Q&A Equity and Trusts Questions and Answers 100% Correct

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Titles in the series: Q&A Company Law Q&A Commercial Law Q&A Contract Law Q&A Criminal Law Q&A Employment Law Q&AEnglishLegalSystem Q&A Equity and Trusts Q&A European Union Law Q&A Evidence ... Q&A Family Law Q&AIntellectualProperty Law Q&A Jurisprudence Q&A Land Law Q&A Medical Law Q&A Public Law Q&A Torts QUESTION 1 ‘Although equity will not aid a volunteer, it will not strive officiously to defeat a gift’ (per Lord Browne-Wilkinson in Choithram International SA v Pagarani (2001)). Evaluate this statement by reference to decided cases. How to Read this Question Thisisabroadessayquestionon theconstitutionof atrustandtheconsequencesof creation. The focus ofthe question is whether the courtis prepared to relax the Milroy v Lord rule infavourof volunteers inorder togive effecttothe clear intentionofthe transferor. How to Answer this Question Agoodanswer tothisquestionwilldealwiththeprincipleinMilroy v Lordbyreference tostructureddiscussionofthe relevant cases.Themainissue iswhenwouldagiftor trust be fully created and do the courts have a discretion to develop the law in this area? The permutation of legal principles determining this question are required to be discussed as well as the effects of constitution and the ineffectual creation of an express trust or gift.Up for Debate Students areurgedtoreadthejudgmentsinthe controversialdecisionPennington v Waine. In this case, Arden LJ’s view of unconscionability was based onthe discretion of the court and varies with the circumstances of each case. This thatinvolvetheprocessofthetransferofthelegaltitletoproperty.InPennington v Waine, what would have been the position if registration of the shares were declined by the company? If the constructive trust theory is to be maintained, despitetherefusaltoregister thenewowner,thiswouldresultinequitytreating an ineffective transfer as a valid declaration of trust. But in Pennington v Waine thedonorhadnotdeclareda trust,normade agift,norhadshedoneeverything in her power to make a gift, yetthe court decided thatthe transfer was effective in equity. Thefollowingarticlesareinstructiveinorder togetabetterunderstandingofthesubject: J Morris ‘Questions: when is an invalid gift a valid gift? When is an incompletely constituted trust a completely constituted trust?Answer: after decisions in Choithram and Pennington’(2003)6PCB393; M Halliwell‘Perfectingimperfectgifts andtrusts:havewe reachedthe endoftheChancellor’s foot?’(2003)Conveyancer192. Answer Plan The Milroy v Lordtest. Transferor completing everything required of him. No self-declaration following imperfecttransfer. The principle in Re Ralli. Multiple trustees, including the settlor. Trust of a chose in action. Consequences of a trust being perfect. Exceptions to the rule that equity will not assist a volunteer.Answer Structure This diagram illustrates the methods and consequences of creating trusts, including gifts. ANSWER This statement by Lord Browne-Wilkinson highlights two fundamental principles of equity:the notion that equity will not assist a volunteer and thatthere is no policy in equitytodefeataperfectgift.Theseareself-evidentpropositions.However,anumberof landmarkcaseshave striventoperfectgiftswhich,on orthodoxtheory,oughttobe con-sidered asimperfect.1 1 TheprinciplelaiddownbyTurnerLJinMilroy vLord(1862)identifiesthetwomodesof constitutingan express trust.Theonus ison the settlor toexecuteone (or in exceptional circumstancesboth)ofthesemodesfor carryingouthisintention.Thetwomodesofcreating an express trust are: (a) a self-declaration of trust; and (b) atransferofpropertytothe trustees,subjecttoadirectiontoholdupontrustfor the beneficiaries. A settlor may declare that he presently holds specific property on trust, indicating the interest,forabeneficiary.Inthisrespecthesimplyretainsthepropertyastrusteefor the relevant beneficiaries. Clear evidence is needed to convert the status of the original owneroftheproperty tothatofa trustee,seePaul v Constance(1977).Thetestthatis applicable here is the ‘three certainties’ test, i.e. certainty of intention, subject matter and objects. Thealternativemodeofcreatinganexpresstrustinvolvesatransferoftherelevantproperty toanother person (or persons) as trustee(s), subjecttoa validdeclaration oftrust.In this context the settlor must comply with two requirements, namely a transfer (gift or sale)ofthe relevantpropertyor interesttothetrustees complementedwithadeclaration of the terms of the trust. If the settlor intends to create a trust by this method and declares the termsofthe trust,butfails totransfer the property tothe intendedtrustees, it is clear that no express trust is created.2 The court will not automatically imply a selfdeclarationoftrust: see Richards v Delbridge (1874) andJones v Lock (1865). Theformal requirements,ifany,concerningthetransferofthelegaltitleorequitable titletopropertyvarywiththenatureoftheproperty involved,inaccordancewiththe Milroy v Lord (1862) principle; but if the transferor has done everything required of him totransferthelegaltitletopropertyandsomethinghasyettobedonebyathirdparty, the transfer will be effective in equity: see Re Rose (1952); contrast Re Fry (1946)in respectofthetransferofsharesinaprivatecompany.Theeffectofthisrule(knownas the rule inRe Rose)is that althoughthe transferofthe legaltitle isnot complete,the transferorwillneverthelessholdthelegaltitletothepropertyasconstructivetrustee for the transferee.Indeed,inPennington vWaine (2002),theCourtofAppealdecided thatthedeliveryofthesharetransfer formtothecompanycouldbedispensedwithif itwouldbeunconscionableforthetransferortorecallwhatsheintendedtodonate,the transfer would be effective inequity. Thisnotion of unconscionability was based on analogywiththeprinciple laiddownbythe PrivyCouncil inChoithram InternationalSA v Pagarani (2001). However,the Privy Council in that case had decided that the trust was perfectly created and thus it would have been unconscionable for the settlor to denytheexistenceofthetrust,whereasinPenningtonthedonorhadneitherdeclared atrustnormadeaperfectgiftnorhadshedoneeverythingrequiredofhertomakethe 1 Highlightthe significance ofthe modes of creating an express trust.this test be satisfied? gift. Accordingly, Pennington may be treated as an unjustifiable extension of the Milroy v Lord principle.3More recently in Zeital v Kaye (2010), an element of orthodoxy was reinstated when the Court ofAppeal applied the strict Re Roseprinciple and distinguished Pennington. In Re Ralli (1964), the High Court decided that a settlor may expressly manifest an intention to transfer the relevant property to third-party trustees (transfer and declarationmode) and,prior to completingthe transfer,to declare himself a trustee for the beneficiaries (self-declaration mode). In this event, the trust will be perfect, provided that the third-party trustee acquires the property during the settlor’s lifetime. The court had also decided that it was immaterial how the third-party trustee acquired the relevant property. The mere factthatthe property had reached the hands ofthe intended trustees was sufficient to constitute the trust. The logic of this test extended the Milroy v Lord principle. Moreover, in Choithram International SA v Pagarani (2001), the Privy Council decided that where the settlor appoints multiple trustees, including himself, and declares a present, unconditional and irrevocable intention to create a trustfor specific persons, a failure to transfer the property tothe nominatedtrustees isnotfatal,for his (settlor’s) retention of the property will be treated as a trustee. Trusteeship for these purposes is treated as a jointofficesothattheacquisitionofthepropertybyonetrusteeisequivalenttoitsacquisition by allthe trustees. There was no distinction between a settlor declaring himself to be the sole trustee and one of a number oftrustees. InFletcher v Fletcher(1844),the court construed the subject matter of a covenant(to transfer property on trust) as creating a chose in action, namely the benefit ofthe covenant.Thisintangiblepropertyrightmaybetransferredtothetrusteesontrustfor therelevant beneficiaries, thus perfecting the trust. What is needed to assign such a right or chose is a clear intention on the part ofthe assignor to dispose ofthe chose to the transferee, but it is questionable whether the settlor had the benefit of the covenant. In any event,the Fletcher principle was subsequently restricted in Re Cook (1965)to debts enforceable atlaw, as distinctfrom any other choses in action.4 2 Express the controversial nature of the Pennington rule. 3 TheFletcher ruleishighlycontroversialandoughttobestatedaccompaniedbyits limitations. Where a trustis perfectly created,the beneficiary is given a rightin rem in the trust propertyandmayprotecthisinterestagainstanyone,exceptabonafidetransfereeoftheCommon Pitfalls Choithram v Pagarani, Pennington v Waine and Fletcher v Fletcher. legal estate for value without notice. He may bring the claim in his own name and is entitled to join the trustee as a co-defendant. On the other hand, ifthe intended trustis imperfect, the transaction operates as an agreement to create a trust. This involves the lawofcontract,asopposedtothelawoftrust.Anagreementtocreateatrustmayonly beenforcedinequitybynon-volunteers.Theruleisthat‘equitywillnotassistavolunteer’ and ‘equity will not perfect an imperfect gift’. To obtain an equitable remedy,the claimantis required to establish that he has furnished consideration, see Pullan v Koe (1913). Valuable consideration refers either to common law consideration in money or money’s worth or marriage consideration in equity. The persons who are treated as providing marriage consideration are the parties to the marriage and the issue of the marriage, including remoterissue. In conclusion, Lord Browne-Wilkinson’s statement is vindicated by a number of exceptional cases including Ralli, Fletcher, Pagarani and Pennington. QUESTION 2 In2010,Alfred,incontemplationofhismarriagewithBette, covenantedwithTimto transfer £50,000 tohim to be held on trustfor Bette for life, remainder to any ofthe children ofthe marriage absolutely. The marriage duly took place.A few months laterAlfred madeabargainwithhisfather-in-law,Freddie,thatinconsiderationof receiving10,000 shares in Cashflow Ltd (a private company), Alfred will settle his yacht, Orca, on trustfor Bettefor life, remainder toherbrother,Charlie,absolutely.Alfreddulyexecutedanother covenantwithTimtosettlehisyacht,OrcaontrustforBettefor lifewithremainderto Charlie. Alfred failed to make any transfers to Tim in accordance with the covenants althoughhehasbeenregisteredasthenewownerof10,000sharesinCashflow Ltd. In 2012, Bette died leaving a son, Donald. Alfred still refused to transfer any of the properties to Tim in respect ofthe covenants. In2013AlfredmetEdeanddecidedtospendhisdecliningyearswithher.Itisatthispointofananswertoanexclusionclausequestionthatmanystudents issue of‘reasonableness’. Aim Higher Inattemptingquestionsontheconstitutionoftrusts,studentsoughttoadopta certainties;theremedies,ifany,availabletoaclaimantwhowishestoenforcean agreementtocreateatrust;theexceptionstotherulethatequitywillnotassista volunteer; and the statutory formalities, if any, that are applicable to the transaction. In February 2014 Alfred died. Amongst his personal effects was a will, executedin January 2014, which declared that all his property was to be distributed to Ede. Ede was also appointed executrix ofAlfred’s will. Advise Donald, Charlie, Freddie, Tim and Ede as to theirrights, if any, in the above transactions. [Ignoreanyapplicationsunder theInheritance(ProvisionforFamilyandDependants)Act 1975.] How to Read this Question This problem question raises issues on the enforcement of covenants to create trusts. Material issues in this question are whether Bette’s son, Donald, her father, Freddie and brother,Charlie aswell asTim,the covenanteemayenforce the agreementtocreate trusts. How to Answer this Question We are toldthatAlfredfailedtotransfer the relevantproperties.Are the trustsofthe covenantsperfect? Ifnot, are the claimants volunteers?The statusof eachofthe claimants is required to be analysed to ascertain whether the nature of the remedies each may have against Albert’sheir.Answer Structure This diagramindicates therequirements forthecreationof anexpress trust, notes its effect and lists the remedies that may be available to a claimant. ANSWER Alfred executed two covenants with Tim on separate occasions to transfer £50,000 and theyacht,Orca,tohimtoholdonvarious trusts,butfailedtotransfer theproperties.Two questions arise in these circumstances: whether the covenants create trusts of the relevantproperties in favourofthe intendedbeneficiaries; alternatively, whether the covenants are enforceable as agreements to create trusts. The testfor creatingaperfecttrustwas laiddown byTurner LJin Milroy v Lord (1862).This involvesthesettlor,Alfred,choosingoneoftwomodesofcreatingthetrust:(a) a transfer of property to the trustees, subject to a direction to hold upon trust for the beneficiaries; or (b) a self-declaration of trust. Applyingthis testtothe factsoftheproblem,we havebeeninformedthatAlfredfailedto transfer the relevant properties (£50,000 and the yacht) to Tim, the intended trustee.5 Thus,it would appear thatthe intended trustis imperfect. Further,the court will not automatically imply the second mode for creating an express trust as laid down in Milroy v Lord,namely,aself-declarationoftrust,inorder toconstituteAlfredatrustee: see Richards v Delbridge(1874).Thereasonfor theruleisthat,despitethetransferor’sintentionto benefit anotherbymeans of a transfer (whether ontrustor not),the transferoroughtnot to be treated as a trustee if this does not accord with his intention, for otherwise all imperfect trusts will become perfect. Alternatively, the intended beneficiaries may argue that the subject matter of the covenantinvolves the ‘benefit ofthe covenant’, as distinctfrom the cash and the yacht, which constitute choses in action. Such properties are intangible personal property rights that are transferred by operation of law in accordance with the intention of the transferor. If thisargumentwere tosucceed,itwouldfollowthatTimwouldhave acquiredthe respectiveproperties fromAlfredandwouldbe requiredtoholdthe sameontrustfor thebeneficiaries: see Fletcher v Fletcher(1844).However,the Fletcher rule is restrictedto onetype of chose in action, namely debts enforceable atlaw: see Re Cook (1965).Adebt enforceable at law involves a legal obligation to pay a quantified amount of money. It does not concernacovenantedobligationtotransfer shares,paintingsor indeedyachts.Itfollows that in accordance with the Fletcher principle only the covenant to transfer £50,000 is capableofconstitutingaperfecttrust.Notrust existsofthecovenanttotransfer the yacht.ItmaybenotedthattheFletcher ruleisahighly controversialprincipleanditis arguable that it is restricted to occasions where the covenantor has agreed that his executorwilltransfer thepropertytothecovenantee trustee.Thisargumenthas the tendency to restrict the principle to its own facts.6 Ifthe trustin respectofthe covenanttotransfer £50,000toTim isperfect(in accordance withtheFletcher vFletcher rule)itfollowsthatthebeneficiaries,whoaregivenproprietary rights in the trust property, are entitled to enforce the trust: see Jeffreys v Jeffreys (1841). Thus, Bette, during her lifetime, and Donald acquire equitable interests in the 4 State the principle oflaw as clearly as possible and apply the same to the facts. 5 The Fletcher rule with its limitation ought to be considered when dealing with constitution questions. Up for Debate to create a trust of his promise to transfer the money?covenanted sum and are entitled in their own rightto bring claims to protecttheir interests. Similarly, Tim, as trustee,may bringclaims ontheir behalf.7 On the other hand, if the trusts of the covenants are imperfect (i.e. the covenant to transfer£50,000andtheyacht)onthegroundthatthesubjectmatterofthetrusthas notbeentransferredtoTim,the intendedtrustee,the trustis imperfect andtheprinciple is that ‘equity will not perfect an imperfect trust’ and ‘equity will not assist a volunteer’. Theunfulfilledcovenantswillamounttoagreementstocreate trustsandbe enforceable, if at all, in contract law. Subject to the Contracts (Rights of Third Parties) Act 1999, in order to enforce the covenants to create trusts, the claimants are required to establish that they have furnished valuable consideration. Consideration refers either to common law consideration in money or money’s worth or marriage consideration. Common law consideration is the price paid by each party to an agreement. ‘Marriage consideration’ takes the form of an ante-nuptialsettlementmadeinconsiderationofmarriage,orapost-nuptialsettlement made in pursuance of an ante-nuptial agreement.8 The persons who are treated as providing marriage consideration are the parties to the marriage and the issue of the marriage,includingremoter issue.Relatingthisprincipletothefactsoftheproblem,itwould appear that Bette (and her estate on her behalf) and Donald (if he is an issue of the marriage between Alfred and Bette) are non-volunteers, having provided marriage consideration.Freddieappearstohaveprovidedcommonlawconsiderationandisalsotreatedasa non-volunteer.Theotherpartiesconnectedwiththecovenants,namelyTimandCharlie, are volunteers and are not entitled to equitable remedies. The non-volunteers are entitled in their own right to seek equitable assistance and, if necessary, obtain equitable remedies.Atthe instance ofthese claimants (Bette’s estate, Donald and Freddie) the imperfect trusts will be treated to all intents and purposes as thoughtheywereperfect.Inotherwords,theclaimantswhohadfurnishedvaluableconsideration will derive from the agreements to create trusts all the benefits accorded to a beneficiaryunder aperfecttrust: seePullan v Koe (1913).Inparticular, Freddie,as anonvolunteer, is entitled to bring a claim in equity for specific performance to enforce the agreement to transfer the yacht to Tim, subject to a trust: see Beswick v Beswick (1968). This is the position even though Charlie is a volunteer and may obtain a benefitfrom the claim of Freddie; but it must be appreciated that neither Tim nor Charlie, as volunteers, may be able to force Freddie to bring such a claim in equity for specific performance: see Re Pryce (1917) and Re Kay (1939). By virtue of s 1 of the Contracts (Rights of Third Parties) Act 1999, a third party to a contractisentitled‘inhisownright’toenforceatermofthecontractif,interalia,the‘term of the contract purports to confer a benefit on him’. This is clearly covered by the covenantto transfer the yachtto Tim on trustinter alia for Charlie.Section 1(5) declares that 6 State the effect of the trust being treated as perfect. 7 Itis imperative to state clear definitions of relevant concepts.‘any remedy’ will be available to the claimant, on the assumption that he is a party to the contract. The effect is that Charlie, a volunteer, is entitled only to damages against the estate of Alfred for breach of contract. The quantum of damages may be calculated by reference to the value ofthe yacht onthe dateofthe breach of contract. Insummaryitwouldappearthatatrustofachoseof£50,000maybeconstitutedand the subject matter of the remaining properties embodied in the covenants may be enforceableby the intendedbeneficiariesasnon-volunteersorunder the1999Act. QUESTION 3 ‘In order for a settlor to create a valid inter vivos trust of property he owns absolutely, itis necessary both to constitute the trust perfectly and to meet certain statutory requirements.’ Discuss. How to Read this Question This broad essay question requires you to consider the various methods of constituting an express trust as laid down in Milroy v Lord as well as the formal requirements for the inter vivos creationof a trust enacted ins53ofthe Law ofProperty Act 1925. How to Answer this Question This question requires you to deal with a variety of issues including the need for control over thetrustpropertytobeeffectivelyconveyedtothetrustee,oralternativelyretaining the property as trustee as laid down in Milroy v Lord. In addition you are required to outline the statutory requirements for the validity of trusts of certain kinds of property (s53oftheLawofPropertyAct1925)andconsider theconsequencesofimperfectcreation (briefly). inadequacy in analysing the issues and presenting clear statements oflaw and applying this to the facts. Up for Debate these arguments.Answer Structure This diagram refers to the various steps that are required to be complied with in order to create a valid express trust. ANSWER Inconsideringthe creation oftrusts, itis importantto realise thatthere are only two waysofcreatinganexpresstrustintervivos.Theseareaself-declarationoftrustanda transfer to the trustees complemented by a declaration oftrust.Unless one ofthese modesof creationhasbeenadopted,the trustis saidtobe incompletely constituted andtheintendedbeneficiarieswillhavenoclaimintrustslawtotheproperty (Milroyv Lord (1862)). An innovation created by the PrivyCouncil involves the occasion where the settlor appoints multiple owners as trustees, including himself. If he manifests an irrevocableintentiontocreateatrust,hisretentionofthepropertymaybeconstruedas one of the trustees, thereby constituting the trust, whether with or without a transfer to the other trustees. The maxim, ‘equity regards as done that which ought to bedone’willbe applicable: see Choithram vPagarani(2001). 9 Incases wherethetrust property needs to be conveyed to a trustee, itis necessary to examine the particular type of trust property in order to determine what must be done for an effective transfer of the title. The requirements will be different for each type of property. In addition,there are‘external’formality rules,imposedbystatute,whichregulatethe wayinwhichtrustspersecanbecreated.ThesearetobefoundintheLawofProperty Act (LPA) 1925 and they are designed to ensure that the creation oftrusts of certain kinds ofproperty is not open to doubt and to minimise the potentialfor fraud by the trustee. Failure to fulfilthese requirements renders the trust unenforceable or void (s53 of the LPA 1925). In the case of a self-declaration of trust, the person who is to be the trustee already has title and,therefore,there is no need to transfer the property.Allthatis needed is an effective declaration of trust – or rather, a declaration by the current owner of himself as trustee–sufficientevidenceofapresentandirrevocabledeclarationoftrustisneeded,as inPaul vConstance(1977)andReKayford(1975),andgenerallythisevidencemaytakeany form exceptin relation to land; see below. The general rule is summarised in the maxim ‘equity looks at the intent rather than the form’. The secondway inwhichtrusts maybe createdinvolves the effective transferofproperty tothe trustee, subjectto the trust.Unless the trustee has title to the property,the trustis incompletelyconstitutedandthebeneficiarieshavenoenforceableclaimtotheproperty under thefailed‘trust’(JonesvLock(1865)).Onapracticalandtheoreticallevelitisessential to know how title to differenttypes of property may be transferred. In the context of trusts, the trustee receives the property on behalf of someone else and not for his own use. It is clear that the particular requirements for the effective transfer of title to a trustee depend upon the nature ofthe property being transferred. It must be noted that an ineffectual transfer of the relevant property to the nominated trustee will not automaticallybetreatedby thecourtsasavalidself-declarationoftrust,otherwiseallimperfecttrustswill becomeperfect.The intentionto declareoneself a trustee is verydifferent fromtheintentiontotransferpropertytoanotherastrusteeandtheyaremutuallyexclusive: see Richards v Delbridge (1874). Before considering the ‘external’ formality requirements for the creation of a trust, it is necessary to consider briefly one or two exceptions to the general principle just considered. First, a trust may be held to have been validly constituted, despite the fact that the trustee has notformally received the legaltitle, iffailure to be invested with thattitle is because of some requirement outside the control of the settlor or trustee. The test is whether thetransferorhasdoneeverythingrequiredofhim,seeReRose(1952).Thetrust 8 This case (Pagarani), or principle, has had an impact on the question whether the trust is perfect. Examinees willfindthat a reading ofthe judgment may assistin understanding where this principle fits within the scheme of things.will be constituted with the equitable interest in the property. Controversially, in Pennington v Waine(2002),theCourtofAppealextendedthisprincipletooccasionswhen itis unconscionable for the transferor to deny his promise. Second, according to Re Ralli (1964), it may be immaterial that the trustee acquires title to the trust property in a manner different from that which the settlor originally intended. It was decided in this case that the capacity in which the trustee acquires the property is immaterial. Third, thereareseveralothermethodsbywhichimperfectgiftsmaybeperfectedinequity. Examples include the principles of donatio mortis causa, the law of proprietary estoppel and the rule in Strong v Bird (1874). We shall looknowattheothermajor requirementfor the validcreationof a trust:the external formality rules imposed by statute. Trusts of property other than land may be created orally or in writing and all that is needed is a self-declaration of trust or an effective transfer oftitle to another as trustee. In the case of land, however,the creation of atrustmustbe ‘manifestedandproved’inwriting.Althoughthe trustdoesnothave to be inwriting,there must be written evidence ofit, even ifthat evidence is not contemporaneous with the date of the creation of the trust(s 53(1)(b) ofthe LPA 1925 and Rouchefoucauld v Boustead (1897)). Failure to comply with this evidential requirement renders the trustoflandunenforceable, althoughthere are exceptions for resultingor constructivetrustsofland(s53(2)oftheLPA1925).Likewise,thecourtmay,inexceptionalcircumstances, allow oral evidence toprove the existence of a trustoflandifthis isnecessary to preventfraudby thetrustee,aswherethetrusteedishonestly claims thatthereisnotrust andthathemaykeepthepropertybecauseof anabsenceofthenecessarywriting(Rochefoucauld v Boustead). Of course,ifthe trustis tobe createdbywill,then different considerationswill apply (see s9 ofthe Wills Act 1837, as amended) and ifthe subject matter ofthe trustis itselfan equitable interest(so thatthe trustee holds an equitable title on trustfor another),there maybefurther formalityrequirementsspringingfromtherequirementsofwritingfound in s 53(1)(c) of the LPA 1925. Finally, it is relevant to note that, in some circumstances, it may be difficult to distinguish between, on the one hand, the creation of a trust of pure personalty (no writing) or of land (evidenced in writing) and, on the other,the transfer of an equitable interestin personalty or land under a trustwhich already exists. The differenceis,however, crucial,for the transferofanyequitableinterestunderanexistingtrust –be itofpersonaltyor realty – must actuallybe inwriting under s53(1)(c) oftheLPA 1925. As thecasesofGrey v IRC(1960)andVandervell v IRC(1967)demonstrate,suchadistinction is not always easy to draw. In summary the underlying rules for the creation of an express trust satisfy the twin needs for clarity and certainty for allthe parties concerned. Up for Debate How would you classify the trust created in Rochefoucauld v Boustead?QUESTION 4 Alfred is the sole beneficial owner under a trustthat comprises 20,000 shares in Trident CoLtd(aprivate company).The trusteesareThomas andTrevor.Discuss theproprietary effect of the following alternative actions: (i) Alfred orally declares that he henceforth holds his beneficial interestin the Trident sharesontrustforhimselffor lifewithremainder toBernardabsolutely. (ii) Alfred orally instructs his trustees to convey his legal title to the Trident shares to Bernard,atthesametimeinformingBernardthatheisnowtheoutrightownerof the shares. (iii) Alfred enters into an oral contract with Bernard for the purchase of Alfred’s beneficial interest in the Trident shares. How to Read this Question This question requires you to consider whether the transactions initiated by Alfred are effective to dispose of his equitable interests. How to Answer this Question In answering this question you are required to deal with the following issues: What are the requirements of s53(1)(c) ofthe Law of Property Act 1925 and wouldthesub-sectionbeapplicabletopersonalproperty(i.e.shares)? What constitutes adisposition within s53(1)(c) ofthe LPA 1925? See Romer LJ’s pronouncement in Timpson’s Executors v Yerbury. Whether adeclaration oftrust ofpart of anequitable interestis treated as a disposition? Wouldthe unificationofthe legal andequitable interests inthe handsof a third party constitute adispositionwithin s53(1)(c)ofthe 1925 Act? Woulda constructive trustthatmayarise froman oral contractbe exemptfrom the requirements of s53(1)(c) ofthe 1925 Act? Common Pitfalls Thisisafairlybroadquestionthatdealswiththekeyelementsrelatedtothecreunnecessarytodealwithexceptionstotherulethat‘equitywillnotassistavolunteer’ in any detail.Applying the Law This diagram represents the legal effect of the various transactions entered into by Alfred. Up for Debate Doyouthinkthatadeclarationoftrustofpartofanequitableinterestoughttobe excludedfroms53(1)(c)oftheLawofPropertyAct1925?Considertheanalysisby a disposition?ANSWER The circumstances indicate thatAlfred is an equitable owner of20,000 shares inTrident Co Ltd and he is the sole beneficiary. His interestis enjoyed under a ‘subsisting’trustfor the purposes of s 53(1)(c) of the Law of Property Act 1925 (LPA). A ‘subsisting’ trust refers to anyformoftrustthatexistsirrespectiveofwhetheritisexpress,resulting,constructiveor indeedstatutory.Section 53(1)(c) requiresa‘disposition’ofanequitable interestundera subsistingtrusttobe inwritingsignedby thedisponerorhisagentlawfully authorisedin writing.10 Failure to comply with the requirements of the sub-section will result in the attempteddispositionbeingvoidandtheinterestwill remainwithAlfred. Before considering the effect of each individual transaction entered into by Alfred there are two preliminary points that underpin the issues. First, s 53(1)(c) of the LPA 1925 is applicable to equitable interests in land and personalty. Despite s 205(1)(x) of the LPA 1925 defining equitable interests by reference to land,the courts have extended the applicationofthesub-sectiontopersonalpropertyinaseriesofhighprofiledecisions.Themischieforpurposive interpretationofthe sub-section,namely topreventfraud, vindicates the extension ofthe provision. It is thus unnecessary and too late in the day for the subsection to be given its literal meaning. Second, the expression ‘disposition’, has been classified by Romer LJ in Timpson’s Executors v Yerbury as including: assignments ofinterests to donees; directions tothe trustees toholdupontrustfor anotherorothers; contracts entered into for valuable consideration in order to sellthe interestto the other contracting party; self-declarations oftrustin favour of other beneficiaries. (i) Alfred’s Oral Declaration of TrustinFavour of Bernard ThequestioninissuehereiswhetherAlfred’sself-declarationoftrustofhisinterestconstitutes a disposition within s 53(1)(c) of the LPA 1925. Romer LJ’s classification of a disposition in Yerbury includes a self-declaration of trust and this transaction involves a sub-trust. Prima facie the oral declaration byAlfredconstitutes an attemptto dispose of his equitable interest and, since it does not comply with the requirement of writing, is therefore void. On the other hand, academics of the calibre of Professors Pettit and Hayton have advancedarguments tothe effectthatthe expression ‘disposition’within s53(1)(c) does notincludethecreationoftrustsbutmerelythecontinuanceoftrusts.Accordingly,acreation of an interest under a sub-trust by way of a declaration oftrust does not constitute adispositionifthedeclaranthasactivedutiestoperform.Thereasonisthatthedeclarant willnotbeable todropoutofthepicturebutisrequiredtoperformhisduties.Where there are only passive duties on the part of the trustees to perform, the declaration will amountto an intended disposition: see Grainge v Wilberforce and Re Lashmar. The nature of the transaction seems to vary depending on whether the declarant has active or 9 This isasummaryofthestatutoryprovision.Itisadvisabletonarratetheprovisionverbatim.passivedutiestoperform.ThedeclarationoftrustbyAlfredisinrespectofpartofhis equitable interest, namely the remainder interest in favour of Bernard, and therefore imposes active duties on Alfred. The effectis that, according to this view, s53(1)(c) is not applicable to the creation ofthis sub-trust. The opposing view was putforward by Brian Green,who,afteranalysingthemaincases,concludedthatthesub-sectiondoesnotdraw adistinctionbetweenadispositionwithorwithout activedutiestoperform.Inbothcases ofsub-trustsadispositionisintendedandwillbeeffectiveonlywhentheformal requirements are satisfied. There is some supportfor this view in Nelson v Greening & Sykes (2007).On this basis the oral declaration oftrust will be ineffective todispose ofAlfred’s equitable interest. (ii) Transfer oftheLegal andEquitable Interests toBernard The transfer of the legal title to shares in a private company is complete when the intendednewowneroftheshares(Bernard)isregisteredinthecompany’sshareregister. Alfred as the sole equitable owner of the shares is entitled under the Saunders v Vautier principle to direct Thomas and Trevor, the legal owners of the shares, to transfer these shares to Bernard. Once the trustees have dispatched an executed share transfer form along with the share certificates to the company, a constructive trust will be created in favour of Bernard. The basis for this trustis thatthe transferors would have done everythingin theirpower totransfer the sharesandthedecision whether toregister Bernardis beyond their control: Re Rose and Pennington v Waine. This constructive trust would be outside the formal requirements of s53(1)(c) by virtue of s53(2) of the LPA 1925: see below. On the assumption that the transfer of the legal title to the shares has been completed, the next issue is the effect of Alfred’s oral statement to Bernard. The House of Lords in Vandervell v IRCdecidedthatthe transferofthe equitable interest,whencoupledwiththe transferofthelegaltitletothesameindividual,wasoutsidetherequirementsofs53(1)(c). The reasonis thatthe trustwillbe terminatedandthere isunlikely tobe a fraud, andspecifically there will be no need for the trustee to chart the movement ofthe equitable interest.TheeffectisthatthistransactionbyAlfredwillbeeffectivetodisposeofthe property toBernard. (iii) AlfredContractstoSellhisInterestintheSharestoBernard ApplyingRomerLJ’sdictuminYerburyitwouldfollowthatacontractforvaluableconsiderationtosellAlfred’sequitable interestintheTrident shares toBernardispotentially adispositionwithins53(1)(c)oftheLPA1925.Assumingtheconsiderationisvaluablethe contractwillbe validandbindingontheparties.ThequestioninissueiswhetherAlfred’s equitable interest will be transferred to Bernard by virtue ofthis oral contract. The solution depends on whether a constructive trust arises in favour of Bernard and, if so, whether the trustwould fallwithin s53(2) ofthe LPAand exemptthe donor fromthe requirements of s 53(1)(c). In Oughtred v IRC the House of Lords decided that when one partyexecuteshispartofthebargain,aconstructivetrustarisesinhisfavouronthebasis ofthe maxim,‘equity regards as done that which oughtto be done’: see also Chinn v Collins. The next question as to whether s 53(2) exempts the disponer from the requirements of s53(1)(c), was surprisingly only adequately dealt with by one Law Lord, namelyLord Radcliffe. He decided that since a constructive trust (as well as a resulting trust) is created by the courts, it would be regarded as outside the requirements of s53(1)(c). His view has now been endorsed by the Court of Appeal in Neville v Wilson. The effect is that onceBernardhasperformedinpartorasawholehissideofthebargainbypayingthe purchasemoniestoAlfred,he,Bernard,willacquireAlfred’sequitableinterest. QUESTION 5 Ayoungcouple,WendyandHarold,decidedtogetmarried.Onthehappyoccasion,Wendy’s father,Frank,whowasapioneerheartsurgeon,covenantedwithhisfriends,JohnandSmith (who were also the executors under his will), to transfer to them £200,000 and a house in Chelsea,toholdontrustfor thebenefitofWendyandHaroldfor theirrespectivelives,thereafter for their children and thereafter for their grandchildren. Failing issue,the trust propertiesweretobe conveyedto Norman,hisnextofkin,absolutely. The day after the wedding, Frank, who had made a fortune from his practice at Harley Street, receivedthe shockingnews thathe hadan inoperablebraintumour andthathe was unlikely to live longer than 12 months. Frank then decided to sort out his affairs. He called the trustees of the above settlement and told them that he would shortly be transferring the house and cash to them. He also executed a further covenant with the trustees to transfer tothemwithinsevendayshisportfolioof20,000shares inLazerdot.com. Later that night, Frank executed the necessary documents relating to the various properties,exceptfor thechequefor£200,000,whichhehadfilledinbutforgottentosign.He gave the documents to his solicitor to effect the transfers. When he went to the door to see the solicitor off, aboltoflightning suddenly struckandkilled both men instantly. Considerthe issuesraisedby the eventsaboveandadvisethe executorswhetheranyof theintendedbeneficiariesanddoneesare entitledtoaninterestinanyoftheproperties. How to Read this Question Thisquestionraises issuesastowhetherFrank’sintentiontocreatetrustsofthehousein Chelsea,£200,000and20,000sharesinLazerdot.comhavebeenperfectedandtheconsequences ofthe various events that have unfolded. How to Answer this Question You are required to analyse and apply the methods of creating trusts by reference to the principles in Milroy v Lord. Consider the consequences of Frank executing the relevant documents in order to transfer the properties, save for the cheque for £200,000. If the trusts of the relevant properties are imperfect who is entitled to enforce the covenants and what remedies will such parties be entitled to? Up for Debate HowwouldyoureconciletheruleinFletchervFletcherwiththeprincipleinMilroyvLord?Answer Structure This chart identifies the legal effect of the transactions concerning Frank’s properties. ANSWER One ofthe primary issues in this problem iswhether a trust attaches toeach ofthe propertiesspecified.Atrustisperfectifthesettlor,Frank,declareshimselfatrusteefortherelevant beneficiaries or transfers the property to the trustees, subject to a declaration of trust, seeMilroy v Lord. Cheque for £200,000 Frankhad forgotten to sign the cheque that would have transferred the funds to the nominatedtrustees,John and Smith.Accordingly,there isnotransfer ofthe funds tothe trustees.Inanyevent,a chequeisarevocablemandatewhichis revokedondeath, see Re Beaumont. The effect is that Frank had manifested an intention to settle funds specified in the cheque, without a transfer ofthe funds.11 Atthe same time an imperfecttransferwillnot automaticallybe construedas a self-declaration of trust with the effect of imposing a trust obligation on Frank, for otherwise all imperfecttransferswillbe treatedasperfect(Richards v Delbridge (1874)). InaccordancewiththeprincipleinFletcher v Fletcher(1844),thecovenanttotransfer £200,000 may be treated as a transfer of a chose in action (i.e. the benefit of the covenant) provided that the cash existed (or its equivalent) at the time of the covenant, 10 Application ofthe principles of law to the facts. Aim Higher inmindthatadditionalissuesmayincludetheexceptionstothegeneral rulethat equity will not assist a volunteer. Effect Cheque – funds not transferred but a chose in action of the benefit of the covenant acquired by trustees House – no legal transfer but possibly transfer of the equitable interest Shares – no transfer of the legal title but disposition of the equitableinterestand Frank intended the chose to be the subject matter of the trust. Whether Frank intendedtocreateatrustof achose inactionwoulddependonthecircumstancesof each case.Thisinvolvesaquestionoffacttobeconstruedbythecourts.Thereisverylittleevidence that Frank intended the subject matter ofthe trustto be the right created under the covenant, as distinctfrom the cash sum of £200,000.12 On the assumption thatthere is no transfer of property to the trustees (either as funds in a bank account or a chose in action), the intended trust of the covenanted sum will involve an imperfecttrust and the maxims that are applicable are ‘equity will not assist a volunteer’ and ‘equity will not perfect an imperfecttransfer’. The consequences of such an omission by Frank will be considered later. The House in Chelsea Thetransferofthe legaltitlehasnotbeeneffectivebecause thetransferdocumentshave not been sentto the Land Registry. The issue here is whether Frank had done everything requiredofhim totransfer the legaltitle tohis trustees JohnandSmith.This is aquestion ofdegree,but,ifhehad,aconstructivetrust(involvingFrank,orhisestateafterhisdeath, holding the property as constructive trustee) would arise transferring the equitable interesttothe trustees,JohnandSmith,ontrustfor thenamedbeneficiaries: see Re Rose (1952) and Mascall v Mascall (1984). In the recent case of Pennington v Waine (2002) the Court of Appeal introduced an alternative basis for resolving the dispute, namely, whether itwouldbeunconscionablefor thetransferor todenythetransfer.Thisisaquestion for the court to decide on the facts of each case. The fact that in Pennington the subject matter was shares in a company, as opposed to land (as in the present case), is notmaterial.Frankappears tohavebeenmotivatedbythemarriageofhisdaughter, Wendy, to execute the covenant and, following the tragic news of his poor heath, informedthetrusteesandhis solicitorofhis intentiontotransfer therelevantproperties. Drawing the evidence together, it would appear thatthere is strong evidence to suggest not only that Frank felt that he had done everything required of him to transfer the house,butthatitmaybeunconscionableforFrank’sestatetodenythetransfer. The Fletcher v Fletcher rule (trusts of choses in action) is distinguishable on the ground thatthe subjectmatter is land, rather thanadebtenforceable atlaw, see Re Cook (1965). 20,000 Shares in Lazerdot.com The legaltitle to shares isonly transferredifthenewowner is registered inthe share registerofthecompany.TheCompaniesAct2006andtheStockTransferAct1963impose an obligation on Frank to execute a share transfer form and send the share certificates, along with the form (personally or through his agent), to the company at its registered officeinorder tosecureregistration. Frankhad‘executedthenecessarydocuments’and deliveredthesetohissolicitor (hisagent).Hashedoneeverythingrequiredofhim?Thisis aquestion offact – see Re Rose, Pennington v Waine (above) contra Re Fry(1946).Ifhehas, the transfer would be effective in equity and he (or his executors) would become a 11 Inconstitution questions itis importantto consider the Fletcher v Fletcher rule.constructive trustee of the shares. In Pennington v Waine the court decided that the deliveryoftheexecutedtransferdocumentstoanintermediarytosecureregistrationwas sufficient compliance with allthat was required fromthe transferor. General It is evident that the intended trust of some of the properties may be perfect. Much depends on the view taken by the court. However, if the trust of any of the properties is imperfect, the question that arises is whether the respective claimant is entitled to enforce the covenant to create a trust. It was stated earlier that the two equitable maxims are applicable with regard to imperfecttrusts.Avolunteerwouldnotbe entitledtoequitable assistance ifthe trustis imperfect. The issue therefore is whether the respective claimants are volunteers and, if so, what claims they may pursue. A volunteer is one who has not provided valuable consideration, i.e. money or money’s worth,or aperson who doesnot come within the marriage consideration.The latter requires amarriage settlement,i.e. anante-nuptial settlementmade in considerationof marriageor apost-nuptial settlementmadeinpursuanceofanante-nuptialagreement: see Re Park (No 2) (1972). The persons within the marriage settlement are the parties to the marriage as well as the issue ofthe marriage, including grandchildren. Applying this principletothefacts,itwouldappear thatWendyandHarold,aspartiestoamarriage settlement, are deemed toprovide marriage consideration. The effectis that Wendy and Harold are entitled to enforce the covenant in equity as non-volunteers. Thus, they are entitledtoclaimspecificperformanceofthe agreement as iftheywerebeneficiaries under a perfect trust: see Pullan v Koe (1913). The next of kin is a volunteer and unable to enforce the covenant in equity: Re Plumtree (1910). But under the Contracts (Rights of Third Parties) Act 1999, the next of kin (third party) is given the capacity to bring an action in his own right. Effectively, this is only in respectofdamages,for theruleremainsthatequitywillnotassistavolunteer.Thevolunteer thereforedoesnothave a claiminpriorityover thenon-volunteers. Despite John and Smith being appointed executors of Frank’s willthe rule in Strong v Bird (1874) is not applicable. Frank manifested a future intention to transfer the properties, see Re Freeland (1952). Common Pitfalls anintentiontocreateatrustasandwhenthesubjectmattercameintoexistence whereas in Re Cook the subject matter was future property.Secret Trusts Further Reading Delany D and Ryan D ‘Unconscionability: a unifying theme in equity’ (2008) Conv 401. LuxtonP‘Insearchofperfection:theReRoserulerationale’(2012)Conv70. Note Thequestionsraisedinthis sectioninvolvethefundamentalprinciplesfor thecreationof anexpresstrust–formalitiesandtheconstitutionofatrust.This isapopular collectionof topics withexaminers. 