) to the proposed conduct by a general resolution of that company in a general meeting. The directors could not make a gift to themselves. The consent of the company must be genuine. As the House of Lords did not discuss this case in Regal (Hastings) Ltd v Gulliver, it must be assumed that the directors in question did not own a majority shareholding. 85

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Directors and Corporate Business Opportunities In Industrial Development Consultants v Cooley, Conflict rule applied, but not the Profit Rule. The defendant was the managing director and general manager of that plaintiff company. That company provided constructive consulting services for industrial enterprises. As a director of the plaintiff company, the defendant attempted to interest the public Gas Board in a project. He was unsuccessful because it was not the Gas Board’s policy to employ development companies. The defendant was an architect who had worked in the gas industry for many years. For this reason, the Gas Board decided to offer the contract to the defendant in his personal capacity. He accepted the offer and obtaining a release from the plaintiff company by falsely representing that he was ill. The defendant did not disclose the offer to the plaintiff, as he should have done. The conflict rule had been breached but not the profit rule. Thus, no liability would attach if the profit rule was applied but the conflict rule could be applied to make the defendant liable. The Court held that the defendant was liable to account to the plaintiff for the profits that he derived from the contract. Roskill J held that the information concerning the Gas Board contract came to the defendant in his capacity as a director of the plaintiff company. By reason of the fiduciary relationship between him and the company, he was duty bound to convey this information to the plaintiff. The opportunity in question was exactly the type of opportunity that the company relied on the defendant to obtain. Defence was that profit was made not in execution of office, therefore not liable under Lord Russell from Regal, but under Lord Sankey. The general exception to this rule is consent. The defendant could have performed the contract if he had informed the plaintiff and received the informed consent of that company. If the plaintiff had been informed, the defendant would not have been released to accept the offer. There was a conflict between the defendant’s duty and his interest. The conflict rule but not the profit rule was breached. The defendant should have informed the plaintiff that the offer had been made and should have revealed the other information that was discovered in the course of the negotiations.

Exoneration from Duty to Account Where the company has rejected pursuing a business opportunity, and a director pursues the opportunity with the full knowledge of the company’s board, no breach of fiduciary duty has occurred. The Privy Council in Queensland Mines Ltd v Hudson adopted this reasoning. There, the company’s board of directors had unequivocally intimated to the managing director that it was not interested in the exploration of certain mines. The managing director later made large profits from the exploration of the mines. The company then became interested and sought to make him accountable for those profits. The Court held that the managing director did not have to account for those profits because the company had consented to the undertaking. Consent is a basis of exoneration. The Privy Council held that there was an alternative way of expressing the exoneration. As soon as the company had expressed its lack of interest in exploring the mines, that matter fell outside the managing director’s fiduciary duty to the company. Either way, the managing director was not liable to account. Thus, the Privy Council ruled that the company had either consented to the transaction or removed the mines from the ambit of the fiduciary duty and therefore there was no accountability. The Privy Council said that one could say that the fiduciary could validly enter into the relevant transaction if there was informed consent or if the company expressly or impliedly said that it did not have an interest in the project. That project would thereby fall outside the scope of the fiduciary duty and there would be no need for informed consent in that situation. The Privy Council also adopted the dissenting reasoning of Upjohn LJ in Boardman v Phipps. He held that the rule precluding a fiduciary allowing conflict to arise between his duty and his interest was confined to a real or a serious possibility of conflict. There would not be liability in the case of conflict that was merely fanciful. Thus, if there is informed consent given by the person to whom the fiduciary duty is owed, to something that the fiduciary proposes to do, the fiduciary may go ahead and commit that act and neither the profit nor the conflict rule would apply.

Promoter and Company A promoter is someone who makes the necessary arrangements for the formation of a company. A promoter is a fiduciary of the company that he forms. 86

LAWS313 EQUITY Lecture Notes – Semester 031 In Erlanger v New Sombrero Phosphate Company, it was held that promoters have their hands in the creation and moulding of the company. They have the power of defining how, and when, and in what shape, and under what supervision, it shall start into existence and begin to act is a trading corporation. Tracy v Mandalay Pty Ltd also deals with the role of the promoter. In both cases, the promoter had a duty to account for an undisclosed profit.

Stockbroker and Principal The relationship between a stockbroker and a client generally will be of a fiduciary nature. It places an obligation upon the broker to make to the client full and accurate disclosure of the broker’s own interest in the transaction in question. Moreover, whenever a broker is approached for investment advice and he undertakes to give it, in giving that advice, the adviser stands in a fiduciary relationship with the person seeking the advice. In Daly v Sydney Stock Exchange Ltd, Book p552 for example, it was held that a stockbroker stands in a fiduciary relationship with his client. In that case, the principal made a loan to his stockbroker. However, The loan fell outside the fiduciary relationship and the broker was a debtor to the principal. The money was not held in trust for the principal. The loan presupposed that title to the money passed to the borrower. This is to be contrasted with a trust where the trustee holds the money in the trust for a beneficiary. A trust and a loan may occur consecutively. A trust and a loan cannot arise concurrently by virtue of a single transaction. Thus, no fiduciary relationship arises when the principal simply lends money to the stockbroker. The money leant is only a loan and therefore it is not held in trust by the principal. This will depend on the intention of the parties.

Partner and Partner A partner is in a fiduciary relationship with his co-partners. More accurately, a partner is a fiduciary to the partnership. A partner must subordinate his interest to the partnership. The argument would be circular if each partner had to subordinate his interest to the other partners. A partnership is defined as the relation that subsists between persons carrying on a business in common with a view to profit. Partners owe fiduciary obligations to one another in relation to the conduct of the business of the partnership according to Chan v Zacharia. The fiduciary relationship arises by reason of the mutual confidence that the partners will engage in some particular kind of activity or transaction for joint advantage only.

Fiduciary Obligations Prior to the Execution of a Partnership Agreement A fiduciary relationship can arise prior to the execution of a partnership during the negotiation stage according to United Dominions Corporation Ltd v Brian Pty Ltd.

Fiduciary Obligations Continue Following the Dissolution of a Partnership Fiduciary obligations may endure beyond the formal dissolution of the partnership top cover any matters involved in the winding up. In Chan v Zacharia, Book p452 two doctors operated a medical practice in partnership on premises where they had a three year lease with an option to renew that lease for a further two years. After the lease had run for two years, the partnership was dissolved. The partnership was in the course of being wound up. The process of dissolution had commenced but had yet to be completed. The parties could not agree whether to renew the lease so the option lapsed. A partnership is first dissolved and then wound up. A corporation is wound up and then dissolved. The lessor granted a lease to Chan for a premium. That premium was a sum of money paid by the lessee to the lessor to obtain the lease. It is known as key money. This was not an exercise of the option – it was a new lease. The High Court held that Chan held the new lease as constructive trustee for those persons entitled to the distribution of the partnership assets. Deane J held that the fiduciary duty owed by a partner to the partnership continued until the partnership was wound up. He applied the obiter dicta observations in Keith Henry v Stuart Walker Book p457. The reasoning in that case that a fiduciary is liable to account for the profit as constructive trustee is dubious because he may only have to account as an equitable debtor. Deane J held that Chan was liable as a constructive trustee. His fiduciary duties continued after dissolution. Those fiduciary duties are only extinguished on complete winding up of the partnership. Deane J applied the profit rule and the conflict rule. Chan had breached both rules in his opinion.

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LAWS313 EQUITY Lecture Notes – Semester 031 Not only was Chan liable as a former partner in a dissolved partnership, but Deane J also held that Chan was liable as a partner because he was trustee of the lease for the interests of the partnership and then trustee for the interests of the dissolved partnership. He thus held the new lease as a constructive trustee. This second point is not supported and is not part of the ratio decidendi of the case because the other judges did not support it. This view is difficult to accept because a partner does not hold partnership property as a trustee. The interest of a partner in the partnership assets is unique. In Canny Gabriel v Volume Sales, for example, the High Court held that each partnership has a non-quantifiable interest in the partnership. That interest is sui generis or of its own kind. Murphy J dissented on the ground that the new lease had been attained after the dissolution of the partnership and after the termination of the fiduciary relationship.

Banker and Customer (Not, as such, a Fiduciary Relationship) This is not really a category of fiduciary relationships. A bank does not owe a fiduciary duty to its customers. A bank accepting deposits is a debtor to its customers according to Foley v Hill Book p7 merely a Creditor/Debtor relationship. However, if the bank, through its officers, conducts itself so as to assume the role of a financial adviser to a customer, then the bank may owe the customer fiduciary duties with respect to such advice. In Commonwealth Bank v Smith, a bank manager gave financial advice to two groups of customers, the prospective vendors and purchasers of a licensed leasehold hotel. Although the manager had disclosed to the purchasers that the bank also acted for the vendors, he neutralised the effect of that disclosure by dissuading the purchasers from selling skilled independent advice. He should have advised them to seek such advice. There was a difference between explaining the general position with respect to the transaction and giving financial advice. The Court held that in doing so, the bank and the manager acted in breach of the fiduciary relationship owed to the prospective purchasers. The Court said that once a breach of a fiduciary duty has occurred, it was not open to the fiduciary to exonerate himself by showing the prospective purchasers would have proceeded anyway with the purchase if they had been properly advised. This is law but Dong unhappy about this. The Full Court of the Federal Court held that the bank and the manager were under an obligation to compensate the purchaser for the monetary difference between the purchase price and the market value. Thus, a fiduciary duty arose through the giving of extensive financial advice. Dong - The difficulty with this decision is that given the breach of his fiduciary duty by the bank manager, why could he not say that it was causally irrelevant to the purchaser’s loss? This is unclear but it is still the law. If the loss is causally unrelated to the breach of fiduciary duty, the bank manager should not have to compensate the prospective purchaser. Contrast with: Finding v Cth – bank was behaving as a bank (vendor) and the bank knew the price it was asking was excessive. Plaintiffs lost – vendor (mortgagee selling) under no obligation to sell at proper market value or disclose valuation In Maguire v Makaronis, Law in Australia - the High Court affirmed the principle that a fiduciary who has breached his duty is not permitted to prove that the person to whom the duty was owed would have entered into the relevant transaction, even if no such breach had occurred. In that case, two solicitors lent money to their clients and obtained a mortgage over the client’s land to secure that loan. They did not do so with the informed consent of their clients due to a deficient command of English, which prevented them from understanding that their solicitors where acting as both lenders as mortgagees. Thus, the solicitors breached the fiduciary duty owed to their clients. The High Court set aside the loan and the mortgage. The Court rescinded the transaction. Rescission involves restoration of the parties to their former positions. The removal of the registered mortgage from the client’s title to land was conditional on their payment to the solicitors of the principal sum lent and the accrued interest determined by the Court. The High Court held that the solicitors were not permitted to prove that the clients would not have entered into the transaction anyway even if they had of told them they were going to be mortgagees. Dong - There is a major principle of difficulty with these cases. The principle of causation seems to have been deserted. These cases, however, are the law. The dichotomy that has arisen is conceptually unsatisfactory. If there is a breach of trust and the trustee can show the damage was not caused by the breach of trust, the trustee will not be liable for the loss. If, however, a fiduciary enters into a transaction with a person to whom the duty is owed, that transaction will be set aside, even if the fiduciary could show that had he not breached his duty, the transaction would still have been entered into. 88