2 SecretTrusts INTRODUCTION Secret trusts are a peculiar animal. They are special because they allow the creation of valid trusts even though the normalformality rules for the creation of trusts by will have not been met.In this sense,they are exceptions to the principles discussed inChapter 1. However, as we shall see, although ‘secret’trusts arise out oftestamentary dispositions (thatis,wills),there isoftenlittle thatis secretabouteither their existenceor their terms. Originally,the doctrine of secrettrusts was developed to allow testators to make provisionforbeneficiarieswhose identity,or evenexistence,wasbestkeptquiet, suchas illegitimate children or mistresses. Today, however,they are more likely to provide an indecisivetestatorwithameansofavoidingthestrictformsrequiredbytheWillsAct1837 (as amended). Secrettrustsare oftwotypes:‘fully secret’trusts and ‘half-secret’trusts.In essence,the difference between the two is that nothing ofthe existence ofthe trustis revealed in the willofatestatorwithafullysecrettrust,whereaswithahalf-secrettrust,thefactofa trust, but not the identity of the beneficiaries, is revealed in the will. This difference in purpose is reflected in the somewhat different conditions which must be met before the existenceofeachtypeofsecrettrustcanberecognisedandenforcedbythe‘secret’beneficiaries. In addition, because both forms of secrettrusts do not meetthe strict requirementsofthe Wills Act 1837,there is considerable academic interestin the theory behind the validity of secrettrusts, especially how theygel with statutory andcommon law rules which would otherwise require their invalidity. There are two general issues which may face a student dealing with secret trusts. First, there are the conditions for the existenceofboth typesoftrusts andthemanner inwhich theyoperate.This requiresa knowledgeof substantive lawandsome appreciation ofthe requirementsoftheWillsAct1837andgeneralequitableprinciplesconcerningthevalid-ity oftrusts. Second,there is the largely theoretical argument aboutthe rationale or theory behind secret trusts. While not necessarily of great practical importance, this is fertile ground for examination questions. Question 6 To what extent is it possible to develop a coherent theory to explain the validity of socalled secrettrusts? How to Read this Question Thisessayquestionraises afundamentalissue thatinvolvesapotential conflictbetween the primacy of Parliamentary provisions (s 9 of the Wills Act 1837 and s 53 of the Law of Property Act 1925) and the jurisdiction of equity to suppress unconscionable conduct. The upshot has been a number of different views expressed in a questto identify the rationale for the validity of secret trusts. How to Answer this Question In answering this question the examinee shouldstate and evaluate the various justifications thathavebeenexpressedfor thecreationof secrettrusts.Indoingsoitisnecessary todistinguishfully secretfromhalf-secrettrusts.Thequestfor layingdownatheoretical basis for enforcing secrettrusts may prove to be illusive and the examinee is required to evaluate the merits of each theory. Up for Debate Aim Higher secrettrusts:justifyingdistinctionsbetweenthetwo’(1995)Conv366. Common Pitfalls The theoriesofenforcement ofsecrettrusts are extremely complex toevaluate withinthe conventionalnormsofthe lawof equity. Students are best advisedto the creation of secret trusts.Secret Trusts Answer Plan The context of secrettrusts:their special status with respectto formalities for the creation of trusts. Fully secret and half-secrettrusts briefly distinguished. Theoriesbasedonfraud:usingastatuteasaninstrumentoffraudordisregarding the intention ofthe testator (old fraud and new fraud). The declaration and constitution theory. Dehors the will theory. Views on the different communication requirements. Answer Structure This diagram illustrates the theoretical bases for enforcing fully and half-secret trusts. Answer Thestartingpointinansweringthisquestionistostatetheobvious:thatis,thatboth fully secret and half-secret trusts may be valid and enforceable despite lack of compliance with the formalities laid down by s 9 ofthe Wills Act 1837 and other statutes. Fully secret trusts are not declared in the will at all, with the trustee apparently taking the property absolutely, while in the case of half-secret trusts the existence of the trust is acknowledgedinthewill,sobringingpartialcompliancewiths9oftheWillsAct1837,butthe identity of the beneficiaries is not. Perhaps the most prevalenttheorywas that secrettrusts would be enforcedby a courtof equity in favourof a secretbeneficiaryon thegroundthat‘equity willnotpermit a statute to be an instrument of fraud’ (McCormick v Grogan (1869), noted with approval in Box v Barclays Bank (1998)). That is, if a fully secret trust was declared void because it did not complywith the Wills Act 1837,the legatee/trusteewouldbe able tokeepthe trustproperty for himselfdespite the factthat he had accepted the trust obligation during the testator’s lifetime. andtransfer;practicaldevelopmentinsolvingproblemsCertainly,this rationalehas the attractionof simplicity and,indeed,theequitablemaxim used here is familiar and well established (see, for example, Rochefoucauld v Boustead (1897)). However, a moment’s thought will reveal that this rationale cannot explain the validity of half-secret trusts. In half-secret trusts, the testator leaves property to the legatee ‘on trust’ for unnamed beneficiaries. There is thus no possibility that the halfsecret trustee may commit fraud, as he or she is forever barred from the property and a resultingtrust will arise (ReKeen (1937); Re Rees (1950)). Theimpossibilityofexplainingbothfullysecretandhalf-secrettrustsonthebasisofMcCormick v Grogan-type fraud has led to the development oftheories that secrettrusts are foundedon a redefinition of what‘fraud’ actuallymeans.Traditionally,‘fraud’wouldmean thetrusteetakingapersonalbenefitwhenheor shewasmeanttoholdthepropertyfor another and this is what is meant by the Grogan rationale. However, some commentators have arguedthatthis is a far too narrow definition of‘fraud’ and that a wider viewmightbe taken,whichcanthenbeusedtojustifybothfullysecretandhalf-secrettrusts.Thiswasthe viewof LordWestburyin McCormickvGrogan(1869).Here,however,liesthe flawinthis theory, because it amounts to no more than the bald assertion that a testator’s wishes and the beneficiaries’interests shouldbe respectedevenifhe hasputthemintoeffectina manner thatis not acceptable (thatis, not in compliance with the Wills Act 1837), see Lord Buckmaster inBlackwell vBlackwell(1929).There isnothinghere toexplainwhy the formalitiesprescribedbystatutefor facilitatingthatintentioncanbe ignored. AfinaltheoryseekstoprisesecrettrustsawayfromitslinkwiththeWillsAct 1837altogetherandtoexplainthemasordinarytrustscreatedintervivos.Accordingtothisview– sometimes called the declaration and constitution theory (or dehors principle) of secret trusts–bothfullysecretandhalf-secrettrustsoperateoutsidethetestator’swillandshould notbe regardedasdependentuponit(BlackwellvBlackwell).Theevidencefor thisis,apparently,provided by ReYoung (1951),where a witness to a will was permitted to be a beneficiary under a secrettrust, and Re Gardner(No 2) (1923), where a beneficiary under a secret trust died before the testator but, nevertheless, his interest passed to his estate. Both of theseresultswouldhavebeenimpossibleifthetrustwasgovernedby theWillsAct1837. Assuming, then, that the Wills Act 1837 is not central to the whole matter, how are secret trusts formedunder this theory?The rationale is thatthe communicationby the testator to the trustee of the trust and/or its terms amounts to a normal inter vivosdeclaration oftrust whichis thencompletedonthe testator’sdeathwhenthepropertypassesintothehandsof the trustee.Thewillis simply the mechanismbywhichthe trusteeobtainsthepropertyand the trust becomes constituted. The logical effect of this argumentis that secrettrusts also departfromtrust rules.Atrustmaynotbecreatedinrespectofafter-acquiredproperty. It is trite law that the trust does not come into existence until the testator dies, that being when the property passes and the trust becomes constituted. Yet, as ever, there are difficulties. If secret trusts are express trusts, this should mean that such trusts of landmustbe evidencedinwritingas requiredby s53(1)(b) oftheLawofProperty Act 1925. However, at least with fully secret trusts, Ottaway v Norman (1972) suggests thatSecret Trusts writingisnotrequiredanditwouldbestrangeforwrittenevidencetobenecessaryfor compliance with s 53 of the LPA 1925 when none such was required for compliance with the Wills Act 1837. Nevertheless, Re Baillie (1886) is unequivocal that writing is needed for half-secret trusts of land. There are other problems, too. If the secret trust does not come into existence untilthe testator’s death, Re Gardner (No 2)(1923) must be wrongly decided,asthetrustdidnotexistwhenthebeneficiarydied!Moreimportantly,ifthe relevant date for constitution ofthe half-secrettrust might be the testator’s death, whyisthedateofthewillsoimportantforcommunicationpurposes?Whyisitnecessary to declare the trust before the will is made if the will is only a trigger for the constitutionofthetrust? Itisdifficulttoanswerthesecriticisms,1saveonlytosaythat the communication rule for half-secrettrusts is wrong and that post-testamentary communication should be possible. Support for this radical proposition comes from other commonlawjurisdictionswhere thedistinctionbetweenfullysecret andhalfsecret trusts has been abolished (for example, Australia). Nevertheless, there are other explanations of why there is a difference in this respect between the two types of secret trust, although none is altogether convincing. Two of the more cogent theories are, first, that the rule allowing acceptance after the will in fully secret trusts was originally procedural, in that evidence of events occurring after the will (that is, acceptanceofthetrustobligation)couldbeadmittedbyacourttoproveafullysecrettrustin order to prevent fraud by the legatee/trustee, whereas with half-secret trusts, where the legatee is clearly stated to be a trustee, there is no possibility of fraud and therefore no need to examine events (for example, acceptance) occurring after the will. Second, it maybethatthehalf-secrettrust ruleisamistakebecauseofconfusionwiththelawof incorporationofdocuments.Awillmaybesaidto‘incorporate’anotherdocumentif the will makes reference to that document and ifthat document was in existence at thetimethewillwasmade.Itis easytoseehowthisrulecouldhavebeencarriedover torequireacceptanceofthehalf-secrettrustatthetimethewillwasmade.Ofcourse, itisclear thatneitherofthesetheories(noranyother)iswhollysatisfactory,andthey do not help in finding a rationale for secrettrusts generally. Whatthey do illustrate, however, is that any theory concerning any aspect of the law of secret trusts is not watertight. There may be no coherent theory underlying secret trusts and perhaps the best we can say is thatthe law in this regard has developed organically, with judges solving practical problems in real cases according to the needs of the parties at the time. That they may have had no realtheory in mind is notin itself a serious criticism.2 Question 7 Thomas executed his will on 1 April, which contained a legacy of £5,000 to Arnold and a legacy of £10,000 to Betty. In his will, Thomas directed Betty to hold her legacy ‘as a matter oftrustfor such persons as I have communicated to her’. On 1 May, Thomas told 1 Itispermissibletostatethatthecurrentlawisinaccurateprovidedthatthepointisclearlyargued. 2 Explanation of the confused state of the law.Arnold that he wished Arnold to pay his legacy to Thomas’s illegitimate son, Zeus. One month later, after a quarrel with Zeus’s mother, Thomas told Arnold to keep the money for himself.On30 March,Thomas telephonedBetty andaskedher whether shewouldbe prepared to be a trustee ofthe money he would leave her in his will. Betty said she would thinkaboutit,andreceivedaletteron2Aprilenclosinga key toa safewhereThomassaid hehaddepositedinstructionsas tothedestinationofthemoney.Bettyimmediatelytelephoned Thomas to assure him she would carry out his wishes. After Thomas’s death, a letterwasfoundinthesafedirectingBettytopaythemoneytoLucy.Thomasdiedon 1 August without altering his will in any way. Advise Arnold and Betty as to their rights concerning the legacies. How to Read this Question Problemquestionsrequirecareful readingandanalysis.Themainissueshereinvolvethe extenttowhichThomasmay alter theidentityofthe intendedbeneficiaryduringhis lifetimeandascertainingthedateofacceptanceofahalf-secrettrustobligation. How to Answer this Question The examinee is required to define fully secret and half-secret trusts and apply the relevantissues tothe facts.The specific issues raisedneedtobe identifiedanddiscussedin depth. The issues involve the date of creation of a fully secrettrust and the possible date of acceptance of half-secret trust obligations. These issues may require objective and balanced arguments to be presented. Up for Debate tain the date of creation offully secrettrusts.Closely related to thatissue is the ficant,practical ramificationswith regard to statutory formalities. Aim HigherSecret Trusts Answer Plan Fully secret trusts: communication and acceptance, validity of revocationof trust and substitution oftrustee/legatee as sole legatee. Half-secret trusts: date of communication and acceptance, method of communication and acceptance,possible contradiction ofthe will. Answer Structure This diagramillustrates anumber of fullyandhalf-secrettrusts issues raised inthe transactions involving Arnold and Betty. Answer This question concerns the law of secrettrusts. In essence, secrettrusts are those trusts which operate inrelation toa testamentarydisposition butwhere either the very factand detailsofthe trustarenotdeclaredinthe testator’swill(fullysecrettrusts)orwhere, although the fact ofthe trustis declaredin the will,the identity ofthe beneficiaries is not Common Pitfalls Thedangerwithproblemsofthistypeisthatstudentsarecontenttoremainwith the most obvious answer, namely that the half-secret trust fails. A moment’s thought will revealthe danger in this, since it must always be remembered that equityencompassesaflexiblesetofprinciples,not ruleswritteninconcrete.(half-secret trusts) (McCormick v Grogan (1869); Re Keen (1937)). In this question, there appear to be issues concerning the validity of fully secret trusts and half-secret trusts. Each attempted disposition will be discussed in turn.3 First,weshallconsider thelegacytoArnold,withoralinstructionstoholdthepropertyfor another under a potential secret trust. In his will, Thomas makes a bequest of £5,000 to Arnold without any limitation on the way inwhichArnoldmayusehisgift.Onthe face ofthe will,this isan absolutegiftto Arnold.Consequently, any claimthatZeusmayhave tothemoneymay ariseonlyunder a fully secrettrust.4Afully secrettrustwill arisewhere,despite anapparently absolutegift, the testator has communicated his intention to the legatee that the property should be heldforanother,whichexpresseddesirehasbeenacceptedby thelegatee(ThynnvThynn (1684)). In our case, there is no doubt of Thomas’s intention to create a trust (contrast Margulies v Margulies (2000)) and, providing thatthe legatee/trustee accepts the obligationat any time before the testator’sdeath,there is every chance thatthe secrettrustwill beenforcedinfavouroftheintendedbeneficiary.Arnold’sacceptanceofthetrustobligation is clear enough and, prima facie, a potential fully secret trust seems to have arisen. Arnold’s acceptance may take the form of silence or acquiescence, see Re Keen (1937). However, before his death, Thomas attempts to revoke his secret trust intention and revertto the position as itis expressed on the face ofthe will; namely, an absolute giftto Arnold. This poses a far-reaching question about the time at which a fully secret trust comes into existence. If,for example,the secrettrust comes into existence the moment thelegatee/trusteeacceptsthetrustobligation,thenclearlyArnoldwillholdtheproperty on trustfor Zeus, as once a trustis created,the beneficiaries’ rights become perfect(see MilroyvLord(1862)).If,ontheotherhand,thesecrettrustcomesintoexistenceatthetestator’sdeath,then clearly the intendedtrust canbe revoked at any time prior to that event and alternative arrangements can be made.5 The former view, which wouldenable Zeus toclaim the £5,000, is superficially attractive because it prevents the testator from using fully secret trusts to alter his testamentary dispositionswithoutmakinganotherwill.Itisonethingtoallowsecrettruststoavoidthe Wills Act 1837 in their formation,but shouldthey alsobeusedtocircumventthe requirements of writing by giving the testator a power of unattested disposition right up to his death? Such a view of secret trusts is implicit in the decisions in Re Gardner (No 2)(1923) andSonleyvClockMakersCompany(1780),althoughSonleywasahalf-secrettrustandRe Gardner (No 2) has attracted considerable academic criticism. Thealternativeviewseesthesecrettrustasarisingonthetestator’sdeathandthereforerevocable until then. The judgments in Blackwell v Blackwell (1929) and Re Maddocks (1902) supportthisview.Thelogicofthisapproachisthatthecommunicationtothetrusteeduring 3 It is important to define relevant legal concepts. 4 Application ofthe legal principle to the facts. 5 Oncontroversialissues examiners requireyoutoraisetheissueandevaluateyouropinion.Secret Trusts his lifetime, and acceptance thereof,is simply an inter vivosdeclarationoftrust and thatthe trust becomes constituted when the property passes into the hands of the trustee on the testator’sdeath.Thus,the trustmayberevokedby the settlorprior tohisdeath.Ifthisis the better view (despite the factthatit allowsoralpost-testamentarydispositionsof property),thenclearlyThomas can revoke the trustin favour of Zeus. Further,it seems from the factsthatArnoldis toreverttobeingthe beneficiaryof an absolutegiftas statedon the face ofthewilland,ifthe revocationiseffective,thiswillbe the finalposition.Indeed,evenifone weretoarguethatArnoldis tobe thenewbeneficiaryunder the secrettrust(thatis,holding on trustfor himself), Irvine v Sullivan (1869)is clear authority for the proposition that a fully secrettrusteecanbeabeneficiaryunderhisowntrust.Arnoldmayclaimhislegacy. Next, there is the gift on trust to Betty, holding for Lucy. There is a clear intentionin respect ofthe bequestinthe willto Betty that she is to be a trustee. Hence, whatever conclusion we come to about the persons ultimately entitled to the £10,000, we know that Betty will not be able to claim the gift. Atthe very least, she will holdthemoneyonresultingtrustforThomas’sestate(ReKeen(1937)and ReRees(1950)). However,in order that Lucymay claim the property, she must establish a half-secrettrust, whereinthedetailsofthe trustwerecommunicatedtoBettyandacceptedbyherprior to,or simultaneouslywith,the execution ofthe will (ReBateman (1970)). Here is Lucy’s first problemas the factsmake it clear that,althoughThomasaskedBetty to be a trusteebefore the date of the will, acceptance thereof was not made until after the will was executed on 1April.6Thereare fourpossibilities. First,the communicationruleis appliedstrictlyandthe half-secret trust is invalid, with Betty therefore holding on resulting trust for Thomas’s estate.Althoughaperfectlydefensibleresultontheauthorities,thisseemsharshinthecircumstances. Second, it might be argued that Betty had impliedly accepted the trust at the dateoftheinitialtelephonecall.ThisseemsuntenableonthefactsandMossvCooper(1861) isnotapplicable.Third,wecouldtaketherobustviewthatthecommunicationruleforhalfsecret trusts is wrong and that the proper approach is that of other common law jurisdictions where the rules for fully secret trusts and half-secret trusts are assimilated. This is attractive, especially because there is no totally convincing explanation for the difference between the two types of trust. However, unfortunately, both Re Keen (1937) and Re Bateman(1970)areclearenough.Fourth,itcanbearguedthatitisnotcertainthatthecommunicationruleisviolatedinthiscase.AsReKeenestablishes,communicationandacceptance must be made before or simultaneously with the execution ofthe will and itis arguable that a process of communication and acceptance that began prior to the execution of the willandwhichwascompletedsoonafter is‘simultaneous’for thispurpose. Assuming,then,thatthe communication and acceptance ofthe trust were validly made, Lucy faces other problems. It might be thoughtthatthe terms of the trust contradictthe termsofthewillandthisisprohibitedbyReKeen(forexample,asI‘have’communicated). However, this point is met if the above argument about the simultaneous nature of the communication andacceptanceofthe details is adopted. Likewise, although Betty isnot 6 Identification ofthe issue as clearly as possible is necessary.given the precise details of the trust, because they are contained within a locked safe, it is clear from Re Boyes (1884) that communication of the means of identifying the beneficiaries is acceptable if it is made atthe relevanttime (the simultaneous argument again) andifitis outofthe power ofthe testator tochange those details. Thus, assuming that Thomas has not kept a key to the safe and cannot change the identity ofthe beneficiaryafterhiswillhasbeenexecuted,Lucywillbeabletoclaimthe£10,000. Question 8 Sam has recently died. By his will, he bequeathed his large collection of rare stamps to ‘Peter and David absolutely’. In addition, in a separate clause in the will he left his house to William ‘on trustfor purposes I have communicated to him’. Beforehedied,hetoldPeter thatbothheandDavidweretoholdthestampsontrustfor Becky,his illegitimatedaughter.Aletter repeatingthe sameinstructionto Davidwas found amongst Sam’s personal effects after his death. David has informed you that he only became aware of Sam’s wishes regarding the stamp collection following his death. Before hisdeath,SamorallytoldWilliamthatthehousewasalsotobeheldontrustforBecky. Advise Becky as to whether she is entitled to any of the properties. How to Read this Question This problem question raises issues concerning both fully and half-secret trusts. On a careful readingofthequestionyouwillnoticethatwehavenotbeentoldwhenthewill wasmade.This is significanttodeterminewhetherDavidisatrustee andtodecideonthe validityofthepotential half-secrettrustthatmaybe imposedonWilliam. How to Answer this Question This problem requires you to state and apply the requirements for the creation of fully and half-secrettrusts and to consider the extentto which David and Williammaybe boundtoholdontrust.Inadditionstudentsarerequiredtoconsider thestandardofproof thatmustbedischargedbeforea claimantmay succeedinprovingtheexistenceofa secrettrustaswellastheformal requirementsunders53oftheLawofPropertyAct1925. Up for Debate law’ (2011) CLWR 40.Secret Trusts Answer Plan Requirements in order to create a fully secrettrust. Communication to one of several intended trustees. Standard ofproof. Requirements for a half-secret trust. Section 53(1)(b) ofthe Law of Property Act 1925. Answer Structure Thisdiagramhighlightssecrettrustsrequirementsandanumberofrelatedissuesconnected with Sam’s will. Answer Sam’s will has effected two transfers – the first concerning a large collection of rare stamps to Peter and David, the second in respect of a house to William. We will deal with the consequences of each ofthese dispositions in turn. The stamp collection The transfer in the will is toPeter andDavid apparentlybeneficially on the face ofthe will. There is no indication that these two individuals take other than for their benefit. However, before Sam died he told Peter that both he and David were required to hold the collection on trust for Becky, Sam’s illegitimate daughter.7 This arrangement raises the possibility of a fully secret trust being created in favour of Becky. We will now examine how far this is the case. A fully secrettrustis one where the legatee takes the property beneficially on the face of the will but subject to an understanding between the testator and themselves concerning the property during the lifetime of the testator. The existence of the trust, as well as 7 Itis advisable to extract salientfacts fromtheproblem inorder to focus on the issue.itsterms,arefullyconcealedbyreferencetothewill.Thisappearstobeevidentinthe problem. In this context,the court draws a distinction between a mere legacy on the one hand,andalegacy subjecttoa secrettrust.8The essenceofthedistinctionis thatina legacy subjectto a secrettrust,the testator communicates the terms of the trust during his lifetime tothe legatees.In this respect,itis immaterialthatthe communication ofthe terms ismade beforeor after theexecutionofthewill,providedthatitismade before the testator’s death. Applying this principle to the facts ofthe problem Sam, during his lifetime, has communicated the terms of the trust to Peter, namely that both legatees are requiredtoholdontrustforBecky.Thusfar,itisclear thatPeterhasknowledgeofthe terms ofthe trust and is subjectto anequitable obligation to carryoutthe testator’s wishes. Has Sam, during the relevant time, communicated the terms of the trust to David? We are told that a letter was found among Sam’s personal effects repeating the instructiontoDavid.Buttheissueiswhether thisletterwasreceivedbyDavidduring Sam’s lifetime.9 Itwouldappear thatthis isnotthe case.The conclusionhere is thatDavid wasunaware of Sam’swishes.The implications ofthis finding willbe exploredbelow. The next requirement for the creation of a fully secrettrustis thatthe intended trustees must accept the terms of the communication made to them. Acceptance for these purposesmaybeexpresslydeclaredbythetrusteesinthesensethattheypositivelyacknowledgetheexistenceofanobligationtoactas trustees.Thereisnoevidencethatthis is the case on the facts of the problem. But acceptance may also be inferred by the silence or acquiescence of the trustee, during the testator’s lifetime, see Moss v Cooper (1861). Of course this can only be the case where the trustee is aware ofthe terms ofthe communication. The rationale is that it would be a fraud on the testator (not to mention the intended beneficiary under the trust) for the trustee to deny the agreement made with thetestator.Accordingly,Peter,byimplication,hasagreedtobecomeatrusteeforBecky. WouldDavidbeobligedtoholdontrustorwouldhetakepartofthepropertybeneficially? To put the question another way, the issue is when a testator leaves property by will to two persons apparently beneficially, but informs one of the apparent legatees of the terms ofthe trust, would the person who is unaware ofthe trust be bound to hold upon trust or not?Thesolutionadoptedbythecourts,whichisfarfromadequate,dependsonthestatus ofthe co-owners and the time when the communication wasmade to those who are awareofthetrust.Iftheinformedlegateeordeviseewastoldofthetermsofthetrust beforeoratthetimeoftheexecutionofthewill andthemultipleowners takeas joint tenants,the uninformed legatee is bound by the terms ofthe trust communicated to the informed legatee. The reason commonly ascribed for this solution is that no one is allowed to claim property under a fraud committed by another. This was stated by Farwell J in Re Stead (1900). The assumption that is made is that the informed trustee attempted to defraud the testator, irrespective ofthe reason for failure toinform the ignoranttrustee. On the other hand, if the communication of the terms was made subsequent to the 8 Application ofthe legal definition to the facts. 9 The legal issue may be identified in the form of a question. Itis important to address thatissue by reference to the law.Secret Trusts execution of the will only the person aware of the terms of the trust is bound, for in this case there is no fraud. On the facts ofthe problem, Peter and David take as joint tenants for they are co-owners without any words of severance, but we are not told when Sam communicated the terms ofthe trustto Peter. If the communication was made before or atthe time ofthe execution ofthe will,this would be sufficientto subject David to a trust in favour of Becky. Ifthe communication was made later, David willtake part(half) ofthe propertybeneficially,andPeterwillholdtheotherportionontrust,seeReStead. Thefinalpointinvolves thestandardofprooftoestablishthetrust.Ifthereisnofraudthe standardofproofisabalanceofprobabilities,butifthereisanallegationoffraudthe standard exceeds a balance of probabilities but is not as high as beyond a reasonable doubt, see Re Snowden (1979). There is no clear definition of fraud, butit has been suggested that where the intended trustee denies the existence of a trust, this involves an allegationoffraud.SinceDaviddisputestheexistenceofanobligationonhispart(failure tocommunicate),itis arguable thatthis imposes ahigher standardofproof on Becky. The house The terms ofthe will indicate the existence of a trust butthe details ofthe trust are concealed.Thisisconsistentwithanintendedhalf-secrettrust.Inordertocreatesuchatrust, the testator is required to communicate the terms before or atthe time of the execution ofthe will. Ifthe termsofthe trust are communicatedafter the execution ofthe will, even during the testator’s lifetime, the evidence is not admissible, see Blackwell v Blackwell (1929).Thereasoncommonlyattributedtothis rule involves compliancewiththe formal requirements under s 9 of the Wills Act 1837 in respect of post-will communications. Commentators have suggested thatitis a confusion of probate rules with trusts rules. In any event the courts have not demonstrated a willingness to modify the principle. Applying thisprincipletothefactsoftheproblem,wearetoldthatSamtoldWilliamoftheterms of the trust before his death. But we are not told specifically at what time the communicationwas made.10 Ifthe communication wasmade before or atthe timeofthe execution of the will, Becky would be entitled to prove the terms of the trust, otherwise the intendedtrustwillfail and the propertywill be heldon resulting trustfor Sam’s estate. There are additional problems in that William has pre-deceased the testator; would this have an effect on the potentially valid half-secret trust? Although there are no decided cases,itis arguable that since the trustee takes as trustee on the face ofthe will,the trust ought notto fail, provided thatthe terms ofthe trust could be established. This is in accordance with the maxim, ‘equitywill not allow a trustto failfor wantof a trustee’.The alternative is thatthe intended half-secrettrustfails by virtue of the probate doctrine of lapse. This rule, it may be pointed out, is applicable where a person takes beneficially under a will. In half-secret trusts this is not the case. An additional issue is whether the terms of the trust could be established in the absence of both William and Sam. If this is notthe case, a resulting trust will arise in favour of Sam’s estate. 10 Where a significant fact is unclear you should assume both ways and apply the appropriate legal principles.Another issue concerns the lack of writing in respect ofthe terms ofthe trust. The argument here is that s 53(1)(b) of the Law of Property Act 1925 enacts that a ‘declaration of trust in respect of land or any interest therein must be manifested and proved by some writing signed by the person able to declare the trust or by his will’. Clearly,the will does not declare the trust and the subject matter is land, but the issue is whether Sam ought to have manifested the terms of the trust in writing. We are told that he orally told William of the terms. Is s 53(1)(b) of the LPA 1925 applicable to the transaction or does s53(2)oftheLPA 1925 exemptthe testator fromthe requirementsof s53(1)(b)oftheLPA 1925?Section53(2)oftheLPA1925enactsthat‘Thissectionshallnotaffectthecreationor operation of implied resulting or constructive trusts.’ This involves the classification of half-secrettrusts.Iftheyaretreatedasintendedexpresstrusts,s53(1)(b)oftheLPA1925 mayberequiredtobecompliedwith.InReBaillie(1886)thecourtdecidedthathalf-secret trusts are required to comply with the predecessor to s 53(1)(b) of the LPA 1925. Non-compliance with the sub-section makes the trust unenforceable for lack of evidence in writing.Thus Beckymay notbe able to enforce the trustofland. If,on the other hand,the trustis treatedas constructive, s53(2)oftheLPA 1925willexempt Samfromthe requirementsof s53(1)(b) ofthe sameAct.An argumentin supportofthis view is thatthe trustis created to prevent fraud. This was the original basis for such trust and may still be applicable today.Secret Trusts The Inherent Attributes of a Trust: The Three Certainties and the Beneficiary Principle INTRODUCTION In the previous two chapters we have looked at the formalities needed to create a trust, thenecessityfor thetrusteetobeinvestedwithtitletothetrustpropertyinorderthat the trustbe properly constituted and the curious exception to some ofthese rules found inthelawofsecrettrusts.Wehavenotyetbeguntoexplorethefactorswhichareelemental inthe trust concept.Inthis chapter,twoofthe inherent characteristicsofthe trust will be examined: the requirement of the ‘three certainties’ and the ‘beneficiary principle’. The ‘three certainties’ is simply a shorthand description for a set of conditions which, when fulfilled, epitomise the trust. These certainties constitute the minimum set of requirements or terms necessary in order to declare the trust. In simple terms, every express trust must be established with: (a) certaintyofintention, so as to indicate thatthe holder ofthe property isunder a trustobligationandmustusethepropertyaccordingtothetermsofthetrust; (b) certaintyofsubjectmatter,soastoensurethatthepropertywhichisthesubject matter ofthe trust obligation is clearly defined ordefinable; and (c) certaintyof objects, so as to ensure thatthe beneficiaries to whom the trustee owes his onerous duties are clearly ascertainable and in whose favour the court can enforce the trust should the trustee fail in those duties. As we shall see, the method of determining whether the three certainties exist may vary fromtrusttotrust,especiallywithcertaintyofobjects.Inaddition,wherecharitabletrusts areconcerned,thecertaintyofobjectsrulestobediscussedbelowarenotapplicable and reference should be made to Chapter 4 for the definition of ‘charity’. Finally, there is no statutoryguidance as tothenatureofthe ‘three certainties’andthere isnosubstitute for a thorough grounding in case law. The ‘beneficiaryprinciple’ is very closely relatedto the needfor certainty of objects for it expresses the idea that every non-charitable trust must have a human beneficiary. Inother words, it is generally impossible in English law to establish a trust for a purpose, unless that purpose can be regarded as charitable (see Chapter 4). Thus, nearly every attempttoplaceadutyonatrusteetoachievenon-charitableaimsinsteadofholdingthe property for ascertainable individuals is doomed to failure. Once again, the beneficiary principleiseasytostate,butdifficulttoapplyinconcretecasesbecauseofthesometimes confusing precedents which are available. Question 9 Does the ‘is or is not’ test propounded by the House of Lords in McPhail v Doulton (1971) provide clarity in relation to the need for certainty of objects in the creation of a discretionary trust or power? How to Read this Question This essay question requires you toanalyse the ‘anygiven postulant’testfor certainty of objectsandevaluate the various approaches thathavebeenadvocated.Inthe lightofthe discussiontheultimatequestioniswhetherthetesthasprovidedclarityinthelaw. How to Answer this Question Inansweringthisquestionyouwillberequiredtoexplainnotonlythetestbuttostate the justification for the assimilation of the test for powers and discretionary trusts in 1971. Inaddition you will be requiredtostate andevaluate the various judicial approaches that have been laid down. Up for Debate Thisisahighlycontentiousareaoflawbecauseoftheuncertainty createdbythe ment’ (1982) 98 LQR 551. Aim Higher third class of uncertainty’ (1974) 38Conv 269.Answer Plan Explain the ‘is or is not’ test. The move to the ‘is or is not’ test. Three views ofthe test: ReBaden and redefining concepts. Other tests of certainty. Answer Structure This diagramrefers tothe rational and judicial approaches underlying the ‘any given postulant’ test for certainty of objects. Answer The narrow ‘list’testfor certainty of objects in respect of discretionary trusts was abandoned by the House of Lords in McPhail v Doulton (1971) in favour of the broader ‘is or is not’testthat has always been applicable to powers of appointment. The justification for this change involved the inappropriateness of subjecting such a broad concept as a discretionarytrusttotheextremelylimited‘list’testas illustratedinIRCvBroadwayCottages Trust(1955).Inaddition,thediscretionarytrust,informthoughnotinsubstance,iscloser toapowerof appointment asopposedtoa fixedtrust.Adiscretionary trustis an express trustthatimposes an obligation on the trustees todistribute property in favour of anyor Common Pitfalls Studentsattemptingthistypeofquestiondonotalwaysappreciatetherationale andramificationsbehindeachoftheinterpretationsofthe‘isorisnot’test.Since assertive,providedthattheybasetheirargumentsonrationalgrounds.allofthemembersofaclassofobjects.Apowerofappointmentissimilar informbut does not impose an obligation to distribute but merely permits the trustee or donee of thepowertodoso.The‘isorisnot’testforcertaintyofobjectsiswhether thetrustees may say with certainty that any given postulantis or is not a member of a class of objects and itisunnecessary for the trustees to draw up a comprehensive list ofthe objects. Unfortunately,this testis easy to state but difficultto apply. Following the change in the law in McPhail v Doulton the case was remitted to the High Court (Re Baden (No 2) (1973)) to determine the validity ofthe trust. The decision ofthe High Court was affirmed by the Court ofAppeal in favour ofthe validity ofthe trust. The three Lords Justices ofAppeal in theCourtofAppealtooktheopportunity toprovide athoroughexplanationofthe ‘isor is not’test. What emerged was three individual interpretations of whatthe test required in practice. When considering the test, it is important to distinguish between ‘conceptual’ uncertaintyand‘evidential’uncertainty.Aclassdescriptionisconceptuallyuncertainwhenthe words used by the settlor or testator do not have a precise legal meaning in themselves, irrespective of the factual circumstances surrounding the particular case e.g. ‘friends’. Conversely, a class description is evidentially uncertain when it is impossible to determine whether, in fact, a person falls within the class description. The issue is one of evidence, notofthemeaningofthewordsusedtodefine the class.Thus,a trust‘formyemployees’ may be evidentially uncertain if there is no method of determining who is in fact an employee.Aswe shall see,itisdisputedwhether the‘isor isnot’test requiresconceptual certaintyoftheclassofobjects,evidentialcertaintyoftheclassofobjectsorboth. StartingfirstwiththejudgmentofStampLJinReBaden(No2)(1973),itisclearthathe approached the ‘is or is not’testliterally. In his view, conceptual and evidential certainty of the class are required, for otherwise it would not be possible to say whether anyone was not a member of the class. It will be appreciated that this is a rigorous standard as it may mean that a trust or power is declared void even though the settlor has drafted his dispositions very carefully,thefaultlyingin lackof evidenceoutsideofhisorher control. Consequently, there has been much criticism of this view of the McPhail test, not least because it requires a degree of certainty barely less than the ‘complete list’ test so decisively rejected by the House of Lords in that case.1 ArecognitionofthesedifficultieswasattheheartofSachsLJ’srejectionofthisliteral approachinthesecondjudgmentinReBaden(No2).Inhisjudgment,thecrucialquestion waswhether theclasswasconceptually certain.Iftherewasconceptual certaintythe trustorpowerwouldnotbeinvalidatedbyevidentialuncertainty.Apersonwhocouldnot prove evidentially that he or she was within the conceptually certain class would be regarded as outside it. This very practical and workable view has much to commend it because it avoids confusing questions about the inherent validity of the trust or power (conceptual certainty)withdifficulties surroundingitsexecution(evidential certainty).It is,perhaps,themostjustifiableoftheviewstoemergefromReBaden(No2). 1 It is acceptable to present rational criticism of a judgment.Thethirdjudgeinthecase,MegawLJ,adoptedtheleast stringentapproach– thetest was satisfied ifit could be said of ‘a substantial number’ of persons thatthey were within the class conceptually, even if it were not possible to make a clear decision about every potentialbeneficiaryorobject. His reasoningwas simply thatthe trustees/doneesofthe power could effectively administer the trust or power in such circumstances and,therefore,itshouldnotbeinvalidated.Asindicated,thistestwillbesatisfiedbymostclassgifts because there will be few class descriptions that do not have a central meaning and where it is not possible to say of a ‘substantial number’ (whatever that means) whether they are in the class or not. Indeed, Megaw LJ’s analysis does not sit well with the House of Lords’ formulation in McPhail that it must be possible to say of any given person whether they are or are not within the class. Indeed, it is arguable that Megaw L J’s approach is but a variant from the ‘one postulant approach’ that was overruled by the House of Lords in Re Gulbenkian (1970). Anotherdifficultyisthatthereisnoagreementastowhetherquestionsofconceptual certaintycanbedelegatedbythesettlor toathirdperson,aswherethesettlordirects that his brother may conclusively determine who is a ‘friend’. On the one hand,this removesthequestionofobjectivevalidityofthetrustorpower fromthehandsofthe court (Re Wynn (1952)) but, on the other, it has merit in that it clearly reflects the settlor’s wishes (Dundee General Hospital Board v Walker (1952)). If we then remind ourselves that absolute gifts to individuals subject to a condition precedent (for example, ‘£100 to any person who is my friend’) are subject to a completely different test of certainty(namely,whether it couldbe saidofjustonepersonthatheor she satisfies the condition (Re Barlow (1979))) and that class gifts and gifts subject to a condition precedent can be easily confused, it is apparent that the certainty rules for discretionary trustsandpowersarenotdefinedwithasmuchclarityaswemightlike.Again,evenif the objects of the trust or power are sufficiently certain, there are the further hurdles of ‘administrative unworkability’ in discretionary trusts (R v District Auditor ex p West Yorkshire MC (1986)) and ‘capriciousness’ with powers (Re Manisty (1974)) to surmount. All in all, a person predicting in advance whether a discretionary trust or power has sufficiently certain objects may make a well-informed estimate, but cannot be entirely confident that he or she will be right.2 Question 10 To what extent have the courts withdrawn from the fundamental principle that private purpose trusts are invalid? How to Read this Question This essay question is pitched by promoting an assertion that the courts have founded new techniques for validating apparent private purpose trusts. This issue may be explored by reference to case law. 2 Itis acceptable in questions like these to conclude thatthe law is far from clear.How to Answer this Question A very good answer would require a clear justification of the rule against the validity of private purpose trusts (beneficiary principle) and an identification of the traditional exceptions to the general rule as concessions to human weakness. In addition students need to discuss the limitations to the lack of beneficiary rule as illustrated by numerous court decisions inrespect ofgifts to unincorporated associations. Answer Plan The beneficiary principle and its purpose. Recognised exceptions and the problem of perpetuity. Re Denleyprinciple. Unincorporated associations: exception to, or application of, the beneficiary principle. Quistclose trusts. Answer Structure This diagram depicts the justification and exceptions to the ‘beneficiary’ principle. Up for Debate corporated associations’ (1995) Conv 302.Answer When aperson accepts the obligation of a trustee,heor she submitsboth to the jurisdictionofthecourtofequityandtotheonerousdutiesoftrusteeship.Itisinherentinthe concept of a trustthat a court must be able to control and enforce the trusteeship and, if necessary, compel the trustees to carry out their duties.3 There are several methods by which a court can exercise an effective enforcement jurisdiction, not least by requiring that alltrustshavecertainobjects.Similarly,itisequallyimportantthattheremustactuallybe someoneinwhosefavour thecourtcandecreeperformanceofthetrustandwhocanapply to the court to enforce its terms. Consequently, with the exception of charitable trusts (which can be enforced by the Attorney General on behalf oftheCrown as parens patriae), a trust must be made for the benefit of human beneficiaries. There must be a cestui que trustin whose favour the court candecree performance (MoricevBishop of Durham(1804); Re Wood (1949)). This is the ‘beneficiary principle’, and it means that, with the exception of charities,nearlyalltrusts for apurpose are void(ReEndacott(1960);ReAstor(1952)).Not surprisingly, therefore, there are a number of exceptional situations where trusts have beenheldvaliddespitebeingapparentlyoractuallyforanon-charitablepurpose. The first pointto remember is thatthe meaning of every trust must be determined in the light ofthe words used by the settlor or testator. Itis perfectly possible for a trust which, onits face,appears tobe for apurpose tobe construedasa trustfor anindividualor individuals (ReSanderson (1857)).4A good example is provided by Re Osoba (1979),where a trust‘for the training of my daughter’ was construed to be a trust absolutely for the daughter, the testator’s expression of purpose (that is, ‘for training’) having no legal effect. Incontrasttotheabovecategory,itisalsoclear thatspecialkindsofpurposetrustswhich actually benefit individuals directly or indirectly may be upheld by the court, providing certain conditions are met. This is known as the Re Denley principle. They are trusts for purposeswhichthecourtholds validsimplybecause thereare individualswithlocus standi who can apply to have the purpose carried out.5 The essence ofthe matter, as explained in Re Denley (1969), is that the beneficiary principle is designed to eliminate purpose trusts of an abstract or impersonal nature, so that any purpose which may be accomplishedwithcertaintyandwhichdoestherebyconferabenefitdirectlyor indirectly on human beneficiaries should not be declared void. Thus, in Re Denley, a trust for the maintenance of a sports ground (a purpose) for use by the employees of a company (the individuals indirectly benefited) was valid on the ground that the employees had locus standi to ensure thatthe trustees put the purpose into effect. Moreover, private trusts are subjectto the full rigour ofthe rule against perpetuities and maybeagroundfor invalidatingthegift,seeReGrant(1980).Inorder toavoidperpetuity, 3 Justification for the beneficiary principle. 4 This is aquestionof constructionand illustrates theflexibilityofthecourt’s jurisdiction. 5 Separate justification for adopting this approach.the purpose trustmustbe expresslyor impliedly limitedtooperatewithin theperpetuity periodby the termsofthe trust.InReDenley itself,the trustwas limitedspecifically tothe perpetuity period and so was upheld by the court. But in Re Grant there was no power of disposal ofthe capital and the gift failed. TheReDenleyprincipleisarefinementoftheruleagainstpurposetrustsand,inprinciple, itcanoperatetovalidateanypurposetrustthatmeetsboththerequirementsofperpetuity and the need for ascertainable individuals indirectly benefited. In addition there are some purpose trusts for very specificpurposes whichare regarded as valid asbeing anomalous exceptions to the beneficiary principle. These are so-called ‘trusts of imperfect obligation’; ‘imperfect’ because there is no beneficiary as such to enforce the trust. Although the categories may not now be extended (Re Endacott (1960)), they have been held valid because the trustees were prepared to undertake the purpose, because the purpose was certain, because there was no perpetuity and because the court had sympathy with the specific motive ofthe testator on the occasion the validity ofthe trust was challenged.6 Thespecificpurpose trustswhichmaybevalidunder theseprinciplesare,first,trusts for theerectionormaintenanceoftombsormonuments,either tothetestatoror someother person (Mussett vBingle (1876)). Second,trusts for the upkeepof animals after the testator’sdeath,provided, again,thatthey are limitedtothe perpetuityperiod(Mitford v Reynolds (1848)). But see Re Dean (1889) which involved a peculiar application of the perpetuity rule. Third,trusts for the saying of masses for the soul ofthe testator may be upheld (Re Gibbons (1917)). Fourth, and very exceptionally, a trustfor the promotion offox hunting wasupheldinReThompson(1934)onaspuriousanalogywiththeanimals’cases. Finally, brief mention should be made of two other matters which relate to the beneficiary principle. First, there are many examples of settlors and testators attempting to givepropertytounincorporatedassociations–suchasthelocalbrassbandorgardeningclub–whichappear tofallfoulofthebeneficiaryprinciple.Theproblemissimply that unincorporated associations have no legal personality and cannot, therefore, be beneficiaries under a trust. The difficulties this poses have been avoided by construing gifts to unincorporated associations not as gifts on trust for their purposes but as gifts to the individual members ofthe association who willthen use the property to carry out the functions of the association (Re Recher’s Trust (1972), Artistic Upholstery Ltd v Art Forma (Ltd) (1999) and Re Horley Town Football Club (2006)). This is so even if the settlor’s or testator’s gift is expressed to be for a purpose, see Re Lipinski. Once again, what seems to be a purpose trust is not so taken, because of a favourable construction by the court. Likewise, so-called Quistclose trusts (from Barclays Bank v Quistclose Investments(1970)),wherebyaperson(A)givesmoneytoanother(B)forthesinglepurpose of enabling (B) to pay his debts to a creditor (C), appear to be purpose trusts – the payment of a debt. However, they have been variously analysed as either a form of the Re Denley trust (Re Northern Developments (Holdings) (1978)) or as a trust for the 6 Independent justification for these exceptions.creditors with a resulting trustfor the provider ofthe money (A) should the recipient (B)notusethemoneytopayhisdebts(CarrerasRothmansvFreemanMathewsTreasure (1985) and Burton v FX Music (1999)). Whatever their true basis, such trusts are not easily proven – as in Box v Barclays Bank (1998)). Inconclusion,itremainstruethatEnglishlawrefusestoadmitthevalidityofnon-charitablepurpose trusts as amatterofprinciple. However,the Re Denleyprinciple,the anomalous exceptions, the imaginative constructions placed on gifts to unincorporated associationsand,aboveall,thewidemeaninggiventocharity,meansthatonlythepurest examples of purpose trusts which have no element of community benefit are likely to be invalid today. Question 11 Consider thevalidityofthefollowingdispositions inthewillofElizabeth,whodiedin 2014: ‘(a) £10,000 for the erection and maintenance of a suitable monument to myself in the villageofmybirthandforanannualmemorial serviceintheparishchurch; (b) £15,000tothevicarofStMary’sParishChurchtobeusedasshepleasesintheknowledgethatnothingwillbedonewhichdiminishesrespectforthechurch;and (c) £50,000 to my trustees to be spent on the provision of tennis courts for use by the residents of my home village.’ How to Read this Question The threeproblemquestions are essentiallygifts topromotepurposesandare therefore subjecttothebeneficiaryprinciple.ThestudentneedstofocusontheanomalousexceptionstotheAstorprinciple,theruleagainstperpetuitiesandtheDenleyprinciple. How to Answer this Question In (a)there are two purposes that are required to be considered the validity ofthe gifts to erect and maintain monuments and the memorial service for private purposes. In (b) there is a hint of charitable purposes that needs to be addressed, even though it may be impossible to draw firm conclusions because of the lack of evidence. In (c) discussion needs to be centred on the Denley principle. Up for Debate rule. What is the rule and what are the limits to principle? Articles published by Conv 420.Answer Plan Anomalous exceptions to the beneficiary principle: severability of gifts and perpetuity. Trusts, absolute gifts and purposes. Re Denley gifts:the appropriate perpetuity rule. Answer Structure This diagram depicts a holistic view of purpose trusts. Aim Higher rule was brought up to date by the Perpetuities and Accumulations Act 2009. Section18oftheAct retainsthecommonlawconcerningthedurationofgiftsfor MLR602providesadetailedaccountoftherulewithproposalsfor reform. Common Pitfalls trust on a failure ofthe intended express trust.Answer (a) £10,000 for Monuments,etc. This is an attempt to establish a purpose trust or, more accurately, a purpose trust with three different aims: the erection of a monument, the maintenance of that monument and the holding of an annual memorial service. The starting place must be Re Endacott itself,fornotonlydoes this firmlyestablishthebeneficiaryprinciple inEnglishlaw,itwas a case involving an unsuccessful attempt to establish a trust for the provision ‘of some useful memorial to myself’. However, Endacott also accepted that there were a limited number of specific purpose trusts whose validity had been accepted by the court, albeit for reasonsof sentiment or expediency.One ofthese, as demonstrated by Mussett v Bingle (1876) and Re Hooper (1932), is trusts for the erection or maintenance of monumentsorgraves,atleastiftheexecutorsofthewillarepreparedtocarryoutthetrust. Primafacie,thiswouldseemtobeauthorityfor thevalidityofElizabeth’strustfor the erection and maintenance of a monument to herself, providing questions of perpetuity canberesolved.Indeed,ourcaseisdistinguishablefromthefailedtrustofReEndacott,as thatinvolved a ‘memorial’, although it seems that even ‘monuments’ must have a funereal character to fall within the limited exception. Unfortunately, however, apart from perpetuity problems, there is a further difficulty as thetrustisalsoforanannualmemorialserviceforElizabeth.Whileitispossiblethata trustfor thepurposeof sayingamass inprivate for a testatormaybe a validpurpose trust (Re Gibbons (1917)), it seems that Elizabeth’s purpose falls outside that limited exception to the beneficiary principle. There is authority from a former colonial court that a private, non-Christian ceremony to perpetuate the memory of a person may be the subject of a valid purpose trust(ReKhoo Cheng Teow(1932)), butitis unlikely that sucha trustwould be accepted today, especially in the light ofthe clear direction from ReEndacott that the categories of valid purpose trusts are not to be extended. Consequently, questions of perpetuity aside, we seem to have one potentially valid purpose trust and one thatis certainly void. Itthen becomes amatter of construction whether the invalidity of one part ofthe giftinvalidates the whole,for it may be possible to sever the presumptively valid purpose trust, especially if some discrete portion of the £10,000 can be set aside for its completion.7 The remainder would result to the testator’s estate, as would the whole amount if there is no severance or if there were a general perpetuity problem (see below). (b) £15,000 to the Vicar of St Mary’s, etc. Thevalidityofthisgiftdependsalmostentirelyontheconstructionthatisplaceduponit. There are four possible alternatives.8 First, this might be an attempt by Elizabeth to give the vicar of St Mary’s a power of appointment over the £15,000, where the object of the power isapurpose.ThereisnoruleinEnglishlawthatmakesitimpossibletocreatea power for a purpose. However, there must be an intention to establish a power (an 7 The issue of severance is inherent in the problem. 