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Agent and Principal An agent is normally a fiduciary to his principal. It is only in extraordinary circumstances that an agent will not be deemed to be a fiduciary. In McKenzie v McDonald, Book p52 the plaintiff (owner of farm) asked the defendant, who was a real estate agent; to sell her farm as she wanted to move to the city. The defendant agreed to sell the farm but persuaded the plaintiff to sell the farm to him in exchange for a shop, dwelling house and the cash difference. The defendant dishonestly undervalued the market price of the plaintiff’s farm and overvalued the market price of the shop, thereby reducing the cash payment. The plaintiff sold the farm to the defendant on the terms proposed by him. The plaintiff discovered that she had been deceived and sought, inter alia, to rescind the contract of sale on the ground that the defendant had breached his fiduciary duties to her in failing to disclose the true position to her. However, the defendant had sold the property to a third party so precise restitutio in integrum was not possible. It was impossible to restore the parties to their exact pre-contractual position. At common law, if precise restitutio in integrum is impossible, the contract cannot be rescinded. However, at equity, there is no need for exact restoration. All that is required in equity for rescission is substantial restoration of the precontractual position. Dixon J ruled that the defendant, having assumed the function of advising and assisting the woman in a difficult situation in the acquisition of a residence by means of the disposal of her property, occupied such a position of confidence towards her as to bring him within the equitable requirements of full disclosure and fair and open dealing. He said that equity merely requires substantial restitution. Rescission could be achieved by ordering the defendant to pay the plaintiff the real difference between the value of the plaintiff’s property and the value of the shop. In that case, the plaintiff sought rescission of the contract and not an account of profits. Notwithstanding the fiduciary relationship, the defendant was able to retain some profit for himself. Rescission or Account of Profits? Dixon J directed the defendant to pay to the plaintiff the real difference between the value of the farm and the shop. In the alternative, the plaintiff could have sued for an account of profits but she did not do so. A plaintiff can seek an account of profits or rescission of the contract but not both. The plaintiff chose rescission. If the plaintiff had sued for an account of profits, she would have received more money because the defendant sold the property for an amount greater than the reasonable estimated market value at the time of the original sale. In the case of rescission, one takes a reasonably estimated market value of the property sols but in the case of an account of profits, once has to account for the profits actually made.

Joint Venturers Joint venturers are not really in a fiduciary relationship. Joint venture is not a technical legal term and is legally imprecise. The practical distinction between a partnership and a joint venture is the distinction between an association of persons who engage in a common undertaking for profit and an association of persons who engage in a common undertaking to generate a product to be shared amongst the participants. As joint ventures often occur commercially, it is impossible to say whether a person owes a fiduciary duty to his co-venturers unless it is specifically stated. One cannot say whether a joint venturer owes fiduciary duties to his co-venturers unless one knows precisely what the joint venture was. The question is what are the legal obligations of a joint venture. A joint venture is an equal fiduciary relationship. It could be a conventional partnership, but for the fact that the circumstances give rise to a joint undertaking rather than a continuing one. A conventional partnership is a continuing commercial enterprise but it is legally possible to have a partnership merely to execute a single joint undertaking term. That partnership is terminated when the venture is completed. Although a joint venture is not always a partnership, in some circumstances it will be. There can be a partnership where there is a single transaction. If a joint venture is a partnership, there will be reciprocal fiduciary duties between the partners and co-venturers. In United Dominions Corporation Ltd v Brian Pty Ltd, Case shows: owe fiduciary partner-partner + fiduciary starts at commencement of negotiations (and ends once wound-up Chan v Zacharia) the joint venture was a partnership. Case of failing to disclose to one of the parties during negotiations. There were three companies, 89

LAWS313 EQUITY Lecture Notes – Semester 031 Brian, United Dominions Corporation and SPL. Those companies were joint venturers in a land development project that generated large profits. The land that was proposed to be developed was owned by one of the three partner’s only, SPL. Before an agreement was signed, whilst the parties were negotiating the formation of the partnership and unknown to Brian, SPL gave a mortgage over the land to United Dominions Corporation to secure all money’s lent by United Dominions Corporation to SPL on any account whatsoever. However, of the parties, before the partnership was formed, where in a fiduciary relationship to each other, there would be a duty of disclosure. The issue, therefore, was whether the parties where in a fiduciary relationship. Brian entered into the joint venture and partnership agreement without knowing of the mortgage given by SPL to United Dominions Corporation. The joint venture produced a profit but United Dominions Corporation as mortgagee relied on the mortgage to say that because it had security over the land, it had a charge on the profit derived from the use of the land. They claimed that the money should be used to repay the mortgage debt such that Brian was denied any share of the money. Brian disputed this claim. Brian claimed that United Dominion Corporation claimed breached its fiduciary duty to Brian by failing to disclose the mortgage received from SPL at a stage where the parties were in a fiduciary relationship, negotiating the formation of a partnership. Brian Won - The High Court held that in relation to Brian’s share of the profit, United Dominions Corporation could not rely on the mortgage (ie. In determining Brian’s share of the profit – the mortgage had to be ignored). The Court held that there was a fiduciary relationship, even at the early stages of negotiation. United Dominions Corporation would not be permitted to benefit from its breach of duty to Brian. SPL and United Dominions Corporation had breached their fiduciary duties to Brian by obtaining respective advantage for themselves from the joint venture without Brian’s consent. Therefore, United Dominions Corporation could not sue Brian to enforce the mortgage and could not plead the existence of the mortgage. As far as Brian was concerned, the mortgage did not exist. Brian thus got its share of the profit. As soon as the parties started to negotiate the formation of a partnership, a fiduciary relationship is formed. The Court ruled that the parties were bound by fiduciary obligations during the negotiation phase. A fiduciary relationship will arise between prospective partners who embark on a joint venture, before the commencement of the partnership. The Court held that the fiduciary relationship could also continue after the winding up of the partnership, following Chan v Zacharia. Thus, these cases in combination extend the spectrum of fiduciary duties in the case of a partnership. Reciprocal fiduciary obligations commence at the moment when the negotiations between the parties for the formation of the partnership begin. That relationship continues when the partnership is formed. The fiduciary relationship continues even after the dissolution of the partnership until that partnership is completely wound up. Not all joint ventures create fiduciary relationships. The only illustration is that of a partnership.

Solicitor and Client This is an important category. The solicitor must not, without the informed consent of his client, stand to make a profit or receive any benefit other than professional remuneration from the transaction which he is retained to conduct. A conflict of interest can arise from a deliberate proposal of the solicitor to deal with his client. In Boardman v Phipps, Company Trust (owned minority shares in company) Boardman – Solicitor to Trust Tom Phipps – Beneficiary (but treated like Boardman) Company wasn’t doing well – so B + TP wanted to buy all shares Trustees refused consent Boardman and TP then went ahead and bought majority shareholding by virtue of representing trust estate – and obtained valuable information from directors and used this (as fiduciary) to obtain majority shareholding without consent of trustees

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LAWS313 EQUITY Lecture Notes – Semester 031 Book p442 Boardman was the solicitor to the trustee’s appointment under a will, namely a testamentary trust. As a solicitor, Boardman was a fiduciary to the trustee. John Phipps was the plaintiff beneficiary under the trust, suing on behalf of the trust. Boardman and Thomas Phipps were alleged to have breached his fiduciary duties to the trust. The plaintiff, John Phipps, alleged a breach of the fiduciary duty. He requested an account of his share of the trust. The trust estate owned a substantial minority shareholding in a private company. Boardman and Thomas Phipps used the shareholding to obtain valuable information from the private company by purporting to act as representatives of this substantial holding. It was only in this capacity that they were able to obtain valuable information from the private company concerning its activities. Using this information which they would not have obtained but for the fact that they purported to represent the trust shareholding in the company, they acquired for themselves the remaining shares in the company, thereby making themselves its majority shareholders. Boardman managed the company and large dividends were subsequently declared on the company shares. As the trust estate held a substantial minority shareholding, it also benefited from the dividends. Boardman and Thomas Phipps obtained a large share of the dividends. The issue was whether Boardman and Thomas Phipps could retain the shares that they had purchased as well as the dividends. Thus, Boardman and Thomas Phipps purchased the remaining shares in the company without the informed consent of the trustees or the beneficiary of the trust, namely the persons to whom the fiduciary duties were owed. On behalf of the trust, John Phipps sought a declaration that Boardman and Thomas Phipps held their shares as constructive trustees for the trust because they had allowed a conflict to arise. John Phipps argued that he was entitled to his proportion of those shares. He argued that Boardman and Thomas Phipps acquired their shares in breach of fiduciary duty owed to the trust estate and therefore must account for the shares as constructive trustees. By way of defence, Boardman and Thomas Phipps admitted that they were fiduciaries to the trust estate, because Boardman was a solicitor to the trustees and Thomas Phipps elected to be treated in the same way. However, they argued that they were not liable to account to the trust estate because they purchased the shares only after ascertaining that the trust estate was not interested in purchasing those shares (okay according to DPC). As the particular investment, namely the shares in the private company, was not authorised under the trust or as part of the statutory list of authorised investments, they would need a Court sanction to purchase the shares. If the trustees decided to act, they must act unanimously they are authorised by the trust instrument to act by majority decision according to Luke v South Kensington Hotel Company. Boardman had asked one of the three trustees whether he would support approaching a Court to purchase those shares. This trustee had said to Boardman that he would not consent to such a Court application. Boardman thus argued that the trust could not purchase the shares. Thus, Boardman and Thomas Phipps admitted that they had not obtained the informed consent of the trustees and the beneficiaries of the shares but they argued that they did not have to obtain this consent. It was not necessary because the trust estate was not interested in purchasing the shares. It therefore fell outside the scope of the fiduciary duty. They said that there was no conflict between self-interest and their duty to the trust estate. By a majority of three to two, the House of Lords rejected Boardman’s argument. Boardman and Thomas Phipps had to account as constructive trustees. Hodgson LJ held that Boardman and Thomas Phipps had used their fiduciary position to obtain confidential information, which they then used to acquire the shares. Such acquisition had been made without the informed consent of the trustees or the beneficiaries. Boardman and Thomas Phipps were therefore constructive trustees. It was not relevant that the trust was not able to acquire the shares because in Keech v Sandford and Regal (Hastings) Ltd v Gulliver, the Court imposed similar liability, notwithstanding the fact that the person to whom the duty was owed could not obtain the property for themselves. Boardman and Thomas Phipps were liable to account to the beneficiaries of the trustee as constructive trustees of the shares that they had purchased. Thus, the fiduciaries were liable to account, notwithstanding the fact that the person to whom the duty was owed was unable to purchase the property. ** (Note distinction: ‘unable’ = liability, ‘uninterested’ = no liability) Cohen LJ and Guest LJ applied the relevant principles from Regal (Hastings) Ltd v Gulliver and Keech v Samford in concurring with Hodgson LJ. The majority judgments focussed on the misuse of the fiduciary position to gain a personal benefit or to make a purchase without the consent of the trustees and beneficiaries. Boardman and Thomas Phipps were held to be constructive trustees, accountable for the profit made. They were, however, entitled to a liberal allowance for the skill that they exercised in the acquisition of the shares and the making of the profits resulting therefrom. 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LAWS313 EQUITY Lecture Notes – Semester 031 Upjohn LJ and Dillon LJ dissented. They held that once it was clear that the trust was not interested in purchasing the shares, there was no conflict between duty and their personal interest. Any conflict had to be real or serious before the fiduciary had to account for the profit. A mere possibility of conflict was not sufficient. They said that there was no possibility of conflict between the duty to the trust and the self-interest in the purchase of the shares. The fiduciary duty to avoid any possibility of conflict between duty and interest meant a duty to avoid a real or serious possibility of conflict. It did not include a duty to avoid a fanciful possibility of conflict. There was no real possibility of conflict because the trust estate could not purchase the shares. Boardman and Thomas Phipps should be allowed to retain their profits. This view may be adopted in Australia as law however Dong believes majority is correct. Boardman argued that the inability of the trust to purchase the shares entailed that the trust was not interested in purchasing the shares. This argument is not unpersuasive. A person is unable to purchase property when he has no interest. He can only have an interest in the property if he is able to purchase it. The House of Lords held that the inability to purchase did not mean there was a lack of interest in making the purchase. The majority was apparently not prepared to infer that a person who was unable to make a purchase was someone who was not interested in making a purchase.