8 This is a very good technique to identify the possible solutions.intention to establish a void purpose trust is not sufficient (IRC v Broadway Cottages (1955)),the objectsofthe power must be certain andthere must be no perpetuity.In any event,itis likely thatthepurposeofthepowerwouldbe regardedas toouncertainwithin the testfor certainty of objects of powers (the ‘is or is not’test) established in Re Gulbenkian(1970).Thesecondpossibilityisthatthisdispositionisregardedasneitheratrustnor a power, but as an absolute gift to the vicar of St Mary’s per se. The point is of some importance as, if this is an absolute gift, the vicar may keep the property for herself and do with it as she pleases. There are several examples of gifts being regarded as absolute despite the factthatthe testator has attachedsome expression ofmotive or desire tothe bequest, including Re Osoba (1979) and Re Andrews (1905). It may be important that thevicarof StMary’s isnotnamed,butidentifiedbyheroffice.Thisdoes suggestthatthe money isnotintendedfor thatpersonindividually,butin virtueofherofficial capacity. Athirdpossibilitymaybethatthisisagiftforcharitablepurposes,beingfor theadvancementof religion(ReFowler(1914)),sees3(1)(c)oftheCharities Act 2011.Insomecases,a gifttoaclergymanontrusttodoashepleaseshasbeentakentoindicateatrustforthe advancement of religion (Re Flinn (1948)). However, once again, in our case, there is no clear indication that any trustwas intendedand, even ifitwere,the general vaguenessof the testator’s instructions suggests thatthe giftmay be usedfor other purposes that are notwhollyfortheadvancementofreligion:advancementisnotthesameasnon-obstruction. Fourth, this may be a straightforward, non-charitable, purpose trust which is void under Re Endacott. So, depending on the construction of the gift, this disposition discloses either no trust orpower at all,beinganabsolute gift; apower for apurpose, which is probablyuncertainandtherefore void;a charitable purpose;or a voidpurpose trust. (c) £50,000 on Tennis Courts Thisappearstobeasimplepurposetrust:afterall,thetrusteeswillbeunderamandatory obligationtoerecttennis courts.However,insteadofbeingvoidforwantofahuman beneficiary, this purpose trust appears to be valid under the Re Denley (1969) principle. Accordingtothiscase,theruleagainstpurposetrustsisintendedtoinvalidateonlythose trustswhich are abstract andimpersonal.If apurpose trustdirectlyor indirectly benefits aclassofascertainedorascertainableindividuals,itwillbevalidastheindividualsmaybe givenlocusstanditoapplytothecourtintheeventthatthetrusteesdonotcarryoutthe trust.Theindividualsdirectlyorindirectlybenefitedhavenoequitableinterestinthetrust property itself, although they do provide the means of enforcement. Indeed, with the exception ofthe perpetuity issue,our case is very similar to thatin Re Denley itself where thepurposewas theprovision of a sportsgroundfor employees.Applying that case,this disposition is presumptively valid. Finally,we come to problems ofperpetuity.9Accordingto the rule againstperpetual trusts, those non-charitable purpose trusts which, as an exception to the beneficiary principle, equity regards as valid, must not last longer than the perpetuity period, being a periodnotexceedingalifeorlivesinbeingand/or21years,sees18ofthePerpetuitiesand 9 Good technique to adopt a holistic approach to the question.AccumulationsAct2009. Furthermore,thequestionofperpetuitymustberesolvedatthe date the disposition comes into effectand,tobe valid,there mustbe nopossibility ofthe purposelastinglonger thantheperpetuityperiod.Thisusuallymeansthatitisnecessary for thetestatrixtomakesomeexpressor impliedlimitationtoperpetuity inthetrust instrument itself (Leahy v Attorney General for New South Wales (1959)). In our cases, although a trust for the erection of a monument will be presumed to be completed within the perpetuity period, a trust for its maintenance must be specifically limited to theperiod.The same is true for the trustfor the annual memorial service, even ifitis otherwisevalid.Likewise,theReDenleytypetrustmustbelimitedtoperpetuity.Thereare no such limitations and all these trusts would seem to fail for perpetuity if nothing else. Similarly, any power given to the vicar of St Mary’s would fail were it not exercised within the perpetuityperiod. Question 12 In1990,pursuanttoameeting20individualsformedtheBenevolentParachutistsClubby each transferring £5,000 to their appointed trustee-treasurer to hold as a fatal accident fund. The minutes ofthe meeting disclosed thatthe fund was to be invested and monies paidoutonacertainpaymentscaletothesurvivingspouseofamemberwhodiedasa result of a parachuting accident. Further contributions to the fund had been received by gifts from anonymous donors and by entertainment organised by the members. The payment scale had been updated from time to time butinvolved one-off capital sums to the recipients.In2014 the fundsoftheClub were valued at £20,000. Advise the treasurer-trustee as to the beneficial ownership of the funds on the assumption that he is the only surviving member of the Club. How to Read this Question This problem question in respect of unincorporated associations involves the status of contributions of funds to the Club and the method of distributing surplus funds on the dateofliquidation.ItissignificantthattheClubhasonlyonesurvivingmember. How to Answer this Question Itis advisable to first define an unincorporatedassociation and deal with the legal status of the Club. The legal effect of donating funds to the Club needs to be examined in accordance with the case law. The main issue in the problem concerns the ownership of assets ofthe Club when only one subsisting member exists. The exclusion of charitable status ought to be expressly stated. Up for Debate The status of ownership of assets held by unincorporated associations and the associations’ (2000) 14 T&T 698.Answer Plan Consideration of whether the Club is charitable. Status of unincorporated associations. Status of gifts to unincorporated associations. Status of gifts on trustfor unincorporated associations. Distribution of surplus funds on dissolution. Answer Structure This diagramillustrates the nature of unincorporated associations and the status of holding its assets. Aim Higher First, consider whether the gifts are capable of subsisting as charitable trusts, second,whetherthegiftscreatevalidprivatepurposetrustsand,ifnot,theconposes:mandates, conditions andestoppels’(1987)Conv415. Common Pitfalls beneficiaryprinciple inthe contextofunincorporatedassociations.Answer ClearlytheClubisnotcharitableforthepublicbenefittestlaiddownins4oftheCharitiesAct2011isnotsatisfied.Thereisacontractualnexusbetweenthedonorsanddonees that would deprive the Club of charitable status, see Oppenheim v Tobacco Securities (1951). This is evidentin a private members’ club. TheClubisanunincorporatedassociationwhichisnotalegalpersonbutcomprisesagroup ofindividualsjoinedtogetherwithcommonaimsusuallylaiddowninitsconstitutioncreating mutual duties and rights, see Conservative and Unionist Central Office v Burrell (1982). 10 The label, Benevolent ParachutistClub, is a means of identifying the members of the Club andclaimsmaybemadeordefendedbythememberscollectivelyor throughtheofficersof theassociationasrepresentativesofthemembers.Theissueinthesetypesofcasesinvolves theidentityoftheownersofassetsoftheassociation.InthisrespectCrossJinNevilleEstates LtdvMadden(1962),inanobiterpronouncement,outlinedvariousconstructionsconcerning giftsor trustsinfavourofunincorporatedassociations.Helaiddownthreepropositions: giftstothemembersoftheassociationas jointtenants, see Cocks v Manners(1871); giftstothe existingmembersasanaccretiontothe fundsoftheClub;and giftsontrustfor thepurposesoftheassociation,seeReLipinski(1977). Theprimafacierulewithregardtogiftstotheassociationconcernsthesecondofthese propositions, see Re Recher’s Will Trusts (1972). 11 In this case Brightman J in an obiter pronouncement declared that a gift to the association may be construed as a gift to the members of the association on the date of the gift, not beneficially, but as an accretion to thefundsofthesocietywhichisregulatedbythecontract(evidencedbytherulesofthe association) made by the members inter se. Thus, a subsisting member on the date of the giftisnotentitledquamember toclaimaninterestinthepropertybuttakesthepropertyby referencetotherulesofthesociety.Amemberwholeavestheassociationbydeathorresignationwillhavenoclaimtotheproperty,intheabsenceofanyrulestothecontrary.Accordingly,thetransferin1990of£5,000byeachofthemembersoftheClubwillbeconstruedas a gift to the members collectively for their benefit, but subject to the contract made with eachotherasmanifestedinits constitution.Theeffectis thatnoonemember isunilaterally entitledtoclaimanypartofthefundexceptinaccordancewiththerulesoftheClub. The donations to the Club by anonymous persons and entertainment are construed in a similar vein.Onthedissolution oftheClubthesedonorsarenotentitledtoareturnofthe funds donated by these means. A material factor concerns the intentions of the transferors.12First,thedonors inthesamecategoryaretreatedashavingthesameintention.Accordingly,allthe anonymousdonorsaredeemedtohave alikeintention. Second, since the intention has not been expressed, the court is required to consider whether there is any evidence of an implied intention that the transferor retained an interest in 10 Definition of an unincorporated association. 11 Wherethereareseveraljudicialsolutionstoanissueitwouldbeprudenttoexpressapreference. 12 Status of donation to the club.theproperty.In ReGillingham BusDisasterFund (1958),theHighCourtdecidedthatfunds donatedanonymouslywerecontributedforaspecificpurposewhichfailedandthefunds weretobeheldonresultingtrustfor thecontributors;butthecourtcouldeasilyhave come to the opposite conclusion, namely the donors, being anonymous, manifested an intention not to have the property returned to them. They would then have parted with their funds‘outandout’,leavingnoroomforaresultingtrust.Inotherwords,thetransfer ofthe funds anonymously creates an irrebuttable presumption thatthe donors had parted out and outwith the funds. This is the better view andthe solution adopted by the HighCourtin Re West Sussex Constabulary Trusts (1971). Withrespecttothe fund-raisingactivities for theClubbymeansofentertainment,it wouldappearthatonauthoritythedonorsarenotentitledtoareturnofthefundsona dissolution of the Club. Those who attended these events with the motive of increasing theendowmentoftheClubcreatedarelationshipof contract,nottrust.Thecontributors received the consideration for which they bargained, namely entertainment. Indeed, there werenodirectcontributions totheClubfunds;only theprofitsoftheentertainmentwere receivedbytheClub.ThiswastheviewofGoffJinReWestSussexConstabulary(1971).The effect is that the surplus funds of the Club originating from a variety of sources form an endowmentwhichbecomesavailablefordistributiononadissolutionoftheassociation. Turningtotheissueregardingthesurplusfundsonthedateofthedissolutionofthe Club, it is worth pointing out that, subjectto any liquidation clauses in the constitution, the modernrulesgoverningthe distribution offunds isbased onthe law of contract rather than the law of trusts. The court will infer a contract between all the members to the effectthat ex-members ofthe Club on the date of dissolution cease to have any interest in the funds, see Re Bucks Constabulary Fund (No. 2) (1979). The earlier solution based on a resulting trust has fallen out of favour. The effect is that only subsisting membersonthedateofdissolutionareentitledtoparticipateinthedistribution. The issue posed in the problem involves the destination of property rights in the event thatallthemembershavepassedawaysaveforone.Thequestioniswhether thesole survivingmemberofanunincorporatedassociationisentitledtothesurplusfundsofthe CluborwhethertheCrownisentitledtoitonabonavacantia.Itisclearthattheassociation will cease to exist because the contract between the members will come to an end. There can be no association since one cannot associate with oneself, see Re Bucks Constabulary(1979).Onthedeathofthe last survivingmember,prior tothe liquidation ofthe Club, the Crown will be entitled to the surplus as opposed to the estate of the last deceased member, see Cunnack vEdwards (1896); butthe issue in the problem is distinguishablebecausethetreasurer-trustee(member)isstillaliveandwishestoestablishan interest in the surplus funds of the Club. On this issue Walton J in Re Bucks Constabulary (1979) in an obiter pronouncement declared that ifthe society is reduced to a single member,neitherhe,norhispersonalrepresentatives,willbeentitledtothesurplusfunds and thus the assetsbecome ownerless and maybe takenby theCrown. However, in the recent case, Hanchett-Stamford v AG (2008),the HighCourt refused to follow the obiter pronouncement of Walton J and decided that the sole surviving memberwas entitled to the surplus funds of the association. The court pointed out thatthe thread that runs through the main cases is that the property rights of an unincorporated associationare vestedinitsmemberssubjecttotheircontractual rightsandduties.Onthedateof thedissolutionoftheassociationthesubsistingmembersareentitledtotheassets.Itwould be illogical if a different rule were to be adopted where the membership of the association fallsbelowtwo.Inaddition,thedeprivationofthepropertyinterestinthesurvivingmember would be a breach of Article 1 of Protocol 1 of the European Convention on Human Rights whichguaranteesthepeacefulenjoymentofpossessions.Nopubicinterestisservedbythe appropriationbythestateofsuchmember’sshareintheClub’sassets. In conclusion, the treasurer-trustee as the sole surviving member of the Benevolent Parachutist Club will be able to claim the surplus assets ofthe Club. Question 13 AssessthevalidityofthefollowingdispositionsinthewillofThomas,whodiedinDecember 2013: (a) £10,000 to myAuntAgatha, knowing that she will use the money in order to secure the future of my daughters; (b) the residue of my estate to my executors for such of my colleagues at work as they shall in their discretion think fit. Thomas worked for the National Health Service at various hospitals throughout his life, but spentthe last ten years of his working life in Claremont General Hospital, which was destroyed by fire just after his retirement in 2010. How to Read this Question Thisproblem question requires youto analyse and apply two ofthe three certainties test forthecreationofanexpresstrustnamely,certaintyofintentionandobjects.Q13(a)concerns the validity of transfers subject to precatory words and 13(b) deals with a transfer subject to a discretion as to the class of objects. Aim Higher should not be regarded as having a clear ratio decidendi. Common Pitfalls ItisnotnecessarytodecidewhethertheBadentestwillbesatisfiedonthefactsof the law, as opposed to conclusions on difficultissues oflaw.How to Answer this Question (a) Youneedto state andapply the testof construction regarding precatorywords andconsider the variousoutcomeswhensuchexpressionsareusedinawill. (b) TheresidueofThomas’sestateissubjecttoadiscretionvestedinhisexecutors. Wouldthis create a specialpower of appointment or alternatively a discretionary trust? Wouldthe transferbe validas satisfyingthe ‘anygivenpostulant’ test? What are the consequences offailure to satisfy the test? Answer Plan Brief introduction to the concept of the three certainties: certaintyofintention:precatorywords, construction ofthegift; certaintyofobjects:trustorpower;testforcertainty;construingthegift;evidential difficulties;administrativeunworkability. Answer Structure This diagramidentifies the ‘three certainties’test as an essential feature forthe creation of an express trust. Up for Debate The ‘anygivenpostulant’testfor certainty ofobjectshas attracted a greatdealof Answer It is a cardinal principle of the law of equity that a trust may only be valid – that is, enforceable by the beneficiaries againstthe trustee – ifithas been createdwith certainty of intention, certainty of subject matter and certainty of objects (Knight v Knight (1840)). Thisparticularproblemconcernsvariousaspectsofthe‘threecertainties’,andeachlimb ofThomas’s testamentary disposition will be considered inturn. (a) £10,000 to AuntAgatha The issue raisedby thisdispositioniswhether the legacyof£10,000toAuntAgatha isby way of trust or an absolute gift – in other words, whether there is sufficient certainty of intention to create a trust.13 If a trust is created, then it becomes necessary to consider whether there are any valid objects of the trust and whether they are defined with sufficient certainty. The imposition of a trust over the money requiresThomas tohave imposed a mandatory obligation upon AuntAgatha to carry out his wishes. This is purely a matter of construction of the words used and the surrounding circumstances (Lambe v Eames (1871)). Itis clear that precatory words (words of expression, hope or desire) will not of themselves impose a trust on the recipient of property in the absence of corroborative evidence (Re Conolly (1910)).14 In our case, the words used by Thomas are stronger than precatory words:Thomasdoesnot‘hope’or ‘wish’thatAgathawill carryouthiswishes,he ‘knows’ that shewill.However,itis stillnot certainthatthis isenoughtoconstitute atrustobligation. For example, in Re Adams and the Kensington Vestry (1884), a gift ‘in full confidence that...’ was held to be absolute and not mandatory in the way of a trust. On balance, itis likely that the bequest to Aunt Agatha will be construed as an absolute gift, essentially because ofthe absence of any other indication thatthis is intended to be a trust.15Moreover, even ifthis disposition was construed to be a trust,there might well be certainty of objects problems. While it is obvious that a trust in favour of ‘my daughters’ is perfectly certainastoobjects,thedispositioninthiscaseis‘inorder tosecurethefutureofmy daughters’. A literal reading of this suggests that this is a trust for purposes connected with Thomas’s daughters, and trusts for purposes are void (Re Endacott (1959)). Of course, it might be possible to construe the disposition (ifit were a trustin the first place) in favour of the daughters per se (compare Re Osoba (1979)) or as a trust saved by the Re Denley principle. However,these difficulties in defining the objects ofthe trust precisely only add to the doubts surroundingthe lackof certainty ofintention(e.g. ReKayford (1975)).Consequently,inallprobability,this is anabsolutegifttoAuntAgatha,whomay usethepropertyforthebenefitofThomas’sdaughtersifshechooses,butcannotbecompelled to do so (Lassence v Tierney (1849)). 13 This is good examination technique; identifying the issues raised in this part ofthe question first before launching into a discussion about the issues. 14 Clear statement ofthe approach ofthe courts to precatory words. 15 Application ofthe principle to the facts ofthe problem. Tentative conclusion on a flexible issue is advisable.(b) The Residue of Thomas’s Estate Thegiftofresiduefor‘suchofmycolleaguesatwork’raises,onceagain,theproblemofcertaintyofobjects,thoseobjectsbeingdefinedby referencetoaclassdescription.As regards thisdisposition,itis clear thatthe executorsare givenadiscretionas towhomfromamong theclasstheyshallselecttoreceiveaportionoftheresidue,andinwhatproportions.So,this partofThomas’swilldiscloseseither adiscretionary trustfor the classor a specialpowerof appointment given to the trustees to appoint among the class. Of course,the difference is crucialsofarastheexecutorsareconcernedbecause,ifthisisadiscretionarytrust,theyare under a mandatory obligation to make a selection from among the class and distribute the property whereas, ifthis is a power,they may decide notto distribute and cannot be compelledtodoso.Whether thisdispositiondisclosesatrustor apower isamatterofconstructionand,as McPhailv Doulton(1970)shows,thedistinctionisnot alwayseasytodraw.Inour case,itis importantthatthereisnogiftover indefaultof appointment,perhapssuggesting that the executors must choose from among the class, although the absence of a gift over does not always foretell a trust, since the testator may be contentto allow the property to revertto the next of kin if the power is not exercised (Re Weekes (1897)). On balance, however, giventhatthegifttothisclassisalreadyoftheresiduaryestateandconsequentlythebeneficiaries in default would be difficult to identify, we can legitimately surmise that Thomas intendedthis to be a discretionary trust. Since McPhail v Doulton,the testfor certainty of objects of a discretionary trust and a power havebeenassimilatedand,evenifthisisapower,thetestwemustapplyiswhether itispossibletosaywithcertaintythatanygivenpersonis,or isnot,amemberofthe class(McPhail). Unfortunately, although this testis easy to state, it is difficultto apply because the leading case on its application (Re Baden (No 2)(1973)) gives us three alternative approaches.16AccordingtoStampLJ,thetraditional,rigidapproachisrequiredtobeadoptedandthisrequiresthe classtobedefinedwithprecision.Thisisastricttestandinviewofthefireathislastplaceof work,willtherebe sufficientemployment records toindicatewithwhomhe worked,evenif itwerepossibletosaywhothenqualifiedasa‘colleague’?Second,evenifwe takeSachsLJ’s approach,itmaybedifficulttodecidewhetherthisdiscretionarytrustisvalid.Inhisview,the testis satisfiedifmembersofthepublicmayprovethattheyarewithintheclass.Thecorollary is that evidential difficulties will not invalidate a trust because any person who cannot provethatheor she is amemberofthe classwillbedeemedtobeoutsideit.Wouldthe concept of a ‘colleague’ be clear enough for the courts to determine validity? Finally, we cometoMegawLJwhoproposedtheleaststrictversionofthe‘isor isnot’test,believingitto be satisfied if it could be said of a substantial number of persons that they were inside the class, even if it could not be said of every potential person whether he or she was or not. It maybe thatThomas’sdispositionswouldsatisfy this versionofthe test.Unfortunately this laxapproachhasbeenheavilycriticisedby commentators. TheconclusionisthenthatThomas’sthirddispositionmayfailforuncertaintyofobjects. It may be that a court would be prepared to redefine the concept of ‘colleague’ so as to make it more certain and then apply the ‘is or is not’ test to the class description so 16 Itis advisable to state and apply each ofthree approaches to the test.redefined(as in ReBaden), butthat cannotbe guaranteed.Indeed, eventhen,the executorsfaceonemorehurdle,for itmaybe thatthe classofthediscretionary trustis ‘administratively unworkable’ and so void for ‘secondary uncertainty’. This concept was expounded by Lord Wilberforce in McPhail and itis clear from R v District Auditor ex pWest Yorkshire MC (1986) that if the settlor or testator stipulates a class so large that the trustees cannot effectively fulfil their duties, nor exercise their discretion properly under a discretionary trust,thattrustwillfail.Inour case, Thomas’s large number offormer places of work may bring the class description within this principle. This will be a matter ofjudgment.Ifthegiftundertheresiduaryclauseisvoidthenthenextofkinwouldbe entitled to such surplus funds.4 TheLawofCharities INTRODUCTION Charitable trusts are valid public purpose trusts. This means simply that it is perfectly possible to establish a trust for the achievement of a purpose, provided that the purpose in law is regarded as charitable. As far as charities are concerned, it is not important if there is no human beneficiary capable of enforcing the trust, because the Attorney General can take action in respect of all charitable trusts on behalf of the Crown.Moreover,validcharitabletrustsarenot subjecttocertainaspectsoftheperpetuityruleandmaybeofunlimitedduration.Furthermore,whencomparedtovalid privatetrusts(thatis,trusts forhumanobjects), charitabletrustshaveotheradvantages; they enjoy considerable fiscal privileges including exemption from many taxes. Hence, many of the decided cases involve HM Revenue & Customs seeking to deny charitable status. Likewise, there are special rules applicable to the failure of charitable trusts (the principles of cy-près)which may oustthe normal rules of resultingtrusts, andthere isa separatebodyof rulesdealingwiththe administrationof charities and the conduct of business by charitable trustees. Obviously it is of singular importance to be able to distinguish between charitable purposes and non-charitable purposes. The former will be valid and enforceable, as well as havingotheradvantagesoverprivatetrusts,andthelatterwillbevoidunlesstheyfall within one ofthe exceptions to the beneficiary principle considered in the previous chapter. The Charities Act 2006 enacted for the first time a statutory definition of charitiesafter centuriesof reliancemainlyoncaselawtoleadthewayonthetypeofactivities that would be given charitable status. The 2006 Act introduced a statutory definition by reference to a two-step approach – the listing of a variety of charitable purposesandthepublicbenefittest.The2006Acthasbeenrepealedandreplacedby the Charities Act 2011. This is a consolidating statute that repeals the diverse statutory provisions that are applicable to charities and insert the same in one statute. The Charities Act 2011 came intoforce on14 March2012.The 2011 Act contains a listof13 charitable purposes – 12 specific charitable objects, and a residual category of charitable purposesdesigned to maintainthe courts’discretionto determine the type ofnovel activitythatoughttobetreatedascharitable.Thisisintendedtobeacomprehensive listofcharitableactivities.Mostofthepurposes,inanyevent,werecharitablebefore theActwaspassed.Themeaningof‘charity’istobefoundprincipallyincaselawand the opinionsoftheCharityCommissioners (now theCharityCommission).QUESTION 14 Bernard died last year leaving a will providing the following legacies: (a) £1,000,000 to be used to train Great Britain’s most promising young amateur athletes for the forthcoming Olympic Games; (b) £2,000,000tobeusedtoraiseawarenessofschoolchildreninLondonofthedangers of possessing a knife in a public place. Consider the validity of these bequests. How to Read this Question This problem question requires you to analyse and consider whether the various bequests in Bernard’s will create valid gifts on trusts for the respective purposes. In both parts of the question you are required to discuss whether the gifts create valid charitable trusts and in the alternative whether private purpose trusts have arisen. In the event of an express trustfailingresulting trustsofthe fundswillarise infavourofBernard’sheirs. How to Answer this Question In (a)the question is whether the stated purpose falls within the definition ofthe promotionof amateur sportwithins3(1)(g)oftheCharities Act 2011.Inadditiontheprovisionof recreationalfacilitiesunders5ofthe2011Actneedstobeconsidered.Inallquestionsconcerningcharitablegiftsyouarerequiredtoanalyseandapplythepublicbenefittest.In(b) the main issue concerns the advancement of education. Answer Plan Trustsfortheadvancementofamateursportwithins3(1)(g)oftheCharities Act 2011. Theprovisionofrecreationalfacilitieswithins5oftheCharitiesAct2011. Advancementofeducationwithins3(1)(b)oftheCharitiesAct 2011. Resulting trust. Aim Higher trust must be deprived ofthe facilities in the first place. Up for Debate The publicbenefittest which pervades all charitable trusts is a fairly case centred haveaffirmedthattherewasnoevidencethatthecourtsadoptedapresumptionin tion(b)iswhetherthelimitationofthebeneficiariestoLondonwillsatisfythetest.Answer Structure This diagram illustrates the tests to determine the charitable status of gifts in Bernard’s will. ANSWER A charitable trust is a public purpose trust that may result in individuals or members of the public deriving direct benefits. Itis enforceable by the Attorney General on behalf of theCrown.Ifanyofthepurposes,asstatedinBernard’swill,failtosatisfythetestsfor charitable status, consideration is required to be given as to the validity of the purposes as private trusts. If the purposes fail on this score, the relevant property will be held on resulting trustfor the residuary beneficiaries under the will.1 (a) £1,000,000 to be Used to Train Great Britain’s Most Promising YoungAmateurAthletesfortheForthcomingOlympicGames PriortotheCharitiesAct2011thepromotionofsportwasnot regardedasacharitable activity: seeIRCvCityofGlasgowPoliceAthleticAssociation(1953),wheretheHouseof Lordsheld thatthe provision offacilities for the recreation ofpolice officers wasnot exclusively for charitable purposes. However, s3(1)(g) ofthe Charities Act 2011 has now recognised that the advancement of amateur sport is to be treated as a charitable 1 Analysis of the issues that will be considered. s 5activity and the training of athletes for the Olympic Games clearly promotes such activity. ‘Sport’ for these purposes has been broadly defined ‘as sports or games which promote health by involving physical or mental skill or exertion’: see s3(2)(d) ofthe Charities Act 2011. Thus, the charitable status of such activity is dependent on the way thefacilityisorganised.Thefactsoftheproblemindicatethatthesportingactivities arerestrictedtoamateursportandthiswouldappeartosatisfytherequirementslaid down in s3(2)(d) of the Act. The public benefit requirement is now obligatory to prove in respect of all charities withoutthe aid of presumptions: see ss4(1) and (2) ofthe 2011 Act. 2Section 4(3) consolidates the case law meaning of public benefit that existed before the passing of the Act. This involves a two-step testof demonstrating abenefitto society.The change in the law introduced by s 3(1)(g) has this effect by reference to the purpose. In addition, those eligible to receive benefits must comprise a large enough group to be considered as the public and without a personal or private relationship being used to limit those who may benefit.Again this test appears tobe satisfied in thatthere isno connection between the donor, Bernard and the intended beneficiaries. Further, s5 ofthe Charities Act 2011 confirms the charitable status of recreational activitiesprovidedthatanumberofbasicconditionsaresatisfied.Thefacilitiesarerequiredto improve the ‘conditions of life’ ofthose who will use them and these persons have need for the facilities because of their youth, disability, and social and economic circumstances. InGuildvIRC(1992),theLawLordsadopteda‘benignconstruction’ofthetestof‘deprivation’anddecidedthat recreationalfacilitiesareprovidedwiththeobjectofimprovingthe conditions of life of the beneficiaries, irrespective of whether or not the participating members are disadvantaged. It would appear thatthe gift to train promising young athletes for the Games will satisfy this test. Inany eventthegiftis capableofbeingcharitableunder s3(1)(m) ofthe 2011 Act,the miscellaneous category. (b) £2,000,000 tobe Usedto Raise Awareness ofSchoolchildren in LondonoftheDangersofPossessingaKnifeinaPublicPlace The issues created by this gift in Bernard’s will concern the advancement of education withins3(1)(b)oftheCharitiesAct2011aswellass3(1)(j)(reliefofthoseinneedbyreason oftheir youth) and s3(1) (m) (the miscellaneous category). The first issue is to determine what is meant by education and second to consider whether thisgift promoteseducation. Prior tothe Charities Act 2011 the advancement of education was treated as a charitable purpose within the preamble to the Statute of Elizabeth 1601.Section 3(1)(b) ofthe 2011 Act consolidates this purpose.Section 3(3) enacts that terms used in the Act are to be given the same meaning under existing charity law. 2 Charities questions require discussion of the purposes and public benefit.Thus,theinterpretationoftheterm‘education’under thegenerallawwillbeconsistently applied.Education hasbeeninterpretedfairlybroadlyby the courts.Itisnot restrictedto teaching activities in schools anduniversitiesbut covers any form of worthwhile instruction,including research or cultural advancement.In ReShaw’sWillTrust(1952),the court decided that the promotion in Ireland of self-control, elocution and the arts of personal contact was charitable. Likewise in South Place Ethical Society (1980), the promotion of ethical principles was treated as a charitablepurpose under thishead. Itwouldappear thatthegiftinBernard’swillmaybetreatedasa formof educationof schoolchildren.Nothinghasbeensaidinthewill concerningthemethodsof raisingsuch awareness.One suchmethodmay involve activitieswithinthe school setting.Inthis event,thenarrowermeaningof educationthatwas consideredinReShaw(1957),involving an element of teaching, will be satisfied. Thepublicbenefittestwillbe satisfiedifthesubjectof educationisfor thepublicbenefit. Inotherwords,thecourttakesintoconsiderationtheusefulnesstosocietyoreducational value of the subject matter that will be advanced. In Re Pinion (1965), the gift of a collection ofpaintings to the National Trustlackedany artistic merit and failedon this ground. In view ofthe spate of senseless attacks on young people involving knives,there cannot beanydoubtthatmeasurestodeter thecarryingofweapons inpublicplaceshaveagreat deal of public value. An additional consideration is whether the restriction to schoolchildren in London only will fail to satisfy the public benefit test. The satisfaction of the testis aquestion oflaw for the judge todecide on the evidence submittedtothe court.3 In essence,thistestwillbesatisfiedifthepotentialbeneficiariesofthetrustarenotnumerically negligible and there is no bond or link between the donor and the intended beneficiaries. The number of schoolchildren in London is not negligible and there is no nexus with Bernard. One minor point ought to be made and that is whether this gift includes a political elementmasqueradingaseducation.4Atrustforpoliticalpurposeswillfailasacharityon the ground that the court is incapable of deciding whether a political programme is for the public benefit: see McGovern v AG (1982). There is very little evidence that the giftin Bernard’swillpromotesapoliticalpurpose.Thegiftisnotdesignedtochangethelawbut simply to raise awareness ofthe dangers in carrying a weapon. 3 Identify questions oflaw and distinguish these from questions offact. 4 Address and expressly exclude related issues. Common Pitfalls public benefit.QUESTION 15 Mark,whohasrecentlydied,madeawillin2008inwhichhemadethefollowinggifts: (i) £250,000 to the University of London upon trust to establish and maintain in perpetuity a School of Law Reform; (ii) £3,000tothe trusteesofthe SouthBlankshireMethodistConference for thepromotion of physical recreation for Methodists in South Blankshire. Consider whether these gifts are charitable. How to Read this Question This problem question on charities requires you to deal with the facts to determine whether the gifts are charitable only. You are not required to deal with private purpose trusts although you may state that on failure of any ofthe stated purposes resulting trusts will arise in favour of the residuary beneficiaries under the will or the next of kin. Thefirstpartofthequestionraisestheissueofthecharitablestatusofthegiftfor the advancement of education and the second part involves trusts for the advancement of amateur sports or recreational activities. How to Answer this Question In the first part of the question the material issues are whether the University of London is intended to be a trustee and whether the stated purpose iswithin the definition of charity.The secondpart ofthe questionrequires youtoconsider whether thepromotion of recreationalactivities is a recognisedcharitable activityand thepublic benefittest. Answer Plan Trusts for the advancement of education. Exemptionof charitiesfromtheperpetuityrule–excessivedurationprinciple. Trusts for the promotion of sport. Section5oftheCharitiesAct2011–promotionofrecreationalfacilities. Public benefittest. Up for Debate mission and AG v Charity Commission where the court decided that the pre-2006 . to amend its guidelines on public benefit.Answer Structure This diagramillustrates theconstruction andeffect of thevariouspurposes stated by Mark in his will. ANSWER (i) £250,000 to the University of London upon Trust Inthisproblem,theissueiswhether thedonationof£250,000totheUniversityfor the stated purpose is charitable. Does the gift advance education as declared in s3(1)(b) ofthe Charities Act 2011? The donation is to the University of London. This clearly is a charitable body that exists to advance education.If, as is possible,theUniversity is the trusteeto promote the statedpurpose,the questionarisesas towhether the statedpurpose is charitable.ASchoolof Law Reform within the University exists as a departmentto undertake the taskofexaminingtheextenttowhichthecurrentlawissatisfactoryandinappropriate cases to suggest proposals for reform. Section 3(3) of the Charities Act 2011 endorses the common law approach to charitable objects. In the law of charities, education has been interpretedgenerouslyandisnot restrictedtotheclassroommodeofdisseminatingknowledge,but requiressomeelementofinstructionor supervision.Thus, researchis capableof beingconstruedas the provisionof education:see ReHopkinsWillTrust(1964).In McGovern vAttorney General(1981), a definition of advancement of education by way of research was laiddownby Slade J.He positedthatthe requirementsare that:(a)the subjectmatterofthe proposed research is a useful object of study; (b) it must be contemplated that the knowledge acquired as a result ofthe research will be disseminated to others;(c) the trustis for the benefit of the public, or a sufficiently important section of the public. It would appear thattheestablishmentofaschooltostudytheextenttowhichthelawisinasatisfactory state would clearly satisfy the test laid down by Slade J. An additional issue is whether this purposeispolitical – for ifthatis the casethegiftwillfailasa charity.5Politicalactivities includeattemptstochangethelawandgiftstofurther theobjectsofpoliticalparties.A trustforpoliticalpurposesis incapableof subsistingasacharity,for the courtmaynot stultifyitselfbydecidingthatitis inthepublicgoodfor the lawtobe changed:see National Anti-VivisectionSociety v IRC (1948), concerningthe activitiesofthe stated society and 5 Related issues ought to be expressly and clearly excluded. 2011McGovern, where Amnesty International was declared to be a political organisation. The School exists only to study the extentto which the law is satisfactory; it is not designed to lobbyParliamentforchangestobeintroduced.Onthisbasisitisacharitableactivity. Afurtherpointinvolves the reference tothe Schoolbeingmaintainedperpetually.Would this infringe the perpetuity rule? Although charitable trusts, like private trusts, are subject to the rule against remote vesting, charitable trusts, as distinct from private trusts, are not subject to the rule against excessive duration. Indeed, many charities (schools and universities) continue indefinitely and rely heavily on perpetual donations. Accordingly, if thepurposesarecharitablethegiftwillnotfailfor infringingtheperpetuityrule. (ii) £3,000 to the Trustees of the South Blankshire Methodist Conference The purpose as stated in this problem raises a number of issues. Is the purpose as declaredin the will, namely physical recreation, a charitable activity? In any event,would thepublicbenefittestbesatisfied?Thedonationcontemplatedappearstopromoterecreation under the guise of advancing religion, i.e. Methodists in South Blankshire. In other words,the religiouselement seemstobepurely incidentalandtherealpurpose isto promote physical recreation simpliciterfor such beneficiaries.Asimilar purpose was consideredbythecourtinIRCvBaddeley(1955).HeretheHouseofLordsdecidedthatthegift was void, as recreational activities or sport are not within the preamble to the Statute of Elizabeth or the ‘spirit and intendment ofthe preamble’: see Re Nottage (1895) and IRCv City of Glasgow Police Athletic Association (1953). Section 3(1)(g) of the Charities Act 2011 includes the advancementof amateur sportwithinthe listof charitable purposes.‘Sport’ for thesepurposeshasbeenbroadlydefinedassportsorgameswhichpromotehealthby involving physical or mental skill or exertion: see s 3(2)(d) of the Charities Act 2011. The effect is that the charitable status of such activity is dependent on the way the facility is organised.However,there is little evidence in Mark’swillto indicate thatthe funds are to be used for the promotion of amateur sport. Section 5 of the Charities Act 2011 consolidates the law regarding the provision of recreational facilities. Section 5 of the Act stipulates that the provision of recreational facilities shallbe charitable iftwo criteria are fulfilled,namely:(1)the publicbenefittestis satisfied; and (2)the facilities are providedin the interests of social welfare. The ‘social welfare’test willbecompliedwithiftwo‘basicconditions’are satisfiedasenactedins5(3).Thefirst requirementis continuous as stipulated in s5(3)(a). The secondrequirement may be satisfiedin alternativeways,eitherbyprovingthatthe facilitiesare available toa limitedclassof objects who have a need for such facilities by virtue of one or more of the factors enumeratedwithins5(3)(b)(i)(suchasayouthcluboranorganisedoutingfororphanedchildren)or s5(3)(b)(ii)‘thefacilitiesareavailabletotheentirepublic’(suchasapublicswimmingpoolor apublicpark)or ‘femaleormalemembersofthepublicatlarge’(women’sinstitutes,etc.).In GuildvIRC(1992),the courtdecidedthatthe testtodayiswhether the facilitiesareprovided with the purpose of improving the conditions of life of the beneficiaries, irrespective of whether the participating members of society are disadvantaged or not. In short, the materialissueconcernsthenatureofthefacilitiesratherthanthestatusoftheparticipants.On this basis a strong case could be made out that the activities contemplated fall within the requirementsof s5 ofthe Charities Act 2011. The definitive issue in this problem is whether the public benefit test will be satisfied. The public benefittestis used to distinguish a public trustfrom a private trust.A public trustis required to existfor the benefit ofthe public (the community) or an appreciable section of society. A unique application of this testis reserved for trusts for the relief of poverty. The testofpublicbenefitis laiddownins4 ofthe Charities Act 2011.Section4(3)oftheAct endorsesthecommonlawapproachtothepublicbenefittestthatexistedprior tothe introductionofthe 2011 Act.The satisfactionofthe testisaquestionoflawfor the judgeto decide on the evidence submitted to the court. In IRC v Baddeley (1955) the court decided that thetestwillnotbesatisfiedwheretheintendedbeneficiariescompriseaclasswithinaclass. The facts of the problem refer to Methodists (a class) in South Blankshire (another class) with the effectthatthe test may not be satisfied. In addition,the beneficiaries must not be numericallynegligible and must comprise a sufficient section ofthe community to be treatedascharitable.Theseareflexiblequestionsfor thecourttodecide. QUESTION 16 Consider thevalidityofthefollowinggiftsinthewillofDaphne,whodiedin2014: (a) £100,000tomy trustees for the establishment andmaintenanceof awalledgarden withintheprecinctsofStLuke’sChurch,for thequiet reflectionoftheparishioners; (b) £10,000 to my trustees to be distributed to such organisations involved in the protection ofthe environment and related causes as they shall in their absolute discretion select;and (c) £50,000tomytrusteesfor thepromotionoftennisinthepublicschoolsofDerbyshire. How to Read this Question Thisquestionrequires youtoconsiderwhether thelegaciescreatevalidcharitable trusts withintheCharitiesAct 2011and,ifnot,thedestinationofthefundsbywayofprivate purpose trusts or as a last resort by way of resulting trusts. How to Answer this Question In part(a) you will need to consider how far the stated purpose promotes religion,otherpurposesbeneficialtothecommunityorprivatepurposes. Part(b) involves issues of construction of exclusivity of charitable purposes and discretionary trusts. Part (c) concerns the extent to which charitable status may be establishedunder the following headings, the advancement of education, the promotion of amateur sport and recreational facilities. Up for Debate whichledtotherevisedguidelines issuedby theCharityCommission.Answer Plan Briefintroductory points aboutthe definition of charity. Possiblefailureofthestipulatedpurposesasprivatepurposetrusts. Trusts for the promotion of religion: activities within a religious context per se might not be enough. Trusts for other purposes beneficialto the community and questions of exclusivity of charitable purpose. Environmentalprotection – a charitable purpose within s3(1)(i) ofthe 2011 Act, but is ‘related purposes’ too vague? Trusts for education: issue of public benefit. Charitablepurposes–theadvancementofamateursport,s3(1)(g)ands5(provision of recreationalfacilities) ofthe Charities Act 2011. Applying the Law This diagram illustrates the holistic nature of dealing with purpose trusts first as charitable trusts, second as private purpose trusts and finally as resulting trusts. Aim Higher Problemquestionsoncharitiesmay involve a varietyofissues.Itisnecessary to present the points in a clear and logical order. Certaintyofobjects– purposes advancement of religion Publicbenefit– en Publicbenefit– Publicbenefit–ANSWER All charities are required to be registered with the CharityCommission (s 30 ofthe Charities Act 2011), subjectto a number oflimited exceptions.Section 37 ofthe Charities Act 2011 enacts that an institution thathasbeen registeredshall be ‘conclusively presumed’ to be a charity. Thus the first stage in determining the status of these institutions is the application to the Commission for registration. Second, charitable purposes under the 2011 Act are construed in accordance with the wealth of case law decided over several centuries:seess3(3)and3(1)m)ofthe2011Act. 6Asageneralpointifanyofthegiftsfailas acharityaresultingtrustofthefundwillariseforDaphne’sheirs.Itwouldnotbepossible to spell out valid private purpose trusts for any ofthese gifts. (a) £100,000 to my Trustees forthe Establishment and Maintenance of a Walled Garden within the Precincts of St Luke’s Church, forthe Quiet Reflection of the Parishioners Thisparticular trustdoeshave the potentialtofallwithin the Denley exception to the rule againstpurpose trusts, althoughthis isunlikely inpracticebecauseofthedonor’s intention to establish a trustin perpetuity. However, it may be that this trustis within the scope oftrusts for the advancement of religion within s3(1)(c) ofthe 2011 Act andis therebycharitable.Thereisnodoubtherethattheproposedtrustisconnectedwithareligious establishment and questions concerning the disputed status of some faiths and beliefsarenot relevant.Thedefinitionof‘religion’within s3(2)(a)isextremelybroadand inclusive: see, for example, Funnell v Stewart (1996) ‘faith healing’. Yet, it is unclear whether trustsfor religiouspurposesper secanbecharitableiftheyarenototherwisefor the advancement of religion (Oxford Group v IRC (1949)).7 Furthermore, in our case, the actualpurposeseemstobetheestablishmentofawalledgarden‘forquiet reflection’and it might be argued that this is not even a religious purpose, as believers are not the only personsableandwillingtoengageincontemplation(ReMacaulay’sEstate(1943)).Onthe other hand, gifts for the maintenance and enhancement of buildings within a church are routinelyheldtobe charitable (Re Raine(1956)), as are some matters connectedwiththe churcheventhoughtheyappear far removedfromthepromotionofthereligionitself(Re Royce (1940): benefit of church choir). The matter here isone of construction ofthe trustinstrumentinthe light of existing caselaw.8Thefactthatthewalledgardenmustbeerectedwithinthefabricofachurch is powerful evidence in favour of a charity for the advancement of religion, as is the fact that the anticipated benefit will fall on parishioners (Re Norton’s Will Trusts (1948)). The onlyother tenableviewisthatthereferenceto‘quiet reflection’mayintroduceanoncharitable elementinto the equation and may make the gift void as not being exclusively devoted to charity.9 Finally, should it be held thatthis purpose falls within the 6 Concise statement of relevant points regarding charitable status. 7 Highlighting the relevant issue in the problem. 8 These are flexible questions of law. 9 This concerns the test of certainty of charitable objects.definitionofcharityperse,itisclearthatthereisasufficientelementofpublicbenefit. Thewalledgardenwouldbeopentoallparishionersandwecanlegitimatelyassume thattheseareneithernumericallynegligiblenor ‘aclasswithinaclass’(WilliamsTrusteesvIRC(1947)).ThiscaseisnotonaparwithGilmourvCoats(1949).Inthatcase,the contemplative nature of the purpose was held to confer no public benefit because the valueofprayer couldnotbeprovenandbecause thenunswere cloistered,limitedin number and did not participate in community life. Our case, however, may be similar to NevilleEstatesvMadden(1962),wheretherewasasufficientelementofpublicbenefit because the persons enriched by the advancement of religion continued to be members of the community. (b) £10,000 to my Trustees to be Distributed to such Organisations InvolvedintheProtectionoftheEnvironment andRelatedCausesas they shall in their Absolute Discretion Select A charitable trust may allow the trustees some discretion in the selection of charitable objects provided, of course, that the trustees are required to exercise that discretion in favourofobjectsthatareexclusively charitable(HoustonvBurns(1918)).Inthisparticular case,there are two issues:first,whether the ‘protection ofthe environment’is itself charitable;andsecond,whether thetrustees’abilitytousethemoneyfor ‘relatedcauses’ has any bearing on the matter.10 Asfar as theprotectionoftheenvironmentisconcerned,this is likely tobe apurposethat falls within s (3)(1)(i) of the 2011 Act ‘the advancement of environmental protection’ and/or s 3(1)(m) of the 2011 Act, the category of ‘other purposes beneficial to the community’. This isdespitethefactthatthereissomedoubtastohowwearetodeterminewhetherany givenpurposeischaritablewithins3(1)(m).Section3(1)(m)(i)to(iii)offerssomeguidance by reference to the approach adopted by case law. According to Russell LJ in Incorporated CouncilforLawReportingforEnglandandWalesvAttorneyGeneral(1971),acourtisentitled to assume that if a purpose is in itself beneficial to the community, it is also charitable in law.On theother hand,the more traditional approach requires thattheremustbe some precedent or analogy with charitable purposes or previous case law before a new purposewhichisbeneficialin itself canalsobe regardedas charitable (Williams Trustees v IRC (1947); Peggs v Lamb (1994)). Fortunately inour case, a trustfor theprotectionofthe environmentisundoubtedly regarded as charitable. Certainly, the preservation of historic buildings and gardens is charitable (Re Verrall (1916)), as are trusts for natural amenities (Re Corelli (1943)). In addition, the Charity Commission explained that a trust to promote conservation must inter alia satisfy the criterion ofmerit or conserve something which deserves protection.Thiswillbedependent onexpert evidence inmarginal cases.Undoubtedly,the protection of the environment will satisfy the public benefit test. There is no stipulationlimitinguse oftheproperty to any specific classor typeofperson and nothing that suggests thatthebenefitsofthe charityper se areprivateandintangible.What, 10 Concise statement of the issues in this question.then, of the trustees’ ability to use the money for ‘related causes’? This, again, is a matter of construction. If ‘related causes’ can be interpreted to mean exclusively environmental purposes, then there should be no problem with the validity of this charitablegift anditis suggestedthatthis is the most sensible view ofDaphne’sdisposition.If,ontheotherhand,‘relatedcauses’mayencompassworthwhilebutnoncharitablepurposes,thenthegiftmayfailasnotbeingexclusivelydevotedtocharity (Blair v Duncan (1902)), at least unless the non-charitable purpose is merely subsidiary to the performance of the charitable object (Re Coxen (1948)) or can be severed from it (Lambert v Thwaites (1866)). Subject, then, to resolving the ‘related causes’ issue, this is a charitable gift. (c) £50,000 to my Trustees forthe Promotion of Tennis in the Public Schools ofDerbyshire Thisis themost straightforwardofDaphne’sdispositions.Section 3(1)(b)ofthe 2011 Act confirms that the ‘advancement of education’ is a charitable purpose. The provision of sportwithinschoolsisclearlyfor theadvancementofeducationinthatitinvolvesthe development ofthe mind and body.It was recognised by the House of Lords in IRCv McMullen (1981)that a trusttoprovide sportingfacilities for schoolswas itself charitable as furthering the education of pupils. This would seem to coverour case.In addition,the endowment and maintenance of independent (that is, ‘public’) schools is a charitable purpose,evenifsomechargeismadetoparentsfor tuitionfees,providingthattheschool isnot runforprofitfor thebenefitofprivate individuals: see IndependentSchools Councilv Charity Commission (2011). Moreover, ifit should be objected thatthe scope of Daphne’s charitable purpose is limited to a particular area and might fail the test of public benefit (whereas in McMullen it was any school within the UK), the trust in Re Mariette (1915) was charitable and this concerned the provision of sporting facilities at just one school (and thatwasanindependent one).Afortiori, a trustfor thepromotionof sportinseveral schools must be charitable. In addition,the advancement of amateur sport by virtue of s3(1)g) ofthe 2011 Act is now treatedasacharitablepurpose.