Summary of Boardman v Phipps There are thus two grounds of liability in Boardman v Phipps derived from Regal (Hastings) Ltd v Gulliver. The majority focussed on the fact that Boardman and Thomas Phipps misused his fiduciary position and this misuse made them a profit, even though it did not cause loss to the trust. It is arguable that even if there was no conflict between duty and interest, Boardman was liable for misusing his fiduciary position, based on the second alternative ratio decidendi in Regal (Hastings) Ltd v Gulliver. The relationship between the two lines of liability in Regal (Hastings) Ltd v Gulliver is unclear. A Court, when applying the test, should say which one is the true basis of liability for a fiduciary.

Remedies Ordered in Boardman and Phipps The House of Lords ordered that: •

Boardman and Thomas Phipps were to be made constructive trustees of the shares subject to them being reimbursed with the money that they used to purchase those shares (ie. Expenses). Proprietary NOT subject to bankruptcy of fiduciary see DPC p457

•

Boardman and Thomas Phipps were made to account for the profits that they made from the purchase of the shares. Personal Equitable debt see DPC p457

•

Boardman and Thomas Phipps were entitled to a liberal allowance for their skill in acquiring the shares (otherwise it would unjustly enrich the trust estate).

It is strongly arguable that Boardman v Phipps will not be followed in Australia and Boardman’s argument may be successful. His reasoning is persuasive. It is possible that Boardman v Phipps is law in Australia. It is possible that it is not. The minority view in Boardman v Phipps was implicitly accepted in Consul Development Pty Ltd v D.P.C. Estates Pty Ltd. In that case, the High Court said that if D.P.C. could not afford to buy the land, there would be no conflict between duty and interest for Grey to make the purchase. However, there, the issue was whether Grey acted in a situation where there was a conflict created between duty and interest. He did not misuse his fiduciary position to obtain information because the information in question was generally available. Even if the reasoning in Boardman v Phipps based on the conflict rule is rejected, one still has to say that Boardman and Thomas Phipps would be liable under the misuse of fiduciary position rule, namely the so-called profit rule.

Employer and Employee In Hospital Products Ltd v United States Surgical Corporation, Mason J held that an employee was a fiduciary to his employer. But no fiduciary from employer to employee as such.

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OTHER POSSIBLE FIDUCIARY RELATIONSHIPS The categories of fiduciary relationships are not closed and the list is not exhaustive. It is possible that there are other examples of fiduciary relationships and the following are some examples. It is not easy to determine whether there is a fiduciary relationship.

Manufacturer and Distributor The relationship between manufacturer and distributor is not generally described as fiduciary. The relationship usually arises out of a commercial transaction entered into at arm’s length between the parties of comparable bargaining power for the express purpose of mutual profit. These factors are inimical to the characteristics of a fiduciary relationship. However, the tenor of the agreement between the parties may evidence an undertaking to act in the interests of another sufficient to attract at least a limited fiduciary duty. The leading case is Hospital Products Ltd v United States Surgical Corporation, although it did not involve a fiduciary relationship. In that case, United States Surgical Corporation manufactured surgical staples in the US. It appointed Hospital Products International, which subsequently took over the assets of Hospital Products Ltd, as its Australian distributor. United States Surgical Corporation subsequently and properly terminated the relationship. Before termination, Hospital Products International acted dishonestly. It secretly manufactured products similar to the United States Surgical Corporation products. It failed to fulfil the orders that were place for United States Surgical Corporation products as it was under a contractual obligation to do as the Australian distributor. Hospital Products International hoped to sell its own staples to fulfil the orders placed for United States Surgical Corporation staples. After the termination of the agreement, Hospital Products International filled the previous orders that it had deferred with its own similar staples. The High Court unanimously held that Hospital Products International had breached its contract of distribution with United States Surgical Corporation by failing to fill the orders of staples. United States Surgical Corporation was clearly entitled to damages. The more important that the Court addressed was whether United States Surgical Corporation was entitled to a more comprehensive remedy. If Hospital Products International owed a fiduciary duty to United States Surgical Corporation, Hospital Products International breached that duty by creating a conflict between itself interest and its duty. It would liable to equitable remedies. A majority of the Court, however, held that there was no fiduciary relationship between the two companies arising from the distribution agreement. The majority was Gibbs CJ, Wilson, Deane and Dawson JJ. Mason J dissented on this point. Gibbs CJ held that the contract did not require Hospital Products International to subordinate its interests (required to be a fiduciary) to United States Surgical Corporation. There was only an implied term that it would use its best efforts to promote sales in Australia. It was not possible that Hospital Products International was under an obligation to avoid a conflict between its duty and its interest. If there is no such obligation, Hospital Products International cannot be a fiduciary. He held that as long as Hospital Products International complied with the terms of the contract, there was no fiduciary duty. Hospital Products International could regard its own interests as important as those of United States Surgical Corporation. The relationship between the two companies was not fiduciary because: •

The arrangement was a commercial dealing entered into by the parties at arm’s length and on equal footing and

•

It was intended that both companies would profit from the distributorship.

For these reasons, it could not be said that Hospital Products International was obliged not to profit from its position. Accordingly, the only relief available to Unites States Surgical Corporation was damages for breach of contract. Mason J, (dissenting) in common with the majority, found that there was no comprehensive fiduciary relationship. However, he did not discard the utility of that fiduciary relationship. He held that because United States Surgical Corporation had entrusted Hospital Products International with the responsibility of promoting and protecting the Australian market, Hospital Products International was a fiduciary for the limited purpose of protecting and promoting the goodwill towards United States Surgical Corporation in Australia. He held that, within the ambit of the fiduciary relationship, Hospital Products International could not act in such a way that there was a possibility of conflict between its own interests and its duty to and the interest of United States Surgical Corporation. The actions

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LAWS313 EQUITY Lecture Notes – Semester 031 in question breached that duty. Hospital Product International’s right to act in its own interests in some circumstances did not prevent it from being a fiduciary to United States Surgical Corporation. The judgment of Mason J suggests that a relationship may be fiduciary where the duty of the fiduciary is neither to exclude his personal interest entirely nor to put the other parties’ interest above his own. Mason J suggests that there can be a fiduciary relationship where the fiduciary has a duty to act in the parties’ joint interest. In this sense, the relationship between a manufacturer and a distributor can be likened to a partnership. Mason J considered that Hospital Product International’s right to act in its own interest was no obstacle to it being a fiduciary to United States Surgical Corporation. This is a problematic proposition and is not persuasive because it seems to go against previous authority, **Critical according to Dong - which says that a fiduciary must always subordinate its interest to the person to whom the duty is owed. Mason J held that the critical feature of a fiduciary relationship is that the fiduciary undertakes, or agrees to act for or on behalf of or in the interests of another person in the exercise of a power or a discretion which will affect the interests of that other person in a legal or practical sense. He did not say that a fiduciary must not act in his own interest in the exercise of his duties. That is a difficult proposition. The Gibbs CJ view that there must be a subordination of ones interest before he can be made a fiduciary is preferable. As Mason J found that there was a breach of fiduciary duty, he proceeded to discuss the appropriate equitable remedy. He said that the appropriate remedy was a constructive trust. However, he disagreed with the Court of Appeal as to the scope of that constructive trust. Whereas the Court of Appeal imposed a constructive trust of all of the assets of Hospital Products International at a specified date, Mason J ruled that a constructive trust should be imposed only on the benefits obtained by Hospital Products International in breach of its fiduciary duty and that such benefits were less than all of the assets of that company on the specified date. However, this analysis is not law. The order that Mason J made was a dissenting order and was not part of the High Court order. Deane J said that there was no fiduciary relationship but he agreed with Mason J that the appropriate remedy was a limited constructive trust should be imposed on the assets of Hospital Products International in favour of United States Surgical Corporation. He imposed a constructive trust as a remedy for what he acknowledged to be a breach of contract and not a breach of fiduciary duty. This reasoning is confusing. Since he was the only judge to propound this line of reasoning, it is not the law in Australia. It is anomalous as a matter of law to award a constructive trust as a remedy for a breach of contract not involving a breach of fiduciary duty. The majority of the Court, however, Gibbs CJ, Wilson and Dawson JJ did not impose a constructive trust because there was Hospital Products International acted in breach of a contract only and therefore, United States Surgical Corporation was only entitled to damages for breach of contract. This approach is preferable. For example, Dawson J (p142 CLR) held that underlying all cases of fiduciary obligations was the position of disadvantage or vulnerability on the part of one of the parties which causes him to place reliance upon the other so as to require the protection of equity acting upon the conscience of that other. He said that the person to whom the fiduciary duty is owed must be in a position of disadvantage or vulnerability otherwise there would be no need to make the person a fiduciary. The approach of Dawson J in defining a fiduciary relationship was adopted by Sopinka J in the Supreme Court of Canada in LAC Minerals Ltd v International Corona Resources Ltd.

Doctor and Patient – NO in Australia It is questionable whether a doctor, as such, is a fiduciary to his patient. In McIerney v MacDonald, the Supreme Court of Canada held that there was a fiduciary relationship between a doctor and a patient. This, however, is not law in Australia. In Breen v Williams, however, a majority of the NSW Court of Appeal refused to follow this decision. The majority held that there was no fiduciary relationship between doctor and patient as such. Kirby P dissented. Thus, the law in Australia, as it stands, is that there is no fiduciary relationship between a doctor and his patient as such. According to the High Court, although a doctor may, in some circumstances, be a fiduciary to his patient, a doctor, as such, is not a fiduciary to his patient.

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Clergy and Parishioner - NO In Clark v RC Archdiocese of Brisbane, Williams J held that the mere relationship of Church or Bishop and communicant is not a fiduciary. It would be pointless to extend the categories of fiduciary relationship given the strictness of the categories. This is a good development in the law.