‘Sport’isdefinedins3(2)(d) assportorgameswhich promote physical or mental skill or exertion. Clearly tennis satisfies this definition and there is no indication that it is other than the advancement of tennis amongst amateurs and therefore a charitable activity. Finally, the tests of ‘public benefit’ and ‘interests of socialwelfare’unders5ofthe2011 Act appear tobesatisfiedonthesefactsandwill serve as a separate ground to support its charitable status. Common Pitfalls Thisquestionrequiresanalysisoftheultimatevalidityofthegiftsandtherefore the event ofthe gifts failing as charitable purposes.QUESTION 17 Consider thevalidityofthefollowingdispositionsinthewillofFreddie,whodiedthisyear: (a) £10,000 on trustfor the preservation ofthe habitat of the colony of badgers that is threatened by the work on the Manchester ring road; (b) £10,000tothe inhabitants of Littlehamfor theprovisionof anewswimming poolto beusedsolelybytheresidentsthereoffor suchaperiodasthelawallows; (c) £10,000 to my trustees, the income to be used for 30 years by the Lifeboat Association for the provision of rescue crafts, thence on trust for the purposes of the Society for the Promotion of Tiddlywinks. How to Read this Question Freddie,thetestator,hasincludedanumberofdispositions inhiswill,allofwhichinvolve consideration ofpurpose trusts or relatedconcepts.Atthe outset,itis importantto bear inmindtwo generalprinciples, reliance on which willhelp determine the validity of Freddie’sproposedgifts. First,itisnotpossible tocreateatrustfor anon-charitablepurpose, save inthemostexceptional cases (ReEndacott(1960) andReDenley (1969)).Suchtrusts are void and the property will resultto the estate ofthe testator. Second, andin contrast, should a purpose fall within the legal definition of charity,there may be a perfectly valid purpose trust which may last in perpetuity and will enjoy considerable legal and fiscal advantages. In fact, the dispositions in this problem concern both charitable and noncharitable purposetrusts. How to Answer this Question Theinstructionsaretodiscuss thevalidityofthegifts inFreddie’swill.This indicatesthat youare requiredto consider,first, charitable trusts, second, private purpose trusts and, ultimately, resulting trusts. In question (a)the main issues are whether the trusts to advance animal welfare may be construed as charitable and the public benefit test. In question (b)the issue concerns the status of a trustto promote recreational activities. In question (c) the issue involves the validity of a gift to a charity with a gift over to provide foranon-charitablepurpose.Thisrequiresconsiderationoftheperpetuityrule. Aim Higher able and non-charitable variety. Up for Debate a charity with a gift over for a non-charitable purpose.Answer Plan A brief note that this question covers both charitable and non-charitable purpose trusts. Protection ofthe countryside, possible political objectives,trusts beneficialto the community. Recreational charities, restrictedclasses,ReDenleypurposetrust. Gifttocharity,followedbyagifttoapurposetrust,perpetuityproblems. Answer Structure This diagram depicts the multiplicity of charitable purposes and effect of failure of the intended express trust. ofanimalwelfareANSWER (a) £10,000onTrustforthePreservationoftheHabitatof the Colony of Badgers that is Threatened by the Work on the Manchester RingRoad Charitable purposes are specified in s 3(1) of the Charities Act 2011 and in addition are required to satisfy the public benefit test. There are 13 purposes stipulated in the subsection, including a general residual purpose in s 3(1)(m). Section 3(1)(k) ofthe 2011 Act identifies the advancement of animal welfare as a charitable purpose. Section 3(3) preserves the common law meaning of charitable purposes and the public benefit test. Prior to the enactment of the 2011 Act, trusts for the protection of animals were held to be charitable as within the spirit and intendment of the preamble to the Statute of Charitable Uses 1601. In Re Wedgwood (1915) the court upheld an animal welfare trust, not for the benefit of the animals in their own right but on the ground that such trusts may promote feelings of humanity and morality amongst mankind. On this basis a trust has been upheld for a home for lost dogs, in Re Douglas (1887). The point is, however, that at common law such trusts are charitable because they benefit mankind – being displays of generosity and human kindness, or as protecting animals useful to man– andnotbecause theybenefitthe animalsper se (ReGrove-Grady (1929)).Consequently, Freddie’s trust must demonstrate some benefit to the public from the protection ofthese animals, and while the display of human kindness in thispurpose is evident,itmightnotbeenough.However,s3(1)(k)ofthe2011 Act specificallyenacts that the advancement of animal welfare is a charitable purpose in its own right. Despitetheseclearwordsitisreasonabletosupposethatthecourtwillimplyalimitation, to the effect that in the event of a conflict of interests between humans and animals, the human interest will prevail, as was the case in National Anti-Vivisection Society v IRC (1948), where the court decided that the advancement of medical science and research far outweighed the welfare of animals used in such research. In addition, the public benefit test enacted in s 4 of the Charities Act 2011 requires the executors of Freddie’s will to demonstrate positively the benefit that would be enjoyed by the community inpreserving the habitat ofthe colony ofbadgers asopposed to the work on the Manchester ringroad.This could prove tobe extremelydifficulttojustify.Moreover, there is a risk that this purpose will be denied charitable status because of its actual or potential political overtones.11 It is a clear principle that charities may not engage in political activities and may not attempt to cloak political objectives with more benign purposes (Bowman v Secular Society (1917); McGovern v Attorney General (1982); Southwood v Attorney General (2000)). In our case, this might be seen as an attempt to protect the countryside from transport policies approved by Parliament and this can too easily be regarded as political, especially ifitinvolves a campaigning or propaganda element. So, even if this purpose does manifest a sufficient public benefit, the desire to protect animals may be so bound up with political objectives that its charitable status should be denied. 11 Identification of a non-charitable element.(b) £10,000totheInhabitantsofLittlehamfortheProvisionofa NewSwimmingPooltobeUsedSolely by the Residents Thereoffor such a Period as the Law Allows Thisis clearlyanattempttoestablishatrustfor arecreationalpurpose.Ingeneralatrustfor recreationor sportper se isnot charitable(Re Nottage(1895))(save for the advancementof amateur sport), althoughthe matter would be differentifthe recreation was tied to an educational purpose (IRC v McMullen (1981)) or some other charitable object. Conversely, trusts for the provision of land for recreation can be charitable, even if limited to persons from a particular locality (Re Hadden (1932)), although this was not extended to an indoor swimming pool in Valuation Commissionerfor Northern Irelandv LurganBC (1968). In the light of this rather clear authority, it seems unlikely that Freddie’s trust will be charitable under the general law. Fortunately, that is not the end of the matter. First, it could be that thistrustcanbe charitableunders5ofthe CharitiesAct 2011ifthe recreationalfacilitiesare provided in the interests of social welfare,this being where the facilities are provided with the object of improving the conditions of life of the people of Littleham, being persons in need of such facilities by reason of age, infirmity or social and economic considerations (s 5(2) and(3) ofthe 2011 Act).Moreover,sinceGuildv IRC(1992),itis clear thatthepersons benefitingfromthe recreationalpurposedonotneedtobe ‘deprived’inorder tohavetheir conditionsoflife improved.Itis enough ifthe general conditionsoflife for membersofthe public are improved.In our case,providedthatthe peopleof Littlehamconstitute a section ofthepublic(astheyarealmostboundtodo,ReHadden(1932)),thispurposemayfallwithin theActandbecharitable,aswasa trustforasimilar leisurefacilityinGuild. Second,evenifthispurposeisdeemednon-charitable,itmight stillbevalidasbeing withintheReDenley(1969)exceptiontotheruleagainstpurposetrusts.Indeed,thisdoes seem to be a trust which indirectly benefits ascertainable individuals and it is limited to theperpetuityperiodby thereferenceto‘suchaperiodasthe lawallows’.Infact,thecase is verysimilar to DenleyitselfandFreddie’sestate canbecontentthat,attheveryleast,he has established a valid non-charitable purpose trust.12 (c) £10,000 to my Trustees,the Income to be Usedfor 30 Years by the Lifeboat Association for the Provision of Rescue Crafts, thence on Trust forthePurposesoftheSocietyforthePromotionofTiddlywinks There is clear authority thattrusts for rescue services are charitable, being for purposes beneficialtothecommunity(ReWokinghamFireBrigadeTrusts(1951)).TheRoyalNational LifeboatInstitutionisa charitableorganisationand,byanalogy, soshouldbe agifttothis LifeboatAssociation for the provision of rescue craft.Thisprinciple hasbeen affirmedin s 3(1)(l) of the Act – the promotion of the efficiency of the rescue services. However, the issuethat requiresconsiderationisthelegalpositionwithregardtothegiftover.After30 years, the £10,000 capital sum is to be given to the Society for the Promotion of Tiddlywinks, which is most unlikely to be regarded as charitable, being recreational and unlikelytofallwithins5(ReNottage(1895)ands3(1)(g)ofthe2011Act).Thisis,then,agift 12 Itis goodtechnique to consider the validity ofthe gift as aprivate purpose trust after considering the law of charities.to charity, followed by a gift over for a non-charitable purpose. In these circumstances, anypotentialperpetuitiesproblemwillbeavoidedbytheclear,certainandgenerousperpetuityperiod of125 years,introducedby thePerpetuities and Accumulations Act 2009. The effectis thatthe gift over to the non-charitable society will take effect 30 years after the Lifeboat Association had the use ofthe income. Three additional issues may require consideration had the facts been clearer.13 These are, first,that the position ifthe Tiddlywinks Society did not exist atthe relevant time of vesting.Inthis eventthepossibilityof aresultingtrustofthe fundswouldbe aconsideration. Second,the validity of a giftto an unincorporated association and the various solutions adopted by the courtswouldhave warranteddiscussion hadthe factsbeen clearer. Finally, the issue arises as to whether the income alone from the trust fund or, alternatively,the entire fund is to be taken by the society. If, on construction,the income is devotedtothesociety,thegiftmayfailfor infringingtheperpetuityperiod.This issuewill be avoided ifthe entire fund is to be transferred to the society. QUESTION 18 Arnold made his will in 2010, in which he left three gifts of £50,000 each to: (a) theNationalAssociationfor the Homeless, anincorporated charity; (b) the Whale Protection League, a voluntary association; and (c) the Cook Home for the Disabled. When Arnold died this year, it transpired thatthe National Association for the Homeless had become defuncttwo years previously and its premises purchased by the UK League Against Homelessness. Likewise, the Whale Protection League had disbanded after disagreements between its members, to be replaced by two organisations, the Whale and DolphinSanctuaryandthe Societyfor theHumaneHarvestingofWhales.It alsotranspires thatthere never was a ‘Cook Home for the Disabled’. Advise as to the proper distribution of Arnold’s estate. How to Read this Question This question is centred on the cy-prèsdoctrine thatis applicable to charities. The issues are (a) whether the original purposes of the various bodies are charitable and (b) since theynolongerexistonthedateofArnold’sdeathwhether therelevantfundsmaybe applied cy-près. 13 Additional considerations where the facts are unclear. Common Pitfalls law and no doubtincreases its attraction as a subjectfor study.How to Answer this Question The cy-prèspoints involvedin thisquestion focuson the issuesof charitable giftswhich fail tovestowingtoinitialorsubsequentimpossibility;thepositionregardingsuccessiveorganisationsandthevariousmeansofconstruinggiftstoinstitutions,purposesornamedfunds. Answer Plan Cy-près: generalpurpose. Initial or subsequent impossibility. Gifts to institutions, purposes or named funds. Successor organisations. Answer Structure Thisdiagramdepicts thevariousprocedures thatneedtobeadoptedinordertodetermine which body will acquire the property under Arnold’s will. Up for Debate doctrine’ (2007) 3 Tru LI 134. Homeless League association Initial Cy-prèsANSWER Arnold has attempted to distribute his property among several named organisations, none of which exists atthe date of his death, atleastin their originalform. Atthe outset, itisnecessarytodeterminewhetheralloranyofthesegiftsarefor charitablepurposes.If any is not, then the property allocated to that organisation will return to Arnold’s estate under a simple resulting trust consequent upon a void purpose trust (Re Endacott (1960)).14Fortunately,allofthe originalpurposes selectedbyArnoldappear tobe charitable. We are told that the National Association for the Homeless is ‘an incorporated charity’;theCookHomefortheDisabledfallssquarelywithins3(1)(d)or (j)oftheCharities Act 2011, being for the relief of the sick; the Whale Protection League will be charitable under s 3(1)(k) of the 2011 Act (Re Wedgwood (1915)), provided that it did not engage in political activities. The importance of deciding that these three purposes are charitable is that it may help determine thedistribution ofArnold’s estatenowthatnoneoftheoriginalorganisations remaininexistence.15Simplyput,the failureof acharitable trustdoesnotalways resultin the property being returned to the donor or his estate but may, if certain conditions are fulfilled, be applied by the court or Charity Commission cy-près – thatis, for purposes as near as possible to those originally stipulated (Re Wilson (1913)).16Broadly speaking,if a charity has failed for ‘initial impossibility or impracticality’, it may be applied cy-près if thereisevidencethatthedonorhadageneralintentiontobenefitcharity(ReWilson). However,ifthecharityhasfailedforsubsequentimpossibilityor impracticality,theproperty may be applied cy-près without the need for such an intention, since it has already beendedicatedtocharityinperpetuity(RePeel(1921)).Inourcases,itwillbenecessaryto determine, first, whether the charitable trust has failed; second, whether such failure is initialor subsequent;and,third,ifthereis initialfailure,whether thereisageneralcharitableintention.EachofthefourpurposesidentifiedbyArnoldwillbeconsideredinturn.17 (a) £50,000 to the National Association forthe Homeless, an Incorporated Charity It is clear that Arnold has attempted to give his donation to a charity which, although once inexistence,doesnotexistatthedatethegiftistotakeeffect,beingonthetestator’sdeath. Ifanything,thismaybeacaseofinitialimpossibility.However,wearetoldthatthepremises of the National Association for the Homeless have been purchased by the UK League Against Homelessness and itis arguable thatthis institution is in factthe successor in title to the National Association. If that is the case, the correct solution may well be that there hasbeennofailureofArnold’sgiftat allbut, rather,acontinuitybetweenhisnamedcharity andits lawful successor,whichmay thenreceive thedonation.18 14 Prevalence ofthe resulting trust where the cy-près doctrine is inapplicable. 15 Significance of charitable trusts and the cy-près doctrine. 16 Importance ofthe donor’s intention and the cy-près doctrine. 17 Summary of issues to be considered. 18 Importance of determining whether there has been a failure or alternatively a succession of the charitable purposes.Whether this is a caseofinitialfailureor acase of a successor charitydependson the construction of Arnold’s gift in the circumstances of the case. There are three possibilities. First,itmaybeconstruedthatArnold’sgiftisagift specifically totheinstitutionnamedin hiswill(ReRymer(1895)).Ifthisisthecase,thenthereisinitialimpossibilityandageneral charitable intention needs to be found if the property is to be applied cy-près. Unfortunately, Re Rymeralsodecides thatitisdifficulttofindageneral charitable intentionwhen a specific donee that once existed has been identified with such clarity although, as Re Finger (1972) demonstrates, this is not entirely impossible. Second, the original donation can be construed as a gift to the particular purposes undertaken by the original institution,sothatifanother institutionhastakenover thosepurposes,thepropertywillpassto it automatically as the successor in title (Re Roberts (1963)). Third,the original donation can be construed as a giftto the charitable fund administered by the original institution, so that if there is another body now administering that fund, the property will pass to it automatically as the successor intitle (ReFaraker(1912)).19Inour case,itisunclearwhich construction to adopt. According to Re Vernon (1972) and Re Finger (1972), if the charity is incorporated – as here – then the gift should be construed as a giftto the specific institutionper se (the firstpossibility above),while ifitisunincorporatedthegift shouldbe construed as a gift for the purposes of the original institution. On the other hand, this guidancetakesnoaccountoftheReFaraker construction.IfwefollowReVernon,the donation to the National Association for the Homeless will fail for initial impossibility (beingagifttoa specific institution) andwillbe applicable cy-prèsonly if ageneral charitable intention can be found – something which Re Rymer, but not Re Finger, says is difficult. Failing such an intention,the property will result back to Arnold’s estate. Again, on the basis of Vernon, a construction ofthe giftfor purposes does not seem possible. This wouldmeanthattheUKLeagueAgainstHomelessness couldnotclaimthepropertyasof rightunless theFaraker constructionisadoptedandthe League isnowadministeringthe NationalAssociation’sfunds.Thiswedonotknow.Allinall,aresultingtrustseemslikely, or cy-près if a general charitable intention can be found. (b) £50,000 to the Whale Protection League, now Dissolved and Replacedby theWhale and DolphinSanctuary andtheSociety for the Humane Harvesting of Whales Once again, assuming this giftto be charitable, we must ask first whatis the proper construction to be placed on Arnold’s original disposition. This is particularly important in this case as there are two organisations who may claim to be the lawful successors in title to the Whale Protection League. We are told that the Whale Protection League was a ‘voluntary association’ and,therefore, it may be possible (should we wish – see below)to avoid construing this as a gift to a specific institution which has failed (that is, not Re Rymer) and so not a case of initial impossibility allowing for cy-près only if a general charitable intentioncanbefound.However,itisnoteasytochoosebetweentheReRobertsconstruction (a giftfor the particular charitable purpose) and the Re Faraker construction (a gift to a particular charitable fund). Again, following Re Vernon (1972), the unincorporated 19 Identification ofthe possible methods of construction.natureoftheoriginalcharitymightleadustochoosethe‘purposeconstruction’,butthen we have the dilemma of deciding exactly what the original purpose was. Was it the protectionofwhales,etc.,inall circumstances,sothattheWhaleandDolphinSanctuarymay claim the gift as carrying on those original purposes? Or was it a giftfor the protection of whales from unnecessary hunting, in which case the Society for the Humane Harvesting ofWhalesmaybethelawfulsuccessor totheoriginalpurpose? Indeed,preciselythesame problem arises if we decide to adopt the Faraker construction (gift to a fund) instead of the purpose approach. It is not at all clear which of the rival organisations now administers the funds of the defunct society. Consequently, in the absence of further evidence, wemightactuallypreferapragmaticsolutionanddecidethatthiswas,afterall,agift specifically to the Whale Protection League, which failed initially at Arnold’s death, but where we can infer a general charitable intention so allowing the property to be applied cy-près.Iftheproperty isappliedcy-près (asopposedtogoingtoasuccessor intitle),each rivalorganisationcanreceive a share,ornone at all,as the courtdecides. (c) £50,000 to the Cook Home forthe Disabled The Cook Home for the Disabled has never existed and therefore there is no doubt that this is acaseofinitial impossibility. Furthermore,there canbenosuccessors intitle toan organisation that never was. The property will result to Arnold’s estate unless a general charitableintentioncanbefound,inwhichcaseitwillbeapplicablecy-près.Inthisregard, Re Harwood (1936) decides that, where a gift has been given to an institution which has never existed, ageneral charitable intention should be presumedunless there is convincing evidence to the contrary. Although somewhat arbitrary, this guidance has been followed in Re Satterthwaite’s Wills Trust(1966) and in our case affords good authority for a cy-près application of the property.5 Resulting Trusts INTRODUCTION Resulting trusts are an essential doctrine in the law of trusts. Apart from relatively rare occasionswhenthesubjectmatterof atrustwillpass totheCrownasownerlessproperty (bonavacantia), resultingtrustsprovidethelastpracticalmeansofdisposingoftrust property should the original scheme of a trust fail. In fact, a resulting trust can arise in such a variety of circumstances that there is only marginal merit in considering it on an undergraduate course asa topic initsownright. For example, resultingtrustsneedtobe considered in relation to secret trusts, the three certainties, the beneficiary principle, charities,formalities and constructive trusts.This isnot an exhaustive list, andthe use ofthe resulting trustin these and other cases is best considered alongside the substantive law which it services. Moreover, there is now much academic discussion about the proper theoreticalbasisof resulting trusts:for example, dothey arise by reasonofthe intention oftheparties,byoperationoflaw,outoftheimpliedorexpressacceptancebytheresulting trustee of an obligation affecting conscience or for different reasons in different circumstances. This has practical consequences, as illustrated by the House of Lords’ refusal to impose a resulting trust on the defendant in Westdeutsche Landesbank Girozentrale v Islington LBC (1996). As indicated above, much of this debate is outside the scope of an undergraduate course, but there are issues here which need consideration. In this chapter,brief attention will be paid to the attributes ofthe resulting trust per se (assumingthat‘resultingtrusts’ share some commonattributes),toissues touchingonthe rationalefortheimpositionof resultingtrustsandtoatypicalproblem-typeexamination question. Inverygeneralterms,aresultingtrustariseswhentheoriginalarrangementenvisagedby the testator or settlor has failed,has not been properly established or hasbeen fully achieved without exhausting the trust’s assets. To this extent, it arises out of a disappointed, failed or satisfied purpose of the testator/settlor. In reality the resulting trust arises in order tocuredefectivedraftingof a trustinstrument.Although this is a simplistic picture – see, for example, resulting trusts in the context of co-owned property – it explains why, under a resulting trust, the property returns or ‘results’ to the person originally entitled to it. To putit another way, resulting trusts may be seen as the consequence ofthe application ofthe oldmaxim that‘equity abhors a beneficial vacuum’. How, and in whatcases,this is relatedtothe intentionofthepersonoriginally entitledtotheproperty or to the state of mind (conscience) ofthe original trustee are difficult and complex issues.Note Section 199 oftheEquality Act 2010 has abolishedthe presumption of advancement(i.e. the presumption of gifts) with regard to transactions that take effect after the subsection comes into force. QUESTION 19 To what extent can it be said that resulting trusts operate to support the equitable maxim that ‘equity abhors a beneficial vacuum’? How to Read this Question Thisessayquestionis structuredforyoutoexplorethe extenttowhichthemaximstated in the question provides an adequate justification for the creation of resulting trusts How to Answer this Question Studentsare requiredtoconsider thedifferenttypesof resultingtrustsandthedistinctions between them. There are many other situations in trusts law where,for one reason or another,themainpurposesofthedonor cannotbe achieved.Thequestionthereforearises as to whoowns the trustpropertyor,more accurately,who isentitledtothebeneficial interestunder the trust.The solutiontothisproblem(sometimesknownas casesinvolving failureof an express trust)is providedby the principlesof resultingtrusts.In short,ifthere are no beneficiaries entitled to the property, the trustee will hold the property on trustfor thedonor (orhisestate):itwill‘resultback’tothepersonwhoprovideditinthefirstplace. Answer Plan General nature of resulting trusts and the maxim that equity abhors a beneficial vacuum. Types of resulting trust. Differences between resulting trusts arising out of the failure of anexpress trust and other resulting trusts. Aim Higher tionofconscienceonthetrustee–itcouldbethecasethatitmaytoosimplisticto assertthatresultingtrustsmaybeseenasprimarilyfillingabeneficialvacuum. Up for Debate The true rationale for the creation of resulting trusts has been the subject of are P Millett,‘TheQuistclose trust:whocan enforce it?’(1985) 101LQR269; and W Swadling,‘Explaining resultingtrusts’(2008) 124LQR72.Resulting Trusts Possibledistinctionbetween‘automatic’and‘presumed’resultingtrusts. Rejectionof sucha distinctionin Westdeutsche LandesbankGirozentrale v Islington LBC (1996). Answer Structure This diagramillustrates thethought processes indeciding whichtransactions attract the resulting trust. ANSWER Resulting trusts representthe solution oflast resort when determining the ownership of trust property, failing which the property will fall to the Crown as bona vacantia (ownerless property), as happened with part of the gift in Re West Sussex Constabulary Widows Fund (1971). The circumstances in which a resulting trust may arise are numerous and varied and most cases are unique on their own facts, although this does not necessarily meanthattheconceptofresultingtrustscannotbeexplainedbyageneraltheory.1 First, one of the most common forms of resulting trust is that which arises when there hasbeen an initialfailureofthe trustwhichthe donor hadintendedtoestablish, either in respect ofthe whole or part ofthe trust property. For example, in Vandervell v IRC (1967) 1 Numerous ‘trigger’ events that create resulting trusts.itself,the donor had attempted to dispose of his interest but had failed to divest himself fullyof oneportion ofhisproperty.Hence,thatportion resultedtohim. Likewise,ifthere iscompletefailureofthetrustforuncertaintyofobjects,or lackofahumanbeneficiary(a purpose trust: Re Endacott (1960)), or where a charitable giftfails initially and cannot be appliedcy-près(ReRymer(1895)),thepropertywill resultbacktothesettlor.Inallofthese cases,the resulting trust arises in consequence ofthe failure of an express trust and, on one view,is said to operate ‘automatically’upon thatfailurebyoperation oflaw (per Megarry J in Re Vandervell (No 2) (1974)). Whether such trusts are correctly described as ‘automatic’, suggesting, as it does, that they operate independently of the intention of the person originally making the gift, is open to doubt following Westdeutsche Landesbank Girozentrale v Islington LBC (1996). In that case, Lord Browne-Wilkinson said that resulting trusts operate because of an intention on the part of the donor to recover the propertyshouldtheprimarypurposefail.Hence,evenincaseswherethereisfailureofan express trust in the sense just discussed, a resulting trust will not arise if there is clear evidence of the donor’s intention ‘to part out and out’ with his property. Such an intention,which would negate the existence of a resulting trust,means thatthe money is ownerless and will pass to the Crown as bona vacantia (Re WestSussex Constabulary).The equitable maxim raised in the question is supported only to the extent that the parties’ intention does not dictate otherwise. Asecondexampleoftheuseof resultingtrustsariseswheretheprimarytrustestablished by the settlor has been completed, yet a surplus of undisposed trust property remains. Again,the traditional view is thatthe surplus is returned to the donor or his estate under a resulting trustbecause ‘equityabhorsa beneficial vacuum’.So, in ReAbbott(1900),the initialtrustwas completedandthe surpluswasheldonresultingtrustfor thesubscribers to the sisters’fund. Again, in Re Gillingham Bus Disaster Fund (1958), it was held that surplus funds shouldresultbacktothedonors.Again,however,intentionwas anessential element in the use of resulting trusts: evidence of the donor’s desire to part forever with his money meant that any surplus will not result (Westdeutsche). It is not sufficient that there was an absolute gift to an individual bound up with a non-binding motive to use themoney for some specificpurposewhichthenfails.So,in ReOsoba (1979),thegift was construed as an absolute gift to the testator’s daughter with merely a non-binding directiontousethemoneyforeducationalpurposes.Theoriginalgiftwasabsolute,nota giftontrustforeducationalpurposes,andthedoctrineof resultingtrustswasirrelevant. This leads us on to another area where resulting trusts may be important. It often happensthatmoney isgiveninvariouswaystoanunincorporatedassociationfor its membersor generalpurposes, aswhere a localwildlife groupraisesmoney from donors andjumblesales.Ifthisassociationthencomestoanend,thesurplusassetsmustbedisposed of: equity abhors a beneficial vacuum. At one time, it was thought that these surplus assets should revert to the donors under a resulting trust (for example, Re West Sussex Constabulary).If aresultingtrustisadopted,equity is fillingthebeneficial vacuum created by the failure of the initial gift (subject, as before, to questions concerning the relevance ofintention). However, in a majority of recent cases, itis evidentthatthe more favoured solution is to distribute the assets of a defunct unincorporated associationResulting Trusts among the surviving members of the association (that is, not necessarily among those people who provided the money in the first place). This is because a donation to the association neednotbe construedas agifton a trust(which subsequently fails)but as an absolute gift to the members of the association subject to their contractual obligations inter se, as created by the rulesofthe association (Re Recher’s Trust(1972); ReBucksConstabularyFund FriendlySociety (No2)(1979)).This construction,which ousts the resulting trustbecause it denies the existence of a primary trust, is more convenient as it does not require an extensive search for the original donors who may be very numerous and elusive. Fourth,we come to a type of resultingtrustthat has come tothe fore in recent years, especiallyincommercialtransactions.Thus,ifA(thedonor)givesmoneytoB(thetrustee) solelyinorderthatBmaypayhisdebtstoC,ifthosedebtsarenotpaid,themoneywill resultto A under a resulting trust(Barclays Bank v Quistclose Investments Ltd (1970)).This may appear quite straightforward, but there are a number of difficulties with this arrangement. For example, if B pays the money to C, A has no claim, so the operation of the resulting trust in favour of A is dependent upon B not carrying out the specific purposeofpayinghisdebts.Doesthismeanthatthe trustimposedonBisapurpose trustthatis validunder ReDenley (1969)(see ReNorthernDevelopments (Holdings)Ltd (1978))?Or thatthe equitable interestin the money is in suspense (Carreras Rothmans Ltd v Freeman Mathews Treasure (1985))? Or that A is the beneficiary under an express trust with apower to directthatthe moneybe paid toC,hence excluding resulting trusts altogether? Furthermore, once the trust imposed on B is carried out (that is, he pays his debts), A will have a simple action in debt to recover the money from B: hence A has lost his proprietary rightin the property under the resulting trust,to see it replaced by a personal right against B indebt, and allthisby B’s own actions.2 In other words,this example of a resulting trustis used in a deliberate way to enable a donor to provide funds for anotherperson(usually acompanywithwhichthedonor is connected) andtorestrictthe useofthosefundsforaspecificpurpose,failingwhichtheresultingtrust comesinto operation.The resulting trustis filling the beneficial vacuum,butonly for the advantage of the donor, and the solution cannot be adopted where no primary trust existed (Box v BarclaysBank(1998)).Furthermore,itisanintendedconsequenceoftheparties’actions, in the nature of a deliberate ‘failsafe’. It is very different from the ‘automatic’ resulting trusts considered above which might be thoughtto arise by operation of law because of an unintentional failure of the original arrangements. This type of resulting trust does seemconsistentwiththe‘intentionapproach’putforwardinWestdeutsche. Finally, brief mention must be made of a different kind of resulting trust.3 This is the socalled ‘presumed’ resulting trust. A presumed resulting trust does not arise automatically in order to fill a beneficial vacuum (assuming, post-Westdeutsche,thatthis is an acceptable analysis), but exists because of a presumed intention ofthe parties to create a trust overproperty.Thispresumption canberebuttedbyevidencethatthepaymentofmoney 2 Listing of various solutions advisable. 3 Status of the presumed resulting trust.was as a gift or loan (Cowcher v Cowcher (1972)). Of course, in one sense, the resulting trustis fillingthe beneficialvacuumcreatedby thepayer’s lackof express intention as to why he is paying the money at all but, in effect,this form of resulting trustis not used to determine ownership of apparently ownerless property, but to give effect to the unexpressed intentions of the parties. QUESTION 20 The Over Village Association, a non-charitable, unincorporated body, existed to safeguard the amenities in the village of Over. It derived its funds from members’ subscriptions, gifts by will and otherwise, the proceeds of local events such as jumble sales and raffles, money in collection boxes and one large anonymous donation. The village has now been granted Protected Status under European Union Regional Funds and its future is secure. The Village Association is aboutto be disbanded, butthere is disagreementastowhattodowiththeconsiderablesurplusfundsthat remain.Thetreasurer comes to you for advice. How to Read this Question Thequestionrequiresyoutoconsiderthedestinationoffundsonaliquidationofanunincorporated association. This is a matter of ascertaining the intentions of the donors as construed by the courts. How to Answer this Question In answering this question students will need to identify the peculiar nature of unincorporatedassociations andconsider the statusoftransferoffunds tosuchassociations.In doing so each source of finance will have to be considered separately to determine the intentions of the parties. Common Pitfalls this goes unchallenged. If it becomes the accepted orthodoxy, the distinction betweenautomaticandpresumedresultingtrustswillhavebeenexploded. Up for DebateResulting Trusts Answer Plan The link between distribution offunds and validity of gifts. The need to consider each ‘source’ offinance separately. Resulting trusts, absolute gifts or bona vacantia. Rules tobe adoptedby the association, especially the establishmentof awinding-up mechanism. Answer Structure This diagram lists the principles for distributing funds on the liquidation of an unincorporated association. ANSWER (a) TheSurplus Derived from Members’ Subscriptions It might be thoughtthat money derived from members’ subscriptions is most appropriately returned to those members under a resulting trust, on the basis that the primary purpose of their subscriptions has failed. Indeed, in some cases, this solution has been adopted and each subscriber (whether still a member at the date of dissolution or not) has received a share proportionate to his or her original contributions (Re Printers and Transferrers Amalgamated Trades Protection Society (1899), and see Air Jamaica v Charlton (1999)in the contextof surplus fundsof pensions). However,this solution presupposesthat the members’ subscriptions were given ‘on trust’ in the first place, which trust has now failedor hasnot exhaustedthe trustproperty.Iftrue,thismusthave been a trustfor the purposes ofthe association even though such trusts for purposes are void under the beneficiaryprinciple (ReEndacott(1960)).Alternatively,itisnowmore likely thatincome derivedfrom members’ subscriptionswillbe treatedas havingbeen given tothe associationnotbywayoftrust,butasanabsolutegifttothemembersindividually,albeiton thebasis thatthemoney is tobe usedinaccordancewiththe rulesofthe association,this forming a binding contract between them (Re Recher’s Trust (1972); Re Bucks Constabulary FundFriendlySociety(No2)(1979);ArtisticUpholstery(1999)).4Thiswouldmeanthatany surplus derived from subscriptions belongs to the members absolutely (thatis,those at the date of dissolution) and may be distributed among them according to their contract (the rules). If the rules prevent the members taking any surplus assets personally when the association dissolves, then either the rules must be changed prior to dissolution (if permitted by the rules themselves) or the property will pass to the Crown as bona vacantia. In our case,therefore,the presumption will be thatthe members atthe date ofdissolution of the association may share in the surplus assets derived from subscriptions, provided this is permitted by their contractinter se under the rules. (b) TheSurplus Derived from Gifts byWill and Otherwise This presents a similar problem to members’ subscriptions, although now there is a real choice tobemadebetweentheresultingtrustoptionanddistributionofthe surplus assets among the members. With gifts from identifiable persons,there is a distinct possibility that the money will be treated as having been given expressly for the purposes of the association and for nothing else. In other words, a primary trust for the association’s purposes was intended which, having failed, the surplus assets attributable to that source result back to the donors unless there is evidence of a clear intention forever to have parted with the money (Westdeutsche v Islington LBC (1996)). Of course, thereareproblemswiththisinterpretation,notleastthattrustsforpurposesarevoid (Re Endacott (1960)) unless they fall within the Re Denley (1969) exception. So, unless this is a Re Denley trust, in theory the donors should be able to recover the whole of their original gifts – not merely the surplus after the void purpose had been undertaken and failed. However, althoughthe pure logic ofthis is compelling,the case law suggests that only the surplus assets will result to the original donors and this would probably be the case if the resulting trust option was followed with our association (Re West Sussex Constabulary Widows Fund (1971)). Similarly, if gifts to the Over Village Association could indeed be construed on a Re Denley basis, the donors would be entitled only tothesurplusfundsunder theresultingtrust(ReAbbott(1900)),theprimarypurpose trust having been valid, but then failed. Finally, we should not discount the possibility that the Re Bucks Constabulary construction could be adopted and that specific donationscouldbe construedasgifts tothe individualmembersofthe associationunder contract, in which case the same considerations are relevant as those considered above when discussing members’ subscriptions.5 4 Modern view of the destination of surplus assets. 5 Contractual basis of donations by will.Resulting Trusts (c) TheSurplus Derivedfrom aLarge Anonymous Donation The surplusattributabletothisgiftpresumptivelyis tobedealtwithinthe samewayas that arising from specific individual donations (as above). Of course, should the resulting trust optionbe followed,the anonymityofthisdonor createsadifficulty,althoughthe courtmay welldirectthatthe surplusassetsbe heldin courtuntil claimedby the donoronproduction of satisfactoryevidence,as in ReGillinghamBus DisasterFund(1958).However,the factthat thedonorwishedfor anonymitymightleadtothe conclusioneither:thatheorshehad intendedtodisclaimanyfutureinterestinthegiftandthatit shouldbe takentobeanabsolute giftto the members ofthe association to be used according to their contractual rights inter se (Re Bucks Constabulary Fund (No 2)); or, that a trust for purposes existed but with a resulting trust excluded by intention, with the surplus going to the Crown (Re WestSussex Constabulary;Westdeutsche v IslingtonLBC; Davis v Richardsand WallingtonIndustries (1990)). (d) The Surplus Arisingfrom the Proceeds of Local Events such as JumbleSales and Raffles Thissourceoftheassociation’sfundspresentstheleastdifficulty.Infact,asmadeclearin Re Bucks Constabulary Fund (No 2) (1979), there are two reasons why the resulting trust optionshouldbeexcluded. First,thepeoplepayingfor jumbleandraffletickets,etc.,are enteringintoapurchasecontractwiththe associationfor itemsofjumbleor raffletickets andtheyobtainalltheyareentitledtowhenthat contractiscarriedout.The ‘donors’ have no claim on any surplus assets, having received their full contractual entitlement. Second, and in any event, it is not the donor’s money which goes to the association but the profitfrom the jumble sale or raffle after deduction of expenses. Consequently, any surpluses derived from these activities cannot go by way of resulting trust and normally willbetreatedasanaccretiontothegeneralfundsoftheassociationtobeusedbythe members individually, subject to their contract inter se (Re Recher’s Trust (1972)). The surplusmaybedistributedaccordingtotherulesoftheassociationasbefore. (e) TheSurplusDerivingfromMoneyPlacedinCollectionBoxes Onceagain,thereisadifficultyherebecausetheidentityofthedonorsmaybeimpossible toestablishand,indeed,theyarelikely tohavegiveninsuchsmallamounts thatnoclaim to surplus will be made. Thus, the resulting trust option seems impractical and absurd. However, as Harman J recognised in Re Gillingham Bus Disaster Fund (1958),this couldbe the logical solution, as the donor might well have intended that the money be used for the purposes ofthe association alone. Why else would he put money in a collection box? However, in Re West Sussex Constabulary Widows Fund (1971), Goff J was of the opinion that money derived from street collections was given ‘out and out’ by the donors, thus deprivingthemof anyfuture claimtoit.Inthat case,GoffJwentfurther andheldthat even the members ofthe Benevolent Fund had no claim to the property because the associationwasnotdesignedfor theirbenefit,being‘outwardlooking’.Thus,thesurplus fellto the Crown as bona vacantia. Further, although this is a rather unattractive solution, and something of a last resort, Westdeutsche v Islington LBCconfirmed thatthe existence of a resulting trust depended on the donor having an intention to recover his property. Consequently,where there isno such intention,there canbe nopossibility of a resulting trust. So, in our case, the Over Village Association may also be described as ‘outwardlooking’ and it is possible that both the resulting trust (lack ofintention) and gift to members (not consistent with the purpose ofthe original donation) will be excluded. ThisisthepictureontheeveofthedissolutionoftheOverVillageAssociation.Obviously, much depends on the reason why the various donations to the association were valid in the first place and the nature of the contract between the members (that is, the rules of theassociation).Thetreasurershouldensurethatheorsheisacquaintedwiththoserules andthefactthatitispossible for theappropriate surplusassets tobedistributedtothose members in existence atthe date of dissolution. Failing that,the property may fallto the Crown asbona vacantia. Finally, any surplusderivedfrom propertywhichwas subjecttoa primary trust will result to the donors. QUESTION 21 Consider the ownership of the equitable interests in the relevant properties, in respect of eachofthedispositionsmadebyAlfredofpropertieswhichheoriginallyownedabsolutely: (a) Atransferof10,000shares inBritishTelecomplctohiswife,Beryl,subjecttoan option, exercisable by their son, Charles, at any time within the next five years, to repurchase5,000oftheshares.TheshareshavebeendulyregisteredinBeryl’sname and she pays 50 per cent ofthe dividends received to Alfred. (b) A transfer of £70,000 to the trustees of his daughter’s marriage settlement: ‘Upon trusttopaytheincometomydaughter,Danielle,solongasshedoesnothavean abortion and on her death, to her husband, Ernest, and on his death to pay the capital and income to their children in equal shares.’ Five years after the transfer Danielle hasan abortion.Tenyears after the transfer,Danielle, Ernest andtheir only child, Frederick, die in a fire. How to Read this Question This two part question on resulting trusts requires you to identify the ownership of the equitable interestinthe shares,optionandthecashfund.Itis crucialtoidentify the location ofthe legaltitles to the various properties and evaluate the conduct ofthe parties to determinewhether thepresumptionof resultingtrusthasbeenrebutted. How to Answer this Question Inansweringthisquestion students shouldfocus onthe existenceofthepresumption of resultingtrustsandconsider theexistenceof rebuttalevidence,ifany.Inaddition,public policy issues,the doctrineof acceleration ofpostponedinterestsandcommorientesneed to beconsidered. Up for Debate Landesbank Girozentralev IslingtonBorough Council(1996).Resulting Trusts Answer Plan Presumption of a resultingtrust(RT) and evidence in rebuttal. Automatic resulting trusts or ‘out and out’ gifts. Limitation restricted by public policy. Acceleration of postponed interests. Doctrine ofcommorientes. Answer Structure This diagram highlights the principles that are applicable in order to clarify the interests of the various parties. ANSWER In each ofthese transactions the location ofthe equitable interestis prima facie unclear. One solution adopted by the courts over the centuries is the institution of the resulting trust – automatic and presumed. The relevance of such a trust will be considered in respect of each transaction.6 (a) A Transferof 10,000Sharesin BritishTelecom plc tohis Wife,Beryl WearetoldthatthelegaltitletotheBTshareshasbeenvestedinthenameofAlfred’s wife,Beryl.This involvedavoluntary transferofthe legaltitle topropertyby ahusbandto hiswife.Therehasbeennoindicationas tothedestinationofthe equitable interestinthe shares.Theprimafaciesolutionadoptedbythecourtsinvolvesapresumptionofaresultingtrustin favour ofAlfred(before the passingoftheEquality Act 2010 apresumption of advancement(gift)wouldhave ariseninfavour ofBerylasAlfred’swife).Thus, as a starting point Beryl is presumed to be a trustee of the equitable interest in 10,000 shares in favour of the transferor, Alfred. The existence of the resulting trust is a reference to the incidenceoftheonusofproof,i.e.Berylbearstheburdenof rebuttingthepresumption. 