Scope of fiduciary? QLD Mines v Hudson Book p455 – MD purchased mines after company said they were not interested - MD exploited mines and made large profits. Company sought to make MD liable for profits. Privy – Although fiduciary, MD did not have to account due consent by company and as soon as they said they were not interested, it was outside of the scope of his duties. Scarman LJ agreed with Upjohn LJ in that it must be a real sense of conflict. In Australia we have to follow Consul

BRIBES RECEIVED BY A FIDUCIARY In Attorney-General for Hong Kong v Reid, Book p436 the Privy Council held that a fiduciary who receives bribes is liable to account for those bribes as constructive trustee to the person to whom the duty was owed. The constructive beneficiary would be the person to whom the fiduciary duty was owed. If money taken by way of bribe is invested by the defaulting fiduciary, the original sum and the profit thereby made will be part of the constructive trust. If the investment decreased in value, the investment will be held on constructive trust and the fiduciary will be personally liable to pay the difference by way of equitable compensation.

REMEDIES INJUNCTION In Pacifica Shipping Company Ltd v Andersen, it was held that a fiduciary who is about to breach his duty may be prevented from doing so by injunction.

REMEDIES TO RECOVER GAINS IMPROPERLY MADE BY FIDUCIARIES AND TO RECOUP LOSSES IMPROPERLY CAUSE TO PERSONS TO WHOM FIDUCIARY DUTIES ARE OWED In the law of fiduciary relationships, there is an unresolved issue. If a fiduciary breaches his duty and thereby made a profit, there is always a remedy against the fiduciary. However, the question is whether that remedy is a constructive trust imposed on the profit in favour of the person to whom the duty is owed or is the remedy merely a personal liability to the person to whom the duty was owed, namely merely an equitable debt? No automatic rule

Liability not Dependent upon proof of loss The person to whom the duty is owed does NOT have to show a loss. If there is a loss however that is > the profit made by the breaching fiduciary, then claim equitable compensation for that loss.

Appropriate Remedy still Uncertain The authorities are undecided on this question and are divided as to the appropriate answer. In Consul Development Pty Ltd v D.P.C. Estates Pty Ltd, Book p457 Gibbs CJ noted this uncertainty. He alluded to the uncertainty as to the appropriate remedy.

Constructive Trust – Proprietary – Not affected by Bankruptcy A constructive trust may be imposed on the profits gained. This approach was adopted in Boardman v Phipps, Chan v Zacharia and in United States Surgical Corporation v Hospital Products Ltd by the NSW Court of Appeal and also by Mason and Deane JJ in the High Court. Those decisions considered that the appropriate remedy was the imposition of a constructive trust. 95

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Bankruptcy – Becomes (Bankruptcy) Trust property – Protected from Creditors If a constructive trust was imposed, the bankruptcy of the fiduciary will not prejudice the person to whom the fiduciary duty is owed by virtue of section 116(2)(a) of the Bankruptcy Act. That section provides that money held on trust by the bankrupt shall not be distributable amongst the bankrupt’s creditors.

Personal Liability (Equitable Debt) – Equitable Compensation or AoP In Cook v Deeks and in Regal (Hastings) Ltd v Gulliver, the Privy Council and the House of Lords respectively decided that the remedy to be imposed was a personal liability on the fiduciary to account for the illicit gains. No constructive trust was imposed in either case.

Unsecured Creditor (No Charge over own property) – Not Protected – Dividend only If a Constructive Trust is imposed (when NOT Bankrupt) then property is owned by person breached, and can’t have a charge over your own property (ie. company shares) – and fiduciary becomes Bankrupt therefore become an UNSECURED creditor and only entitled to a portion, ie. Xc in the dollar. An equitable creditor is not protected by the Bankruptcy Act. Section 108 provides that if the person to whom the fiduciary duty is owed is only an unsecured creditor, he can only claim a proportion of what is owed.

The Relevant Equitable Remedies Compared In Warman International Ltd v Dwyer, Warman International Ltd and its holding company, Peko-Wallsend Ltd, the plaintiffs, were the Australian agents for the distribution of gearboxes manufactured by an Italian company. During the currency of that agency agreement and during his employment, the general manager of the Queensland division of Warman International Ltd, Dwyer, persuaded the Italian company to terminate the agency agreement with Warman International Ltd and to appoint as its Australian agent, a company that he had formed for the purpose of taking over the agency. He also set up another company associated with the former company to exploit that agency arrangement with the Italian company. As Dwyer had established those two companies, he was the directing mind and will of those companies. Dwyer was a fiduciary of Warman International Ltd as he was the general manager of the Queensland division of that company. Dwyer had breached his fiduciary duties by putting himself in a situation where his self interest conflicted with his duty to Warman International Ltd. Through Dwyer, those companies that he had set up had actual knowledge of his breach of fiduciary duty and therefore knowingly assisted in his breach of fiduciary duty. Those companies were thus liable under the Barnes v Addy principle. Dwyer would also be liable to Warman International Ltd. The Queensland Court of Appeal ordered Dwyer and the two companies to pay equitable compensation to Warman International Ltd for the deprivation of its chance to continue the agency agreement with the Italian company. The High Court disagreed. They suggested that is was more appropriate to ask Dwyer and the two companies that he controlled to account for their profits for a period of two years commencing on the date on which the new agency begun. The account of profits was limited to two years because after the expiration of that period all the benefits from Dwyer’s breach of duty would have been exhausted. Thus, the duty to account is not for an indefinite period. It is only for such a period as would reflect the advice obtained by the defaulting fiduciary. Thus, the High Court held that equitable compensation was not the appropriate remedy.

(Apply) Liberal Allowance for Expenses, Skill and Effort AoP and Constructive Trusts subject to a deduction for expenses, skill and effort. The High Court ruled that there should be a deduction from these profits of a liberal allowance for the expenses, skill and effort with which Dwyer and the other two companies had contributed to enable the profits to be made. This due or liberal allowance is similar to the concession that was awarded in Boardman v Phipps. The High Court ruled that although ordering an account of profits, an equitable charge should also be imposed on the assets of Dwyer’s two companies to secure payment of those profits to Warman International Ltd. The personal liability to account for profits was made secure. If the companies were insolvent, that would not prejudice Warman International Ltd.

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If Charge – Protected from Creditors As an alternative to the imposition of a constructive trust, one could have a personal duty to account for profits, namely an equitable debt, secured by a charge on the relevant property. Even when there is no constructive trust, the charge will protect the person to whom the fiduciary duty is owed in the case that the fiduciary becomes bankrupt – S58(5) Bankruptcy Act The High Court held that equitable compensation was not the appropriate remedy but the Court allowed Warman International Ltd to elect between equitable compensation for having been deprived of its chance of continuing the agency or an account of profits made by Dwyer and the two companies.

Contributory Negligence In Day v Mead, the plaintiff, Day, acted on the advice of his solicitor, Mead, and invested in a private company. Mead was a director of that company. The company was not financially sound and it was placed in receivership shortly after. In breach of his fiduciary duties, the solicitor had failed to disclose to his client that he was a director of the company in which he advised his client to invest in. The New Zealand Court of Appeal held that the plaintiff was entitled to equitable compensation for loss suffered. The Court reduced the amount of compensation payable to the plaintiff on the ground that in failing to obtain independent financial advice, the plaintiff had been guilty of contributory negligence. This is a controversial decision but it was followed in Mouat v Clark Boyce, another decision of the New Zealand Court of Appeal. These cases would not be followed in Australia because contributory negligence is a concept introduced by statute. Contributory negligence deals with common law causes of action, not equitable causes of action. As contributory negligence is a creation of statute, it is not recognised by either the common law or by equity. The statutory defence of contributory negligence cannot be used in the case of loss caused by breach of a fiduciary duty.

Remedies Sought must be Mutually Consistent When seeking remedies for a breach of a fiduciary duty, one cannot seek remedies that are mutually inconsistent. This point is made in many cases. For example, in Tang Man Sit (deceased) v Capacious Investments Ltd, the Privy Council held that it was inconsistent for the plaintiff to claim an account of profits from a defaulting fiduciary concurrently with a claim for loss caused by the fiduciary’s breach of duty. The plaintiff was required to elect between these two alternative remedies to avoid double recovery. Where there has been a breach of a fiduciary duty, and profits are made, then the person to whom the fiduciary duty is owed can claim those profits but cannot claim those profits and equitable compensation. He cannot aprobate and reprobate. By claiming the profits, he is affirming the transaction. If the fiduciary enters into an initially unauthorised transactions and profits are made, and the person to whom the duty is owed wants to claim those profits for himself, he affirms the transaction, making it and the profits his own. Alternatively, he can say that he has suffered loss because of the fiduciary’s conduct, the transaction is not affirmed and he wishes to claim equitable compensation for the loss caused by the breach of fiduciary duty. The person to whom the fiduciary duty is owed cannot claim both remedies because if the transaction is affirmed, and he is claiming the profits, he cannot claim concurrently that he has suffered loss. Once he claims for the loss, on the other hand, and he repudiates the transaction saying that it has caused him loss and he wants to be compensated for the loss, then he can only be compensated for the loss and he cannot claim an account of profits because those profits were produced by a transaction which he has repudiated and cannot be his. Cannot have double recovery. Whether to claim an account of profits or equitable compensation depends on whether he thinks he will get more money from an account of profits or from equitable compensation, claiming that he has suffered loss because of the fiduciary’s duty. There are some situations where no profits are made but the loss is caused by breach of the fiduciary duty. In that case, there is no need to elect as no profit has been made. There can still be a claim for equitable compensation for the loss caused, namely equitable debt. If this person claims equitable compensation, there is no trust because equitable compensation is monetary compensation. It cannot be said that a fiduciary has made himself a trustee of money that has been lost to the trust estate. 97

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REMEDY SUMMARY

FIDUCIARY IN BREACH – NOT BANKRUPT – DEFICIT Net Profit = $1.5m Used $1.5m to Purchase Company Shares = now worth $1m Alternative Remedy 1 Attorney-General for Hong Kong v Reid: If the investment decreased in value, the investment will be held on constructive trust and the fiduciary will be personally liable to pay the difference by way of equitable compensation. •

Impose Constructive Trust of Shares = $1m

•

Equitable Compensation of $0.5m (to account for deficit)

•

Unsecured (No Charge as they were company shares) – only entitled to dividend if goes bankrupt

Alternative Remedy 2 •

Account of Profits = $1.5m

•

Charge over Shares $1m (Charge is deficient by $0.5m)

Both subject to liberal allowance for Expenses, Skill and Effort

KNOWING ASSISTANCE – BANKRUPT – PROPERTY EXCESS Net Profit = $1.5m Used $1.5m to Purchase Property (Emerald) now worth $2m Alternative Remedy 1 •

Account of Profits = $2m (not the $1.5m)

•

+ Charge over Emerald itself (to secure sale)

•

Charge protected by s58(5) Bankruptcy Act

Alternative Remedy 2 •

Impose Constructive Trust of Emerald = $2m

•

Trustee on Bankruptcy owns Emerald, protected by s116(2)(a) Bankruptcy Act

Both subject to liberal allowance for Expenses, Skill and Effort

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WEEK 11 TRACING (REMEDY) Tracing is a topic of more than academic interest. Insolvency and personal bankruptcy is common. Often, there is no point in bringing a personal action against the debtor. If someone can show that the bankrupt, whether a natural person or a company, is a trustee of the relevant property, then the beneficiary will NOT BE adversely affected by the bankruptcy of the trustee by virtue of section 116(2)(a) of the Bankruptcy Act. See Re Goode Book p552, is an example of this provision being successfully invoked in a tracing action. If the bankrupt person is a mere debtor, either at law or in equity, then the creditor, if unsecured, will simply have to apply under section 108 and will only obtain a proportion of what he is owed. If, however, someone can show that he can trace his property, he is protected, even against a bankrupt trustee. Tracing is the action by which a person follows his property through a series of transactions into the hands of another person or into whatever different form it has taken by way of exchange or otherwise. As such, it is a proprietary action and not a personal action. There are two types of tracing: •

Tracing at common law, namely tracing recognised by the common law

•

Tracing in equity, namely tracing recognised by equity

TRACING DEFICIENCIES Each type of tracing has a major deficiency. Equity allows tracing into a mixed fund or a compound or an amalgam of goods that have been inextricably mixed. Equity imposes a charge on the mixture and the mixture will be sold. The profits will be distributed amongst the persons who have contributed their property to the mixture. Common law tracing cannot be used to trace money or other kinds of property into a mixed fund. The remedy of a charge is unknown to the common law. A person seeking to trace at common law has legal title. A person with legal title cannot be defeated by the defence of bona fide purchaser for value of the legal estate without notice. This defence is only available against an earlier inconsistent equitable interest, not an earlier legal interest. Advantage: CL Tracing Not defeasible by defence of Bona Fide purchaser A person seeking to trace at equity will only have an equitable interest that can be defeated by a person pleading the defence of bona fide purchaser for value of the legal estate without notice. Equitable title is always vulnerable to this defence.

TRACING AT COMMON LAW Tracing at common law is limited. The common law allows property to be traced, only so long as the original property has simply been converted into another form. Once the original property has been inextricably mixed with other property, then the common law has no remedy to separate the compound into its components. Major Disadvantage: As soon as there is MIXING, common law tracing becomes impossible. For instance, if A steals $100 from B and buys a personal chattel with that money, the common law provides for tracing. If, however, C steals $100 from A and $100 from B and uses that money to buy a personal chattel, A and B could not trace their money at common law. A well-known case of common law tracing is Taylor v Plumer. Book p487 Plumer (Principal)

Walsh To Buy Bank Notes

(Agent) Embezzled Bank Notes Bought Shares & Bullion

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Walsh subsequently Bankrupt Assignee in Bankruptcy (Taylor) said Shares are theirs Sued Plumer in Trover (Conversion) Plumer Defence: Cannot be guilty of converting my own property: If traced they are mine In that case, Plumer handed money to Walsh, his stockbroker, for the purchase of bonds. Instead, Walsh dishonestly embezzled the money, buying shares and gold for himself. Walsh took the shares as evidenced in the share certificates and the gold. He was about to leave the country. Before he could do so, however, Plumer seized the share certificates and gold. Walsh became bankrupt. On bankruptcy, Walsh’s property would have vested in his assignees in bankruptcy. Before the bankruptcy legislation was enacted, there was no trustee in bankruptcy. The assignees in bankruptcy took over the bankrupt’s property to administer it. Walsh’s assignees in bankruptcy claimed that the share certificates and the gold belonged to Walsh and not to Plumer. They claimed that on Walsh’s bankruptcy, the property had been assigned to the assignees. The assignees sued Plumer in trover, namely conversion. Plumer claimed that the tort of conversion is an improper claim of ownership over another person’s property. Plumer said that the gold and the share certificates were his property because they were purchased with his money. Plumer argued that the items were his because he could trace his money into them. The issue, therefore, was whether Plumer could trace his money into the gold and into the shares. Lord Ellenborough held that common law tracing was allowable. He ruled that Plumer could trace his money into the gold and share certificates because they had been purchased with his money. Makes no difference in law whether you are tracing the original chattel or their substitute. They were merely items of property that had been substituted for his money. The action in trover against Plumer failed. Can Trace in CL property or what they have been converted into – Plumer won Defect in CL Tracing: However, in obiter dicta, he also observed that where sums of money belonging to different persons had been inseparably mixed, the common law would not allow tracing of money into the mixed fund. This is greatly important because there is no common law remedy. He did not say who would own the mixed fund at common law. However, it appears that the person in possession would own the mixed fund. He would simply be liable to the other person for converting his money, but not liable in an action for tracing for property which originally belonged to another person. Some analysts say that Taylor v Plumer was not a case concerning common law tracing. That case, however, had to be concerned with common law tracing because the action brought against Plumer was an action in trover or conversion, undoubtedly a common law action. Another case dealing with tracing at common law is Lipkin Gorman v Karpnale Ltd. Lipkin Gorman (Solicitors) Stole Bank Notes

Cass (Partner)

Karpnale (Casino) Bank Notes ‘lost in Gambling’

Lipkin Gorman sued Karpnale under CL ‘Money Had & Received’. (Personal Action) but tracing assisted Plaintiff claim for money had and received by Karpnale. There - Lipkin Gorman was a firm of solicitors. Karpnale Ltd owned a gaming club. Cass was a partner of Lipkin Gorman who had authority to make withdrawals from the solicitor’s bank account for the purposes of the firm. He made fraudulent withdrawals and gambled the money at the club (Casino) belonging to Karpnale Ltd. The Court HoL held that at common law, Lipkin Gorman was the owner of a chose in action against the bank. Money withdrawn by Cass could be traced at common law into the hands of Karpnale Ltd. Common law tracing would have been available if Cass still possessed the money that he had withdrawn from the account. At common law, when Karpnale Ltd received the money from Cass, Lipkin Gorman could still trace the money because there had been no mixing. However, as soon as Karpnale Ltd mixed its own money with the money belonging to Lipkin Gorman, that money could no longer be traced. At common law, that money would have then lost its separate identity.

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LAWS313 EQUITY Lecture Notes – Semester 031 Common law tracing enabled Lipkin Gorman to show that the money received by Karpnale Ltd was the solicitor’s money. Having established that Karpnale Ltd had received the money without valuable consideration, Lipkin Gorman succeeded in suing Karpnale Ltd in an action for money had and received. This is a personal action and not a tracing action. Lipkin Gorman could not trace their money because Karpnale Ltd had mixed those funds with its own. Karpnale Ltd had to pay back the money. If Karpnale Ltd was bankrupt, Lipkin Gorman would have only been able to receive a proportion of what it was owed.

TRACING IN EQUITY (MIXING OKAY) Equitable tracing is encountered more often than common law tracing because the property sought to be traced, whether money or physical items, are often mixed. Disadvantage – subject to defence of Bona Fide purchaser without notice. (Money defined: If Bank Notes received as ‘currency’ then defence applies, but if ‘rare coin’ transferred as collectors item – therefore personal chattel and defence doesn’t apply) In Black v Freedman, an employee stole money from his employer. The Court held that the employer could trace the money because the employee was a fiduciary to his employer. This case is sometimes cited as authority for the proposition that someone can trace in equity without an initial fiduciary relationship. This is incorrect. In Re Goldcorp Exchange, it was observed that tracing is not based on vague notions of justice. Tracing is based on the ability of the owner to trace property through a number of transactions, The beneficial owners must be able to show that the property remains his, either in its original state or after it has undergone a number of transactions. The claimant must be able to show continuing ownership of specific property. Ie. need to be able to show you own it to commence tracing. In that case, certain persons had purchased gold bullion on a non-allocated basis. Although they purchased specific quantities of bullion, no bullion was set aside on their behalf. They had purchased specific quantities of bullion but not specific bullion. The company had falsely represented that it held sufficient stocks of gold to meet requests for physical delivery of the quantity purchased. When Goldcorp Exchange went into receivership, the charge belonging to the Bank of New Zealand, the chargee’s crystallised to the property of Goldcorp. The issue was whether the claimants, namely the purchasers of the bullion, could claim that the bullion belonged to them in equity so the charge belonging to the Bank of New Zealand could not crystallise on that gold. The Privy Council held that there could be no tracing. The claimants did not have a proprietary interest in the bullion because no bullion had been specifically appropriated to such claimants. Therefore, they could not sustain their claim to trace in equity, having no equitable proprietary interest. All the bullion belonged to the insolvent company and was subject to the bank’s crystallised charge. The claimants had nothing to trace.

IS THERE A NEED FOR AN INITIAL FIDUCIARY RELATIONSHIP TO ALLOW EQUITABLE TRACING? –DEBATED – NOT CLEAR There is some debate as to whether it is necessary to show that the money or other property sought to be traced was initially transferred to a fiduciary. This debate is unresolved. In Re Hallett’s Estate Book p499 and in Re Diplock, Book p523 it was held that equitable tracing is only available where a pre-existing fiduciary relationship can be shown. This requirement was doubted and undermined in Chase Manhattan Bank v Israel-British Bank. Book p534 In that case, there was no initial fiduciary relationship between the Chase Manhattan Bank and the Israel-British Bank. Goulding J, citing Viscount Haldane in Sinclair v Brougham, held that all one need’s to trace in equity is a continuing ownership in equity of the subject matter of the tracing action. He held that equitable tracing was possible, even in the absence of an initial fiduciary relationship. The better view is that there is no need in equitable tracing to show an initial fiduciary relationship. If a nonfiduciary thief stole money and paid it into his bank account mixing it with his own money in the account, there could be no common law tracing because the two sums of money had become mixed. Equity should permit tracing in that case.

RULE IN CLAYTON’S CASE – FIRST IN / FIRST OUT This Clayton’s Case: rule prescribes that in a running account with deposits and withdrawals, there is a rebuttable presumption of fact that money is withdrawn from the account in the order in which it was paid into the 101

LAWS313 EQUITY Lecture Notes – Semester 031 account. If money was deposited on different days, the money that was first paid in is rebuttable presumed to be the money which is withdrawn first. According to The Mecca, Book p498 this rule does not apply to different sums of money deposited on the same day because the bank does not necessarily enter such sums into the account in the order in which they are deposited.

TRACING INTO A MIXED FUND Where a trustee mixes property with his own, the remedy of tracing is not excluded. In Re Hallett’s Estate, Book p499 Hallett (Solicitor)

Without authority, sold Bonds

Trustee of Bonds (Family Trust)

On different days paid money into personal account

Bailee of Bonds (for Coterill) – Bailee was a fiduciary 1.

Paid in proceeds of Family Trust

2.

Then paid in proceeds of Mrs C Bonds

3.

He withdrew various sums of money from account

4.