6 The last resort nature of identifying interests under resulting trusts. Transferinthe Has the presumption been rebutted? The presumption of resulting trust is an artificial rule for allocating the equitable interestin property when this is unclear. The presumptionmaybe rebuttedby evidence that establishes the true intentionsofthe parties. Such evidencemaytaketheformoforalorwrittenstatementsaswellastheconductofthe parties. However,there are two principles that are applied by the courts in this context – whether the evidence isadmissible and,if so,theweighttobe attachedtosuchevidence. We are toldthat Berylpays50 per centofthe dividends toAlfred. In the absence of oralor writtenevidence,this is evidenceof conductthatisprejudicialtoBerylin the sense thatit may indicate an acknowledgment from Beryl that 50 per cent of the equitable interest belongs to Alfred. Has she consistently paid this amount of the dividends to Alfred? Did she feel obliged to do so? Does Alfred expectto receive this amount when the dividends are paid to Beryl? Are there any mitigating factors that existin favour of Beryl?7 These are issues that are connected to the weight of the evidence. Issues of weight are for the tribunal of fact. If the courtis convinced that Beryl’s conduct acknowledges the interest of Alfred,thepresumptionof resultingtrustwillnotberebuttedas to50per centofthe shares.There doesnot appear tobe any evidence ofthe conductofthe parties regarding the remaining 50 per cent of the shares. On this basis Alfred will be presumed to retain the equitable interest in these shares as well and the presumption may not be rebutted. The effect would be that Beryl holds 50 per cent of the shares (capital) on resulting trust for Alfred, subjectto the terms ofthe initial transfer.Alternatively, ifthe presumption is rebutted, Beryl will be entitled to the shares in equity but subjectto the terms ofthe initial transfer. An additional complication is thatthe initial transfer ofthe shares by Alfred to Beryl was subjecttoanoptionexercisablebyCharlestorepurchase50percentoftheshareswithin five years.Thus,the legal righttoexercise theoption was vested inCharles.Thismuchis clear. The question in issue concerns the location ofthe equitable interestin the option. Thisisavoluntary transferofpropertyrightsandaccordinglygivesrisetoapresumption ofresultingtrust(prior totheEqualityAct2010atransferofpropertybyafathertohis son would have given rise to a presumption of advancement). The effect is that, prima facie,Charlesholdsthelegal righttotheoptioninfavourofAlfred.Wehavenotbeen given any evidence that could be used in rebuttal of this presumption of resulting trust. Accordingly,Alfred maymaintainhis equitable interestintheoption. (b) A Transfer of £70,000 to the Trustees of his Daughter’s Marriage Settlement Thereareseveralissuesinthisproblem.Thetermsofthe trustindicatethattheincomeis payable to Danielle until herdeath, subjectto a restriction that she does not have an abortion. Five years after the transfer Danielle has an abortion. The firstissue is whether thisclauseisvoidonthegroundofpublicpolicy.ItisnotapositiverequirementthatDanielle musthave an abortion (which mightbe void),butitis anegative prohibition that she does not have an abortion. On this basis itis likely thatthe clause is valid. The nextissue concerns the effect of the abortion that Danielle arranged. In particular, would this 7 Identification of issues of fact.Resulting Trusts condition trigger the termination of Danielle’s interest? If the court decides that a conditionsubsequentlyhas takenplaceandthatthisbringsDanielle’s interesttoanend,the nextissueisthedestinationoftheequitableinterest.Ernest,thenextinline,isentitledto the income on the death of Danielle, and not merely on the termination of her interest. The issue is whether a resulting trust arises or, alternatively, that Ernest’s interest is acceleratedafterDaniellehasanabortion.Thedoctrineofaccelerationofapostponedinterest is based on the notion that if a prior interest under a trust fails so that the reason for the postponement disappears, a subsequent interest may be brought forward and be enjoyed immediately.The gap inownership maybe filled by anaccelerationof a subsequent interest.There isnoroom for aresultingtrustinorder todelay the enjoymentofthe subsequentinterest.Suchcomplications oftentakeplacewhere adraftsmanof a trustorwill fails to foresee a contingency which has in fact taken place. The court will construe the trustinstrument or will inorder toascertain whether there is agapinownership and whether thedoctrineofaccelerationiscapableoffillingthatgap: seeReCochrane(1955). Applyingthe testto the factsofthis case, it appears that noprovision is made in the trust for the equitable interest in the events that have taken place. In such an event the court may apply the doctrine of acceleration andbring forwardErnest’s life interest after Danielle’s interestlapses. Allthree parties die in a car crash. For the purposes of inheritance it may be necessary to ascertaintheorder in whichthe partiesdied.Ifthere isnomedical evidence todetermine theorder ofdeath,the doctrineof commorientes (endorsedin s184 ofthe Law ofProperty Act 1925)may be adoptedto identifywhenthedeaths aredeemedtotake place.This rule stipulatesthattheorderofdeathsisbasedontheseniorityoftheindividuals.Thus,Frederick is presumed to be the lastto die and the property may be distributed to Frederick’s heirs.ConstructiveTrusts1:The DutyNottoMakeaProfit from the Trustand Co-ownership Trusts INTRODUCTION Inthefollowingtwochapterswewillturnourattentiontooneofthemost versatileof all the forms of the trust concept: the constructive trust. Indeed, so versatile is this conceptinthemodernlawthattherereallyareseveraltypesofconstructivetrusts,all of which bear the same name, but which do not necessarily share the same characteristics or serve the same purposes, save only that they all arise by operation of law consequentuponsomedefect of conscienceonthepartofthe constructive trustee.Inthis particular chapter, we will consider two specific kinds of constructive trust. First, there is the constructive trust that is imposed on a trustee or other fiduciary as a consequenceofthatpersonusinghisorherpositiontomakeapersonalprofitorgain.In essence,this constructive trust requires the trustee or fiduciary to accountfor any such profits on trust for the beneficiaries or persons to whom the fiduciary duties are owed: see Crown Dilmun Ltd v Sutton (2004). It is in the nature both of a remedy against the trustee/fiduciary for unauthorised activities and a safeguard that ensures that she acts forthebenefitofthetrustandnotforherself.Thisisessentiallyapersonalobligation imposed on the trustees or other fiduciaries notto profitfrom the exercise oftheir fiduciaryduties andthe remedymay involve anaccountof suchprofits. Second,we shall consider the particular principles applicable to the acquisition of interests in land where a person claims a share in a matrimonial or quasi-matrimonial home belonging inlawtoanother.Thisspeciesofconstructivetrustisinthenatureofaremedyagainst the legal owner of property, against whom the constructive trust is deployed, in order to achieve equity between the parties. Attheoutset,itshouldbenotedthatitisnotoriouslydifficulttodefinewithprecision the exact circumstances in whicha constructive trust may arise. Yet,perhaps thatis justasitshouldbe.Ifthereisacommonthreadthatlinksalltypesofconstructivetrust (and that is debatable), it is that they are used to prevent and rectify inequitable conduct. Consequently, some of the material considered in this chapter may well overlap with material considered elsewhere.QUESTION 22 Discussthetrustsissues raisedineachofthesituationsbelowandadvisetheparties concerned: (a) SgtJimTowwasuntil recently aBritishmemberoftheUNpeacekeepingforce in Utopia. He was in charge of the security of food depots. He has accumulated a sum of£50,000inaLondonbankaccount.Thismoneycamefrombribeshereceivedfrom some civilianworkers of a large aid agency workinginUtopiawho were illegally sellingUN food supplies to private food shops. These facts have now been exposed by a Sunday newspaper. (b) Peter is the company secretary oftwo companies, namely X Co Ltd and Y Co plc. Six months ago he passed on to his friend, James, special company information on the two companies. James subsequently sold the information to a third company for £100,000, which he shared with Peter. How to Read this Question This two partquestion concerns the duty to accountthatis imposedon a trustee or fiduciary. Specifically the issues involve the law with respect to fiduciaries receiving bribes and strangers toatrust receivingtrustpropertyor assisting ina fraudulentbreachoftrust. How to Answer this Question In answering this question you are required to deal with the following material issues – who is a fiduciary? The status of bribes received by fiduciaries, the effect of a trustee or fiduciary putting himself in a position of conflict of duty and interest, the status of key information concerning the trust and the liability of strangers to a trust intermeddling with trustproperty. Aim Higher and whether the fiduciary still has the property under his control. Up for Debate andCMitchell,‘Remedies fordishonestassistance’(2004)64MLR16.Constructive Trusts 1 Answer Plan Conflict of duty and interest. Duty to account for bribes received. Whether trustinformation may be treated as trust property. Knowingly receiving trust property. Answer Structure This diagram highlights the personal liability to account for breach of trust and the liability as constructive trustee. ANSWER (a) Sgt Tow Jim Tow has accumulated £50,000 from bribes by illegally selling UN food supplies to private shops. The question is whether he is accountable to the UN agency for these bribes.1 The general rule is that a person occupying a position of confidence (such as a trusteeorfiduciary)isprohibitedfromderivinganypersonalbenefitbyavailinghimselfof his position, in the absence of authority from the beneficiaries, trust instrument or the court. In other words, the trustee or fiduciary should not place himself in the position where his duties may conflict with his personal interest. If such a conflict occurs and the 1 Elements of liability for knowingly receiving claim.trusteeobtainsabenefitorprofit,heisaccountabletotheclaimantsasifheisaconstructive trustee. This is known as the rule in Keech v Sandford (1726). The ingredients of the claim are:2 (1) the defendant holds a fiduciaryposition towards the claimant; and (2) the defendant obtained a benefit; and (3) there isa causal connectionbetweenthe relationshipandthe benefit. Failure to establish all of these conditions would lead to a failure in the proceedings. The firstissue is whether Sgt Tow is a fiduciary. This is a question oflaw. The concept was defined by Millett LJ in Bristol and West Building Society v Mothew (1996) as someone who hasundertakentoactfor or onbehalfof another in circumstanceswhichgiverisetoa relationshipoftrustandconfidence.MillettLJwentontolaydownthedutiesimposedona fiduciary and addedthathe is prohibitedfrom makingan unauthorisedprofit.On the facts ofthe problem Sgt Tow was a member ofthe UN peacekeeping force in Utopia. He acts on behalfof aninternational agency.It would appear that Sgt Tow, as a securityofficer,is undoubtedlyafiduciaryandowesfiduciarydutiestotheclaimant;seeReading v Attorney General (1951). The nextissue is whether he had obtaineda profit.This is a question offact andwe are toldthathehas accumulated£50,000in aLondonbankaccount.Didhe receive this sum in his capacity as a fiduciary? This is also a question of fact and requires a causal link to be foundbetween the receipt ofthe sum and his fiduciary capacity. We are told that the £50,000 was received as bribes for the illegal sales to private shops. This is conclusive evidence that, in effect, he abused his position as a security officer and consciously and deliberately released the food to unauthorised persons in return for remuneration. On the question of accountability for the bribes,the clear rule is that the defendantis required to pay back the bribes that he received: see Lister & Co v Stubbs (1890), Sinclair Investments v Versailles Ltd (2011) and contrast Attorney General for Hong Kong v Reid (1994). But if the defendant had invested the bribes and received a profit, a more complicated question is involved, namely, whether he is accountable only for the bribes and whether in addition to thebribesheisaccountablefor theprofitsderivedfromthebribes.Thesolutionadoptedby the CourtofAppeal in Lister v Stubbs was thaton receiptofthe bribe a relationshipof debtor and creditor is created. This did not involve the trust notion. However,the Privy Council in Attorney General for Hong Kong v Reid refused to follow Lister and decided that both the bribe and the additional profit are held upontrustfor the persons to whomthe duty is owed.On receiptofthe bribe,the fiduciarybecomes a trustee ofthe sum for the benefitof the innocentpartyandis liable to accountfor thispropertyandanyderivativeprofits.Ifthe bribeisusedtopurchaseotherpropertywhichdecreasesinvalue,thefiduciaryisrequiredto accountfor thedifferencebetweenthebribeandtheundervalue.Alternatively,iftheproperty has increased in value,the innocent party is entitled to claim the surplus, because the fiduciary is not entitled to profitfrom a breach of his duties. The reason for this rule is that whenthe bribe is received,itis requiredto be paidimmediately to the claimant;principle – equityconsidersasdonethatwhichoughttobedone.Thus,aconstructivetrustisattached 2 Uncertain nature of degrees of knowledge.Constructive Trusts 1 tothebribe.The effectis thatthe£50,000inthebankaccountmaybe the subjectof aconstructivetrustinfavouroftheclaimant.MorerecentlytheCourtofAppealinSinclair v Versailles (2011) refused to follow the Privy Council decision in Reid and instead endorsed the Listerprinciple.InsimilarveintheSupremeCourtinWilliams v CentralBankofNigeria(2014), decidedthataclaimfordishonestassistancewasaclaiminpersonamandsubjecttothe limitation period of six years. The effect is that an agent or other fiduciary who receives a bribehasapersonalliabilitytoaccounttotheprincipalfor the amountofthebribeasa debtor.The claimis personal and not proprietary and therefore the claimantdoesnot acquireaninterestininvestmentsacquiredwiththeproceedsofthebribe. (b) Peter Peter,acompanysecretary,isanofficerofthecompaniesXCoLtdandYCoplcandis clearlyafiduciaryinrespectofthosecompanies.Hedisclosessensitiveinformationconcerning the companies to James. On the basis of the analysis in (a) above he is in breach of his duties as a fiduciary in both unlawfully disclosing the information and receiving a profit as a result of the disclosure. He has allowed his duties to conflict with his interest: see Industrial Developments v Cooley (1972) and Regal (Hastings) Ltd v Gulliver (1942). In Boardman v Phipps (1967) an argument was raised as to whether information was capable ofbeing treatedas trustproperty.The House of Lords, by a majority, decidedthat confidentialinformationwascapableofbeingtrustproperty.Onthefactsofthisproblem Peterhasusedtrustproperty (information)toderive anunauthorisedprofit andis therefore accountable as a constructive trustee.3 Peter’saccomplice,James,mayalsobeliableasaconstructivetrusteeandbeunderaduty to account to the claimants for the profits that he made by selling confidential information (trust property). The nature of liability would depend on whether James still has the propertyintraceableformornot.Thetestofliabilityunder thishead,aslaiddownby Hoffmann LJ in El Ajou v Dollar Land Holdings plc (1994), is whether: James received trust property, in breach of trust; and knows that the information is trust property; and acts in a way inconsistent with the trust.4 On the first issue the court decided in Boardman v Phipps that confidential information is capable of beingtrust property (see above). With regardto the problem there was clearly a breach of trust in that the companies did not authorise the disclosure of the information.Does Jameshave knowledge thatthe information is trustproperty? ‘Knowledge’for these purposeshadbeen classifiedby Peter Gibson Jin Re Baden Delvaux (1983) asincludingsubjectiveandobjectiveknowledge.Thisisaquestionofdegree.SinceJamesdoesnot repaytheproceedsofsaletothecompanies,heactsinconsistentlywiththetrust.Accordingly,a courtordermaybe attachedtothe£100,000receivedby James. 3 Attempting to identify the basis ofliability for knowingly receiving claims. 4 Liability to account but no constructive trust.Alternatively, in Re Montagu Settlement Trust (1987) and more recently in BCCI v Akindele (2000)thecourtdecidedthatthebasisofliabilitywhenastranger receivestrustpropertyfor his own benefit is unconscionability, i.e. whether it would be unconscionable for the defendanttoretaintheproperty.Thecourtalsodecidedthatthetestissubjectiveawareness. IfJamesdidnot receivethetrustpropertybutmerelyassistedPeterdishonestlyinafraudulent design, he (James) will be accountable as if he was a constructive trustee. This was the testlaiddowninthedefinitivecaseofRoyalBruneiAirlines v Tan (1995).Thebasisofliability isdishonestlyassistinginafraudulentscheme.InTwinsectra v Yardley (2002)theHouseof Lordsdecidedthatthetestfordishonestyisthecombinationtestthatexistsincriminallaw, i.e. the defendant’s conduct is dishonest by reference to the ordinary standards of reasonable andhonestpeopleandthathehimself realisedthathisconductwasdishonestbythose standards. This is both an objective and subjective test. Further, in Barlow Clowes International Ltd v Eurotrust (2006),the PrivyCouncil decided that an inquiry into the defendant’s views about standards of honesty was not required. The standard by which dishonesty is judgedisobjective.InAbou-RamahvAbacha (2006)andStargladevNash(2011),theCourtof AppealendorsedtheapproachthatwasadoptedinBarlow Clowes(2006)andconfirmed thatthe standard fordishonesty is objective. QUESTION 23 Atrusteemustnotplaceherselfinapositionwhereher interestanddutyconflict. Discuss, with reference to decided cases. How to Read this Question Thisisadescriptivequestiononthedutyofthetrusteenottoplaceherselfinaposition whereherdutyandinterestconflictandis a casebaseddiscussionoftheprinciple.Itis also necessarytostatetheoccasionswhenabenefitreceivedbyatrusteemayberetainedbyher. How to Answer this Question In answering this question it is necessary to state the justification for this inflexible rule oflaw andillustrate the principle andrelevant exceptions tothe rule throughcase law. Common Pitfalls occurwhenthefiduciarydoesnotactwiththebeneficiary’sbestinterestsinmind. Up for Debate exploredbyJEdelman,‘Whendofiduciarydutiesarise?’(2010)126LQR302.Constructive Trusts 1 Answer Plan Thedutytoaccountisimposedonpersonsalreadyinafiduciarypositionin order toensure that anyprofitmade by virtue ofthat position is not retained. The trustee’s duties are owed to the trust and any unauthorised benefit received by the trustee is claimable by the trust. Examplesof various circumstances inwhichthis liability canarise. Occasions when certain benefits may be authorised by law. Answer Structure This diagram illustrates the extent of the fiduciary duty to account. ANSWER The essence of the trust or fiduciary relationship is that the fiduciary owes clear and strict duties to administer the trust property or other assets for the benefit of those entitled in equity to that property or assets. In order to ensure that these duties are honoured in full, there is a virtuallyabsolutebar againstthe trusteeusingher positionfor anypersonalgain. Such is the strictnessofthis rule that a duty to accountfor any benefit received will be imposedonatrusteeorotherfiduciaryirrespectiveofanyintentionaldeceit,recklessnessor negligenceonherpart(Regal (Hastings) Ltd v Gulliver (1942)).5 Itisenoughifthetrusteeor fiduciary has simply placed herself in a position where her duty to the trust has conflicted withherowninterest.InCrownDilmunLtdvSutton(2004),thecourtdecidedthatafiduciary 5 Clear basis ofliability in dishonest assistance cases.who concealed information from his employer concerning the opportunity to redevelop propertyinordertobenefithimself,wasaccountabletotheclaimantfortheprofitsreceived. Thisoverriding principle of equity is ofgeneral application, anditisnow recognisedthat there are a number of identifiable situations where the court will intervene to impose a duty to account on a trustee or fiduciary. First, as a matter of principle,trustees are under a duty to act without remuneration:trusteeship is essentially gratuitous. The trustee’s obligation is to ensure the most efficient running ofthe trust, withoutthe self-interest of creating unwarrantedwork for which they could be paid (Robinson v Pett (1734)). Any remuneration so received will presumptively be payable to the beneficiaries unless authorised by law including the trust instrument. The Trustee Act 2000 contains general provisions authorising the payment of remuneration or stipulatingthe circumstances in whichremuneration can be paid (ss28–30). Theywill provide remuneration for nearly all professional trustees, subject to any express terms of the trustinstrument. Other means by which the trustee may properly claim to keep any remuneration arise from the existence of a contractto that effect with the beneficiary (although apromise tofulfilexistingduties isnot goodconsideration),under certainstatutoryprovisions(forexample,s42oftheTrusteeAct1942;JudicialTrusteeAct1896),under thespecial rules relating to solicitor trustees (Cradock v Piper (1850)) and where the paymentis earned duringadministrationof assetsabroad(ReNorthcote’s Will Trusts(1949)). Second,there is a rule that a trustee may not purchase for herself certain types of property, in particular rights in property which should properly be purchased for the beneficiaries. So, a renewalof a trustlease in favour ofthe fiduciarywill be heldon constructive trustfor thebeneficiaries (Keech v Sandford (1726)).Thiswillbesoevenifitisclearthat the landlord would not have renewed the lease in favour of the beneficiaries. The trustee’sduty is toactin thebestinterestsofthe beneficiaries,notinherown, andthere isan irrebuttablepresumptionoflawthatatrusteecannottakethebenefitoftheleasefor herself(Re Biss (1903) and Popat v Shonchhatra (1997)). Third, as explained in Tito v Waddell (No 2) (1977), a trustee is unable to purchase the trust property itself. Simply put,the trustee cannot be both vendor (as trustee) and purchaser of property which she is holding for the benefit of another (Ex p Lacey (1802)).This is knownasthe‘self-dealing’ rule,althoughitshouldbeemphasisedthat,insomecircumstances,atrusteewillbepermittedtoretainherpurchaseifthereasonsfor theself-dealing rule are not present,6 see Holder v Holder (1966). Fourth,andinsimilarvein,the‘fairdealing’rulemakesitclear thatatrusteemayonly purchase the interestofthe beneficiary ifthe transactionwas atfullmarket value andthe trustee disclosed all material facts (Dougan v Macpherson (1902)). Fifth,thereare anumberof cases,involvingdifferentfactualbackgrounds,wherethe court hasimposedaconstructivetrustonafiduciarybecauseofaconflictofinterestanddutyina 6 Initial confusion as to the meaning of dishonesty.Constructive Trusts 1 businesscontext.Forexample,ithasbeenheldthatanyfeespaidtocompanydirectorswho hold those directorships because of their legal ownership of trust shares must be held on trustfor the beneficiaries (Re Francis (1905); Re Macadam (1946)).As mentioned before,the essence of the matter is that such directors will have received fees only because they were trustees,althoughiftheirappointmentswerenotdue totheirholdingtrustshares,the fees may be retained (Re Dover Coalfield Extension (1908)). Again, in Williams v Barton (1927), a trusteewhopersuadedthe trusttoemploya firm of stockbrokersfromwhomhe receiveda commission was held to hold that commission on constructive trust for the beneficiaries, and in Boardman v Phipps (1967), a solicitor who made a profitfrom the purchase of shares, having gained important information while acting as a fiduciary, was required to hold that profit on trust. A further example is provided by Reading v Attorney General (1951), where an army sergeant was held to be a constructive trustee of monies received for escorting vehicles unsearched through army checkpoints, although in Regal (Hastings) Ltd v Gulliver (1942) itwasemphasisedthatneither fraudnorabsenceofbonafideswasnecessarytotrigger the imposition ofthe constructive trustin these circumstances (see, also, LSE v Pearson (2000)). The presence of a goodmotivemay mean,as in Boardman,that a fiduciary is entitledto receiveequitableremunerationforherskillinachievingaprofit,eventhoughtheprofititself mustbe heldon trustfor the beneficiaries.Obviously,however,this jurisdiction willnot be exercised in favour of a fiduciarywho is malafidesor whose fiduciary dutiespositivelyprohibit personal gain(Guinness plc v Saunders(1990)). Clearly the equitable principle that a trustee must not place herself in a position where her interest and duty conflict has many applications. However, it must not be thought thatthetypesofliabilitydiscussedaboveareexhaustive,or thateverycaseofaconflictof interest and duty can be neatly pigeonholed into one of these categories. By way of example,inAttorney General for Hong Kong v Reid (1994),thePrivyCouncilhasheldthata bribe acceptedbyapersoninafiduciarypositionwillbeheldonconstructive trustfor the person(s) to whom the fiduciary duty is owed, so disapproving of Lister & Co v Stubbs (1890), which for many years had decided that no constructive trust could existin these circumstances. However, in Sinclair Investments v Versailles Ltd (2011) the Court of Appeal refusedtofollowReid anddecidedthattherecipientofabribeowesapersonaldutyto accounttothe principalfor the amountofthe bribe and this principle doesnot extendto assetspurchasedwiththeproceedsofthebribe.MorerecentlyinWilliams v CentralBank ofNigeria (2014)theSupremeCourtapprovedtheprinciplelaiddowninSinclair. QUESTION 24 The Trustee Act 2000 contains widely drawn statutory authority permitting professional trusteestochargefortheirservices.Thisisaverydesirablereformofthepre-existinglaw. Discuss. How to Read this Question This is a descriptive question thatfocuseson the justification ofthe principles laid down intheTrustee Act2000authorisingprofessionaltrusteestobepaidfor their services.The effectofactingforthetrustwithoutauthoritytobepaidshouldalsobedealtwith.How to Answer this Question A good answer would include the justification for the general rule requiring trustees to avoid a conflict of duty and interest. The inadequacies of the pre-2000 law ought to be highlighted but the main focus of the answer will be the methods by which the Trustee Act 2000 has dealt with the problem. Answer Plan Discuss inadequacies in the old law. Outline Trustee Act 2000 provisions ontrustee remuneration. Answer Structure This diagram highlights the changes made by the Trustee Act 2000 authorising trustees to be paid for their services. Up for Debate Itis recommended that you analyse this article thoroughly.Constructive Trusts 1 ANSWER Theofficeoftrusteeshipis inherentlygratuitous,springingfromthe fundamentalprinciple that a trustee must not place himselfin a position where his interest and duty conflict(Bray v Ford (1896)).Consequently,before the Trustee Act 2000,it was clear both in principle and practice that a trustee should act without remuneration (thatis, paymentfor services rendered), unless there was some specific rule of law or equity under which the trustee could charge.7The overriding fear was thatthe trustee might be tempted to generate income for himself by creating work, thus unnecessarily overloading the trust and acting in his own interestinsteadofthatofthebeneficiaries(Robinson v Pett (1734)).Ofcourse,itwasalsotrue that the gratuitous nature of trusteeship could itself cause problems. For complicated trusts, itisessentialthatthebeneficiariesareabletorelyonexperiencedandprofessionaladvisers, but these are unlikely to be willing to act without payment. Even in smaller trusts,the amountoftimeandeffortdevotedtothe trust’sadministrationmay reflectlackofpayment and,insteadofpreventingtheoverloadingofthetrust,theabsenceofpaymentmightresult intoolittleattentionbeingpaidtoitsaffairs;abalanceneedstobestruck. Prior to the Act, the balance was adopted by acceptance of the principle that there was nothingunlawfulinatrusteereceivingpaymentfor fulfillinghisduties,providedthatthis couldbejustifiedbyreferencetosomespecificprovisioninthetrustinstrumentora general rule of law. Unfortunately, as discussed below, it is clear thatthese pre-Trustee Act 2000 principles indicatingwhena trustee couldreceive remunerationwerehaphazard, complicated and altogether unsatisfactory.8 By far the most common method by which trustees could have established – and still can establish – a right to receive remuneration is by relying on an express clause in the trust instrumentauthorisingthetrusteestobepaid(Willis v Kibble (1839)).Thismethodwill continuetobecommonforprofessionallydraftedtrusts,especiallyfortruststhatemploy professional trustees such as banks and investment managers.9 Such a charging clause canbedraftedwidelysoastogiveappropriaterecompensetotrusteesactinginaprofessional capacity.Inaddition,under s28oftheTrustee Act 2000,where suchaclause exists and the trustee is a trust corporation or is a trustee acting in a professional capacity,the trustee is entitled to receive such remuneration even ifthe services rendered could have beenprovidedbyalay(thatis,non-professional)trustee.Thiseffectivelyreversestheold law with respect to ‘charging clauses’, which were always construed strictly against a trustee andpreventedchargingforworkthat couldbe regardedasnotwithintheprofessionalambitofthe trustee.Inthis sense,theTrustee Act 2000 supportsandenhancesthe efficacyofchargingclausesintrusts(see,also,s28(4)(a):signatureofawitnesstothewill does not invalidate a charging clause in the will in favour ofthat witness). Itis a welcome change to the law and releases trustlaw from the scope of rules developed at a time when trustswere largely private mattersundertaken forprivate tasks. 7 Specific identification of the elements ofthe claim. 8 Structured discussion of the cases. 9 Statement of liability including the remedy.In the absence of a charging clause in a trust, the law prior to the Trustee Act 2000 made it difficult for a trustee to claim remuneration. So, although the court had (and probably stillhas)aninherentjurisdictiontoorderthepaymentofremuneration,includingauthorisingpaymentfor the firsttimeor varyinganexistingchargingclause (Re Duke of Norfolk’s Settlement Trusts (1981); Foster v Spence (1996)),the power was limited.The court would not authorise remuneration simply for the benefit of the trustee, but only if the payment of remuneration would be for the better administration ofthe trust. When deciding whether to exercise its discretion,the court would consider every aspect ofthe case, including how the administration of the trust would be improved, the need to protectbeneficiariesfromunscrupuloustrusteesandtheessentiallygratuitousnatureof trusteeship, andonly ifthere was a demonstrable needfor professionaltrusteesor ifthe trustees could not undertake the proper administration of the trust without devoting more oftheir own time, would remuneration be awarded.10 Second, although it was possible for a trustee to establish a right to remuneration through the conclusion of a contractto that effect with the beneficiaries,the courts lookedwith scepticism at such arrangements. For example,the trustee might have been forcedintoanunfavourable contract(or any contract)by a threatfromthe trustee to abandonhisdutiesunder the trust.Consequently, suchcontracts were rare (Ayliffe v Murray (1740))and,inanyevent,thetrusteemusthaveofferedconsiderationfor thebeneficiaries’ promise to pay, which could not be the promise to carry out the duties under the trust which the trustee is already obliged to perform. Third, there remain several (relatively limited) statutory provisions that authorise the payment of remuneration to certain types of trustees. It must be emphasised, however, thatthese provisions do not authorise the payment oftrustees generally, but rather are designedtoensurethatspecific trusteesappointedfor specificpurposescanbepaid(for example, under s42 ofthe Trustee Act 1925). A trust corporation appointed by the court maybe authorisedtocharge the trustfor administering it, andsimilarprovisions existin respect of the judicial trustee, the public trustee and persons appointed as custodian trustees(s1(5)ofthe JudicialTrusteeAct1896; ss4(3)and9ofthePublicTrusteeAct1906). Fourth, it remains the case that a trustee may be entitled to retain any remuneration received as a result of administering assets abroad, provided that these are received involuntarily (Re Northcote’s Will Trusts (1949)). This exception is of limited importance and is born moreof conveniencethanofprinciple.Theessenceofthematterseemstobe thatthe court regardsthepaymentof remunerationfromoutsideitsjurisdictionaspresumptivelyoutside its control,unless itis in the nature of a bribe or is otherwise inequitable. Finally, a solicitor trustee has a unique right to receive remuneration for work undertaken on behalf of the trust,providedthatthese‘profitcosts’ relatetoworkundertakenonbehalfofthe trust generally (and not in respect of his trusteeship alone) and are no greater than those that ‘couldhavebeenincurredifthesolicitorhadnotbeenatrustee’(Cradock v Piper(1850)). Again,thisisalimitedexceptiontothegeneralpre-TrusteeAct2000principlesandisakinto thesolicitortrusteebeingpaidforworkwhichisinadditiontohisnormaldutiesastrustee.10 10 Factors relevant in exercising the court’s discretion.Constructive Trusts 1 Obviously,apartfromtheuseofthechargingclause,whichisnowmademoreefficacious by the 2000 Act, there was limited scope for a trustee to claim remuneration. The absence of such a clause meant that a trustee had little hope of claiming remuneration unless one of the limited exceptions applied. It was in order to meet this deficiency that theTrustee Act 2000nowprovides,ins29,methodsbywhichdifferenttypesoftrusteesmayclaimremuneration.First,unders29(1),atrusteewhoisatrustcorporation (notbeingatrusteeofacharity)‘isentitledtoreceivereasonableremunerationoutof thetrustfundsforanyservices thatthetrust corporationprovides’,providedthatno such remuneration is provided for in the trustinstrument or by any other statutory provision.Second,unders29(2)atrusteewhoactsinaprofessionalcapacity(notbeinga trustcorporation,soletrusteeortrusteeofacharity)isentitledtoreceivereasonable remuneration if every other trustee has agreed in writing to such payment, again provided that no such remuneration is provided for in the trust instrument or by any other statutory provision. In addition, under s 30 of the Trustee Act 2000, regulations may be madeconcerningtheprovisionof remunerationtotrusteesofcharitieswhoaretrust corporations or who act in a professional capacity. These are wide powers, withss29 and30providing,for the firsttime, ageneral right for trust corporations, trustees acting in a professional capacity (not being sole trustees)andtrusteesofcharitabletruststobepaidforworkdoneonbehalfofthetrust.It seems now that it is only sole trustees (not being a trust corporation or charitable trustee) that have no general statutory right to remuneration. This is entirely appropriate in an age where the trust has developed beyond the ‘family’trust so common in many of the earlier cases. Note Questions 23 and 24 addressed the wider issue of when a trustee must avoid a situation where his interest andduty conflict andthis raises some issues about remuneration. QUESTION 25 Cassandra is the registered proprietor of a large house in London. In 2008 she met Donald, a young merchant banker, and soon she had invited him to live with her. Donald willingly accepted, not least because he was about to be evicted from his own flat throughhis inability topay the rent.Atfirst,Donald insistedthathe sharedthe expenses of running the house, but it soon became clear to him that Cassandra had more money thansense,andheacceptedhergenerositywithoutcomplaint.Aftersometime,Cassandra began talking about ‘the future’, and although he was not entirely committed to the relationship, Donald played along, especially as Cassandra had told him that the house was as good as his own now that they were together. This slice of luck encouraged Donald to abandoneven whatlittle financial caution he possessed, and he had soon spent nearly all of his savings on various luxury, but unnecessary, items of furniture for the house and far too many visits to the casino. By this time, Cassandra was becoming a littleannoyedatDonald’sbehaviour,andafteroneterriblerow,inwhichshehadtoldhim to leave, Donald promised to mend his ways. Subsequently, he became altogether moreresponsibleandevenbegantoredecoratethehouseathisownexpenseandoverhaulthe garden. Unfortunately for him, this had come too late for Cassandra, and now she has decided to throw Donald out of the house. Donaldisdevastatedandcomestoyouforadviceastowhetherhecanclaimasharein the house. How to Read this Question This question concerns the acquisition of beneficial interests in property belonging to another through the mediumof constructive trusts. In concrete terms,the problem revolves arounda contest between the legal owner ofthe property –Cassandra – and the person who may be able to claim an interest in the property under a constructive trust – Donald. If he is successful,Cassandra will hold the legaltitle on trustfor both ofthem, in such shares as the court determines. How to Answer this Question You need to state and apply the general principles of acquisition of equitable interests inthe familyhome throughtheadventofthe remedial constructive trust.Itis crucial toidentifyinwhomthelegalownershipofthepropertyisvested.Theprimafacierule is that equity follows the law. The burden of poof will rest on the party without the legaltitle claiminganequitableinterestintheproperty.Statetheessentialelements of a common intention constructive trust. The quantification of the share of the equitable interestisdeterminedby reference tothe intentionsoftheparties as construed by the courts. Up for Debate The seminal decisions ofthe House of Lords in Stack v Dowden and Jones v Kernott have attracted agreat deal of academic debate as to the merits and limits ofthe tioner’s view’ (2011) Conv PL 123. Aim Higher bank Girozentrale v Islington LBC (1996) is very important.Constructive Trusts 1 Answer Plan General principles of acquisition of beneficial interests through constructive trusts, Stack v Dowden (2007), Jones v Kernott (2011). The legal owner as constructive trustee. Theneedforapromise, relianceanddetriment, LloydsBankvRosset(1991). Quantifying theshare. Whether a remedy canbe refusedongeneral equitableprinciples. Answer Structure This diagram illustrates the application of the relevant principles in determining the respective interests of the parties in the family home. ANSWER On the factsas stated,it seems clear thatwhenDonaldmetCassandra,Cassandrawas sole legal owner ofthe property and thatit was not subjectto any mortgage. The property belonged to Cassandra absolutely and had already been paid for. In Stack v Dowden (2007) the House of Lords decided that as a starting pointthe maxim ‘equity follows the law’wasapplicable, i.e.the beneficial interest will prima facie be enjoyed by the party with the legal title, namely Cassandra. The burden of proof will therefore lie on Donald to establish an equitable interestbyway of a constructivetrust.Hemustpleadapromiseor oralassurance plusdetrimental reliance in order to establishthatit would be inequitable for Cassandra to denyhimashareintheproperty.Thereareanumberoffactorstoconsiderhere. InStack v Dowden andJones v Kernott the courtintroducedthe singleregimeoftheconstructivetrustasameansof resolvingdisputesbetweenpartiesastotheequitableinterestsinthefamilyhome.TherearetwohurdlesforDonaldtoovercomeinorder tosucceed in his claim to an interestin the house. First,to discharge aburden to prove thatCassandraintendedhimtohaveabeneficialinterestintheproperty.Thisquestionisdetermined objectively by the courts. The significant facts have already been identified. It may be doubtful whether Donald may discharge this burden, but if he does, the second issue involves the evaluation of that interest. The courts will consider all the material facts in order todeterminewhatwouldbe fair totheparties: seeOxley v Hiscock (2004). First,itis clear that Donald readily movedinto the house atCassandra’s instigation. However, there is no suggestion at this stage that Cassandra has made any promise or assurance in relation to ownership of the property. As Lord Bridge made clear in Lloyds Bank v Rosset (1991),the obligations of common or shared occupation of property are not identical with the obligations of shared ownership and consequently it is extremely unlikely that a court would be prepared to divine a promise of shared ownership from facts such as ours. Indeed, because in Rosset Lord Bridge went so far as to suggestthat it was virtually impossible asamatter ofprincipletoinfer apromise fromconductperse, thereseemslittleuponwhichDonaldcanbase aclaim atthis stage.Evenifby some intellectual gymnastics itis possible to discover a promise made to Donald, there is no evidence of detrimental reliance. Although Donald does vacate his current residence, and even though such action has, in the past,been held to constitute detriment(Tanner v Tanner (1975)),itisclear thathisactionsarepromptedbyhisowncircumstancesandhave little to do with whatever Cassandra may or may not have promised. Second,there is little chance that Donald may claim an interest just because he has insisted on paying household expenses. The payment of household expenses is not equivalent to payment of the purchase price of property (Burns v Burns (1984)) and (as above) thereisnooralassurancetowhichthisexpenditurecanbelinkedasdetrimental reliance. Indeed, such statements that Cassandra does make (see below) are made after Donald spendsmoney.Inotherwords,thesemonetarypaymentsarenotmadetotheacquisition ofthe property, nor are they in reliance on a promise. There is no interestto be found on these facts (Burns v Burns(1984) and Lloyds Bank v Rosset (1991)). Finally,however,itappearsthatCassandradoesmakeapromiseofsorts toDonaldandit is a matter of construction whether this is sufficient to raise an interest in his favour by wayof a constructive trust. First, aproblem existswith intention: doesCassandra intend togrant Donalda share in the propertybyher references to‘the future’ andher apparent statementthatthe house is ‘asgoodas’his? In our case,we donot know whatCassandraConstructive Trusts 1 actuallymeant,butmay a reasonable person in Donald’s position conclude thatthiswas anassuranceabouttheownershipofthesharedhome?This issueisdeterminedbyreference to an objective standard. Such a principle is clearly supported by Midland Bank v Cooke (1995) which,although distinguishable because inthat case there were some payments towards the purchase price, suggests that the court will take a generous view of whatthe parties ‘intended’. The same principle was applied in Stack v Dowden (2007) and Jones v Kernott (2011).Consequently,Cassandramay findherselfinsomedifficultyhaving assured Donald that he had a share in the property, even ifthis was not actually her intention(see,forexample, Eves v Eves(1975),wheretherealintentionwastodenyan interest). Furthermore,it seems clear fromthe facts thatDonaldhas reliedon this assuranceinthathehas spenthis savingsonvarious itemsoffurnitureandvisits tothecasino. Withreferencetothe allegeddetriment,Cassandramightclaimthatthiskindofdetrimental relianceis insufficienttofoundaninterestbywayofaconstructivetrustbecauseitwasunrelatedto the property (money spentatthe casino)andpartwasnotnecessary for theuse and enjoyment ofthe property (luxury furniture). Indeed, certain cases, such as Gissing and Christian v Christian (1981),suggestthatthedetrimentsufferedas aresultofthepromiseor assurance must be related to the property over which the interest is claimed; for example, spendingmoneyon improvements.However,an alternativeviewis thatallthatis requiredis detrimentwhichhasbeencausedby thepromise,thenatureof suchdetrimentbeingimmaterial.Thissecondapproachhasmuchtocommendit,especiallysinceitisconsistentwiththe theory thatthe essenceofthe constructive trustin these cases is the factof a promise made and then inequitably denied. The detrimentis, on this view, merely the trigger for the trust, notthereasonfor itsexistenceinthefirstplace.So,followingthisapproach,Donaldappears to have a reasonably strong claim to an equitable interest in Cassandra’s property. He can show an assurance, reliance and detriment. This means that Cassandra’s subsequent attempttoevicthim–whichmaybeseenasanattempttowithdrawthepromise–comes toolate(Turtonv Turton(1987)).By thattime,theequitymayhavebeenraisedinhisfavour.11 Finally, however, as adviser to Donald, one must issue a word of caution. In some cases, constructivetrustsappear totreatmorallyinnocentpeopleharshly,butonlytheninorder to do equity to another person who has a greater claim. Yet, what constructive trusts will not be used for is to enable an undeserving litigant to gain a windfall which is not merited:thetrustfixesontheconscienceofthelegalownerofproperty;itwillnotbe imposedmechanicallytoassisttheundeserving(Westdeutsche LandesbankGirozentrale v Islington LBC (1996)). The very essence ofthe constructive trustis thatitis not rigidin application and does not have hard and fast rules. This much was stated by Lord Diplock inGissing v Gissing (1971)andisafeatureoftheuseofconstructivetrustsinlatercases, includingthose casesdifficulttoreconcilewitheachother suchas Lloyds Bank v Rosset (1990) on the one hand and Midland Bank v Cooke (1995), Stack v Dowden and Jones v Kernott ontheothersideofthespectrum.Thus,iftheconstructivetrustisrightlytobe regardedasameansof remedyinginequitable conductin circumstanceswhere the conscience ofthe legal owner is affected, a court may well take the view that Donald should notbe able torelyonittoclaimabenefitwhichhe appearsnottodeserve.11 11 Application ofthe principles of law to the facts.Common Pitfalls Questionsconcerninginterestsinthefamilyhomeareregularlyaskedinlandlaw House of Lords decisions in Pettitt v Pettitt, Gissing v Gissing, Lloyds Bank v Rosset, Stack v Dowden andJones v Kernott.Note thatinStack, LordNeubergerarrivedatthe same conclusion as Baroness Hale but by a different route.Constructive Trusts 1 ConstructiveTrusts2:The Liability of Strangers to the Trust INTRODUCTION Wehaveseenalreadyinpreviouschaptersthattoaccepttheofficeoftrusteeis toopen oneselfandone’sconducttotheclosestscrutiny.Notonlyisthetrusteeexpectedtobehave at alltimeswiththe utmostpropriety,butthere are also circumstanceswheneventhe morallyinnocentfiduciarymay findhimselfsubjecttothe coercivejurisdictionofthecourt. Furthermore,itisnotonlytrusteesproperwhomay findthemselvesinthisposition,for the reachof acourtof equityisbothlongandpowerful.Aswe shallsee inthisandthe following chapters,thirdpartiesmayalltooeasilybecomeembroiledinthetrust’saffairsand,asfaras the variousremediesofthe beneficiariesare concerned,itisoftenirrelevantwhether these ‘strangerstothetrust’areinnocent,negligentordownrightdishonest. The problems considered in this chapter relate to the liability of a person who is a stranger tothetrust–broadlydefinedasapersonwhowasnotoriginallyappointeda trustee or to a fiduciary position. In very general terms, any person who interferes with theoperationofthetrustorwhoassiststhetrusteeinabreachofhistrustdutiesmay find himself fixed with a constructive trust and answerable to the court and the beneficiaries for any misapplication ofthe trust property. Of course, it is not in every situation that a stranger tothe trustis held liable to the beneficiaries as a constructive trustee.Yet in appropriate cases, when the conditions established by the case law are fulfilled, the constructivetrustswingsintooperationandprovidesamostpowerful remedy. Insimpleterms,astranger tothetrustmaybecomeaccountabletothebeneficiariesorbe treated as a constructive trustee in four situations: (a) by dishonestly assisting the trustee in a breach oftrust; (b) by receiving trust property for his own use in the knowledge that it was transferred in breach of trust; (c) afterhavingreceivedtrustpropertyinconformitywiththetermsofthe trust,by knowinglydealingwiththatpropertyinbreachofthetermsofthetrust;and (d) by inducing the trustee to commit a breach oftrust. Together,thesedifferentexamplesof accountingas aconstructivetrusteegivethebeneficiary some hope of redress in the eventof a breach oftrust, evenifthe trustee has escaped theclutchesofthecourtornolongerhasthetrustproperty.Onenoteofcautionoughttobe 7Constructive Trusts 2 mentioned.MillettLJ inParagonFinancevThakerar(1999)opinedthatthe liabilityof an accessoryisstrictlynotasaconstructivetrusteebecausehedoesnotacquirethetrustproperty. His liability is to account to the beneficiaries for any benefits received. This is a ‘personal’ liability to account rather than an in rem liability. Once again, as with so much in the law oftrusts,the ‘rules’ are to be found in case law, although there is some doubt whether thegrowingvolumeof caselawactuallyhasdoneanythingtoclarifythelaw. QUESTION 26 Analyse,withreference todecidedcases,the circumstances inwhicha‘stranger’maybe liableasaconstructivetrusteeforintermeddlingwiththemanagementofatrust. How to Read this Question This essayquestion requires you todeal with the rationale for the liability of strangers to a trustto accountto the beneficiaries and to identify, by reference to decided cases, the elements of such liability. How to Answer this Question Points to raise in answer to this question are the distinctions between liability as a constructive trustee and the duty to account. The focus of this question involves the nature oftheliabilityofastrangerasatrusteedesontort,knowinglyreceivingordealingwith trust property and dishonest assistance in a fraudulent scheme. Up for Debate (1998) 114 LQR 399. Aim Higher person would indicate that he was participating in a breach of trust. But the Court of Appeal decisions in Abou-Ramah v Abacha (2006) and Starglade v Nash bined’objective and subjective testfordishonesty incriminal law.Answer Plan Thenature of a stranger’s liability as constructive trustee andits justification. Trusteede son tort. Knowing receipt or dealing. Dishonest assistance. Lack of clarity: position of principle. Answer Structure This diagram illustrates the heads of liability of strangers to a trust. ANSWER First,astranger tothetrustmaybecomeaconstructivetrusteebecauseheorshehas assumedthedutiesof a trustee.Inotherwords,if a stranger takes ituponhimselfto meddle with the trust property as if he were a trustee, equity willtreat him as such a trustee(MaravBrowne(1896)).Thisistrusteeshipdesontortandtheessentialpointis thatthe person fixedwith liability as a constructive trustee has steppedinto the shoesof theoriginaltrusteesor fiduciaries,as inJames vWilliams (1999).Itiseffectively selfappointed trusteeship, see Dubai Aluminium Co v Salaam (2002). third party Trusteede son tortSecond,equitywillimposeaconstructivetrustonastrangerwhohasreceivedtrustpropertyforhisownbenefitinbreachofthetermsofthetrust.Thisformofliabilityisoften referredtoas‘knowingreceiptordealing’withthetrustproperty(BadenDelvaux and Lecuit vSociétéGénéralepourFavouriserleDéveloppement duCommerceetdel’Industrie en France SA (1983); Houghton v Fayers (2000)). It seems, then, that there are three primary conditions for the imposition of this liability: HoughtonvFayers. 1First,andobviously,theremustbedisposalof assetsinbreachoftrustor breach of fiduciary duty. Second,the stranger must either have lawfully received property andthereafterapplieditforhisownpurposesinamanner inconsistentwiththetermsofthe trust(inconsistentdealing:KarakRubbervBurden(1972))or,inthealternative,havereceived trust property for his own benefit(knowing receipt: InternationalSales Ltd v Marcus (1982)). Third,itseemsthatthetransfereemusthavesomedegreeofknowledgeornoticeofthefact thatthe transfer (or inconsistentdealing) was in breach oftrust(PollyPeck International plc v Nadir(No2)(1992);WestdeutscheLandesbankGirozentralevIslingtonLBC(1996)). Unfortunately, the precise degree of knowledge required for liability for knowing receipt/ inconsistentdealingisuncertain.2Ontheonehand,ithasbeensuggestedthat,beforeliability can arise, the recipient must either know or be reckless as to whether the transfer to himorsubsequentuseofpropertyisinbreachoftrust.Thisdegreeofknowledgeequatesto thefirstthreeofPeterGibsonLJ’sinfamouscategoriesofknowledgeinBadenDelvaux(1983) and necessarily has the effect of restricting the circumstances in which a stranger may be liable. It has been applied in cases such as Carl ZeissStiftung v HerbertSmith& Co (No 2) (1969), Re Montague (1987) and, in a commercial context, in Cowan de Groot Properties v Eagle Trust plc (1992), Eagle Trust v SBC Securities (No 2) (1992). Alternatively, other cases suggestthatliability should existifthe stranger is subjectively aware of or is simply negligent with regard to the facts of a breach of trust. This ensures thatliability will arise when any of the five categories of knowledge in Baden Delvaux exists. Cases such as International Sales Ltd v Marcus (1982), Belmont Finance Corporation v Williams Furniture (No 2) (1980) and the closely argued judgment of MilletJ at first instance in AGIP(Africa) Ltd v Jackson (1992) supportthisview.Itis implicitintherecentjudgmentofFerrisJinBoxvBarclaysBank(1998). Indeed, if it is true that the essence of liability for knowing receipt/inconsistent dealing is that the stranger has received property for his own benefit to which he was not entitled, then(inthe absenceof apure‘no fault’ restitutionaryliability)itisquiteappropriatethathe shouldbe obligedtoreturnitunlesshe was innocentof all participationin abreachoftrust and it should make no difference whether the alleged transaction in breach arose out of a ‘commercial’or ‘private’trust.3Ofcourse,whata‘reasonable’personshouldhaveknownor enquiredaboutmayvaryaccordingtothecircumstances–andthenatureofthetransaction may affect this – with strangers acting commercially being under a lesser duty to enquire and hence a lesser chance of liability (El Ajou v Dollar Land Holdings plc (1994) (first instance)).Yet,inprinciple,negligenceshouldnotbeadefencetoaclaimbyapersonwitha 1 Elements of liability for knowingly receiving claim. 