BUT balance exceeded total of Trust money Hallett then died Bankrupt

Coterill gave Hallett, her solicitor, custody of Russian bonds owned by her. He thereby became the bailee of the bonds. Sir George Jessel MR held that a bailee was a fiduciary, owing fiduciary duties to the bailor. Hallett was also a trustee of his own family trust. As such, he held certain trusts for the settlement. As a trustee, he was also a fiduciary. Therefore, he was a fiduciary to both the settlement and to Coterill. He improperly sold Coterill’s bonds and the settlements bonds. He paid the respective proceeds of sale into his personal account on different days. He already had money of his own in the account. Thereafter, he made deposits and withdrawals from that account but at no time did the credit balance fall below the amount of the combined proceeds of the sale of the two parcels of bonds. He died insolvent. Coterill and the beneficiaries sought to trace their money into Hallett’s personal account. The relevant parties claiming against Hallett’s deceased estate did not pursue any personal action against his executor’s because the estate was insolvent. The money in Hallett’s personal account was always greater that the total of the sums obtained by the sale of the bonds. If the rule in Clayton’s Case had been applied, then all of the Family Trust money and some of Coterill’s money would have been withdrawn and lost. The settlement would not have been able to trace its money and Coterill would have been able to trace a large part of her money. This results in very harsh treatment of the trust. It was purely accidental that the trust money was paid into the account before Coterill’s money. The Court of Appeal was not prepared to endorse such an unjust result. The Court allowed tracing in equity against Hallett and therefore against his estate. Sir George Jessel MR held that where a person was able to do something rightfully, he could not be heard to say that he had done it wrongfully. Since Hallett always had enough money of his own in the account to meet his withdrawals, he was presumed, as a fiduciary, to have been honest in making his withdrawals. He was presumed to have withdrawn only his own money. Coterill’s money and the trust money was intact in the account.

New Rule from Hallett’s – Presumption of Honesty A majority of the Court of Appeal did not apply the rule in Clayton’s Case. The Court said that if a fiduciary has mixed his own money with trust money, used in the broad sense to include all money traceable in equity, Rule: then the fiduciary will be presumed to withdraw his own money first, IRRESPECTIVE OF when it was paid in. It is only after the account has been completely withdrawn that the trust money will be deemed to be withdrawn. Here, Hallett always had enough money of his own to cover the withdrawals. The Court assumed that every withdrawal was from his own funds and he never touched the trust money. There was enough trust money in the account on his death so there was no need to decide which of the two trust funds had priority. The beneficiaries of the trust settlement and Coterill got all of their money back, namely all the money was traceable in equity. The delinquent trustee cannot rebut the presumption of honesty. 102

LAWS313

EQUITY

Lecture Notes – Semester 031

Remedy options for Claimant: Sir George Jessel stated certain principles in obiter dicta: •

If property was wrongfully purchased entirely with trust money, the beneficial owner can either elect to take the property so purchased as his own, or to hold that property as security for the amount of the trust money used in the purchase, namely a CHARGE over that property. The decision will depend on whether the property had depreciated or appreciated in value. If the property has increased in value, the beneficial owner should elect to take the property as his own. If the property has diminished in value, the beneficial owner should elect to take a charge over the property. If the property has neither appreciated nor depreciated in value, either option is appropriate.

•

However, where the trustee, namely a person subject to equitable tracing, has purchased property with trust money as well as his own money, the beneficial owner, namely the person seeking to trace, cannot take the entire property. He is, however, entitled to have a charge on the property purchased to secure the amount of trust money improperly used in its purchase. Alternatively, he can elect to take a proportionate part of that property. Later cases have said that this is good law.

Important Update: The first point is supported by the obiter dicta observations of Sir Richard Scott VC in Foskett v McKeown Book p 553 Scott VC: If the asset has INCREASED in value, then claimant should claim proportionate ownership (ie. More money back as a % ownership as it increases in value), but where the asset has DECREASED in value then claimant should claim a proportionate charge (as charge has to be satisfied first before Trustee can claim the balance). Dong unsure as to whether this is law in Australia as it went to the HoL – 3:2 majority.

Presumption of Honesty still applies if balance < aggregate of Trust monies Brady v Stapleton HCA – Presumption of Honesty would still apply even if the balance had fallen below the aggregate of Trust monies. And only if his own money had been exhausted will he be deemed to have used Trust money.

HAVE TO SHOW OWNERSHIP AT START OF TRACING PROCESS Re GoldCorp Exchange Book p534 – Have to show ownership at beginning of Trace otherwise there is nothing to trace.

CLAYTON’S CASE (1ST IN/OUT) OR PARI PASSU (RULE OF PROPORTIONALITY)? The problem with the decision in Re Hallett’s Estate is that if Hallett had withdrawn all of his money and then started to withdrawn trust money what does a Court do? Is the rule in Clayton’s Case to be applied and would a Court say that the trust money first deposited was the first withdrawn? On the other hand, does a Court apply the alternative rule, namely rather than applying the rule in Clayton’s Case, as between equally innocent owners of the money in the account, but apply the pari passu rule or the rule of proportionality, namely assume that the withdrawals made from the account will be proportionate to the funds in the account owned by the equally innocent parties? The better view, and the view supported by authority is to apply the pari passu rule in that situation. However, because there is authority to the contrary, there is uncertainty as to which rule a Court would apply. This issue only arises between equally innocent parties. As the fiduciary is not equally innocent, his money is assumed to have been withdrawn first. Re Stenning supports the application of the rule in Clayton’s Case. North J held that where a fiduciary mixes several trust funds, the rule in Clayton’s Case will apply as between those trust funds of the equally innocent parties, applying the obiter dicta of Baggally LJ in Re Hallett’s Estate. In Re British Red Cross Balkan Fund, the pari passu rule was applied because application of the rule in Clayton’s Case would have lead to injustice. In that case, a trust fund had been raised by subscription to held the sick and wounded in a war. After the end of the war, the trust had generated a surplus that was held on resulting trust for the subscribers. It was not considered to be a charitable trust. The issue was determining the beneficial ownership of the surplus. Astbury LJ considered the application of the rule in Clayton’s Case to be unfair on the facts and he declined to apply it. He divided the surplus ratably or proportionally amongst the subscribers to the fund = pari passu. 103

LAWS313 EQUITY Lecture Notes – Semester 031 A problem arises with two or more equally innocent parties owning money in a bank balance. What is the best approach as between those parties dealing with the sums withdrawn from the bank balance? Is the rule in Clayton’s Case to be applied or is the pari passu rule to be applied? The pari passu rule is favoured as it is more just than the rule in Clayton’s Case which depends on which money was paid into the account first. There is authority to support both rules. The position is uncertain, and even though the pari passu rule is preferable, both rules will be applied in the alternative. If mixed funds have been used to purchase a physical item of property, pari passu must be applied according to Sinclair v Brougham. The rule in Clayton’s Case only applies to running accounts. In New Zealand, the Court of Appeal preferred the pari passu rule over the rule in Clayton’s Case in a competition between several investors seeking to trace their money in a common fund in Re Registered Securities Ltd.

Refinement of Pari Passu – applies to EVERY withdrawal, not just ultimate balance. When the property is applied pari passu, is it only proportionately applied to the ultimate balance in the account? The more sophisticated and complex but just approach is to say that every withdrawal from the account must be made pari passu. In Re Ontario Securities Commission, clear according to Dong - it was held by the Ontario Court of Appeal that EVERY withdrawal from a mixed fund owned by equally innocent parties should reflect the proportionate ownership of that mixed fund. This is very clear according to Dong. However unclear in In Barlow Clowes International Ltd (in liq) v Vaughan, Book p531 the UK Court of Appeal laid down two propositions: •

If the application of the rule in Clayton’s Case produces injustice, then the pari passu principle as annunciated in Re Ontario Securities Commission should be applied.

•

Where the application of the rule in Clayton’s Case produces injustice but it would be impractical or disproportionately expensive to apply the Re Ontario Securities Commission, the ultimate balance in the mixed fund should be applied proportionately. Very unfair according to Dong.

The Re Ontario Securities Commission version of the pari passu rule should be applied to every withdrawal from the funds in a mixed account. It is difficult to understand how it would be impracticable to apply this principle. Only in exceptional situations would it be impracticable or disproportionately expensive. In Australia, on the one hand, Kline J in Re Jones (deceased) applied the pari passu rule. On the other hand, Myers J purportedly applied the rule in Clayton’s Case in Austin v Khaliffe.

Position Uncertain between equally innocent claimants Re French Caledonia Travel Service Pty Ltd in liquidation 2002 NSW SC 641 – Campbell J: Preferred pari passu but left open the difficult question as to whether to apply Clayton’s or pari passu between equally innocent claimants.

PRESUMPTION OF HONESTY NOT CONFINED TO MIXING OF DIFFERENT SUMS OF MONEY BUT APPLIES TO ANY MIXING OF DIFFERENT ITEMS OF PURE PERSONALTY BY A FIDUCIARY In Brady v Stapleton, Dixon J and Fullagher J: the High Court established three propositions: •

The presumption of honesty in Re Hallett’s Estate is not confined to cases where money is mixed. It applies to all cases of mixing of personal property, even shares and bonds. (ie. If mixed shares, uses his own shares first)

•

Where the items of pure personalty are mixed in such a way so as to be specifically severable, the person tracing can take a charge on the mixture or amalgam. This principle only applies to an identical mixture of company shares and bonds. (Case decided before proportionate ownership, therefore today can claim a charge or proportionate ownership)

•

The presumption of honesty is to be applied, even though factually there is no honesty. For example, there is $1,000 of the trustee’s money in the account and $1,000 of trust money in the same account. If the trust withdraws $1,200 from the mixed fund of $2,000, there can be no factual honesty because there was only $1,000 104

LAWS313 EQUITY Lecture Notes – Semester 031 of the trustee’s money. At least $200 of that amount must be trust money. Therefore, the trustee was dishonest but is deemed to be honest as far as possible. Thus, he is deemed to have withdrawn $1,000 of his own money and $200 of trust money. This is a presumption of law, not a presumption of fact.

MIXING BY FIDUCIARIES OF THEIR OWN MONEY WITH TRUST MONEYS DERIVED FROM ONE OR MORE SOURCES In Re Oatway, Book p539 O’s Bank Account 1.

X pounds – O’s Money

2.

Then deposited 3000 pounds – Trust Money

3.

Withdrew – 2137 pounds which he used to buy shares

4.

Balance was more than 3000 pounds

5.

Then Various debits and credits

6.

Result = empty account (all funds withdrawn and dissipated)

proceeds identifiable

O died insolvent Oatway was a solicitor and trustee. He fraudulently paid 3,000 pounds in trust money into his personal bank account. He later withdrew 2,137 pounds and used it so purchase shares. Immediately after this withdrawal, there was a credit balance of more than 3,000 pounds in his personal account. Later, all the money was withdrawn and dissipated. There was no credit balance left in the account to the trust estate could not trace its money into the account. The shares were subsequently sold and the proceeds were identifiable. The issue was whether the trust estate could trace its money into those proceeds of sale by virtue of the presumption of honest, Oatway eventually having died insolvent. If the presumption of honesty is to be applied as espoused by Sir George Jessel in Re Hallett’s Estate, where a fiduciary mixes his own with trust money and he makes withdrawals from the account, he is deemed to be honest and he withdraws his own money first. If this was applied, Oatway would have been presumed to have withdrawn his own money from the account first, in which case the shares would have been purchased with his money and the trust estate would not be able to follow its money into the shares and the proceeds of sale. Joyce J held that such a result was unjust. He introduced an exception to the presumption of honesty. – can only be applied as against the delinquent fiduciary and not in his favour. Dong doesn’t agree. The presumption of honesty in Re Hallett’s Estate is to be invoked by the tracing claimants against the fiduciary only. The rule cannot be invoked by the fiduciary for his own advantage. For example, if funds are withdrawn from the account, invested profitably and the balance is dissipated, the Court will assume that the sums withdrawn are trust money and the dissipated balance is the fiduciaries own money. Re Oatway is not a true tracing case but it is accepted as good law. Oatway’s deceased estate tried to invoke the Re Hallett’s Estate presumption of honesty to benefit the deceased estate. Although Re Oatway is regarded as good law, it does undermine the rationale of tracing and is conceptually difficult. Tracing allows a person to follow his property through every stage of the tracing process. Re Oatway is inconsistent with this proposition. It is not a convincing case because in tracing, the beneficial owner is supposed to be able to say at every stage of the tracing process that he can follow his money. This cannot be done in Re Oatway because at the time of investment, it is impossible to know whether (at Stage 3 – purchase of shares) it will profitable or not or whether the balance in the account will be subsequently dissipated.

Claimants can only claim LOWEST balance of account in intermediary period See Roscoe v Winder is a tracing case that can be explained on the basis of an equitable owner following his property. A debt collector had collected 455 pounds that he improperly paid into his personal account. After various payments into and withdrawals from the account, the credit balance fell to 25 pounds. Thereafter, he paid in more money and made other withdrawals. When he died insolvent, the balance was 358 pounds. The issue was whether his clients may follow their money into the sum of 358 pounds or only into the smaller sum of 25 pounds. 105

LAWS313 EQUITY Lecture Notes – Semester 031 Sargeant J logically held that the clients of the debt collector could only trace the smaller sum because when the credit balance fell to 25 pounds, the trust money in the accounted necessarily amounted to that sum. When the debt collector subsequently paid in other sums, there was no evidence that he did so with the intention of replenishing the trust money that had been improperly withdrawn. He held that this was because the account was a personal account and not a trust account. Had it been a trust account, he would have been presumed to restore the trust money with the later deposits that he made into the account. Where the account in question is a personal account, there is no presumption of honesty. There is a presumption of honesty if the money withdrawn is dissipated. Alternatively, there is a presumption that the money withdrawn belongs to the trust if that money is profitably invested. Trust can only claim the lowest intermediate level of the bank account, even if account increases again. Thus, the traceable sum was 25 pounds. The other sums paid into the account where evidence that the debt collector deposited his own money. The increase in the balance did not increase the claimant’s rights. There was no presumption that the sums subsequently paid into the account with the balance of 25 pounds were paid in to repair the breach of trust. If the account was a trust account, it could be presumed that the money subsequently paid into the account by the trustee was paid into the repair the breach of trust. Here, there was a personal account. Thus, claimants on a bank account claiming to be able to trace their money into the account cannot claim an amount greater than the lowest credit balance in the intermediary period. The intermediary period if the period between the improper mixing of the trust money and the trustee’s money and the time when the tracing action is brought. If the account in question is a trust account, the subsequent payments are deemed to be made to repair the breach of trust. The Supreme Court of Queensland applied Roscoe v Winder in Lofts v MacDonald Book p523. The following example is an illustration of this principle. •

Day 1: The trustee opens a person account with $1,000 of his own money.

•

Day 2: The trustee improperly pays $1,000 of trust money into the account. The balance in the account is now $2,000.

•

Day 3: The trustee withdraws $1,500 from the account and dissipates the money. At this stage, there is only $500 of trust money left in the account.

•

Day 4: The trustee pays $1,000 of his own money into his account. At this stage, the credit balance is $1,500.

•

Day 5: The beneficiary commences a tracing action with respect to the $1,000 of trust money initially paid into that account.

The intermediate period is day 2 to day 5 inclusive. The lowest intermediate balance is $500. The beneficiary can trace only $500 from the credit balance of $1,500 in the trustee’s personal account at the date of commencement of the action, notwithstanding that at that date, there was $1,500 in the account. In Bishopsgate Investment Management Ltd v Homan, it was held that a beneficial owner of property cannot trace that property through an overdrawn account, applying the Roscoe v Winder principle. In this situation, there is nothing for the claimant to trace.

WHETHER TO APPLY HALLETT, RE-OATWAY. PARI PASSU OR CLAYTON’S? Clayton’s Case = Rebuttable Presumption – First in / First out. Hallett = Presumption of Honesty (Fiduciary taken to withdraw his own money first). Delinquent trustee cannot rebut. Re Oatway – exception to the presumption of honesty – can only be applied as against the delinquent fiduciary and not in his favour. Pari Passu = Proportionality Rule – Withdrawals from the account will be proportionate to the funds in the account owned by the equally innocent parties. Re Ontario – every withdrawal from mixed fund should reflect proportional ownership. If the money was withdrawn and was profitably invested, Re Oatway will apply. If the money was withdrawn and subsequently dissipated, Re Oatway cannot apply. Apply Hallett if investment goes bad.

106

LAWS313

EQUITY

Lecture Notes – Semester 031

Competition between Delinquent Fiduciary & Claimant 1.

Apply Hallett - If investment money dissipated or invested at a loss

2.

Apply Oatway - If withdrawn money is profitably invested.

Competition between equally innocent claimants 1.

Doubt as to whether you apply Clayton or Pari Passu

Where mixture of Fiduciary and innocent claimants Four Possible Combinations: Therefore can have Clayton’s + Hallett, OR Pari Passu + Hallett, OR Clayton’s + Oatway, OR Pari Passu + Oatway

CONFLICT - TRACING COMPARED WITH A BREACH FIDUCIARY (AOP) Tracing is to be contrasted with the profit rule in Regal (Hastings) Ltd v Gulliver and the duty to account incumbent upon fiduciaries. The different rules conflict in particular situations. For example, the rule will conflict where a trustee and fiduciary mixes in a personal bank account his own money with trust money. •

The trustee opens a personal bank account and pays in $1,000 of trust money.

•

The trustee then pays in $1,000 of his own money.

•

$2,000 is then withdrawn and is used to purchase an asset.

•

The asset then appreciates in value to $4,000.

If the tracing principle was applied, the trust can say that $1,000 of trust money was used to purchase an asset that has doubled in value. Therefore, under the tracing principle, the trust estate can claim one half of the value of the asset, namely $2,000. If, however, the Regal (Hastings) Ltd v Gulliver principle is applied, the trust estate can claim more than $2,000. A fiduciary cannot profit through his breach of duty. The trustee will therefore have to account for all the profit made and he can only retain his initial contribution. The trust estate can recover $3,000. In the case of conflict in the result reached, lower Courts have applied the profit principle but as yet, there has been no higher Court authority. In Scott v Scott, HCA (Disappointing case according to Dong) Book p537 a trustee, acting in breach of trust, had mixed trust money with his own money to purchase a house. The house increased in value. The trustee then restored to the trust estate the money that he had taken from it to buy the house. After the trustee died, the new trustees sought a declaration that the estate of the former trustee held the house in trust for the trust estate. The executrix of the deceased defaulting trustee argued that as the trustee had repaid the trust money that he had taken from the trust to buy the trust, he had thereby repaired the breach of trust. Therefore, the trust had no claim to the house and no liability attached to the trustee. The High Court rejected this argument. The Court held that the principle in Regal (Hastings) Ltd v Gulliver was to be applied here. A trustee would not be allowed to profit by misusing his fiduciary position. The High Court said that the deceased estate of the defaulting trustee had to account for the proportion of the profit attributable to his misuse of the money. The High Court allowed the trustee to keep the profits that were attributable to the use of his personal funds. (Same result as if tracing principle applied) A proper application of the principle would mean that the trust estate gets all the profits made by the trustee. The High Court improperly applied the Regal (Hastings) Ltd v Gulliver principle. By applying the profit principle in a truncate manner, the same result was generated as would have occurred under the tracing principle. The Court left this question of the conflict between the two rules open and did not identify the conflict between its decision and the principles. The Court declared that the trustee had to account to the trust for the proportion of the profit made by him that was attributable to the use of the trust money. The Court imposed a charge to secure the payment to the trust estate of the relevant sum of the profit. The importance of Scott v Scott lies in the obiter dicta comments of the Court that are now regarded as good law:

107

LAWS313 EQUITY Lecture Notes – Semester 031 • In principle, where a trustee has improperly used a mixed fund comprising his own money and trust money to purchase an asset, the trust estate is entitled to claim a proportionate share on the asset. •

The trust estate can either have a charge imposed on the asset requiring that asset to be sold so that the trust estate may be repaid or the trust estate can elect to take a proportionate share of the asset.

•

If the property has depreciated in value, the trust estate should elect to have a charge imposed on the asset to secure the money because no profit has been made.

•

If the property has appreciated in value, the trust estate should apply for all profits and proportionate ownership to ensure the fiduciary does not make a profit from his breach of duty.

The High Court held that where two trust funds are mixed to purchase an asset, the two trust estate are entitled to share the asset proportionately or have charges pari passu over the asset, citing Lord Provost of Edinburgh v Lord Advocate. In England, the trust estate can claim a proportionate share of ownership. This is an illustration of tracing and not the profit principle. The important question is whether the asset has appreciated in value. If the asset has appreciated in value, according to Regal (Hastings) Ltd v Gulliver, the trust estate can claim an account of profits, something greater than proportionate ownership. In Re Tilley’s Will Trusts, Book p542 it was held that where trust money and the trustee’s own money is mixed, the trust estate can claim a proportionate share of the asset under the tracing principle.

Two Difficult Cases – which preferred Profit Rule In Paul A. Davies (Australia) Pty Ltd v Davies (No 2), Book p542 Mahoney J held that the tracing principle and the profit principle would produce different results where a profit was made. The profit principle was to apply. In NSW, Paul A. Davies (Australia) Pty Ltd v Davies (No 2) is good law because it was followed by Bryson J in Australian Postal Corporation v Lutak. The decisions in these cases where unsatisfactory under the tracing principle.

MIXING BY INNOCENT VOLUNTEERS Mixing by a fiduciary is to be distinguished with a case of mixing by an innocent volunteer. The principles to be applied are totally different. For example, an innocent fiduciary may receive trust property not knowing that it was trust property, thinking that a gift has been made. He cannot plead bona fide purchaser for value of the legal estate without notice because he has not given consideration. He has taken the property without notice so no constructive trust arises. The position adopted is intermediate and is only significant in tracing cases. In Re Diplock, Diplock purported to give a residuary estate to charitable or benevolent objects to be selected by the trustee. This purported gift was geld to be void under the Chichester Diocesan Fund v Simpson principle because the gift was not exclusively charitable. Pursuant to the gift, however, the executor’s had distributed assets to charities. Therefore, payments to the charitable institutions as innocent volunteers were void. In Australia, there would have been a valid gift . A Court would read the phrase as charitable gifts or benevolent and charitable gifts. Section 104 of the Trusts Act would sever the word benevolent but would not sever the charitable purposes. However, there is no equivalent to section 104 in England. The bequest failed. The executor’s did not know that the gift was invalid until the decision in Chichester Diocesan Fund v Simpson. There is no inconsistency between Re Diplock and Commissioner of Stamp Duties v Livingston. The next of kin sued the executor’s in a personal action for breach of duty. Having failed to recover all of the money, they sued the recipients of the money, the charitable institution to recover the money on two alternative bases: •

A personal action against the charitable (innocent) recipients to return the money wrongfully paid to them. A personal action is not concerned with tracing. And an alternative action:

•

The deceased estate represented by the next of kin, sought to trace the payments made bona fide but wrongfully to the charities. This was a proprietary action against the charitable recipients based on the right to trace the estate money.