2 Uncertain nature of degrees of knowledge. 3 Attempting to identify the basis ofliability for knowingly receiving claims.Constructive Trusts 2 123 better title.InBCCIvAkindele(2000),theCourtofAppealtriedtoovercomethesedifficulties by noting thatthe state of knowledge ‘must be such as to make it unconscionable’for the recipientto retain the benefit. This reformulation by Nourse LJ clearly is intended to avoid the controversy surrounding the ‘Badencategories’ and the uncertainties produced by the ‘knowledge/notice’distinction.However,itisnotcertainthat‘unconscionability’isanyless opaquethanpreviousattemptstoidentifythe‘core’ reasonfor liability. Moving now to examine the liability of a stranger for dishonestly assisting another to commit abreachoftrust(Barnes vAddy (1874);RoyalBruneiAirlines vTan(1995)).Itis importanttorealiseherethat,unlikeknowingreceipt/inconsistentdealing,the stranger maynever receivethetrustpropertyand,evenifhedoes,itisnotforhisownbenefit. Consequently, this is a form of secondary liability, usually resorted to when for some reason the trustee who has committed the fraudulent breach oftrust cannot be found or hasinsufficientfundstosatisfytheclaimsofthebeneficiaries.Inaddition,thestranger’s liability is to account for the profits. Strictly he is not a constructive trustee, for he does not receive the trust property but merely assists in a breach oftrust: see Millett LJ in Paragon Finance v Thakerar (1999). 4 However,theliabilitybelongstothestrangeralone,henceitisnolonger truethatthe stranger can be liable only ifthe trustee himself has behaved fraudulently. This was established by the Privy Council in Tan. Of course, it remains true thatthe stranger must himself be culpable. In Tan, however, Lord Nicholls, for the Privy Council, made it clear that what was required was for the assistor to be ‘dishonest’. He indicated that an objective standard was required but added that the experience and knowledge of the defendant may be taken into account. InTwinsectra vYardley (2002),themajorityofthe Houseof Lordsadoptedthe criminallaw testfordishonesty (as laiddownbyLordLaneCJin RvGhosh(1982))namely,thedefendant’s conductisdishonest by reference tothe ordinary standardsof reasonable and honest people and that he himself realised that his conduct was dishonest by those standards. This involves both objective and subjective questions. In Barlow Clowes International Ltd (in liquidation) v Eurotrust International Ltd and others (2006), the Privy Council decided that no inquiry is required to be made as to the defendant’s view about standards of dishonesty.Consciousness of dishonesty involved consciousness ofthose elements of the transaction which made participation transgress ordinary standards of honestbehaviour.Itdidnotalso requirethedefendanttohave thoughtaboutwhatthose standards were. In short, the standard by which the defendant’s dishonesty is judged is purelyobjective.InAbou-RamahvAbacha (2006),theCourtofAppeal reaffirmedthe notion that the test of dishonesty is objective and requires the court to decide that the defendant knowsofthe elementsofthe transaction which makes it dishonest according to the normally accepted standards of behaviour. The objective standard for dishonesty was further clarified by the Court of Appeal in Starglade Ltd v Nash (2010). The objective testisdecidedby thecourtby referencetothedefendant’sknowledgeandexperience. 4 Liability to account but no constructive trust.Further, there are significant issues concerning the standard of proof required for dishonesty.InJyskeBank vHeinl(1999)itwasheldthatthestandardofproofinvolvedahigh levelofprobabilitygreater thana‘balanceofprobabilities’ andthe inability ofthe claimants to meet this meant that the ‘assistance’ claim in Akindele was unsuccessful. However,inStatek Corp vAlford (2008),the HighCourtdecided thatthe standard of proof ofdishonesty is the traditional civil standardof abalanceofprobabilities. AnalternativeviewwasputforwardbyLordNichollswritingextra-judicially.Apersoncan be made liable to accountfor intermeddling with trust property whenever this is necessary to reverse an unjust enrichment, having regard to the defendant’s status as a bona fide purchaser for value or any defence of change of position. Note A general answer to such a question is sufficient, provided thatthere is ample reference to caselaw. QUESTION 27 The liabilityof a stranger for meddling with trustproperty shouldbe strict.Then, subject only to the defence of change of position, the courts could determine in all the circumstances whether the defendant should return property to the beneficiaries without having to agonise aboutthe defendant’s state of mind. Discuss. How to Read this Question This is an essay question that requires you to identify and analyse the rationale for liability of an intermeddling stranger to a trust. How to Answer this Question A good answer will identify the basis of liability for dishonest assistance and knowing receipt.Theissueiswhether liabilityshouldbebasedonrestitution,faultorwhether liabilityshouldbestrict.Thereareeminentadvocateswhosupporteachoftheseviews. Common Pitfalls itis recognised thatthis is a personal liability to account.Constructive Trusts 2 125 Answer Plan Basisofliability fordishonest assistance and knowingreceipt. Confirmationthat somedegreeoffaultisrequired:RoyalBruneiAirlines vTan (1995), Westdeutsche Landesbank Girozentrale v Islington LBC (1996). The restitution angle and the change of position defence. Confusion of language:the problem of semantics. Confusion of facts: receipt or assistance. The application oflaw to facts – a recipe for differentinterpretations ofthe law. Answer Structure This diagramconstructs the essential elements of liability of strangers to a trust and suggested reforms. Up for Debate Thisquestionreflectstheacademicdebatewhichisragingoverthescopeof,and ledge of accessories and recipients’ (2000) JIBL 138. Aim Higher LJgavelittleornoguidanceastohowthiselusiveprinciplewouldbeapproached.ANSWER Liability in ‘assistance’-type cases is to account to the beneficiaries as though the defendantis a constructive trustee: seeParagonFinance vThakerar(1999). 5The propertyhasnot beenreceivedby the stranger forhisownbenefit(Barnes vAddy (1874)).Consequently,it is apparentthat suchliability shouldneverbe triggeredby simple factualassistance,but only where such assistance is tainted by personal fault. Further, as is made clear by the PrivyCouncilin RoyalBruneiAirlines vTan(1995),the strangermaybe liableonlywherehe is ‘dishonest’:merenegligence,or adeliberatebuthonestassistance,isnot sufficientto found liability (see, for example, Ferrotex v Banque Français de l’Orient (2000)). The dishonesty test now replaces the old tests of knowledge based on the Baden categories for assistance liability. However, although apparently simpler,therewere difficulties initially as to what amounts to dishonesty, or how it is proven.6Brinks v Abu-Saleh (No 3) (1995) suggests that dishonesty implies some knowledge on the part ofthe stranger,butit was not clear whether this concerns the existence of a trust, or ofthe fact of breach, or ofthe factthattheproperty isanother’s,or ifithas someothermeaning.The testtoday fordishonesty was laid down by Lord Nicholls in Royal Brunei Airlines v Tan (1995). It means that the defendant had acted with a lack of probity or simply not acted as an honest man in thecircumstancesofthe case.ThisdefinitionwasconstruedbyLordHuttoninTwinsectra v Yardley (2002) as involving the criminal law test for dishonesty (as laid down by Lord Lane CJ in R v Ghosh (1982)). This testincorporates a combined objective and subjective standard.Thedefendant’sconductisdishonestbyreferencetotheordinarystandardsof reasonable and honest people and that he himself realised that his conduct was dishonest by those standards. However, in Barlow Clowes International Ltd (in liquidation) v Eurotrust International Ltd and others (2006), the Privy Council decided that no inquiry is requiredto be made ofthe defendant’s view about standards ofdishonesty.Consciousness of dishonesty involved consciousness of those elements of the transaction which made participation transgress ordinary standards of honest behaviour. It did not also require the defendant to have thought about what those standards were. The standard applicablehereisobjective.InAbou-RamahvAbacha(2006),theCourtofAppealaffirmed thatthe standardisobjective anditisunnecessary toshow ‘subjectivedishonesty’in the sense of consciousness on the part ofthe defendantthatthe transaction was dishonest. It will be sufficient if the defendant knows of the elements of the transaction which makes it dishonest in accordance with the normally acceptable standards of behaviour. Thus, the standard by which the defendant is judged is objective but with a subjective element. This approach was endorsed by the CAin Starglade Ltd v Nash (2010). In reversing the decision of the trial judge, the CA decided that the test is whether the judge is convinced that the defendant’s behaviour is or is not within the ordinary standards of honest commercialbehaviour. Turning then to ‘knowing receipt’, it seems clear that the essence of the liability of the stranger inthese cases is that he has received trust property for hisown benefit:per 5 Clear basis ofliability in dishonest assistance cases. 6 Initial confusion as to the meaning of dishonesty.Constructive Trusts 2 127 MilletJinAGIP(Africa) Ltd v Jackson (1992).Liability comprises an obligation toreturnthe propertyoraccountfor itoutofhisownresources.Consequently,theliability isprimarily restitutionary:toreturnpropertywhichbelongs toanother. Withthis inmind,the crucial question is whether the stranger, who has received the property for his own benefit, will be liable onlywhen he was at‘fault’(thatis, had some degree of‘knowledge’) or whether the liability is strict – so that even an innocent defendant can be liable – subject to a defence of change of position. At present, it seems that liability is fault based: see Lord Browne-Wilkinson (obiter) in Westdeutsche Landesbank Girozentrale v Islington LBC (1996) and,firmly,theCourtofAppealinBCCIvAkindele.Yet,asnotedbelow,thishasbeenchallenged, althoughthere is littleunanimity amongthe cases forwhatdegreeofknowledge is required. It has been suggested in cases such as Carl Zeiss Stiftung v Herbert Smith & Co (No 2) (1969), Re Montague (1987) and Cowan de Groot Properties v Eagle Trust plc (1992) thatliabilityarisesonlywhenthestrangerhad‘wantofprobity’,probablymeaningintention or recklessness as to whether the property was transferred in breach of trust, and some case law suggests that mere negligence might be too low a standard in so-called ‘commercial’ cases where the strangers are professional advisers merely executing the wishes of the trustee (Cowan de Groot Properties v Eagle Trust plc (1992); Polly Peck International plc v Nadir (No 2) (1992)). Alternatively, other cases suggest that liability should existifthe stranger is simplynegligent withregard to the terms ofthe trust:inother words,ifheshouldhaveknownthatthetransferoftrustfundsorhisownsubsequent dealings with them were in breach oftrust. This ensures that liability will arise when any ofthe five categoriesofknowledge inBadenDelvaux exists (subjective andobjective knowledge). Judgments in cases such as International Sales Ltd v Marcus (1982), Belmont Finance Corporation v Williams Furniture (No 2) (1980), at first instance in AGIP (Africa) Ltd v Jackson (1992) and Box v Barclays Bank (1998) support this view. Different again is the approach in Akindele, where Nourse LJ seeks to avoid this past confusion by saying that the recipient must act ‘unconscionably’ before liability can arise. How this differs from ‘knowledge’or‘notice’isunclear,althoughitseemscertainthatitdoespresupposesome element offault. This doubt about the practical application of the test of ‘fault’ required to fix a stranger withliabilityfor‘knowingreceipt’raisesamorefundamentalpoint:namely,whetherliability should depend on any fault at all. After all, if liability is triggered by receipt and the obligationis toaccountfor itsvalue(or returnitifstillheld),thenshouldnotmerelyinnocent recipients also be liable? Of course, recipients would need a defence, as every circumstanceinwhichXmight receiveY’sproperty couldnotfindliability(for example,ifXwere a bona fide purchaser for value). This approach – generally thoughtto be purely restitutionary – is indicated by the House of Lords in Lipkin Gorman v Karpnale (1991) and has been argued forcefully academically by Lord Nicholls writing extra-judicially.Certainly, that was the position with the claim at law and many would argue thatthere is no reason for any difference merely because the beneficiaries of a trust are pursuing a claim in equity. Lest this is thought to be unfair to the innocent stranger, it is balanced by the recognition of a general defence – ‘change of position’. This would be available to any stranger todefeattheimpositionof aconstructive trust,ifthe courtthoughtfit,dependingonwhether the strangerhas changedhispositioninreliance onreceiptofthemoney.As is evident, this introduces an element of discretion into the fixing of receipt liability, butitisnot at all clear whether the ‘knowledge’basedtest really is anymore objective. QUESTION 28 ArnoldistheagentofTarquin,thetrusteeofasettlementinfavourof‘thechildrenof Sarah’. Tarquin instructs Arnold to pay £5,000 to Len, who, Tarquin says, is the illegitimate child of Sarah and himself. Tarquin also instructs Arnold to invest £10,000 in the stock exchangeinTarquinEnterprisesLtd,tobuy£5,000worthofticketsinthenationallottery (allofwhichlose)andtotransfer£10,000toClarenceaspaymentforservicesrenderedto the trust. One year later, Tarquin goes missing with the remaining trust fund monies. Moreover, it transpires that Len is in fact the child of Tarquin and Emily (Arnold’s sister) and thatthe money has all been spent. Tarquin Enterprises have gone bust due to a dramatic withdrawal of cash from their bank account. AdvisethechildrenofSarahastotheirremedies,ifany,againstArnoldandClarence. How to Read this Question This question requires you to deal with breaches oftrust and the liability of Tarquin,the trustee, and Arnold and Clarence, strangers to the trust. The claims of the beneficiaries may include wrongful distribution, knowingly receiving trust property and dishonestly assisting in a fraudulent breach of trust. How to Answer this Question Inourparticular case,it seems that‘the childrenofSarah’ – thebeneficiariesofthe trust– wouldbeunabletopursueanactioninbreachoftrustagainstTarquin(their trustee) because he has disappeared. Consequently, they must resort to alternative remedies, which, in this case, means attempting to establish that strangers to the trust are fixed withconstructivetrusteeshipbecauseoftheirinterferenceorinvolvementwiththeactivitieswhich have causedloss to the trust estate.Importantly, it mustbe remembered that theliabilityofthestrangers–ArnoldandClarence–canexistonlyifinteraliatherehas actuallybeen abreach oftrust:Brown vBennett(1998).The familiar liability of‘dishonest assistance’ and ‘knowing receipt’ can arise only if the dealings with the trust property disclose a breach of the terms of the trust. Common Pitfalls Thenotionofstrictliabilitytobeimposedonthirdpartieswhointermeddlewith trust property was advocated extra-judicially by Lords Nicholls and Millett but priate cases.Constructive Trusts 2 129 Answer Plan Liabilityasaconstructive trusteeforknowingreceiptanddishonestassistance. Level of knowledge ordishonesty required: whether satisfied. Profits. Answer Structure This diagram identifies the nature of the liabilities of Tarquin,Arnold and Clarence for breaches of trust. ANSWER As far as the wrongful distribution of the £5,000 of trust monies to Len is concerned, it isaclearbreachofthetermsofthetrust(ReHulkes (1886)).Ifanyliabilityexists,itwill lie in ‘dishonest assistance’, for clearly Arnold has participated in Tarquin’s breach of Up for Debate Theproperrationalefortheliabilityofstrangerstoatrusthasbeenthesubjectof andCMitchell,‘Dishonestassistance,knowingreceiptandthelawoflimitation’ (2008) Conv226.Constructive Trusts 2 trust. In order to maintain a successful action against Arnold on this ground,two essential conditions must be fulfilled.7 First, it must be established that Arnold has assisted Tarquininabreachoftrust.This isa factualmatter.Assistance impliespositivehelp although, inthis case, itis not difficultto establish. Royal Brunei Airlines v Tan(1995) makes it clear that the liability is the stranger’s and the state of mind of the trustee cannot colour it.A‘simple’breachoftrustisenough. Second,Tanalsomakesit clear that the stranger’s assistance must be coloured by his own ‘dishonesty’ before liability can arise. In Twinsectra v Yardley (2002), the majority of the House of Lords adopted the criminal law test for dishonesty (as laid down by Lord Lane CJ in R v Ghosh (1982)). This involves both objective and subjective questions. Controversy surrounded the Twinsectratest.InBarlowClowes vEurotrust(2006),the PrivyCouncildecidedthatdishonesty was to be judged by reference to an objective standard. The test was whether the defendant was conscious of those elements of the transaction that made his participationtransgresstheordinarystandardsofhonestbehaviour.InAbou-RamahvAbacha (2006),theCourtofAppeal endorsedthedecisioninBarlowClowes anddecidedthat the test of dishonesty is predominantly objective but with a subjective element and thatBarlowClowesdoesnotinvolveadeparturefromtheTwinsectracase.TheCourtof Appealdecidedthatthetestfordishonestywillbesatisfiedifthedefendant knowsof theelementsofthe transactionwhichmake itdishonestinaccordancewiththenormally acceptable standards of honest behaviour. In Starglade Ltd v Nash (2010), the CA decided that the test for dishonesty was the principle stated by the Privy Council in Barlow Clowes and involved an objective standard. The judge will then consider the conduct, experience and knowledge of the defendant to determine whether his conduct may be characterised as dishonest. Moreover,there is controversy in respectofthe standardof proof ofdishonesty. In Jyske Bank v Heinl (1999) it was decided by the Court of Appeal that the claimant bears a high standardofproof exceedingthe traditional civil standard,butnotashighas the criminal standard of proof. However, in the more recent case,Statek Corp vAlford (2008),theHigh Court revertedbacktothe traditional civil standardofproof of abalanceofprobabilities. No doubt each case will be unique to its own facts.8 In our case,we do not know with certaintyArnold’s state of mind or motives, butit might besignificantthatLen’smother isArnold’ssister.Whilenotconclusive,thisdoessuggest some participation in Tarquin’s fraud and, if this is true, Arnold will be accountable and orderedtorepaythe£5,000tothetrustfundwhichLenhasnowdissipated. Much the same considerations apply to the twofurther ‘investments’made byArnoldon Tarquin’s instructions exceptthat,inboth cases,there isnoclear evidenceof abreachof trust.Thismakesitimpossibletobecertainwhether thestrangerswillbeaccountablefor dishonestly assisting Tarquin in his activities. Of course, as above, the possibility that a breach oftrust has occurred canbe inferred from the nature ofthe investments ordered 7 Specific identification of the elements ofthe claim. 8 Structured discussion of the cases.byTarquin,asitishardlylikelythatthetrustdeedauthorisesinvestmentinoneofthe trustee’sowncompaniesor inapurelyspeculativelotteryandsuchinvestmentsmaywell be outside ss 3 and 4 of the Trustee Act 2000. Yet this is only a rebuttable presumption. With that in mind, it is again necessary to assess Arnold’s state of mind in order to determine whether the beneficiarieshave a remedy in a dishonest assistance claim concerning these losttrustfunds.Unfortunately,there isnothing in the factsofthe problem to help us here and, as we have seen,the factthat no reasonable person would have acted as Arnold did (that is, Arnold was negligent) is not enough to trigger the powerful duty to accountin assistance cases (Tan). In the absence of further evidence,the matter must restthere. The third stage of the beneficiaries’ proceedings against the ‘strangers’ will be an attempttofixClarencewithconstructivetrusteeshiporthedutytoaccount,thistime on the basis of‘knowing receipt’.Ifthis liability is successfully established,Clarence will be required to return the £10,000 to the trust and any profit that it has generated while in his hands (English v Dedham Vale Properties (1978)).9As a first step, it is apparent that Clarence has received the £10,000 for his own use and benefit,thus establishing clearly that this is a case of ‘receipt’ (AGIP (Africa) Ltd v Jackson (1992); BCCI v Akindele (2000)). Yet, before Clarence can be liable, it must be established both that the transfer to ClarencewasinbreachoftrustandthatClarencehadsufficientawarenessor ‘knowledge’ of this to make him liable or that it is unconscionable for him to retain the benefit(Akindele). In fact, although these are separate criteria, it often happens that theyareinterwoven,astheyareinthiscase.So,ifitistruethatClarencehasrendered services to the trust, the payment of £10,000 may well be legitimate (that is, there is no breach) – s14 ofthe Trustee Act 2000 – and, even ifthe paymentisnotlegitimate per se, Clarence could easily be a bona fide purchaser for value (having ‘paid’for the money withhisservices)andthusnotbeliable.Ontheotherhand,ifthetransfer toClarence was in breach of trust – perhaps as part of a scheme to defraud the beneficiaries – Clarence’s position must come under much closer scrutiny. If a breach has occurred, Clarence will be liable if he had ‘knowledge’ ofthe relevantfacts. There is no agreementin the case law as to which level of knowledge is required for ‘receipt’ liability. Some cases (for example, Cowan de Groot Properties v Eagle Trust plc (1992)) suggest that either ‘actual knowledge’ or ‘recklessness’ must exist in order to establish liability. In Re Montague (1987), Megarry VC also argues powerfully in favour of a minimum standard of‘want ofprobity’.Onthe other hand,other cases (International Sales Ltdv Marcus (1982); Belmont Finance Corporation v Williams Furniture (No 2) (1980); Box v BarclaysBank (1998)) indicate plainly that receiptliability can be triggered by mere negligence, and this was also the view of Millet J in his very thorough judgment in AGIP (Africa) Ltd v Jackson (1992). Possibly, it is the meaning to be given to the ‘unconscionability’ test put forward in Akindele, but this remains to be seen. In our case, it is not clearwhetherClarencehasanyknowledgeofthebreachoftrust;hemaybeinnocent. An enquiry must be made as to Clarence’s understanding of Tarquin’s actions and, it is 9 Statement of liability including the remedy.submitted, the better view is that he will be liable as constructive trustee if he was merely negligent or worse: that is, if any of the five categories of knowledge identified in Baden Delvaux and Lecuit v Société Générale pour Favouriser le Développement du Commerce et de l’Industrie en France SA (1983) are present. Note Thisproblemquestion is quite general and one should not shy fromstating thatthe preciseanswerdependsonfactswhicharenotmadeapparentinthequestion.Ofcourse, thismeansthattheanswerrequiresadiscussionoftheprinciplesbehindtherules.8 TheLawofTracing INTRODUCTION One of the most effective remedies available to a beneficiary who has been deprived of the trust property as a result of a breach oftrust by the trustee is to be found in the law of tracing. ‘Tracing’ of trust property – either ‘at law’ or ‘in equity’ – enables a claimant to identifyhisownership ofproperty into whosoever’s hands that property falls and to recover it to the extent that the defendant still possesses it. Most importantly, it is clear thataclaimantwhoreliesonthetracingprocessistracinghisorherownershipofthe property irrespectiveofthe formthepropertyhas takenin thehandsofthedefendant.In Foskett v McKeown (2000), Lord Millett drew a distinction between ‘following’ and ‘tracing’.Bothprocessesinvolveexercisesinlocatingtheassetsoftheclaimant.‘Following’istheprocessofidentifyingthesameassetasitmovesfromhandtohand.‘Tracing’is the process ofidentifying a new asset as a substitute for the old. For example, ifthe trusteewronglydistributestrustproperty–beingcash– toX, andXuses that cashtopurchase a car,the claimantmay ‘trace’hisownershipthroughthe cashintothe carand recover itfrom X. It should also be noted atthis early stage thatthe remedies attached to theprocessoftracingandtheliabilityofastrangerasconstructivetrustee(Chapter7)are frequentlycomplementary.So,athirdpartywhohas receivedtrustpropertywith‘knowledge’that there has been a breach oftrust may be a constructive trustee and subjectto the tracingprocess.In the former case (thatis,that of constructive trusteeship), he must hold the trust property for the beneficiaries and be subject to a personal liability. As we shall see in the case of successful tracing, the defendant may be entirely innocent but must still returnthe property initspresentformto the rightful owners. In addition, it is reasonably clear thattracing in equity is a ‘proprietary’ institution in the sense that asuccessful claimant assertshis righttothepropertyper se:hence,ifthe defendantisbankrupt,the claimantmay recover ‘his’ property (assuming it exists andis identifiable) and he is not treated as a general creditor and does not have to take only a share of the defendant’s assets. It is a matter of ‘hard-nosed property rights’: Foskett v McKeown (2000).Obviously, such apowerful remedy cannotgounchecked andit should come as no surprise that the availability of the remedies attached to tracing in equity is restrictedtocertainsituations.Unfortunately,theprecisecircumstancesinwhichtracing is available are not universally agreed – either academically or judicially – nor, indeed, is thereagreementastowhether tracing‘atlaw’andtracing‘inequity’areassimilaras theyfirstappear.Theseissues,aswellasproblemquestions testinganawarenessofhow tracing works in practice, are the staple of examinations.134 As inferred already,there are two forms oftracing:tracing ‘atlaw’ (common law tracing) and tracing ‘in equity’. Tracing atlaw is available to anyperson who has legaltitle to propertyanditsprimarypurposeistoidentifythepersonwhothelegalownershouldsue, thatbeingthepersonintowhosehands thepropertyhaspassed.Oncethedefendanthas beenidentified,theclaimantmaythensueonavarietyofcausesofactionascircumstances dictate. These are the action for ‘money had and received’, being appropriate wheretheproperty tracedismoney,andanactioninconversionor forwrongfulinterference, where the property consists of goods or other kinds of property. We should note, however,that recent case lawhas tendedto‘deconstruct’ claims intracing– especiallyat law – and to regard the claim as an example of a general restitutionary liability, whereby the defendant should return property to the claimantifthe defendant has been unjustly enriched at the claimant’s expense, to the extent of the unjust enrichment, in circumstances where there is no defence of change of position (Trustee of the property of FC Jones v Jones (1996)). In addition, as we shall see, there is one serious limitation on the effectiveness of tracing at law, for it is impossible to trace at law if the original property has been mixed with any other property (as opposed to having been exchanged for any other), although, again,this may be changing. Fortunately, tracing into a ‘mixed fund’ is perfectly possible in equity. Moreover, given thattracingatlawrequires the claimanttohave legaltitle toproperty,itis clearlynot availabletoabeneficiaryunderatrustwho,afterall,hasonlyanequitable title.Consequently,mostoftheissuesexaminedinthischapterwillfocusontracinginequity,that being the remedy available to a beneficiary under a trust and that being the remedy that does permit a claim to be made even though the trust property has been mixed with some other, even with that of the trustee himself: Foskett. Finally, we shall see that anotheraspectoftheproprietarynatureoftracinginequity is thatit entitles the claimant both to the property which the defendant has in his possession and to any increase in its valuethatitmayhave acquiredinthemeantime (Foskett:entitledtobenefitsoflife insurancebecausepremiumswerepaidwithbeneficiaries’money).Until recently,thishasnot been possible in law, but, once again, the move to a generally restitutionary approach maymake even thispossible (Trustee of the property of FC Jones v Jones). QUESTION 29 Whataretheessentialrequirementsforasuccessfultracingclaimatlawandinequity? Aim Higher thattheclaimantmayattachanorderontotheproperty.‘Tracing’istheprocess stituted form.InWestdeutsche(1996), LordBrowne-Wilkinson indicatedthat a thief holds stolenproperty on constructive trust for the rightful owner as the thief’s conscience necessarily is bound.Thismeans thattheowner couldtrace theproperty throughthehandsofthe thief into the hands of the ultimate recipient. It is an example of the ‘act in breach’ giving rise to both the claim and the fiduciary relationship necessary to support it. Clearly,this wide view would do much to reduce the practical obstacle placed in the way oftracingby the needtoestablish the fiduciary relationship. However,inShalson v Russo (2003),Rimer JdoubtedLordBrowne-Wilkinson’s viewandstatedthat a thiefhasnotitle to property that he steals and thus cannot become a trustee of it. The true owner retains the legal andbeneficialtitles totheproperty. Perhaps thebetter viewis thatthe thief does acquire title through his act of taking possession, but he does not acquire a better title than his victim. In Boscawen vBajawa (1995),theCourtofAppeal indicated that equitable tracing should be regarded as a route to a defendant for all manner of remedies. So, in that case, once the defendant had been identified as having received the claimant’s money (transferred in breach oftrust),the claimant was subrogated to (that is, placed in the position of)the mortgagee whom the defendant had paid off with the money. So, it appears that equitable tracing– justlike its counterpart atlaw – isdeveloping anew restitutionary cloak. How to Read this Question Thisis abroadbasedessayquestionontracingatlawandinequity.Itwouldbeappropriate to establish the rationale and requirements of tracing in each jurisdiction and highlight the limitations applicable to each. How to Answer this Question Itis often difficultto describe and analyse the law oftracing in the abstract. The concept of following or tracing the ownership of property is metaphysical, but nevertheless very powerful if one happens to be the defendantin a tracing claim. The ‘big’ question is whether tracingatlaw and tracingin equitywill survive asdistinct classesof action in the face ofthe new restitutionary approach. Following Foskett v McKeown, it seems thatthey willfor sometimetocome.However,inessayssuchasthis,examplesarealwaysusefulto illustrate difficultconcepts. Answer Plan The purpose of a tracing claim, both atlaw and in equity. Conditions for both claims. Up for Debate Tru LI78.136 Advantages of a tracing claim Differencesbetweenthem:inestablishingtheremedyandinrespectofthe defences available to a defendant. Answer Structure This diagram illustrates the process of tracing at law and in equity. ANSWER Common law tracing is a means of following legal title to property through successive personsuntilthe property (or itspresent equivalent) is identifiedinthe handsofthe defendant. In essence, it is a means to an end, not the end itself (AGIP (Africa) Ltd v Jackson (1992); Trustee of the property of FC Jones v Jones (1996)). When the present possessor ofthe property in which the claimant’s legaltitle subsists is identified,the claimant has a choice of remedies against that possessor. If the property is money, then the action will be against the present recipient for ‘money had and received’ (Lipkin Gorman v Karpnale (1991)), whereas ifthe property is a specific item,then the action willlieintortforwrongfulinterferencewithgoodsorconversion.Inthe former case, the amount ofthe money ‘had andreceived’by the defendantwillbe returnedto the claimant and, in the latter case, the defendant will pay damages representing the value oftheitemor,inexceptionalcases,theitemitselfmaybereturnedatthediscretionof the court. 1 Inthe first place,tracingatlaw(and inequity) requires theproperty to be inidentifiable form. If it has been destroyed, or money has been dissipated, then tracing is of no use:thepropertyandthelegaltitletoitareextinct.Second,tracingatlawrequiresthe claimanttohavehadlegaltitletoproperty.Therefore,asamatterofprinciple,itisnot 1 Multitude of remedies to complement the tracing process. Atlawavailable to a beneficiary under a trust who is, of course, a person with a pure equitable title.Moreover,itmustbe clear thatthe claimanthas retainedlegaltitle tothe property. Given that title to money usually passes with possession, it is often easy to defeat a claimatlaw, seeBox vBarclaysBank (1998).Third,thepersonal natureoftracingat law may cause problems ifthe defendant hasgone bankruptbecause,intheory,the personal claimofthe tracerwill rankequallywithotherpersonal claimsmadeonthe bankrupt’s estate. Fourth, although there has been much debate, it seems that tracing atlaw is not available ifthe claimant’s property has been mixed with that of another person and then passed on. The essence of the matter is that mixing at law renders the legaltitletothepropertyunidentifiable,inmuchthesamewayas ifthepropertyhad actuallybeendestroyed. Fifth,beingtraditionally regardedas a personal claim, an innocent defendant in an action supported by common law tracing should not normally be required to disgorge profits made by use ofthe property wrongfully received. The claim isforthevalueoftheproperty,nottheproperty(comparetracinginequity).However, in Jones v Jones (1996), the Court of Appeal held, on general restitutionary principles, thatifthedefendanthadnotitle tothemoney shehadreceived,thenshehadnotitle to the profits she made by using it. Finally, it may now be the case that a defendant may be able to plead ‘change of position’ as a defence to an action triggered by common law tracing (Lipkin Gorman v Karpnale (1991)). For example, it may well provide adefence to a claiminmoney ‘had andreceived’for apersonwhois abona fidepurchaser for value of the claimant’s property and to other persons who, in all innocence, have received the claimant’s property in circumstances where the court thinks they should not be held personally liable.2 Tracing in equity does not suffer from the practical limitations of common tracing and consequently is much more versatile. Importantly, tracing in equity is regarded as proprietary in nature, with the consequence that it attaches directly to the property in the hands ofthe possessor (no matter what its current form) and gives the claimant paramount rights to recover it, even if the defendant is bankrupt. The defendant has no right to the claimant’s property and so it forms no part of the defendant’s assets. Furthermore, the proprietary nature of the claim means that the claimant is entitled to any increaseinthevalueof‘his’propertywhileithasbeenoutofhispossession,aswhere sharesarepurchasedwithtrustmoneyandthey riseinvalue(ReTilley(1967);Foskett (2000)). The remedies in equity include a charge over property in the defendant’s hands if it represents the claimant’s original ownership, or an order for the return of specific assets, or a charge over specific funds,or a charge over a specific portion ofthe property or funds.3 Thetriggerforaclaimofequitabletracingisthattheclaimantmusthaveanequitable proprietary interest in property and only an equitable proprietary interest (Re Diplock (1948)).Consequently,abeneficiaryunderatrustmaytraceinequity,butatrustee(legal titleonly)andanabsoluteownermaynot.Second,unlikethepositionatlaw,itseems 2 Limitations as to tracing at law. 3 Broader approach to tracing in equity.138 thattracinginequity canoccur only ifthere was inexistence a fiduciary relationship between the equitable owner and some other person before the events giving rise to the tracing claim occurred (Sinclair vBrougham (1914);AGIP(Africa) Ltd v Jackson (1992); and confirmed in Westdeutsche Landesbank Girozentrale v Islington LBC (1996)). This will alwaysbethecasewheretheclaimarisesoutofatrustanditisclearthatcourtsmaydo their utmost to find the required fiduciary relationship in order to facilitate the tracing claim (Chase Manhattan Bank v Israel-British Bank (1981)). Third, it is inherent in the equitable tracing claim that the property of the beneficiaries must have been transferred to another person wrongfully. Otherwise, the equitable ownerhasnorightor reasontoclaim its return. Fourth,beingaclaim inequity, equitable tracing is not possible against a person who is a bona fide purchaser of the legal estate for value withoutnotice, although itmay still be possible totrace againstthe person who has sold the trust property to the purchaser (Re Diplock (1948)). Likewise, it appears that thecourthasadiscretiontodisallowtracingagainstaninnocent volunteer (thatis,a person who gives no value for the trust property but is innocent of wrongdoing), ifto do otherwise would be inequitable in all the circumstances. It is felt that this discretionary limitation in Re Diplock is now subsumedin the developingdefence of change ofposition advocatedbyLordGoffinLipkinGorman(1991).Similarly,thedefencewillnotbeavailable to a wrongdoer, such as a defendant who has acted in breach of his fiduciary duties. In anyevent,themerefactthatthedefendanthasspentthemoneyinwholeor inpart,in the ordinary course of things, does not, of itself, render it inequitable that he should be called upon to repay the claimant. However, if the defendant has spent the claimant’s moneyonaventurewhichwouldnothavebeenundertakenbutfor thegift, suchconduct wouldbe capableofbeingconstruedasa change ofposition.InNiruBattery Manufacturing Co v Milestone Trading Ltd (No 2) (2004),the Court of Appeal decided that good faith was the touchstone of the defence of change of position and that this concept was incapable ofdefinition. In conclusion, it is apparent that both tracing in law and tracing in equity can be powerfultools in thehands ofpersonswrongfully deprivedoftheir property.Atpresent, the conditions for the application of each are different and some would argue that they are fundamentallydifferentinpurpose. However,the object oftracing is quite limited: it is to restore to the claimantthat which he has been wrongfully deprived, often in breach of trust. Somestudentsattemptingthistypeofquestionhaveatendencytowriteallthey Clayton’s Case (1816), etc.).QUESTION 30 Charleswasthetrusteeofalargeprivatetrustfund.Hecashedachequefor£26,000 drawn on the trust fund and gave the money to James, the trust’s financial adviser, with directions to use halfto purchase shares for the trust and to use halfto investin antique furniture. James used £7,000 ofthe money to purchase shares inXCo in the name ofthe trust, and he delivered the share certificates toCharles as promised. However, he used a further £10,000 to purchase shares in Y Co in his own name, although he has now given these to his daughter as a birthday present, much to her surprise. James puts a further £5,000 in hisownbank account,in which he alreadyhas some £4,000 ofhisown money. Outofthisaccount,hepurchases shares inZCotothe valueof£3,000, andgives themto his son. He spends the rest ofthe money from this bank account on a family holiday. The final£4,000ofthetrustmoneywasusedtopurchaseantiquefurnitureatalocalauction. The shares inXCohave slumpedinvalue;those inYCo have remainedconstant;but those inZCohave trebledin value.Unfortunately,Jameshasdisappeared,andthe furniture turns out to be fake and is worthless. Advise Charles of any action he might take to recoup the losses to the trust fund. Howto Readthis Question Thisisaproblemquestiononbreachoftrustandtracingatlawandinequity.Thisisevident inthequestionbecausewearetoldthatoneoftheparties,James,inpossiblebreachoftrust has disappeared. It would not be possible to pursue James personally for breach of trust. Insteadtheclaimofthetrustfundistoadvisetheclaimantsonrecoupingtheloss. How to Answer this Question In answering this question it would be advisable to state and apply the principles of law concerning the breach(es) of trust and the process of tracing at law subject to the possible defences available to the defendants. Once the trust property becomes mixed with the fiduciary’s funds we would be required to consider the merits of tracing in equity, indicating the advantages and limitations of doing so. Up for Debate InLipkinGormanvKarpnale (1991),the Houseof Lords introducedthedefenceof a change of position defence’ (1992)Conv 124. Aim Higher nottoconsiderequitable tracingatall –because,ononeview,thetrusteehasno partiallyeffectiveremedyinequitabletracingisavailabletothebeneficiaries.Answer Plan Tracingatlaw: existenceoflegaltitle andcontinuance ofthattitle. Appropriate remedy and defences, if any. The need to trace in equity:the beneficiaries. Increase in value of trust property. New restitutionaryapproaches. Answer Structure This diagram depicts the nature of tracing both at law and in equity. ANSWER This problem raises a number of issues concerning the remedies available to a trustee (Charles)andthebeneficiariesforwhomheholdsthetrustpropertywhenthetrustproperty is misapplied in breach of trust. However, perhaps the first piece of advice that one may offer to Charles is to warn him of the possibility that he may be sued personally for breachoftrustby thebeneficiaries.Of course,the acts inbreachwere committedby James–Charles’sagent–butitisclearthatCharlesmightbeheldpersonallyliablefor losses to the trust estate through James’s action ifCharles did notfulfil his duties in respect of agents under ss1, 21 and 22 ofthe Trustee Act 2000, or otherwise delegateda function which he should have exercised personally (see s 11 of the Trustee Act 2000).4 Similarly,there is no doubtthatJames would have been liable for breaching his contract of agency andprobably alsoas constructive trustee forknowinglydealing inconsistently with trust property (Karak Rubber v Burden (1972)). In this regard, it is worth noting that the£7,000worthofsharespurchasedinXCointhenameofthetrustaresafeandthat the furniture purchased by James, according to his instructions, is also part of the trust estate, even though it is worth very little. If at allpossible,Charles shouldbe advisedinitially toseektotrace themissingtrust fundsatlaw.Theadvantagesofthisapproachare,first,thatthereisnoneedtoprove 4 Nature of the liability of Charles and James.aninitialfiduciaryrelationship(althoughthiswouldnotbeaproblemfor thebeneficiaries); second,that an action to recover the property can be made against any persons who have received it, regardless of their state of mind or whether any of them still retains it(AGIP(Africa) Ltd v Jackson (1992)); and third,thatthe defences availableto therecipientofthepropertyarefairlylimitedinscope,eventhoughachangeofposition defence to a claim atlaw maynow be accepted as valid (Lipkin Gorman v Karpnale (1991)).5 If Charles can establish that he – as trustee – retained legal title to the £10,000 whichwastransferredtoJames,andwhichJamesimproperlyinvestedinYCo,hemay be able to maintain a tracing claim at law against these assets which now lie in the hands ofJames’s daughter. In this connection,Charles will have to establish that he has a legal right of ownership which has survived the transfers to James and subsequentlytohisdaughter.Thiswouldnotappeartobeaprobleminthiscase,especially since James received the money as agent (see Lipkin Gorman v Karpnale (1991)). Thereafter, James could not transfer the shares beneficially to his daughter under the equitable maxim nemo dat quod non habet. In addition, there is no doubt that a claim to trace atlaw will survive changes inthe nature ofthe property, providing thatitisnot mixedwithanyotherproperty (Taylor vPlummer(1815)).Thus,Charleswillbeableto tracehislegaltitletothepropertythroughJamestohisdaughter.Charleswillbeable to maintain an action against James’s daughter personally for wrongful interference with goods and can expect damages to the value of the property she has received. This liabilitywillpersistevenifshehasdisposedofthesharesandmaybedefeatedonlyif she can rely on the defence of ‘change of position’, recognised in Lipkin Gorman v Karpnale (1991) and applied in Bank Tejaret v HKSB(1995). This is unlikely in the circumstancesasthereisnoevidencethatJames’sdaughterhasinanywayactedtoherown detriment in innocent reliance on her receipt of the shares. The next issue concerns the £5,000 which James places in his own bank account, where there is £4,000 of his own money. James has mixed the trust money with his ownmoneybeforepurchasingthesharesandgivingthemtohisson.Thisisfataltoa claimoftracingatlawagainstJames’ssonbecause, asfar as the commonlawis concerned, the mixing of property before it is passed to the recipient makes it unidentifiable (AGIP (Africa) Ltd v Jackson (1992)).6 It is possible that Charles could argue that JamesbecameaconstructivetrusteeforhimonthebasisthatJamesmusthaveknown that he was behavingin breachoftrust and so became a trustee onthe basis of conscience, following dicta in Westdeutsche Landesbank Girozentrale v Islington LBC (1996). ThiswouldtriggeraclaiminequitybyCharles–thetrusteeandnowbeneficiary:TwinsectravYardley (2002). However,perhaps the best advice is thatifthe trustfund isto have a good chance of recovering the £5,000, the beneficiaries must be persuaded to pursue a tracing claim inequity againstthe shares now inthe possession ofJames’s son.Infact,thereiseverychancethatanequitabletracingclaimwouldbesuccessful, atleastinsofarasthetrustfundmoniesremainidentifiable.Forexample,thereisan initial fiduciary relationship and the beneficiaries undoubtedly have an equitable 5 Advantages of tracing at law compared with tracing in equity. 6 Limitations on tracing at law.proprietary interest(Re Diplock (1948)). Moreover, as noted above, so long as the beneficiaries’ equitable proprietary interest is identifiable, it is irrelevant that the property is no longer in its original form or that it has been mixed with other property (Re Hallett (1880); Re Oatway (1903)). The beneficiaries may trace the trust fund money into James’s bank account and,following the rule in ReOatway (1903), Jameswillbe presumed to have spent £3,000 of the trust money on the shares in Z Co (not following Re Hallett (1880) because there are no monies left in the bank account which could satisfy the beneficiaries’ claim). Given that James’s son is not a bona fide purchaser for value,he cannot resistthe tracing claimagainstthe shares. Butifthe circumstances hadwarrantedit,hemayhavebeenentitledtothedefenceofchangeofposition:see Lord GoffinLipkinGorman.Inthepresent caseJames’s sonstill retains the sharesinZ Coandthereisnoevidencethathehaschangedhisposition.Thus,hemaynothavea defencetoaclaimtorecoverthesharesinequity.Itshouldalsobenotedthatthebeneficiaries are entitled to the increase in the value of ZCo’s shares because tracing in equitygivestheclaimantsaproprietaryrighttopropertyandanyincreaseinitsvalue (Foskett). Finally, as noted above and as Re Diplock (1948) makes clear, equitable tracing is unavailable when the property ceases to be identifiable. The money spent by James on a family holiday is lost and, following the traditional approach, the beneficiaries will be forcedtorelyonpersonal remedies (ifany)againstthetrusteeinorder torecover the outstanding £2,000. For thesakeof completeness,it shouldalsobenotedthatbothJames’sdaughterandson may incur the additional liabilities of constructive trusteeship if they have knowingly received trust property in breach of trust and, furthermore, the bank which cashed Charles’s chequecould,intheory,be liable forassistingCharlesinabreachoftrust,provided they were dishonest(RoyalBrunei Airlines v Tan (1995)).Again, both are unlikely on the facts as given (see Lipkin Gorman v Karpnale (1991)). QUESTION 31 Zebedeeisthetrusteeofatrustfund,holdingasumofmoneyontrustforDougaland Florence.Atthe same branch ofthe bank at which the trust accountis held, Zebedee has hisowncurrentaccountwhichstandsincreditat£500.Thefollowingeventsoccur: Common Pitfalls either money had and received or wrongful interference with goods, and must, (a) Zebedee pays £6,000 ofthe trustfund into his own account; (b) he thendrawsout£500whichhe invests intheRoundabout PropertyCo; (c) he draws a further £3,000 from his account and gives it to his son, Brian, an antique dealer, who uses his skill to make a very successful purchase of a painting at auction; (d) hedrawsoutafurther£1,000,£500ofwhichhespendsonmakingimprovementsto his house and the other £500 he gives to his daughter, Ermentrude, so that she can pay off her debt to Loanshark Co; (e) he pays £500 to the local hospital appeal, which has used the money to purchase some much needed equipment; and (f) hepays£500intothe current accountofthe SpringboardTrust, ofwhichhe is alsoa trustee andwhich is in credit at £400. He then buys shares in MagicCo for £700 and entertains his family to dinner with the remainder. Zebedee has gone bankrupt and the shares in Roundabout Property Co have halved in value. The painting is worth £10,000 and the shares in Magic Co have trebled in value. AdviseDougal,FlorenceandtheSpringboardTrustastotheirremedies,ifany. How to Read this Question Itisevidentthatthisisatracingquestionbyreferencetothevariousbreachesoftrust committedbythetrusteebeforehisbankruptcy.Itisalsoclear thatsincetherehasbeena mixture of funds that tracing at law would not be possible but tracing in equity will have to beconsidered. How to Answer this Question In answering this question it is necessary to first identify the breach(es) of trust and set out the elements of a tracing claim in equity. In addition, the limits of tracing in equity, includinga change of positiondefence is relevantto the question. Answer Plan Breach of trust action is the first resort. In the event of an unsatisfied claim,tracing may be available. Loss of the remedy – change of position. Mixed funds: two trusts. Replacement of trust funds. Innocent volunteers. Up for Debate subrogation and change of position’ (1996) 9 TruLI 124.Answer Structure This diagramindicates the nature of thetracingprocess inrespect of thevarious properties. ANSWER Althoughitisnotabsolutelyclear fromthefactsoftheproblem,itishighlylikelythat Zebedee,the trustee, has committed a series of breaches oftrust when disposing ofthe trustfund monies in the way indicated. Certainly, his mixing ofthe trust monies with his own may well be a breach of trust and it is highly unlikely that the trust instrument authoriseshim to make gifts to his children or other causes.7However, Zebedee isbankrupt, and personal claims against him will have to be abated in Zebedee’s bankruptcy alongwiththeclaimsofothercreditors.Insuchcircumstances,thebeneficiarieswillwish 7 Consideration of a breach of trust. Beneficiaries–paripassuto pursue such proprietary remedies as they might have, as this will give them a right to theirpropertyper se in priority tothosewhoare ‘merely’ creditors.Tracinginequitymay well prove to be the route to the most effective remedy.8 Fortunately,there is no doubtthat Dougal and Florence are entitled to pursue equitable tracing. Itis possible in equity to trace ownership into,through and out of a mixed fund, so the factthatthe trustee has mixed the £5,000 oftrust money with that of his own will not defeat the tracing claim. When Zebedee transfers the trust money into his account, it is likely that he is committingabreachoftrust. First,thereisthe£500withdrawnfromthemixedaccountand used to purchase shares in Roundabout Co Ltd. The change in nature of the beneficiaries’ equitable interest – from money into shares – is not an obstacle to equitable tracing,providedthatthesharescanbesaidtohavebeenpurchasedwiththebeneficiaries’ money in the first place, bearing in mind that Zebedee has £500 of his own money in the mixed bank account.9 In this regard, Re Hallett (1880) decides that a trustee making purchases from a bank account in which funds are mixed must be presumedto have spent hisownmoney first,as there is always apresumption against a breach of trust. Yet, in our case, this would mean that the shares in Roundabout belonged to Zebedee, even though, after allthe events have taken place,there is no money left in the account to return to the beneficiaries. In these circumstances, when, in effect,there is nothing in the bank accountto trace to, Re Oatway (1903) makes it clear thatthe beneficiaries can turn to property purchased out ofthe mixed fund as being the embodiment of their equitable interest, even if, at the time it was purchased, there was enough money to satisfy their claim.10Consequently, the Roundabout shares willbelonginequitytoDougalandFlorence,althoughthefactthatthesharesarenow worthonlyhalftheiroriginal valuemeans thattheywillhave torelyontheirpersonal claim against Zebedee to recover the balance. Inprinciple,thesameconsiderations apply tothe£3,000whichZebedeethenwithdraws andpays tohis son;this is trust money andcapable ofbeingtraced.Again,the factthatit was then used to purchase an antique painting will not destroy the tracing claim. Moreover,theaddedcomplicationthattheproperty(asmoney,andthenachattel)isinthe hands of Brian, a third party, is no bar. Brian is not a bona fide purchaser for value, although there is no indication that he knew the money was transferred to him in breach oftrust andisunlikely tobe a constructive trustee (Westdeutsche Landesbank Girozentrale v Islington LBC (1996)). Re Diplock (1948) makes it clear that equitable tracing is perfectly possible against an innocent volunteer where the property is identifiable. The court is mostlikely toorder the returnofthepaintingitself as this iswhere thebeneficiaries’ equitable interest is to be found, especially since the proprietary remedy carries with it anyincreaseinthevalueoftheproperty(ReTilley(1967);FoskettvMcKeown(2000)). 