In Re Diplock, the Court of appeal discussed the tracing claim, making it clear that the charities had received the money without notice. The charities received the money without notice of the invalidity of the gift. The charities were not fiduciaries but were innocent volunteers. Controversially, the Court said that an initial fiduciary relationship was required for equitable tracing.

108

LAWS313 EQUITY Lecture Notes – Semester 031 The Court held that where an innocent volunteer mixes his own money with trust money such as the money of the deceased estate or any money that can be traced in equity, the mixed fund is owned by the two contributor’s pari passu, in proportion to their contributions because the parties are equally innocent. The innocent volunteers and tracing claimants have equal rights. After stating the general principle, the Court of Appeal examined the interests of the next of kin on behalf of the estate in different situations: •

Where the charities, namely the innocent volunteers, had used the money to improve the buildings on their own land. The Court held that the money so used could not be traced. Firstly, the use of money in this manner could not be shown to have increased the value of the land. The improvements may lower the value of the buildings. Secondly, it would be an extravagant result to grant the deceased estate a charge on the entire land owned by the charity simply because the estate’s money had been used to construct part of a building on that land. The Court drew a distinction between the use of trust money to make improvements on the innocent volunteer’s land, which could not be traced, and the entirely different situation where the money is first mixed with the volunteer’s own money into a common fund which is then used to purchase property. In the latter situation where the two funds have been first mixed before the property is purchased, the volunteer and the trust would have ratable or proportionate charges on the property. This reasoning is unconvincing.

•

Where the innocent volunteer has earmarked (identified) the trust money in its bank account , namely it had acknowledged that it belonged to the trust estate, that money is specifically recoverable by the trust.

•

Where trust money had been mixed with the volunteer’s money in the volunteer’s bank account, the rule in Clayton’s Case would apply to the operation of that latter and active account. There is now uncertainty as whether to apply the rule in Clayton’s Case or pari passu. The Court declined to apply pari passu to each withdrawal because it considered it to be complicated and difficult in practice. This is a doubtful conclusion but the Court did hold that pari passu would apply between two equally innocent volunteers such as two trust funds.

•

One of the charities held government bonds before receiving the trust money and later used the trust money to increase its quantity of stock. The Court said that the stock was owned by the volunteer and the deceased trust estate proportionately. The Court held that the rule in Clayton’s Case only applies to active bank account with deposits and withdrawals. The stock subsequently withdrawn, sold and dissipated was to be attributed pari passu to the parties and not in accordance with the rule in Clayton’s Case.

Re Ontario Securities Commission rejected the decision in Re Diplock given that in that case, the Court said that volunteers have equal rights.

Special Statutory Provision – Section 109 Trusts Act In Ministry of Health v Simpson, Book p523 the House of Lords upheld the right of the next of kin, on behalf of the estate, to sue the recipients in a personal action and not a tracing action to recover money, provided that the next of kin first exhausted person remedies against the defaulting executor’s. Section 109(1) extends this right to bring a personal action to any person who has suffered loss by reason of a wrongful distribution of trust property by the trustee. The wrongful distributee is an innocent volunteer. Extends Simpson to trustees who improperly pay the recipients. Ie. Sue trustees and recipients also. Section 109(2) provides that, except by leave of a Court, no person who has suffered loss by the wrongful distribution of a personal representative or trustee may sue the wrongful distributee until he has first exhausted his remedies against the personal representative or the trustee. This confirms the position in Ministry of Health v Simpson. But must sue executor or trustee first, before trying wrongful recipient – unless leave of court to do otherwise. S65(7) Trustees Act (WA) allows suing recipient first Section 109(3) provides that where a wrongful distributee has received the property in good faith and has so altered his position in reliance thereon, and it would be inequitable to enforce the remedy (ie. Not an absolute defence like Bona Fide purchaser), the Court may make such order as it considers to be just in all of the circumstances. This is the defence of change of position, reversing the decision in Ministry of Health v Simpson where it was held that there could be no such defence. Dong’s view is that this is NOT available in a tracing action as s109(1),(2) relate to a person who has suffered loss (no loss if can trace properly). Section 109(3) gives the defence of change of position to a wrongful distributee in the case of tracing. For example, if the money is distributed and the wrongful distributee uses that money to purchase any asset, he can rely on the change of position defence. Judicial authority has not determined this issue. The section 109 defence may not be 109

LAWS313 EQUITY Lecture Notes – Semester 031 available in a case of tracing because if the claimant can say that the property is identifiable and always has been identifiable has his property, he has not suffered loss. If the property remains in the hands of the wrongful distributee, there has been no change of position. In Western Australia, section 65(7) of the equivalent legislation requires the plaintiff to sue the distributee before suing the trustee or personal representative.

SUMMARY

Clayton’s

Hallett’s – Presump of Honesty

•

1 In / 1 Out

•

(Running Accounts)

st

st

Pari Passu

•

Fiduciary uses own money first

•

Even until funds exhausted – Brady v Stapleton

•

(Mixing money & Property)

•

Only against fiduciary (depreciated value) – Re Oatway

•

Proportionality Rule

•

In proportions regarding innocent claimants (ratio)

•

(if physical item purchased with mixed money – must use Pari Passu – Sinclair v Brougham)

•

Applies to every withdrawal – Re Ontario Securities Commission

Richard Scott VC in Foskett v McKeown – If asset: •

INCREASES in value – claim proportionate ownership

•

DECREASES in value – claim a proportionate CHARGE

TRACING TEMPLATE EXAMPLE – TUT 11 Bank Y

Bank Z

•

$2m (R)

•

$4m (J)

•

$1m (N)

•

$2m (M)

•

+ $3m (J) Stamp – under Clayton’s

•

$6m

•

$6m

•

-$3m

•

-$4m W2(Y) Land

•

$3m

•

$2m

•

-$1.5m W2(Z) Land

•

-$2m W3(Y) Shares

•

$1.5m

•

$0

•

-$1.5m W3(Z) Shares

•

$0

W1(Z) Stamp

Key: W = Withdrawal

PROCESS CL Tracing no longer possible due mixing Issue of Fiduciary? – don’t have to resolve as N, J, M all Bailors and R = Bailee. Therefore relationship of Bailment = Fiduciary. Hallett’s per Jessel J. Agency also exists which also = fiduciary. (Focus on withdrawals – para’s 4,6,7) •

Para (iv) – W1(Z) 110

LAWS313 • Para (vi) – W2(Y) & W2(Z) Land •

EQUITY

Lecture Notes – Semester 031

Para (vii) – W3(Z) & W3(Y) Shares

Clayton’s or Pari Passu – we don’t know, therefore: •

In relation to Land: Clayton’s + Pari Passu (2 answers)

•

In relation to Shares: Clayton’s + Pari Passu (2 answers)

Total = 4 answers

Answer 1: Clayton’s + Presump of Honesty in relation to LAND W1(Z)

$3m (J) Clayton’s, therefore +$3m in Bank Y is J’s

W2(Y)

Land depreciated (therefore make sure R’s money used to buy land) $4m total withdrawn =

W2(Z)

-

$2m (R) Presump of Honesty

-

$1m (N) Clayton’s

-

$1m (J) Clayton’s

Land depreciated $1.5m withdrawn = -

$1m (J) Clayton’s

-

$0.5m (M) Clayton’s

Therefore Land combined = -

$2m (R)

-

$1m (N)

-

$2m (J) ($1m + $1m)

-

$0.5m (M)

-

$5.5m

Land now only worth $3.5m Therefore Scott in Foskett: N,J,M apply for charges on land. Not proportionate ownership. Charge = $3.5m, 3 tracing claimants N,J,M – then nothing left for R. As charges not satisfied R loses $2m and the other charges satisfied of $3.5m as follows: -

$1m (N)

-

$2m (J)

-

$0.5m (M)

Answer 2: Clayton’s + Presump of Honesty in relation to SHARES W3(Z)

$1.5m (M) Clayton

W3(Y)

$2m (J) Clayton $3.5m Shares purchased

(have to apply Pari Passu now as can’t tell which money purchased shares first) and not enough to claim interest in full Shares now = $1.75m 111

LAWS313

EQUITY

Lecture Notes – Semester 031

$750K (M) $1m (J) $1.75m No contribution from R, therefore M and J have to share depreciation proportionately

Answer 3: Pari Passu + Presump of Honesty in relation to LAND W1(Z)

$2m (J) PP 4:2 or 2:1 ratio (of $3m) $1m (M) PP 1:2 ratio (of $3m) $3m for Stamp deposited into Y, therefore deposit in Y of $3m = $2m (J) and $1m (M)

Therefore Bank Y now: $2m (R) $1m (N) $2m (J)

Ratio 2 – 1 - 1

$1m (M) $6m W2(Y)

Land depreciated, therefore make sure Presump of Honesty used (Hallett) $4m withdrawn =

W2(Z)

-

$2m (R)

-

($2m between N,J,M in 1,2,1 ratio)

-

$1m (J)

-

$0.5m (M)

-

$0.5m (N)

-

$4m

$1.5m withdrawn = -

$1m (J) 2-1 ratio

-

$0.5m (M)

-

$1.5m

Land purchased for $5.5m, therefore contribution to purchase price = -

$2m (R)

-

$2m (J) ($1m +$1m)

-

$1m (M) ($0.5m + $0.5m)

-

$0.5m (N)

-

$5.5m

Now land worth $3.5m, therefore Scott in Foskett: apply for charges over land -

$0 (R)

-

$2m (J)

-

$1m (M)

-

$0.5m (N)

-

$3.5m 112

LAWS313

EQUITY

Lecture Notes – Semester 031

Answer 4: Pari Passu + Presump of Honesty in relation to SHARES W3(Z)

W3(Y)

As from before Ratio 2:1 in regards to J:M, therefore $1.5m withdrawal: -

$1m (J)

-

$0.5m (M)

-

$1.5m

Innocent parties ratio (from before) 2-1-1, therefore $2m withdrawal: -

$1m (J)

-

$0.5m (M)

-

$0.5m (N)

-

$2m

Therefore combined contribution to purchase price is as follows: - $2m (J) ($1m + $1m) -

$1m (M) ($0.5m + $0.5m)

-

$0.5m (M)

-

$3.5m

Shares now only worth $1.75m, therefore respective Charge amounts: -

$1m (J)

-

$0.5m (M)

-

$0.25m (N)

-

$1.75m

Charge over $1.75m Shares, and claimants suffer shortfall in equal proportions

113