8 Primacy of tracing in equity. 9 Distinction between following and tracing. 10 Significance of presumptions in respect oftracing claims in equity.Theissueoftheidentifiablenatureofthetrustpropertyisquitepertinentwhenconsideringthenext£1,000whichZebedeewithdraws,half ofwhichhe gives tohisdaughter and halfofwhichhespendsonhisownhouse.InReDiplock,theHouseofLordswasofthe viewthatitwas impossible to tracemoney thathad beenused topay offadebt,both because the creditor could be regarded as a purchaser for value and because the money effectively ceasedtoexist as independentproperty.Consequently, atfirst,unlessZebedee’s daughter (or Loanshark Co) has taken the money with knowledge of the breach of trust, and is thereby a constructive trustee, there appears to be no route to a successful recovery of this £500. By way of contrast, however, the Court of Appeal, in Boscawen v Bajawa (1995), allowedthe claimant a remedy against a defendantwhohadused monies tracedtohimtopayoffamortgage.InBoscawen,theclaimantwassubrogatedtothe creditor who had been paid off.11 So, in our case, if we follow Boscawen, and similar reasoning adopted by the House of Lords in Banque Financière de la Cité v Parc (Battersea) Ltd (1998),the claimantswillbe subrogatedtoLoansharkCo, andmaybe able torecover the money by enforcing the debt against Ermentrude as creditors. Turningto the £500 spentby Zebedee on his house,thismightbe recovered.Itis perfectly possible to levy a charge for a specific amount on property owned by another if this would enable the beneficiaries’ interest to be protected. Indeed, there is no such objection to levying achargeonthepropertyofthetrusteewhohasactuallycommittedthebreachoftrust. Conversely,however,therearedoubtswhether the£500paidtothelocalhospital canbe recoveredbythebeneficiaries.Thereisnodoubtthatthepropertyistraceableper se;the factssuggestthatthemoneyhasbeenusedtopurchaseidentifiableequipment.Itisclear that the court has a general discretion to deny tracing where it would be inequitable to permitit and this may prevent recovery from the hospital. The mixing ofthe final £500 with the £400 ofthe Springboard Trust raises the question ofthe ability to trace to an asset(the shares in Magic Co)when all claimants to it(Dougal, FlorenceandthebeneficiariesofSpringboardTrust)areinnocent.Inprinciple,unlessthe rule in Clayton’s Case (1816) applies, the two sets of claimants will be able to trace and claimthe shares inMagicCoinproportiontotheirmoney inthemixedbankaccount before thepurchase tookplace:thatis,inthe ratio5:4(£500:£400).Asbefore,both partieswillbeabletoretainanyincreaseinthevalueoftheirportionoftheshares(Re Tilley (1967);Foskett v McKeown(2000)).The balance in the accountwouldbe sharedona similarbasis.If,ontheotherhand,Clayton’sCasedoesapply,thenthebeneficiariesofthe Springboard Trust will be able to claim that the first £400 worth of Magic Co shares belongs to them, on a ‘firstin,first out’ basis.12However, even ifitis clear thatZebedee’s accountisan‘active’bankaccountwithintheClaytonrule,BarlowClowes International Ltd (In Liquidation) v Vaughan (1992) establishes that Clayton’s rule is one of convenience only and should not be applied either where the property of the respective claimants is identifiable or where it would achieve an inequitable result.Asimilar view was echoed in 11 Complementary nature of the doctrine of subrogation. 12 Alternative but unpopular solution in Clayton’s Case.Commerzbank Aktiengesellschaft v IMB Morgan (2004). It is suggested, therefore, that the proportionate share rule (pari passu, 5:4) should prevail. Any sums which the beneficiaries cannot claim, and where they still suffer a loss, can be recovered only in a personal action against Zebedee or against any of the third parties who mayhave had such an awarenessofthe materialfacts as to make themliable as constructive trustees. QUESTION 32 Byhiswill,TerrenceappointedEdwardandEdwinaashisexecutorsandtrusteesand bequeathed£500,000 toLucy and£300,000 for the charitable purposes ofthe WarVeterans Association. Edward and Edwina took all proper steps to prove the will and, after makingall proper enquiries,paidover the monies toLucy andthe charity.However,Terrence had provided for David and Dee, as his residuary legatees, and they claimed successfully that the will should be set aside on the grounds of Lucy’s undue influence over Terrence. Likewise,it appears thatthe WarVeteransAssociation isnot entitledtocharitable status, being merely a non-charitable association. It also transpires that Rack, a creditorofTerrencewhohadbeenabroadatthetimeofTerrence’sdeath,isoweda largesum of money, and he now claims £300,000. Unfortunately, the strain of this was too much for both Edward and Edwina: they turned to gambling and both are now bankrupt. Lucy, however, has spent £100,000 on completely renovating her house, £150,000 on shares in the stock market and £50,000 on a year of high living. The War Veterans Association has spent all the money on providing pensions for disabled servicemen. Advise David, Dee and Rack as to their rights, if any, in Terrence’s estate. How to Read this Question Thisproblemquestion includes the liabilityoftrustees forpossibly innocentbreachesof trust, claims for knowingly receiving trust property for the defendant’s benefit,the tracing process and the in personam claim of unpaid or underpaid creditors or next of kin within the Re Diplock rules. How to Answer this Question Inansweringthisquestionyouarerequiredtodiscussthefollowing:theactionfordamages for breach of trust, the imposition of a constructive trust, the law of equitable tracing and thespecialisedReDiplockinpersonamactionareperhapsthemostwidelyused. Up for Debate ofkinas laiddowninReDiplockwere consideredinanarticlewrittenby JMartin, article carefully.Answer Plan Loss of the remedy. Innocent and culpable defendants. Re Diplock in personam remedy – strict liability. Defence of change of position. Answer Structure This diagram highlights a claim for breach of trust and the liabilities of strangers as constructive trustees or for accounting. ANSWER Itis clear that even innocent and honesttrustees may be liable in damages for breach of trustiftheyhavefailedtocarryoutthetermsofthetrustor fulfiltheir fiduciaryduties(TitovWaddell(No2)(1977)).UnfortunatelyforEdwardandEdwina,itseems thatthey mayhave committedbreachesoftrustinpayingthetrustmoneytoLucyandtheWar VeteransAssociation,eventhoughthismayhavebeenduetoanunderstandablemistake as to law or facts (see,for example, Re Diplock itself).13It maywell be thatthe twotrustees could mount a successful defence to such an action – perhaps under s 61 of the Trustee Act 1925onthegroundsthattheyhavebehavedhonestlyandreasonably andoughtfairly to be excused (Williams v Byron (1901)). In any event, we are told thatthey are now bankruptandsoareunlikelytobeabletosatisfythelargeclaimsofDavidandDeefor their losses of £800,000, even assuming they had no defence to the action. This means that the two claimants must seek alternative remedies. Asafirstchoice,itmaybethatDavidandDeewillwishtoestablishthatLucyshouldbe regarded as a constructive trustee ofthe £500,000 she has received. Ifthis proves to be the case, Lucy will be personally liable for this entire amount, whether or not she retains anyofit. Of course, such liability is not easily established, and David and Dee will have to assertthat Lucy has knowingly received trust property in breach oftrust within the principlesdiscussedinInternationalSalesLtdvMarcus(1982),AGIP(Africa)LtdvJackson(1992) andBCCIvAkindele(2000). 14Undoubtedly,thetransferwasinbreachoftrust–becauseof the finding of undue influence – and Lucy has received the property for her own benefit, aswitnessed byher subsequent use ofit. The crucialquestion then remainswhether she hasasufficientdegreeofknowledgetofixherwithliability.Fortunately,whateverdoubts there are as to the required degree of knowledge for knowing receipt – intention/recklessness and/or negligence (Baden Delvaux and Lecuit v Société Générale pour Favouriser le Développement du Commerce et de l’Industrie en France SA(1983)) or (if different) ‘unconscionability’ see BCCI v Akindele – the finding that Lucy procured the will by her undue influence is enough to establish her knowledge of the relevant facts. She will be a constructive trustee of the money she has received. As noted above, this imposes on her a personalliability torepaythe£500,000.Ofcourse,itisquite likelythat shewillbeunable tofindthis amountofmoney andwe are toldthat shehas spent atleast£300,000on specificprojects.In suchcircumstances,whileDavidandDeemaywellbe able torecover the unspent £200,000 and perhaps even some ofthe balance out of Lucy’s other assets, the beneficiarieswouldbe well advisedtoresorttothe proprietary remedy oftracing. There is no doubt that David and Dee would be able to satisfy the preconditions for tracingin equity identifiedin Re Diplock (1948): as residuary legatees theyhave an equitable proprietary interest and there is a clear fiduciary relationship between them and EdwardandEdwina.Moreover,ReDiplockdoesindicatethat recoveryofpropertythrough tracingin equitymightbe refusedifthe propertyhas been somixedwith that of an innocent volunteer that a successful action would be inequitable (now regarded as a change of position defence: see Lipkin Gorman v Karpnale (1991)). Lucy is not ‘innocent’ and, therefore,there iseverychance thatDavidandDeewouldbegranteda chargeover Lucy’s house, either to the value of the money spent on it (£100,000) or in the proportion that 13 The strict nature ofliability for breach of trust. 14 Knowingly receiving trust property or unconscionability.£100,000 represents of the house’s value after improvement (Re Tilley (1967); Foskett v McKeown (2000)). To some extent, whether the court chooses the fixed charge (£100,000) or the proportionate charge may depend on the value of the house and whetherthecourtfeelsthatthetwoclaimantsshouldbenefitfromanywindfallprofit arising from an increase in the house’s value. The same considerations apply, mutatis mutandis,toLucy’s investmentin the stockmarket. Finally, itisunfortunately quite likely thatthe£50,000spenton‘highliving’willbeuntraceable,havingbeendissipatedonunidentifiable purchases. This amount will have to be the subject ofthe personal claim against Lucy and/or the trustees. David and Dee may also be able to maintain a tracing claim against the assets spent by the War Veterans Association. As before, there is no doubt about the nature of David’s and Dee’s equitable interest or the existence of their proprietary rights. Moreover, it is inherentinatracingclaimthatthefundssoughttoberecoveredhavebeentransferredto the recipientinbreach oftrust;otherwise there isnogroundof recovery.In this case, itis clear that the property should never have been distributed to the Association, since it is not a charity. The trust was for a non-charitable purpose, and therefore void, with the money resulting to the residuary legatees under the beneficiary principle (Re Endacott (1960)).Infact,these are similar factsto Re Diplock itself.Unfortunately,however,likeRe Diplock, this tracing claim may run into difficulties. As noted above, Re Diplock suggests thattracing will not be permitted where it would be inequitable to force the return ofthe property from an innocent volunteer. However,thatis notthe end ofthe matter.In Re Diplock,the House of Lords expressly accepted the existence of a limited in personam action, available against the recipients of property,atthe suitof unpaidor underpaidcreditorsor nextof kin arisingoutof a wrongly administeredtestamentary estate.15In our case,given thatthe estate of Terrence hasbeen wrongly administered, David and Dee and Rack (the creditor) will have a personal action againstLucyandagainsttheofficersoftheWarVeteransAssociation,allofwhomhave receivedfundsfromthe executorsandtrustees.Importantlybecausethe actionispersonal (in personam), it is irrelevantthatthe recipients no longer have the property and they must satisfythe claimsofthe threeclaimantsoutoftheirownfunds.As is clear,thisisapowerful remedyandthisisonereasonwhycurrentlyitexistsonlyinthecontextofawronglyadministered testamentary estate (and possibly after a wrongful distribution of the assets of a defunct company – Re LeslieEngineers Co Ltd (1976)). Itis also true thatthe claimants must exhausttheirpersonal actionsagainstthe executorsbefore they can proceed further, althoughthatis not a problem in our case. Finally itis likely,following LipkinGorman vKarpnale(1991),thattheofficersoftheWarVeteransAssociationmightbeabletoplead‘change ofposition’tominimiseordenytheir liability.Thisdefencedoes,however,lie in thediscretionofthe court,anditmay wellbe that,in the lightofthe bankruptcyofthe executors,the courtwilladmittheclaimofRack(whohaslittlechanceofatracingclaimbeinga‘mere’ contractual debtor: Box v Barclays Bank (1998)), and perhaps David and Dee to the extent thattheyhavenot recoveredthe funds fromother sources. 15 Significance ofthe personal action by the unpaid creditors or next of kin.Note These three problem questions show the diverse range ofissues that can arise in the law oftracing. NotehowusefulRe Diplock canbe:itisauthority fornearly everyaspectof tracinginequity.Consider alsothepowerfulnatureofthe Re Diplockinpersonam remedy. This is an invention of equity, limited in nature, but potentially ruinous for the innocent recipients of wrongly distributed funds. It remains to be seen whether Lipkin Gorman is authority for the existence of a general, strictliability restitutionary remedy – subject, as always, to the change of position defence.9 BreachofTrust INTRODUCTION Itisperhapssurprisingthatthelastofthebeneficiary’sremediestobeconsideredisthepersonalactionforbreachoftrust.Afterall,the attempttofix a strangerwithadutytoaccount or constructive trust(Chapter 7) and the remedy oftracing (Chapter 8) are triggered by an initial breach of trust by the trustee. Moreover, even in situations where these other remediesareavailable,ifthetrusteeresponsiblefor thebreachisabletosatisfytheclaimsofthe beneficiaries in full, a personal action for damages for breach of trust will be the normal course of action and the court may insist that it is pursued before other avenues are followed. As we have seen, the duty to account and the constructive trust and the remedy of tracingareusedprincipallyagainstthirdparties,beingpersonswhohavemeddledwiththe trust or who have come into possession ofthe trust property subsequentto the trustee. In contrast, the action for breach of trust is personal to the trustee in two senses. First, only those trustees who are responsible for the breach of trust may be sued for damages, although the extent of the ‘personal responsibility’ of a trustee for breach of trustis quite wide. Second, the action for breach of trust itself is a personal action and the successful claimant(usuallythebeneficiary)willbecomeanormaljudgmentcreditor.Consequently,in the event of the trustee’s bankruptcy or death,the beneficiary will have to take her chance along with all of the other creditors and claimants and may not receive all of the damages awardedinthe breachoftrustaction.Thisiswhy theproprietaryremediesdiscussedinthe twopreviouschaptersaresousefulwhenspecifictrustpropertyisstillidentifiable. Itwouldbeamistaketobelievethattheactionforbreachoftrustisnotimportant.Itis the first weapon of the wronged beneficiary and one whose net can be cast particularly widely.Ingeneralterms,there are four areasof concerntothe studentalthough, as ever, this is a somewhat arbitrary classification. First, questions arise as to what actually constitutesabreachoftrustandwhoisresponsiblefor it.Thisistiedtothestandardofcare requiredoftrusteesandthemeasureofcompensationforaprovenbreach.Second,there is much case law concerning the circumstances in which a trustee may be liable for breachoftrusteventhoughthe‘actinbreach’was committedby anotherperson,suchas an agent or co-trustee. This can be easily confused or interwoven with issues in the first category.Third,therelationshipoftrusteeswitheachother consequentuponabreachof trustcanseemconfusing,hencequestions concerningtheliabilityoftrusteesinterseand any remedies theymay have against each other are often askedin examinations. Fourth, and perhaps less difficult,the student must have an awareness ofthe trustee’s possible defences toanactionforbreachoftrust.Onceagain,inalloftheseissues,caselawis154 important although various provisions of the Trustee Act 1925 and the Trustee Act 2000 are relevant and must be examined with some care. QUESTION 33 In what circumstances may a trustee successfully plead a defence to an established breach oftrust? How to Read this Question Thisessayquestionrequiresyoutodiscussthevarietyofdefencesormeansofmitigation available to trustees who are sued for breach of trust. Ever so often with breach of trust questionsstudentsfailtoconsider thepossibledefencesavailabletotrustees. How to Answer this Question Thereareawidevarietyofdefencesavailabletotrusteesbothat commonlawandby statutoryprovisions.Certaindefencesareavailableonlyagainstcertainclaimantbeneficiaries such as participant beneficiaries or those granting trustees informed consent to the alleged breaches of trust, see Re Pauling, indemnity of trustees Chillingworth v Chambers, s 62 of the Trustee Act 1925. In addition there are occasions when a claim may not succeed against the trustees in breach, see s 61 of the Trustee Act 1925, claims brought outsidethelimitationperiodandclaimsbarredbyvirtueofexemptionclauses. Answer Plan Release/acquiescence by the beneficiary. Participation/consentto abreach oftrust by the beneficiary. Sections 61 and 62 ofthe Trustee Act 1925. Statutory limitation and laches. The joint and several liability of trustees: although a trustee may be liable, an indemnitymaybeobtainedfromco-trusteeswhoaremoreculpable. Up for Debate readingthejudgmentoftheCourtofAppealandtheLawCommissionReport. Aim Higher available to one trustee against another.155 Applying the Law Thisdiagramliststhepossibledefencesthatmayberaisedbyatrusteeinproceedings for breach of trust. ANSWER Thedefences available totrusteesmaybe foundinboth statute andcommon law. First,a trusteemayrelyontheprinciplethatabeneficiarywhoparticipates in,orconsentsto,a breachoftrustby the trusteewillthereafter bebarredfrombringingan action for breach oftrust(Life Association of Scotland v Siddal (1861)). The essence ofthe matter is thatthat particular beneficiary has so involved himself with the breach that he should not thereafterbe able todeny it and, consequently,itis irrelevantwhether the beneficiary actually benefits from the breach or not (Fletcher v Collis (1905)).1 Whether the beneficiary has become soinvolvedwillbe aquestionoffact, althoughitis clear thatthebeneficiary must be aware of allthe relevantfacts and understand fully the nature ofthe transaction which is proposed (Re Pauling (1964)). Similarly, the consent must be freely given and it hasbeensaidthatabeneficiarywhoconsentsorparticipateswithoutindependentadvice maynotbesoawareofwhatisproposedastobarhimfromalateractionforbreachof trust (Holder v Holder (1966)). Again, the personal nature of this defence, operating as it does against particular beneficiaries,means thatthe trustee may stillface claims arising fromhis activities fromotherbeneficiariesnotimplicatedinthebreach. 1 Justification for the defence.156 In similar vein, a beneficiary’s conduct after the breach may be such as to amount either to a release of the trustee or acquiescence in the breach sufficient to protect the trustee from later suit by that beneficiary (Farrant v Blanchford (1863); Stafford v Stafford (1857)). The essential point here is that the beneficiary’s conduct after the breach has occurred may be such that it amounts to a personal bar against pursuing an action. As with cases of consent, whether there has been a release or acquiescence is a question of fact and, again,thestateofknowledgeofthebeneficiaryisdecisive.Forcasesofrelease,theclassic judgmentin Farrant v Blanchford emphasises that a release is effective only if the beneficiary was of full age and capacity and had full knowledge of allthe circumstances and of his claims against the trustee. This seems to suppose that, unlike cases of consent(and possibly expostfactoacquiescence), areleasecanbe effectiveonly ifthebeneficiary realisedhe was releasinga trustee froma breach oftrust.Atfirst,this seemsquite logical yet cases of prior consent require knowledge of the facts and circumstances, but not that they amount to a breach, and this is sometimes said to be the position with ex post facto acquiescence as well (Holder v Holder (1966)). It would be unfortunate if there was a distinctionbetween consent/acquiescence onthe one handandrelease onthe other andso itissubmittedthatthegeneraltestputforwardinRePaulingshouldbeadopted. There are circumstances when beneficiaries may be compelled to use their beneficial interests toindemnify the trustees formoniespaidoutin restoration of a breachoftrust. Although the trustee is under a personal obligation to make restoration for loss flowing fromthebreachoftrust,hemay recover allorpartofthat sumfromcertainbeneficiaries. Thismaybeachievedineitheroftwoways.First,acourtofequityhasaninherentand discretionary jurisdiction to impound (that is, confiscate) a beneficiary’s equitable interest inorder to indemnify the trustee when the beneficiary has instigated or requested a trustee to commit a breach oftrust(Chillingworth v Chambers (1896)) or when the beneficiary had consented to a breach oftrust out of which he had received a personal benefit, such confiscation being limited to the benefit received (Fletcher v Collis (1905)). Second, this equitable jurisdiction has been extended by s62 ofthe Trustee Act 1925 which gives the court a discretionary power to indemnify a trustee out ofthe beneficiary’s interestif thebreachoftrustwascommitted‘attheinstigationorrequestorwiththeconsentin writing’ofthe beneficiary. Once again,the courtwillnot exercise its statutorydiscretion unless the beneficiary knew and understood all the relevant facts which thereafter amounted to a breach oftrust (Re Somerset (1894)), although it is only in respect of consentthatthe trustees’ claim toindemnityunder s62mustbe supportedbywriting. Inaddition,a ‘stand-alone’defenceisavailabletothe trusteesirrespectiveofthe actionsof individual beneficiaries and which can afford a defence to an action by them all.According to s61 ofthe Trustee Act 1925,the courthas a discretionarypower to relieve a trustee from liability for breach oftrust, in whole or in part,if it appears thatthe trustee ‘has acted honestly,reasonably,andoughtfairlytobeexcused’.Itisclearthat,despitethegeneralwordsof this section,this is not a statutorymodificationofthe strictliabilityoftrustees.The statute doesnotgivethecourtageneralpowertoexemptallhonesttrusteesbutisfor thoseexceptional occasions when there is simply no justification in conscience for the imposition of liability despite the factthat a breach has occurred (Williams v Byron (1901)). Moreover,the elementsofthedefenceare tobe readconjunctivelysothatatrusteemustestablishthathe hasactedhonestlyandreasonablyandoughtfairlytobeexcused(DavisvHutchings(1907)).157 In the recent case, LloydsBankplc v Markandanand Uddin(2012) EWCA65,the CArefusedto grant relief under s 61 of the Trustee Act 1925 to a firm of solicitors on the ground thatthe defendantsdid not act reasonably. Finally,mentionmustbe madeofthree furthermatters.First,the generalprinciplesoflimitationof actions applies to the action for breach oftrustin much the same way as to other personal actions.2Thus, exceptin the case of fraud or where the trustee has possessionof trustpropertyorhadpossessionoftrustpropertyandconvertedittohisownuse (s21(1)(a) and (b) of the Limitation Act 1980; and see Armitage v Nurse (1997)), no action for breachof trust can be brought after six yearshave expiredfrom the date the actionaccrued.There is noperiodoflimitationforcaseswithins21(1)(a)and(b),andliabilityfordishonestyendures without limitation of time (Armitage). Second, the liability of trustees inter se may be adjusted by a claim for a contribution by those trustees who have been required to make entirerestorationagainstthosewhohavenotpaidor who are moreculpable.Thisjurisdiction now resides primarily in the Civil Liability (Contribution) Act 1978 (see, for example, DubaiAluminiumCovSalaam(2002)),althoughtherearethreesituationsoutsidetheAct whereone trusteemaybemadetoindemnifycompletelyanyotherswhohaveactually made restoration to the beneficiaries: where a trustee has received trust money and made use of it (Bahinv Hughes (1886));where the trustee atfault was a solicitor trustee on whose advicetheothertrusteesrelied(ReLinsley(1904));andwhereatrusteeisalsoabeneficiaryof the trust(Chillingworthv Chambers (1896)).Third, a trustee in breach may escape liabilityby relyingon an exemption clause.These are popular withprofessionaltrustees as theymitigate the strictliabilityoftrusteeship. Further, as Armitagev Nurse(1997)illustrates,an exemption clause can be effective to exclude liability for negligence and ‘equitable fraud’ (that is, deliberate but honest breaches believed to be in the interests of beneficiaries), althoughit cannot exclude liability fordishonesty. QUESTION 34 ‘Atrusteemaybe liable topay compensationforhisownbreachoftrust andinsome cases for those committed by others.’ Analysetheconceptof‘abreachoftrust’andassesswhethertheaboveisanaccurate statement of the law relating to liability for breach of trust. 2 Importance of limitation periods and laches. Common Pitfalls pointing consequences.158 How to Read this Question This question requires you to identify action on the part of the trustee that may amount toa breach oftrust. In addition youare requiredtoconsider the extentto which a trustee is required to make compensation for the loss suffered by the trust as well as the consequencesofimposingjointandseveralliabilityonthetrusteesasawhole. How to Answer this Question In answering this question you are required to consider the following: What constitutes a breach of trust? The scope of liability for breach oftrust. The prominence of exclusion clauses. Thetestfor compensatingthetrustfor thelosssufferedbythebreach. ThedistinctionbetweenprimaryandvicariousliabilityundertheTrusteeAct2000. The scopeoftheprincipleofjoint andseveral liabilityoftrustees. Contributions and indemnities between trustees. ApplyingtheLaw This diagram specifies the sources and extent of liability of the trustees for breach of trust. Up for Debate ently in ‘commercial’ and ‘traditional’trust cases.159 ANSWER Theliabilityforbreachoftrustisgenerallystrictinthesensethatitisenoughthatthe trustee has committed the act or omission which amounts to a breach of trust.3 For liabilitypurposes itis irrelevantwhether the trustee knewhewas committing thebreach and didsoforhisownbenefit,orwasrecklessastothepossibilityofabreachoccurringorwas negligent of the same or was entirely innocent and honest. Thus, it remains a breach of trustfor even if he believed he was acting in conformity with the terms of the trust(as in Re Diplock (1948)) and did so in the belief that his action was in the best interests of the beneficiaries (Harrison v Randall (1852)). Theallencompassingnatureofthis liability is themainreasonwhyprofessionaltrustees insist on the inclusion, in the trust instrument, of a clause excluding liability for certain typesofbreachoftrust.AsArmitagevNurse(1997)illustrates,anexemptionclausecanbe effective to exclude liability for negligence and ‘equitable fraud’ (that is, deliberate and honest breaches believed to be in the interests of beneficiaries), although it cannot exclude liability for dishonesty. Despite some fierce criticism of Armitage v Nurse, the Trustee Act 2000 leaves the existing law on exclusion clauses untouched and, further, permitstheexclusionofthe statutorydutyofcareimportedbys1(seeSch1 ands7ofthe Trustee Act 2000).4 Oncetheliabilityofatrustee forbreachoftrustisestablished,thetrusteeisunderan obligation to make good such loss as flows from the breach oftrust, although the loss is notlimitedtothatwhich is reasonably foreseeable (TargetHoldingsLtdvRedferns (1996)). In this sense, the essential quality of the trustee’s obligation is compensatory, but not being limited by considerations of foreseeability and remoteness of damage (see, for example, Re Dawson (Decd) (1966)), can be more extensive than damages for breach of contract or those which lie in tort. Of course,that does not mean thatthe trustee is liable forallloss thatflowsdirectlyor indirectlyfromhisbreachoftrust,for theremuststillbe a causallinkbetweenthebreachoftrustandthelosstotheclaimant(SwindlevHarrison (1997)).Theessentialquestionis,then,whether itcouldbeshownthatthelosswouldnot haveoccurredbutfor thebreach(TargetHoldings)andnoliabilityfor thetotallosswill arise ifthe trustee can show thatthe loss, or partofit, wouldhave occurredin any event – aswherethebeneficiaries losemoneybecauseofafallinthevalueofproperty rather than because of the admitted misapplication of trust funds (Target Holdings), or where theclaimantwouldhaveactedinthesamewayhadthebreachnotoccurred(Swindle). Finally in this survey ofthe nature ofliability for breach oftrust,two further supplementary rulesmaybe noted. First,ifthere isno loss,orno provable loss (Nestlé v National WestminsterBank (1992)),the trustee’s liability is limitedtoaccountfor anyprofitshehas received (Vyse v Foster (1874)). Second, in general, the losses occasioned by a breach of trustinonetransactioncannotbesetoffagainstanyprofitsmadebytheminanother 3 Good point to make that liability is strict. 4 Importantto state the justification for trustees’ defences.161 (DimesvScott(1828)),saveintheexceptionalcasewherethelossmakingtransactionand theprofitmakingtransactioncanberegardedasessentialingredientsofthesame activity (Bartlett v Barclays Bank Trust Co (No 2) (1980)). Itisalsoimportanttoappreciatethatitisinherentintheconceptofbreachoftrust,as withother formsofliability,thatonly those trustees responsible inlawfor thebreachwill be liable to the beneficiaries.5 This is self-evident. However, because it is perfectly possible foratrusteetocommitabreachoftrustthroughomissionaswellascommission,the extentof atrustee’spersonal responsibility for breachismore extensive thanmightfirst be imagined. In simple terms, a trustee will be liable for a breach oftrustin the following situations, even though some other person may have committed the acts or omissions that constitute the actus reus of the breach. First, and most obviously, a trustee will be liable for a breach oftrust where he has actually committed the acts in breach, as where a trustee pays money to the wrong persons (Re Diplock) or makes off with the trustfund. Second, a trustee may be liable for failing to performaduty imposedonhim by the trustinstrumentorgeneral law, aswhere atrustee fails to safeguardthe trust’s assets.Third, a trustee (A)may be liable for a breach oftrust even ifthe act or omission in breach was committed by a co-trustee (B), but only if A can be said to have failed in his duty to supervise the trust’s affairs, which failure facilitated thebreachoftrustbyB: see,for example,Bahin vHughes(1886).This isnotliability forB’s actions(itisnotvicarious),but ratherA’sprimaryliabilitybecauseofhisfailuretomonitor the trustin accordance with hisownduty.Thisdutymay springfrom the common law,or constitute an aspect of the statutory duty of care imposed on trustees in respect oftheir powersunder theTrustee Act 2000(s1andSch 1).Anexample iswhere a co-trusteepays awaymoney to the wrong beneficiaries and was allowed todo so by the inattention of his colleagues. Fourth, a trustee may be liable even if the act or omission in breach of trust was committed by an agent employed to act on the trust’s behalf, but only if it can be shown that the trustee failed in his duty in one of two ways: (a) by falling below the standard of care required by trustees in the appointment of agents, etc. (for example, stockbrokers): s1 andPtIV ofthe Trustee Act 2000;or (b)by failing toreview the exercise ofthe delegable functions of agents as required by s22 ofthe Trustee Act 2000. Finally,it shouldbenotedthatonce the liabilityofparticular trustees for abreachoftrust hasbeenestablished,thatliabilityis,betweenthem,jointandseveral.Of course,inpractice,one liable trusteemaybemore culpable thananother and,asamatterofprinciple,it isunfair thatonlyoneofthetrusteesshouldbemadetobear theentireliability.Consequently, a contribution may be sought from other liable trustees under the Civil Liability (Contribution) Act 1978. Further, in limited circumstances, a liable trustee may be requiredtopayacompleteindemnitytothetrusteewhohasbeenrequiredtomakerestitution to the beneficiaries under the principle of joint and several liability. This occurs where the indemnifying trustee was a solicitor on whose advice the other trustees relied (Re Linsley (1904)), where the trustee has committed fraud (Re Smith (1896)), where the 5 Liability ofthe trustee is personal. This is an integral part ofthe question.trusteehas receivedthe trustproperty andmadeuse ofitforhispersonalbenefit(Bahinv Hughes (1886)) and where the trustee is also a beneficiary (Chillingworth v Chambers (1896)).Referencemayalsobemadetothepotentialliabilityofatrusteewhoretires:first, for a breach of trust committed while he was a trustee; and, second, for breach of trust committed by his successors, if the retirement was designed to facilitate such a breach (Head v Gould (1898)). The Trustee Act 2000 has, at last, brought some clarity and certainty to this area of the law.This page intentionally left blank The Office of Trustee and itsPowers andDuties INTRODUCTION Thischapterrepresentssomethingofa‘sweepingup’ofseveralissuesthathavenotbeen dealt with so far. Necessarily, in the subjects considered in previous chapters, much has beensaidabouttheresponsibilitiesoftrustees,theirdutiestowardsthebeneficiariesand the powers they enjoy in respectofthe trust property. Many ofthese responsibilities are ofageneralnature–suchasthedutytorespectthetermsofthetrustandthepowerto choosebeneficiariesunderadiscretionarytrust–andtheyshouldnotbeforgotteninany generaldiscussionofthenatureoftrusteeshipandtheextentofthetrustee’spowersand duties. In particular, in Chapter 6, we examined the trustee’s duty not to make a profit fromthetrustandthisformsanintegralpartofanydiscussionoftrustee’sduties.Thus,it mustnotbe thoughtthatthe specificmatters consideredinthis chapter are theonly attributes of trusteeship; nor, indeed, should it be assumed that there is any essential thread thatties together the matters dealt with below in a way that excludes consideration of other issues. The questions consideredin this chapter cover several areas:first,the trustee’sdutynot todelegateanyofhisessential responsibilitiesunder thetrust; second,theappointment and removal of trustees; third, the trustee’s power of maintenance and advancement; fourth, the trustee’s power of investment; and, fifth, the variation of trusts, being the extentto which the duty to carry outthe terms ofthe trust as originally conceived can be altered by application to the court. The duty not to delegate is another example of the powerful nature of the trust obligation. Itis for the trustee to discharge his specific duties andto exercise anydiscretionary powers. Any unauthorised delegation of these responsibilities is itself a breach oftrust. Indeed, even if a trustee legitimately delegates some administrative function connected with the trust (such as the purchase of shares), that trustee still may be liable for breach oftrust even thoughthe act which gives rise to the breach was committed by the person to whom the task was entrusted. Second, although the appointment and removal of trustees may seem a technical matter, it is of considerable practical importance. Trustees die, retire or simply desire to have nothing more to do with the trust and itisimperativethatthegoodadministrationofthetrustfunddoesnotsufferbecause of a lackofnewor suitablyqualifiedtrustees.The relevantprinciples are tobe found primarily in statute, albeit supplemented by case law. Third the power of maintenance and advancement refers to an attribute enjoyed by trustees of certain kinds of trust. In 10outline, such powers allow the trustee either to use the income from trust property for thebenefitofaninfantbeneficiarybeforetheinfantisactuallyentitledtoit(powerof maintenance) or to pay a proportion of the trust’s capital sum to a potential beneficiary before he or she becomes absolutely entitled to it (power of advancement). These powers may be either expressly included in the trust instrument or implied under ss 31 and 32 ofthe Trustee Act 1925. Fourth,the investment oftrustproperty isone ofthe mostimportant ofthe trustees’ responsibilities,for it ensures thatthe trustfundgenerates the maximum benefit for all the beneficiaries. Consequently, it is vital that the trustees invest the capital monies lawfully, securely and competently, bearing in mind theneedtoprovideagoodincomefor thoseimmediatelyentitledandtopreservethe capital valueofthe fundfor those entitledinremainder.Mostprofessionallydrafted trusts include express powers of investment but a trustee may also take advantage of theprovisionsoftheTrusteeAct2000.Finally,thecourt’spowertosanctionachange in the nature or extent of the powers and duties of a trustee (and, indeed, other aspects ofthe trust) falls within the general law on variation of trusts. As we shall see, this jurisdiction is both inherent and statutory although, because it often involves amending the settlor’sor testator’soriginal intentions,the courtexercises itspowerwithconsiderable care and inlimited circumstances only.This isparticularly so where itis not only the trustees’ powers and duties that may be varied but also the nature and extent ofthe beneficiaries’ equitableinterests. QUESTION 35 Explain the circumstances when a court may sanction a variation ofthe terms of a trust. How to Read this Question Thisessayquestion requires youto collect and comment onthe occasions when the trustees may seek approval to depart from the terms of the trust. The departure may be justified both administratively and dispositively under the inherent jurisdiction of the court or by statute How to Answer this Question In answer to this question you are required to state the justification to vary the terms of the trustand theposition where thebeneficiary’s consentmaynotbe obtained.The limitations regarding the inherent jurisdiction of the court are required to be noted before embarkingonthevariousstatutoryprovisionsauthorisingtransactionsfor thebenefitof the trust. Aim Higher Trusts Act 1958 alone is not advisable.Answer Plan The need for a power to vary trusts. Intervention ofthe court where consents cannot be obtained. Inherent jurisdiction of the court. Section 57 of the Trustee Act 1925. Section 53 of the Trustee Act 1925. Section 64 of the Settled Land Act 1925. Variation of Trusts Act 1958. Answer Structure This diagram lists the various tests by the courts and statutes in order to modify the terms of the trust. Up for Debate Court of Appeal in Goulding v James (1997) and noted by P Luxton, ‘Variationof ANSWER Itis intrinsic in thenatureof a trustthatthe trusteesareunder an obligationtocarryoutthe termsofthe trust accordingto the trustinstrument,asmodifiedor supersededby the general law. However,there may be many reasons why the details of the trust,the powers and duties of the trustees, or even the nature and extent of the beneficiaries’ interests as originally specified, prove impossible to implement in practice. Likewise, the testator or settlor cannot be expected to foresee all possible future contingencies and no amount of expansive or open-ended drafting can hope to cover all possibilities. Therefore there must be somemethodbywhichthetermsofatrustmaybevaried,indetailandinsubstance. 1Today, the great majority of proposed variations oftrust arise because of a desire to minimise the tax liabilities of the trust (see Re Weston (1969)), although applications to vary can have other, more altruistic motives, such as a desire to protectthe trustproperty from wayward beneficiaries (Hambro v Duke of Marlborough (1994)). As amatterofprinciple,itisopentoallofthe beneficiariesunder atrust,providingtheyare offull age and capacity,toconsentto anyproposedreorderingofthe trust(Saundersv Vautier (1841) and related powers under s6 of the Trusts of Land and Appointment of TrusteesAct(TOLATA)1996).2However,manyofthetrustswhereavariationwouldbemost beneficial are precisely those where the beneficiaries are eitherunwilling or unable to consent– forexample,becausetheyare infantsormembersof ahypotheticalclass,suchas futurechildren.Inthesecases,avariationofthe termsofthe trustcanbe achievedonlywith theaidofthe courtexercisingits inherentorstatutoryjurisdiction. The court’s inherentjurisdictiontoorder a variationoftruston the applicationof either the trustees or interested beneficiaries was examined in detail by the House of Lords in ChapmanvChapman(1954).Effectively,thisdecisionlimitedthe court’spower toapprovea variationincasesofgenuineemergencyornecessitycausedbyunforeseeneventswhichthe proposed transaction is designed to remedy, see Re New (1910). 3 Such was the concern at the restrictivenatureofthe inherentjurisdictionrevealedin Chapmanandthe limitednatureof theexistingstatutoryjurisdiction,thattheLawReformCommitteeproposedtheenactment of ageneral statutegrantingthe courtagreater jurisdictiontoauthorise variationoftrusts. The resultwas the Variationof Trusts Act 1958. Before consideringthe Variation of Trusts Act (VTA) 1958 in detail,briefmention should be madeofthreeotherformsofstatutoryjurisdictiontovarytrusts.Unders57(1)oftheTrustee Act 1925,thecourtisgiventhejurisdictiontovarythepowersofthetrusteessoas toenable themtoachievetransactionsconnectedwiththe administrationofthetrustthatwould otherwise be impermissible. Importantly,this jurisdiction is limited to varying the administrativepowersofthetrustees(suchasthepowerofinvestment)anddoesnotenablethe courttosanctionachangeinthenatureorextentofthebeneficiaries’equitableinterests(Re Downshire(1953);Mason vFairbrother(1983)).Second,the courthasalimitedjurisdictionto 1 Thejustificationinorder tomodify thetermsofthetrust. 2 Adjustmentofthetermsundergeneralprinciplesoflaw. 3 Justification for the VTA 1958.authorisecertainotherwiseimpermissibletransactionsunders53oftheTrusteeAct1925in cases where this is necessary to provide for ‘the maintenance, education or benefit’ of any infantbeneficiallyentitledtotrustproperty (Re Gower(1934)),and this can includemaking thetrustmoretaxefficient(ReMeux(1958)).Third,andofrealsignificance,s64oftheSettled Land Act 1925gives the courtpower toauthorise the tenantfor life toundertake any transactionaffectingsettledlandwhich‘intheopinionofthecourtwouldbefor thebenefitofthe settledland,oranypartthereof’.Obviously,thisjurisdictionappliesonlytolandwithinasettlement,andnonewsettlementsmaybecreatedafter1January1997(s7ofTOLATA),butit doespermitthe courttovaryboththe administrativeprovisionsofthe trustandthebeneficialentitlementsofthe equitableowners(Re Downshire(1953)).Indeed,as HambrovDukeof Marlborough (1994) illustrates, s 64 may be used to alter the beneficial entitlements of an equitable owner against his wishes and may even resultin the transfer ofthe land to completelynew trusts (see, also,Raikes v Lygon(1988)).4 The Variation of Trusts Act 1958 alsoallows changes to be made toboth the administrative powersoftrusteesandthebeneficialinterestsoftheequitableowners,althoughthecourt’s jurisdictionunderthisstatuteisofageneralandwide-rangingnatureandwasentirelynovel (Re Steed (1960)). However, the Act does not simply empower the court to authorise any variationtothe termsof a trustas itthinks fit.Rather,theActbuildsupontheSaunders vVautier principlethatallofthe beneficiaries,if offullage andcapacity, canconsenttoa variationof their trust.Thus,under s1,the courtis empoweredto give its consentto a variationor arrangementofthetrustonbehalfofanyoffourclassesofpersonwhoareincapableofconsentingfor themselves.These are: (a) infantswitha vestedor contingentinterest(s1(1)(a)); (b) personswhomaybecomeentitledtoaninterestasbeingamemberofa specifiedclass onthehappeningofafutureevent,exceptifthatpersonwouldbeamemberofthe classifthefutureeventhappenedonthedateofapplicationtothecourt(s1(1)(b)); (c) personsunborn(s1(1)(c)); and (d) personswithaninterestunderadiscretionarytrustarisinginconsequenceofaprotectivetrust,wheretheinterestoftheprincipalbeneficiaryhasnotfailed(s1(1)(d)). Although these provisions appear complicated (and s 1(1)(b) has caused difficulties – see Knocker v Youle (1986)), the essential point is that the court will consent for these people (whomaybeadultsorinfantsrespectively)butmayonlydosoifitissatisfied(forclasses(a), (b) and (c))thatthe variation is for those persons’benefit. Moreover, although the ‘benefit’ will usually be financial in the form of fiscal advantages (Re Sainsbury (1967); Re Robertson (1960)),the court can consentto a variation thatis of moral or social benefitto the beneficiaries(ReWeston(1969);ReCL(1969)),and,inexceptionalcircumstances,thisbenefitcan outweighany financial disadvantage causedby the variation(Re Holt(1969)).In D (a child)v O(2004),thecourtacceptedjurisdictionunder theVTA1958toincreasetheamountsubject tothestatutorypowerofadvancementunders32oftheTrusteeAct1925.Likewise,thecourt willconsider theproposedschemeasawholeandmayevenconsenttoa variationthat contradicts the settlor’s original intentions (Re Remnant (1970); but see, contra, Re Steed 4 Other forms of variation without resort to the VTA 1958.(1960)). There is some doubt, however, whether a completely new scheme which undermines the essential basis of the trust can amountto a ‘variation’ or ‘arrangement’thatthe court couldapprove,see ReT(1964),contrastReBall(1968). QUESTION 36 David is a solicitor to a trust. The trustees are Margaret and Norman and the beneficiaries EdwardandFrancis.Thetrustinstrumentcontainsaclauseexcludingthetrusteesfromliabilityfor any lossor damage tothe incomeor capitalofthe fund‘unless suchlossordamage shallbe causedby theirown actualfraud’.The assetsofthe trustincludedapaintingwhich Davidwishedtobuy.Davidinformedthe trusteesofhiswishand,uponDavid’ssuggestion, the trusteesapproachedavaluer,Tony,fromwhomtheysoughtavaluationofthepainting. Davidwas aware thatTonyhad previouslybeenconvictedof an offence involvingfraudbut didnot revealthatfacttothetrustees.ThetrusteesthemselvesmadenoinquiryastoTony’s character and merely acceptedDavid’snominationofhim. Having been told by David of his wish to buy the painting, Tony puts its value at £100,000, approximately one half ofits true market value, and David boughtitfrom the trustees at that price. He has just sold it for £210,000. DiscussthepossibleliabilitiesofMargaret,Norman,DavidandTonytothebeneficiaries. How to Read this Question Thisproblemquestionrequiresyoutodealwiththeliabilitiesofexpresstrustees,Margaret and Norman and third parties to the trust, David, the solicitor and Tony, a valuer. In additionyouare requiredtoconsider the validityof anexclusionclause. How to Answer this Question Inansweringthis question youare required to consider the duty of care imposed on expresstrustees,thedegreeofprotectionfromliabilityinrespectoftheexclusionclause, the nature of fiduciary duties and the liability of strangers for knowingly receiving trust propertyanddishonest assistance inafraudulentbreachoftrust(accessory liability). Common Pitfalls law should be cited. Up for Debate loyalty’(2005)121LQR452,whichare worthyof study.Answer Plan Trustees’ duty of care. Extent of exclusion clause. Fiduciary duties. Knowingly receiving property for one’s benefit. Accessory liability. Answer Structure Thisdiagrampresents thepossibleclaims thatmaybebroughtagainstthetrustees and third parties. ANSWER Liability of Margaret and Norman MargaretandNormanaretheexpresstrusteesunder thesettlement.Theyarerequiredto exercise a duty of care. The standard of care as laid down by s 1 ofthe Trustee Act 2000 is such care and skill as are reasonable in the circumstances: (a) havingregardtoany specialknowledgeorexperiencehehasorholdshimselfoutas having; and (b) ifhe acts as a trustee in the course of a business or profession,to any special knowledgeor experience thatitis reasonable toexpectof apersonactingin the courseof that kind of business or profession.5 Thus,thesectionhascreatedanobjective/subjectivetestofthestandardofcarerequired from the trustees.The minimum degree of care andskill expectedfrom a trustee is to be determinedpurelyobjectivelyby the court.Butthis standardof caremaybe increasedby reference to the trustees’ special knowledge or experience acquired personally or held out bythem.Schedule 1 totheTrustee Act 2000 lists theoccasionswhenthedutyof care arises. This includes occasions when trustees enter into arrangements in order to dele5 Factors takeninto considerationtodeterminewhether thedutyof carewas complied with. of liabilitygate functions to agents, nominees and custodians as well as the review oftheir actions. On the facts of the problem, the trustees were aware that David, a fiduciary to the trust, wished to purchase the trust property, a sale was made to David, the trustees relied on David’s recommendation of a valuer,Tony, and the trusteesmade no inquiries as to Tony’s character; Tony turns outto have had a previous conviction for a crime involving fraud.Didthetrustees reviewtheactionsoftheagent,Tony,withanydegreeofcare? These factorsare strongindications thatthe trusteesmaynothave exercisedthe appropriate degree of care necessary in the execution oftheir office.6 However, the trustees may be entitled to rely on the exclusion clause that exists in the trust instrument. Assuming that the clause had been validly inserted in the instrument, the issue concerns the extenttowhichsucha clause mayprotectthe trustees froma claim for breach of trust. Such clauses are not, without more, void on public policy grounds.Moreover,providedthe clause doesnot purporttoexclude the basic minimum dutiesofthe trustees,itmay not be construedasbeingvoid for repugnancy tothe trust.7 Some ofthe minimum duties which may not be excluded are the duties of honesty, good faith and acting for the benefit of the beneficiaries: see Armitage v Nurse (1997). In this case the court decided that the expression ‘actual fraud’ conjures up the notion of dishonesty and is not capable of protecting trustees. In the problem, breach of duties owing to actualfraudisnotexcludedbyvirtueoftheclause,forsuchbreachisexpresslyinsertedin theproviso. Ineffect,the settlor intendedtoprotectthe trustees frombreachesowingto ‘constructivefraud’orbreachesoffiduciaryduties.Onthisbasis theclausemaybesufficientto protectthe trustees from a claim by the beneficiaries. David’s Liability First,Davidmaynotbe able toclaimprotection fromthe exclusionclause,evenasa constructivetrustee.Theclauseisintendedtoprotectexpresstrusteesandinanyeventthere may be actual fraud involved in David’s conduct. In order to establish the liability of David, the beneficiaries are required to establish the following three cumulative propositions: (a) the defendant holds a fiduciaryposition towards the claimant; and (b) the defendant obtained a benefit; and (c) a causal connectionexistsbetween the relationshipandthebenefit.8 A fiduciary is an individual who is aware that his judgment and confidence are relied on, andhavebeenreliedon,bytheclaimant,seeBristolandWestBuildingSociety vMothew (1996), an overridingduty ofloyalty is expectedfrom him.InBoardman vPhipps (1967),a solicitor to a trust was treated as a fiduciary. In like circumstances, David is a solicitor to the trust and would be treated as a fiduciary. 6 Duty of care imposed on trustees. 7 Test to determine the validity of the exclusion clause. 8 Elements of liability of a fiduciary.Has David obtained a benefit? This is a question of fact and the issue seems clear that he obtained a benefit, namely a profit of £110,000. Alternatively, he had obtained trust property,namelythepaintingvaluedat£200,000approximately.Didheobtainthisbenefitas a result of his fiduciary relationship to the trust? Again, this is a question of fact. David informed the trustees of his desire to purchase the painting, he recommended a valuer who was unsuitable to give an independent valuation ofthe chattel, he failed to disclose material facts to the trustees. The cumulative effect of these facts suggests that David was in breach of his fiduciary duties to the beneficiaries. ThereisanadditionalbasisofliabilityasDavidpurchasedthetrustproperty –hashe knowingly receivedtrustproperty forhisownuse?Thebasisofliabilityunder thisheadis that a stranger who knows that a fund is trust property, transferred to him in breach of trust, cannottake control ofthe property for his own benefit, butis subjectto the claims ofthetrust.Heisnotabonafidetransfereeofthelegalestateforvaluewithoutnotice. Theelementsofthe causeof actionwerestatedbyHoffmannLJinElAjouvDollarLand Holdings plc (1994). These are thatthe claimantis requiredtoprove first, adisposal ofhis assets in breach of fiduciary duties; second, the beneficial receipt of the assets or their traceableproceedsby the defendant; and,third, knowledge on thepartofthe defendant thattheassetsaretraceabletoabreachoffiduciaryduty.Thetypesofknowledgefor these purposes were laid down in Re Baden Delvaux (1983) as encompassing all types of knowledge, including constructive knowledge.9 Alternatively,MegarryVCin Re Montagu’sSettlement(1987) reviewedthebasisofliability under this head and decided that the test is ‘want of probity’ which requires subjective knowledge of wrongdoing on the part of David. This view was affirmed by the Court of Appeal in BCCI v Akindele (2000) where Nourse LJ declared that the categories of knowledge arebestforgottenandthe testofliability iswhether itwouldbeunconscionable for Davidtoretaintheproperty.This is aquestion oflawfor the courts todecide.Onthe facts oftheproblemitis clear thatDavidisaware thatthepaintingis trustproperty transferredtohim inbreachoftrust.Hewillthereforebecomeaconstructivetrustee.AsDavid hassoldthepaintingtoathirdparty,possiblyabonafidetransfereeofthelegalestatefor value without notice, the remedy available to the beneficiaries is to recover the profit from David. Tony’s Liability Tony’s liabilitymay bebasedon the factthathe was an accessory in thebreachoftrustor dishonestly assisting in a fraudulent breach of trust. The liability here was stated in the classic case of RoyalBruneiAirlines v Tan (1995) as fault basedand involvingadutyto account. Assistance involves any act (including an omission when there is a duty to act) effectedbyanotherwhichenablesthedefendanttocommitadishonestbreachoftrust.10 In Brinks Ltd v Abu-Saleh (No 3) (1995), it was decided that a defendantis required to lend assistance intheknowledgeof,orbeliefin,the existenceofthe trust,andtheknowledge 9 Liability for knowingly receiving trust property. 10 Tony’s liability as an accessory.172 that his assistance willfacilitate the breach oftrust. Tony was introduced to the trustees byDavidinorder tovaluethetrustassetandsignificantlyundervaluedthepainting.Itisa questionoffactwhether thiswasdonedishonestly,negligentlyor innocently.Thetestof dishonesty was stated by reference to the Twinsectra (2002)/Eurotrust (2006)/Abacha (2006)/ Starglade (2010) decisions as involving an objective standard but with a subjective element.Onthefactsoftheproblemitwouldappear thatTonywasawarethathewas undervaluingthe property with a view to assisting David in acquiring the same at an undervalue.It would seemthatthe testofdishonesty is satisfied and hewill become liable for a breach. The final point concerns Tony’s status. Millett LJ in Paragon Finance v Thakerar (1999) opinedthattheliabilityof anaccessoryis strictlynot asaconstructivetrusteebecausehe does not acquire the trust property. His liability is to accountto the beneficiaries for any benefits received.11 Equity Prior to the Judicature Acts 1873/75 the principles of equity evolved to redress the gaps createdbytherigidapplicationofprinciplesofcommonlaw.Thetheoreticaljustification of equity’s interventionwas basedonprinciples ofnaturaljustice,fairness andmorality. This was apparent by reference to the equitable maxims. These are a set of principles which illustrate the way equity was applied. Following the nineteenth statutory reforms thecreativenatureofequityhadsubsidedintostructuredprincipleswhichdevelopedthe law on a more consistent basis. Questionsonequity,asdistinctfromtrusts,arenotcoveredinsomeexaminationsand,if theyare,theytendtobesetonselectedareas.Youneedtocheckwithyour tutorasto whether this aspect of the syllabus warrants your preparation for exams. This chapter puts together a selection of questions on equitable concepts. Question 37 ‘The guidelines laid down in the American Cyanamid case were designed to achieve more certainty in the law as well as re-asserting judicial discretion.’ Discuss. How to Read this Question Thisquestionrequiresyoutoevaluatethecontributionsmadebythe‘sea-change’decision of American Cyanamid to the law ofinterim injunctions. How to Answer this Question In answering this question you are required to deal with the following issues: Definition of interim injunctions. The nature ofthe test applied by the courts before Cyanamid. The guidelines introduced by Lord Diplock in Cyanamid. Exceptions or limitations to Cyanamid guidelines. Perception ofthe guidelines in subsequent case law.174 Applying the law This diagram outlines the main steps in the development of interim injunctions Answer An interim injunction is one made after the commencement ofthe proceedingsbutprior tothe finaldetermination ofthe court.The objective in obtaining such an injunctionis to ensurethatthestatusquoofthepartiesismaintainedandthattheclaimantdoesnot sufferadditionallossbeforethesubstantiveactionisdeterminedbythecourt. The pre-Cyanamid approach of the courts to the grant of an interim injunction required theclaimanttomakeoutastrongprimafaciecasethathewouldsucceedatthemain trial,that damageswould be an inadequate remedy and the balance of convenience favours the grant. This was the approach taken by the House of Lords in Stratford v Lindley (1965) and Hoffman- La Roche v Secretary of State for Trade and Industry (1975). In Hubbard v Vosper (1972),LordDenningstatedthattheremedyofaninjunctionshouldremainflexibleandthatthecourtshouldtakeintoaccountallthecircumstancesofthecase. Up for Debate The Cyanamid casehasbeenheraldedinsomequarters as involvinga significant theincreaseintheexceptionstotheruleindicatethatitisdoubtfulwhetherLord Diplock’s objectives have been achieved. This theme was explored by A Keay, 175 In American Cyanamid Co v Ethicon Ltd (1975), the House of Lords, led by Lord Diplock, reviewed the principles regarding the grant of interim injunctions and was concerned that decisions at the interim stage were based, necessarily, on affidavit evidence alone and was not tested by cross-examination. It would be unrealistic to require the judge hearing the application for an interim injunction to spend the same time on the issue as the trialjudge atthe finalhearing. LordDiplock laid down guidelines that are required to be considered before the issueof an interiminjunction.These are: (1) There is a serious question to be tried, i.e. the claim is not frivolous or vexatious; whether damages would provide an adequate remedy for the claimant and is the defendantable topay suchsum? Iftheanswer is yesthe injunctionwouldnotbe granted. (2) Whether the undertaking as to damages provided by the claimant constitute adequate protection for the defendant and will the claimant be able to honour it? If the answer is yes,then the possibility ofthe defendant’s success atthe trial is no bar to the grant of the injunction. (3) If there is doubt as to the adequacy of the remedy of damages, the court may consider thegeneralbalanceof convenience.The factors thatare takenintoconsideration vary from case to case. If the factors appear to be even balanced the court will preserve the status quo; where the court, having considered all ofthe above, is still unable to arrive at adecision it cantake into accountthe relative strength ofthe parties’ cases. The court should not embark on anything resembling a trial for the only evidence of the facts is in affidavit format. However where the strength of one party’scaseisdisproportionatetotheother thismaybetakenintoaccount. (4) Special factors may be taken into consideration in order to determine the balance of convenience.Itdoesnotgivethe courtalicencetodisregardthe Cyanamidprinciples. Clearly the central issue in Cyanamid is the balance of convenience as opposed tothe strengthofeachparty’s casewhichcomes lowerdowntheorderofissues tobe considered.Thepolicywas tomaintainabalancebetweentheparties sothatthe substantive matter may be tried at a later date. The Cyanamid principles received a mixed response from the courts, although the bulk of the cases have endorsed the principles, there is a substantial number of cases that have soughtto impose qualifications and create exceptionson the guidelines.In Fellowes v Fisher (1976),LordDenningintheCourtofAppealfounditimpossibletoreconciletheprinciplesin Cyanamid withthoselaiddowninStratford v Lindley andfeltthattheoldapproachworked well.Hehadcontinuedtoconsiderthemeritsofthecaseasthecentralissuebytreating these as ‘specialfactors’thatwere separate from the ‘balance of convenience’issue. Some courts, while endorsing the Cyanamid principles, have voiced a concern thatthere are cases where justice and the needs ofthe partiesdictate a fuller hearingsimilar to that which existed before Cyanamid. Many judges have effectively created exceptions, expressly or impliedly, in order to navigate away from the principles in Cyanamid. In NWL v Woods (1979), the House of Lords recognised that the interim determination would be decisive and the matterwouldnotgotoafinalhearing.InCambridgeNutritionLtdvBBC(1990),theCourtof176 Appeal recognised an exception in respect of the transmission of a television programme where time was all important. In similar vein are applications for mandatory injunctions, mattersconcerningindustrialdisputes,AG v Punch Ltd (2003).Insomecasesthecourtshave soughttoavoidtheCyanamidprinciplesbywayofinterpretation.InR v Secretaryof Statefor Transport, Ex p Factortame (1990),the court decidedthatthe case involvedserious questions to be tried and points oflaw,thus avoidingCyanamid. In Series 5 Software Ltd v Clarke (1996), Laddie J suggested that LordDiplockinAmerican Cyanamid did not intend to exclude consideration of the relative strength of the parties’ cases inmost applications for interim injunctions. He suggested thatwhat was intended was toavoidhavingtoresolve difficultissuesoffactor law onan interimapplication.The considerationofthe relative strengthoftheparties’ cases is thusnot amatteroflast resortbutshouldbeavoidedincasesinvolvingdifficultdisputesoffactor law. The granting of interim injunctions has been affected primarily in the area of freedom of expression by the introduction of the Human Rights Act 1998. Section 12(3) enacts that no such relief (affecting the exercise of the right to freedom of expression) is to be grantedso as to restrainthe publication before trial unless thecourt is satisfied thatthe applicant is likely to establish that publication should be allowed. Art 8 of the Convention involves the right to private or family life and Art 10 declares the right to freedom of expression. In the overwhelming majority of cases the courts have declared that in the contextof s12(3)the Cyanamid principles are to be put onone side in favourof aconsideration ofthe strength of each party’s case. In Douglas v Hello Ltd (2001),theCourt ofAppealstatedthatitwasincumbentonthejudgetoconsiderthemeritsofthecase. In Cream Holdings v Banerjee (2004), the House of Lords decided that the applicants hadfailedtoshowthattheyweremorelikelythannottosucceedattrialinpreventing the publication of the information. Question 38 ‘Thetwostreamsofjurisdiction(lawandequity)thoughtheyruninthesamechannel run side by side and do not mingle their waters’ W Ashburner, Principles of Equity, 1933, Butterworth &Co. Discuss. How to Read this Question Thisessayquestionrequiresyoutoexaminethe ‘fusion’debate.Theissueiswhether the Judicature Acts 1873/75 has fused the principles of law and equity or simply achieved an integration ofthe administration oflaw and equity? How to Answer this Question In answering this question you should define the meaning of the expression ‘fusion’ in thiscontext.BrieflyillustratethedualsystemoflawandequitybeforetheJudicatureActs andconsider the extenttowhich the twosystemsof ruleshave been integrated by reference to decided cases.177 Applying the law This diagram sketches out the salient features in the ‘fusion’ debate. Answer The firstissue to raise is the meaning of the word, ‘fusion’ in this context. The orthodox view is that the administration of law and equity has been fused by the Judicature Acts leaving law and equity free to develop by reference to the principles that existed before 1873/75. In short, no new cause of action or remedy has been created since the Judicature Acts. This is the view of Ashburner and the majority of judges and academics and will be exploredshortly.An alternative meaning ofthe conceptis that since the Judicature Acts the distinctions between legal andequitable estatesor interests andremedies nolonger exist.This view,which is difficulttosupport,is thatthenineteenth century statuteswere codifying Acts of Parliament that integrated both systems of rules into one. This may accountfor some decisions that cannotbe explained by reference tolaw or equity but by reference to a set of new principles. Up for Debate JMartin,‘Fusion,fallacyandconfusion:acomparativestudy’(1994)Conv.13. set of principles, see Tinsley v Milligan178 PriortotheintroductionoftheJudicatureActsthecourtsatlawandequityappliedseparate rules in determining disputes. The most significant feature of this division was the refusalofthecourtsoflawtorecogniseequitablerightsandinterestsassufficientto entitle the holder to relief at law. Unsuccessful attempts were made by beneficiaries in actions indebt broughtin the common law courts torecover monies from their trustees. Before 1873/75 the correct procedure in these cases was for the beneficiaries to bring actions for account in the Court of Chancery. In order torectify the injustice ofthe separate courts system the Judicature Acts 1873/75 werepassed.Section 25(11)(now theSenior Courts Act 1981, s49) enactedthatinall matters ‘of conflict or variance between the rules of law and equity with reference to the same matter, the rules of equity shall prevail’. There was nothing in the Act to indicate thatthisprovisionattemptedtocodify lawandequity andcreate anewbodyof rules whichdidnotoweitsorigintotheprinciplesthatexistedbefore1873.Thus,itisarguable thatthe Acts merely fused the administration oflaw and equity. However there are occasions when the court may award damages (a common law remedy) for breachof an equitable obligation.This conclusion,in itself,is not of major significance but whatis significantis the reasoningin the courtto the effectthatthe remedy was availableirrespectiveoftheoldjurisdictionthatwasinvolved.ThiswastheapproachoftheCourt ofAppeal in Seager v Copydex Ltd (1967).The claim was in respectof breach of confidence in marketing a carpet grip belonging to the claimants. Despite the nature of the equitable claim the court awarded damages. It is arguable that this remedy was available under the ChanceryAmendmentAct1858(LordCairnsAct).ButLordDenningactedontheassumption that the Judicature Acts permitted remedies available in one court but not the other irrespective of the jurisdiction concerned. In Re Pryce (1917), the issue was whether the court would award damages at the instance of a third party volunteer for breach of a voluntary covenant to create a trust. Eve J reasoned that since damages may not be awarded at law, likewise damages would not be awarded in equity. If Eve J is correct this would mean that the Judicature Acts have altered the substantive law by depriving a claimant covenantee fromenforcingavoluntarycovenantatlaw.Butwherevaluableconsiderationhasbeenprovided by the claimant, even though the transaction has not been reduced in the form requiredby law,the claimmaybe upheldin equity, see Walsh v Lonsdale (1882).Likewise,an equitableassignmentforvaluableconsiderationbutdoesnotcomplywiththeprovisionsof s136oftheLawofPropertyAct1925,maybeenforceableinthesamewayasunder thepre1873Act, see Brandt’s Sons & Co v Dunlop Rubber Ltd (1905). The better view is that althoughthe two systemsoperate closely they are notfused.In appropriatecasesitisstillnecessarytoconsider theoriginofthejurisdictionunderlyingthe claim or defence. In MCC Proceeds v Lehman Brothers International (1998), the issue was whether an equitable owner was capable of suing for conversion. The claim in conversion hadits originsatlaw.It was decidedthatonly the legalownerwas capableofbringingsuch action. The court highlighted the distinctions between legal and equitable interests and decidedthatthe Judicature Actshadnotmodifiedthis rule.TheActintroducedprocedural improvements in the administrationoflaw andequity.In Swindle v Harrison (1997),the court decidedthatcommonlawdamageswasnotavailableforbreachoffiduciaryduties.179 However Lord Browne Wilkinson took a different view in the House of Lords decision Tinsley v Milligan (1994). The issue here was whether an equitable interestin real property may be asserteddespite the existence of an elementofillegality in contributingto the purchase of the property. The court allowed the equitable owner to succeed in her claim. Lord Browne Wilkinsonsaidthatthe effectoffusionresultedina single rule as to whenanequitable ownermaybeentitledtoenforceherinterestacquiredbyanillegaltransaction. Therehavebeenmanyoccasionsincontemporarysocietyrequiringthe rulesofequitytobe developed to meetthe needs of society. This task has been achieved within the framework of equitable principles.In the event of a stranger to a trust knowingly receiving trustproperty for his own benefit in breach of trust the court may impose a personal liability on the defendant.The rationaleaswellas the specificelementsofliabilityare the subjectsofjudicialand academic controversy.The remedy availableis restitutionary.Withregardto a stranger dishonestly assisting another in the commission of a fraudulent breach of trust, muchofthelawhasbeenclarifiedbythePrivyCouncildecisioninRoyalBruneiAirlines v Tan (1995).Afurtherdevelopmentofthe law regardingrightsof ownershipofthe familyhome has been achieved by the introduction of the remedial constructive trust in Stack v Dowden (2007)andJones v Kernott (2011).Withregardtotheprocessoftracinginequitytherequirementthatthe claimant establishes the existence of a fiduciary relationship relates back to the pre-Judicature Acts.Although today thismay be consideredto be an anachronism the courtshavedeclaredthatit remainsanintegralrequirementandcannotbemodifiedexcept by statute, see Westdeutsche Landesbank v Islington Borough Council (1996). In conclusion there is sufficient evidence to contend that the principles of law and equity have not been fused by the Judicature Acts. In contemporary society the principles of law andequityarenotstaticandalthoughthepolicyattributesitsorigintopre-Judicaturerules thedetailsof suchdevelopmentmaynotbepartialtoeithersystem. Question 39 ‘... in the field of equity,the length ofthe Chancellor’s foot has been measuredor is capableofmeasurement.Thisdoesnotmeanthatequityispastchildbearing;simplythat its progeny must be legitimate – by precedent out of principle.’ Per Bagnall J in Cowcher v Cowcher (1972). Evaluate this statement. How to Read this Question Thisessayquestionmakesreferencetothe‘Chancellor’sfoot’.Thisisanexpressionthat wasusedbefore theJudicature Acts 1873/75 todescribetheexpansivepowerofequity in creatingnewrightsandremedies.Thequestionraisestheissueastowhether inthepostJudicatureperiodequity isstill capableofdevelopment,albeitwithinlimits. How to Answer this Question Inansweringthisquestionitisnecessary toindicatehowcreativetherulesof equitywere in the pre-Judicature period to such an extent that a commentator (John Selden) statedthattherulesofequityvariedwiththelengthoftheChancellor’sfoot.TheJudicatureActs werepassedtofuse the administrationoflawandequity.However,itisnecessary to demonstrate that, within limits, the rules of equity are still capable of development or refinement. The justification for acting within broad equitable principles achieves an element of certainty in the law which is desirable. Answer Structure This diagram highlights some of the main features in the structured development of equity. Up for Debate (1994) 110 LQR 238.Answer The expression ‘equity’ has a variety of meanings that vary with the context in which it is used.First,it referstothecollectionof rulescreatedinitiallybytheLordChancellorandsubsequently by the Court of Chancery prior to the enactment of the Judicature Acts 1873/75. Theseruleswerebasedongroundsof conscience,fairnessandjustice.The interventionby theCourtofChancery soughtto dealwiththe provenlimitationsofthe commonlaw.Major contributions of equity in this context include the trust, partnerships, protection of the mortgagoragainstthemortgagee,theadministrationofestatesofdeceasedpersons,protection of vulnerable persons such as infants and those suffering from mental disability, bankruptcy law to mention a few.Second,the termrefers to the equitable interestin property,i.e.arightofownershipnot recognisedbythecommonlawbeforetheJudicatureActs. Third,theexpressionrefersto‘mereequities’.Thisisaproceduralrightwhichisancillaryto somerightofpropertysuchastherighttohaveadocument rectifiedorarighttohavea transaction set aside for undue influence. The contribution of equity to the enrichment of the law may be summarised as the exclusive jurisdiction (creating new rights such as trusts),concurrentjurisdiction(creatingnewremediessuchasinjunctions,specificperformance etc.) and the auxiliary jurisdiction (creating new procedures such as the subpoena, discoveries, interrogatories etc.). Referring to the question, the reference to ‘equity’ includes these three meanings. The reference to the ‘Chancellor’s foot’ is an expression used by a commentator, Selden, to describe the unabashed approach of the Court of Chancery to judgeeachcaseaccordingtothetenetsofjustice,conscienceandfairnesswithoutregardto binding precedent.This approach, before the Judicature period, resulted in a great deal of uncertaintyastotheequitablerulingsand,inabroadersense,injusticetosomelitigants. The reference in the question to ‘childbearing’ refers to the notion that post-Judicature equity is still capable of beingdeveloped or refined but by a systematic method in the contextof overridingequitableprinciples.Someofthesedevelopmentshavebeenmade in the context of the constructive trust, resulting trust, tracing, estoppel and special interim injunctions (freezingand searchorders)to name a few. Equity’screativitymaybedemonstratedinthe fieldofthe constructivetrust.Inthe context of proprietary rights in the family home, the courts have moved away from the presumptionsof resultingtrustandadvancementtothe realisticprinciplesofthe resultingandconstructive trust, see Pettitt v Pettitt (1970), Gissing v Gissing (1971) and Lloyds Bank v Rossett (1990)before finally settlingon the remedial constructive trustprinciples laiddownin Stack v Dowden (2007) and Jones v Kernott (2011). Prior to this journey the courtshad advocatedan unrestricted ‘new model’ constructive trust illustrated by Eves v Eves (1975) which had the undesirableeffectof creatingagreatdealof volatility inthisarea. Another area of development is with regard to the liability of a third party to the beneficiaryforknowingly receivingtrustproperty forhisownbenefit anddishonestly assisting another in a fraudulent scheme. The courts had frequently stated that the status of this liability is toaccount‘as a constructive trustee’butthebetter viewis thatthe languageof the constructive trust is misleading because liability is personal, not proprietary, see Paragon Finance v Thakerar (1991) and Sinclair Investments v Versailles(2011).Theresultingtrusthasalsobeenafieldfordevelopmentbyequity.Thecourtswerejustified in introducing the resulting trust to enhance the status of an unsecured lender to thatof a beneficiarywhere aloan wasmade topromote a specific purpose.The fundsdid notbecome thegeneralpropertyofthe recipient,see Barclays Bank v Quistclose (1970). AlthoughthereasoningofLordWilberforcehasbeencriticisedtheimpositionofthetrust has been welcomed in this context, see Carreras Rothmans Ltd v Freeman Matthews Ltd (1984) and Re EVTR (1987). On a different point, where the claimant transfers property with the intention of putting the property out of reach of his creditors, but subsequently repents andwishes to ‘turn the clockback’ andrecover hisproperty,wasoriginally frustrated by the courts. The court originally applied the maxim, ‘he who comes to equity must come with clean hands’ and prevented the claimantfrom adducing evidence of his equitable interest, see Tinker v Tinker (1970). A significant development in this contextis Tinsley v Milligan (1993), where the House of Lords decided that there is no inflexible rule to the effect that evidence of a fraudulent or unlawful purpose for a transfer of property is sufficient to prevent an equitable owner from recovering his property, if he does not rely on this purpose to support his claim. Theprocessoftracinginequityintoamixedfundheldatabankinwhichtwoormore innocent claimantsare interestedhasbeenthe sourceof somedevelopment.Inthis case theharshandarbitraryprinciple inClayton’s Case (1816),maybe avoided.The courtshave recognised that the status of the claimants are in pari passu and they ought to share the loss proportionately rather than the winner takes all, see Barlow Clowes v Vaughan (1992) and Commerzbank Aktiengesellschaft v IMB Morgan(2004). Inthefieldofproprietaryestoppelthemodernapproachistobroadenitsscopeandfocus on the defendant’s unconscionability rather than strict, rigid rules. In Cobbe v Yeoman’s Row Management Ltd (2008), the House of Lords decided that a proprietary estoppel claim required clarity as to the terms of the representation and expectation of the interestin the property in question. In Thorner v Major (2009),the House of Lordsdecided thatthe test may be applied more flexibly in a domestic context. Inthe latterpart ofthe twentieth century the courts developed new forms ofinterim injunctions that may be regarded as formidable weapons in the litigation armoury. One ofthese was originally called the ‘Mareva’ injunction but which is now known as a freezinginjunction.This type ofinjunctionwas designedtopreventadefendantfromremovingassets fromthe jurisdiction ofthe Britishcourts (ordissipatingassets within the jurisdiction) which,ifnotprohibited,mayhave the effectofdefeating thewhole purpose oflitigation, see Mareva Compania Naviera SA v International Bulkcarriers SA (1975).During the same period the court developed another interim injunction originally called an ‘Anton Piller’ order, but now known as a ‘search’ order. The underlying principles were originally laid down in Anton Piller KG v Manufacturing Processes Ltd (1976), and are currently in statutory form in s7 ofthe Civil Procedure Act 1997. Inconclusion, in support ofthe statementbyBagnallJ,the developments in equitynoted abovewerealleffectedwithintheambitoftraditionalequitableprinciples,asopposedto anunbridled,diverse collection ofprinciples created by the courts.Question 40 What factors may the court take into consideration in deciding whether to exercise its discretion concerning an order for specific performance? How to Read this Question Thisessayquestionrequiresyoutooutlinethecircumstanceswhenadefendantmaysuccessfully raise a defence to a claim for specific performance. How to Answer this Question In answering this question it is necessary to describe the nature of an order for specific performance and indicate that all equitable remedies are discretionary. Itis atthis stage that you may outline some of the occasions when the court refused to make an order for specific performance. Answer Structure Thisdiagramlistssomeofthefactorsthatareconsideredbeforeorderingspecificperformance. Up for Debate relief against forfeiture’ (1985) 44 CLJ 204. misrepresentationAnswer The remedyofspecificperformanceisanorderofthecourt requiringthedefendantto perform his part ofthe contract. Itis an illustration ofthe concurrentjurisdiction of equity thatwasdevelopedprior totheJudicatureActs1873/75.Theremedyoperates‘inpersonam’, i.e.againstthedefendantpersonallyandwillbeacontemptofcourtifthedefendantrefuses to complywiththe orderwithoutlawful excuse. Theremedy,likeallequitableremedies,isdiscretionaryinnaturebuttherearesomesettled groundson which the courtwill refuse to grantthe order.The courtswilltake many factors into account when consideringwhether or notto grant a decree,includinglaches,the conductoftheclaimantandthequestionofhardshiptothedefendant.InPatel v Ali (1984),it washeldthat,inconsideringtheissueofhardshiptothedefendant,thecourtcouldtakeinto account eventswhich had occurred after the contract had been entered into, although this wouldberare.Inthiscasetherewasanunforeseenchangeinthedefendant’scircumstances subsequentto date ofthe contractfor the sale of a house.The defendant, a youngmarried womanwiththreeyoungchildrencontractedbonecancer resultinginamputationofher leg subsequenttodateofcontract.Thedefendantbecamedependentonassistancefromfamily andfriends livingin the neighbourhoodofthehousecontractedtobe sold.The HighCourt decided that it would have inflicted hardship amounting to injustice on the defendant to order specific performance ofthe contract since that wouldhave the effectof askingher to dowhatshehadneverbargainedfor,namely,tocompletethesaleaftermorethanfour yearsandafteralltheunforeseeablechangesthathadtakenplaceduringthatperiod.Moreover,after the longperiodofdelay(forwhichneitherpartywas toblame)itwouldhavebeen just and fair to leave the claimants to their remedy in damages.The court saidthatit could, in the exerciseofitsdiscretion ina proper case, refuse specificperformanceof sucha contract on the ground of hardship suffered by the defendant subsequent to the date of the contract,evenifthe hardshipwas not causedby the claimant and did not relate to the subjectmatterofthecontract.Thecourtmayalsotakeintoaccountthehardshipthatwould besufferedbyathirdpartyindecidingwhether tograntthedecreeof specificperformance, see Thames Guaranty Ltd v Campbell (1984). ThediscretionarynatureoftheremedyofspecificperformancewasconsideredbytheCourt of Appeal in Quadrant Visual Communications v Hutchinson Telephone (UK) (1993),where the claimantdidnot come tocourtwith‘cleanhands’havingfailedtodisclose tothe defendant amaterialfactbeforeenteringthecontractforwhichhewasseekingspecificperformance. Iftheclaimanthasdefaultedinsomeway,forexample,ifhehasfailedtoperformhispartof the contract by the time specified, then the defendant may use the fact of the claimant’s defaultinhisdefence.Exceptinspecificcircumstances,equitywillnotconsider timetobeof the essenceof a contract.The exceptionshavebeenclearlysetout by the courtinBritish and Commonwealth Holdings v Quadrex Holdings (1989), as occasions where the contract expresslysostipulate;orthecircumstancesofcontractindicatethattimeisoftheessenceor wherenotice to completehasbeengivenby the claimant. Inparticular cases, such as those involvingcontractswhichrequiresupervision,other considerationsmayberelevant.Itseemsthatthecourtswillviewasoneofdegreethequestionofwhetherornotacontractrequirescontinuoussupervision.Evenifcontinuoussupervision of a contractshouldprove tobenecessary,specificperformancecouldstillbe grantedprovidedthatitisquiteclearwhatthedefendantisrequiredtodo.Thus,inBeswick v Beswick (1968),alltheLawLordsthoughtitunimportantthattheobligationunderthecontractwasa continuing one. In Co-Operative Insurance Society Ltd v Argyll Stores (Holdings) Ltd (1997),the House of Lords reversed the Court of Appeal’s decision and decided that the defendant wouldnotbecompelledtokeepitssupermarketopenpursuanttoa‘keepopen’clauseinthe lease.One reasonfor thiswas because the courtwouldnot order specificperformance of a contract requiringconstant supervision. It was obvious thatthe difficulties which the court would encounter in supervising performance would prevent it from enforcing contracts for personal services, see Wolverhampton and Walsall Railway Co v London and North Western Railway (1873).Inaddition,itwasthought tobecontrarytopublicpolicytocompelthepartiestocontinueaworkingrelationshipwhere one ofthem was unwilling to do so. To grant an order for specific performance in suchcircumstances couldbe tantamountto turningthe contractsof employmentintocontractsof slavery, see Francesco v Barnum (1890). In Lumley v Wagner (1852), the court refused to grant specificperformanceofacontracttosingatatheatre.Notallcontractsforpersonalservices present suchdifficulties.InHill v CA Parsons Ltd (1971),anemployeewasdismissedafter havingrefusedtojointhetradeunionathisplaceofemploymentwhereaclosedshopwasin operation. The court granted an interim injunction restraining the termination of his employmentonthegroundsthattheIndustrialRelationsAct1971(sincerepealed)wouldhavecome into force within a few weeks and would have given the employee protection in any event. Furthermore, the employer and employee retained mutual confidence in each other. Lord Denningnotedthatthe decisionin facthadthe effectofgrantingspecificperformanceof a contract of employment. In Erskine McDonald Ltd v Eyles (1921), the court decided that a breachofacopyrightagreementofferingthedefendant,anauthoress,apublishingcontract towritehernextthreebookssubjecttocertainroyaltyterms,wasspecificallyenforceable.In breach of this agreement the defendant attempted to sell her manuscripts to a rival publisher. The court decided that such agreements were not contracts to render personal services,butcontractstoselltheproductsofthelabouror industryofthecontractingparty. As a general principle, specific performance will not be granted where it would be futile or impossibleas‘equitydoesnothinginvain’.Thus,specificperformancewillnotbeorderedof a partnership agreement which is not for a fixed term as the partnership could be terminated anyway at will, see Hercy v Birch (1804). Both mistake and misrepresentation may give one party the right to rescind the contract. Theymay also be usedas a ‘defence’to an action for specific performance as it seems that thecourtmaybemorewillingtorefuseadecreeofspecificperformancethantograntrescission, see Denny v Hancock (1870). Question 41 ‘The decision whether or not a (search order) should be granted requires a balance to be struck between the plaintiff’s need thatthe remedies allowed by the civil law for thebreachofhisrights shouldbe attainableandtherequirementsofjusticethatadefendant should not be deprived of his property without being heard.’ Per Scott J in Columbia Pictures Incorporation v Robinson (1986). Considerwhatsafeguardsexisttopreventabusebyaclaimantingrantingasearchorder. How to Read this Question This essay question requires you to identify and evaluate the pre-conditions before granting a search order How to Answer this Question It is necessary first to define a search order, second, to state the general rule in Entinck v Carrington and, third, to identify the relevant conditions that need to be satisfied before granting the order by reference to decided cases. Applying the law This diagram charts the main events in the history of the search order. Up for Debate Ithasbeenarguedthatthegrantingofasearchorder initiallyhadbeentoooften (1990) 106 LQR 601.Answer The ‘search order’ was originally called an Anton Piller order, a derivative from the case thatiscloselyassociatedwiththeordernamely,Anton Piller v Manufacturing Processes Ltd (1976). A search order is a form of mandatory interim injunction created to reduce the risks that, pending trial,the defendant does not dispose of any articles, including documents,thatmayberelevanttotheclaimant’saction.Morepreciselyitisanorder,secured ex parte, authorising certain named persons to enter the defendant’s premises for the purposeofinspecting,photographingandremovingtheobjectsspecifiedintheorder. As far back as the eighteenth century the courts affirmed the constitutional right of the citizen to protect his property from official interference. This was achieved in Entinck v Carrington (1765). It was decided thatthe Secretary of State had no power at common law toissue generalwarrants for the arrestofthose suspectedof publishing seditious libels. Equally, at common law, the warrants may not authorise the search for, and seizure of, documents in the possession of the defendant. It was against this background that the courts inthe twentieth century found a legal route to grant suchorders.Initially this route involveda fictionthatthedefendanthadconsentedtosuchsearch, see Bhimji v Chatwani (1991). It was in effect a search warrant in disguise. In Anton Piller v Manufacturing Processes Ltd thepracticeofgrantingsuchanorderwasapprovedbytheCourtof Appeal and in Rank Film Distributors v Video Information Centre (1982) the same was endorsedby the House of Lords. Today the practice hasbeen endorsedin statutory form in s7 of the Civil Procedure Act 1997. In Anton Piller,theCourt ofAppeal laid down the following pre-requisites for the granting of the order. These are: the claimant must have a strongprima facie case,the ordermaynot be usedas a fishing expedition; theclaimantmust showactualorpotentialdamageofaveryseriousnature; there is clear evidence that the defendant has incriminating documents or things andthatthereisarealpossibilityofthesedocumentsor thingsbeingdestroyed before an inter partes application could be made; theinspectiononbehalfofthe claimantmustdonorealharmtothedefendantor his case; the court will need to be satisfied thatthe claimant has the capacity to pay for any damages that may be ordered against him when the merits ofthe case are ultimately determined. The application is made ex parte and supported by affidavit evidence with a form of the order attached. The court may reject, accept or amend the form in its discretion.Certain safeguards exist in the execution of the order. These were laid down by the court in UniversalThermosensors Ltd vHibben (1992),andarenowincludedinCPR25.Theseare: that the order be served and supervised by a solicitor from a different firm from that acting for the claimant;that the solicitor supervising the search should be experienced and knowledgeableabout the workings of search orders; that the supervising solicitor should explain in ordinary language the meaning and effect of the order to the defendant and his right to seek legal advice if done immediately; thatthesolicitorshouldprepareawrittenreportontheexecutionoftheorder; that a copy of the report should be served on the defendant and that the report should be presented to the court at an inter partes hearing; thatthe orders should be served on weekdays during office hours in order to give the defendants the opportunity to obtain legal advice; that the party serving the order should include a woman ifit is likely that a woman might be alone at the premises. In the Columbia Pictures case, the court ruled that the claimant, having obtained the searchorder,shouldnotactoppressivelyorabuseitspower intheexecutionoftheorder. An order that allows the claimant’s solicitors to take and retain all relevantdocumentary materialandcorrespondencecannotbejustified.Theorder isrequiredtobeproportionate. Once the claimant’s solicitors have satisfied themselves what material exists and have had an opportunity to take copies thereof,the material oughtto be returned to the owner, and should only be retained for a relatively short period for such purpose. It is inappropriate for seized material, the ownership of which is in dispute, such as alleged pirate tapes,tobe retainedby the claimant’s solicitorpending trial.As soon as a solicitor for thedefendantisontherecord,theclaimant’s solicitoroughttodeliver thematerialto the defendant’s solicitor on his undertaking to keep it in safe custody and produce it, if required, incourt. Where these safeguards have been breached by either the claimant or his solicitor, the court may set aside the order. In the event ofthe order not being set aside,the court can awardexemplarydamagesandthesolicitormaybeliableforcontemptofcourt. Theeffectivenessofthesearchorderhasbeenrestrictedbytheapplicationofthedefendant’s privilege against self-incrimination. The privilege is to the effect that no person is required to answer any question or produce a documentin court proceedings where the information would incriminate him as to offences in contravention ofthe criminal law. In Rank Film Distributors Ltd v Video Information Centre (1982),the court upheldthe defendant’s claim to the privilege against self-incrimination in a case that involved breach of copyright. The standard form informs the defendant ofthis privilege. It should be noted thats72oftheSeniorCourts Act1981restrictstheprivilegeincasesinvolvingpassingoff and/or cases relating to the infringement of intellectual property rights, see Coca Cola Co v Gilbey (1995).However,where the case fallsoutside the ambitof s72,the defendantcan rely on the privilege against self-incrimination. This would appear to be clear from the case of Tate Access Floors Inc v Boswell (1991), where the court stated that, in civil proceedings involving an allegation which could give rise to a criminal charge of conspiracy,the court could not make a search order since this would infringe the defendant’s privilege against self-incrimination.Thecourt’s jurisdictiontoissue searchorderswasextendedtooccasionsafter judgment had been obtained where there was a risk of justice being thwarted by a defendant who was intent upon rendering any judgment nugatory, see Distributori Automaci Italia v Holford General Trading (1985). Inconclusionitisevidentthattodaythecourtsaremindfulofthedraconiannatureof searchordersandwillendeavour toensurethattheguidelinesarefollowedandthat such orders will not be granted, exceptin appropriate cases. 12 Pick and Mix Questions It is sound examination technique to analyse the question and reflect on whether there are any additional substantialor incidental issues thatneedtobe includedin your examination answer. This selection of ‘pick and mix’ questions contains multiple issues for your benefit. Question 42 Alex and Bernard are trustees under the will of Klondyke, who died in 2012. Under the terms of the trust, the trustees are to hold various items of furniture, some family heirloomsandcashinKlondyke’sdepositaccountontrustforPerkyforlife,thenceabsolutely for such of his children then living. In 2013, Alex approached James, a stockbroker, to seek hisadviceon the investmentofthemoney,andalthoughJameswasonly recently authorisedbytheStockExchange,heconfidentlyrecommendedseveralinvestments.Alexpaid over half the trust monies to James in order to carry out the recommended investment policyafter tellingBernardthatthiswas‘purelyamatterofform’.James investedthe money as agreed but, due to his inexperience of high tech stocks, all the investments madeasubstantialloss.InresponsetoJames’sfurther requests,Alexpaidovertherestof themonies,this timefailingtoconsultBernard.Duetogoodfortune,thesecondbatchof investmentsonoldfashioned‘blue­chips’madeasubstantialprofitandtheeventualsum repaid to the trust was far in excess ofthe original sums invested. Meanwhile, Perky has persuadedbothtrustees tosellthefurnitureandfamilyheirloomsandtopurchasea sportscarforhimwiththeproceedsoftheformerandtodonatetheresttocharity. In 2014, Perky dies and his two living children become aware of how the trust has been administered.Havetheyanycauseforcomplaintand,ifso,whataretheirremedies? How to Read this Question This problem question requires you to deal with a combination of issues. It is clear that trust duties are imposed on Alex and Bernard. Identify the possible breaches of trust by the trustees. Consider the liability of each or both trustees. Are there any grounds for relief?May thebeneficiaries trace their assets inthehandsofthirdparties? How to Answer this Question In answering this question you are required to deal with the trustees’ duty to exercise reasonable care in appointing an agent, James, and reviewing his conduct. The appointmentis required to be in writing which is absentin this question. Assuming Alex is liable for breach oftrust would Bernard,the co-trustee, also be liable? Trustees are jointly and severally liable forbreachoftrust.May Bernardclaima contributionfromAlex?Consider the measure of loss to the trust. Has there been a breach of trust when Perky persuades the trustees to sell the furniture and use the funds for Perky’s personal benefit? In addition the beneficiaries maybe entitled to trace their funds in the sports car and heirlooms in the hands of the purchasers. Answer Structure This diagram depicts the main issues in answering the question. Up for Debate abletothetrustees.ThenatureofthelosstothetrustaswellastheavailableremisDCapper,‘Compensationforbreachoftrust’(1997)61Conv14.Answer Onthefaceofit,onemightthinkthatPerky’schildrenhadlittletocomplainabout.As theproblemmakesclear,thesumheldbythetrustatPerky’sdeathwas‘farinexcess’ of the original sums and the investment policy seems to have been successful. However,theessentialnatureofliabilityforbreachoftrustisthatitisrestitutionary:it shouldrestoretothetrustfundallthelosscausallylinkedtoanybreachoftrustandit mattersnotthat certainactivitiesofthetrusteeshavebroughtconsiderablegainsto thetrust(DimesvScott(1828);BartlettvBarclaysBankTrustCo(No2)(1980)).Likewise, where investment powers are in question, the possibility of a breach is measured againstthedutyof carelaiddownins1oftheTrustee Act 2000namely,that a trustee ‘must exercise such care and skill as is reasonable in the circumstances’, having regard to any special knowledge or experience thatthe trustee has, or holds himself out as having, and with regard to any special knowledge and skill acquired by the trustee actinginthe course ofbusiness.Asunder the law before the 2000 Act,itis likely that fulfilment of the trustee’s duty in regard to investments is not to be measured in terms of absolute results, be they gains or losses (see, also, Nestlé v National Westminster Bank (1993)), butin terms ofthe care exercised on reaching the gain or loss. Seen in this light, this problem raises a number of issues concerning the trustees’ potential liability for breach of trust. In particular, it is necessary to determine, first, whether there have beenanybreachesoftrustwhichhavecausedlosstothetrustfund;second,whohas caused these breaches and who is responsible in law for them; third, whether the trustees may raise any defences in an action by the beneficiaries; and, fourth, whether thereareanyotherremediesthebeneficiariesmightpursueiftheactionforbreachof trust proves insufficient to meet their claims. The first matter to examine is whether Alex or Bernard, or both, can be said to have committed a breach oftrust when the initial investments recommended and effected by Jamesresultina substantialloss.There isnobreachoftrust simplybecause investments make a loss or only a little profit. That risk is in the nature ofinvestment(Nestlé v National WestminsterBank (1993)).However,there are a number of reasons whyAlex and Bernard mightbe liable.Itwill be rememberedthatAlex is the ‘active’trustee in this matter and it ishe whoinitiates these events. So,focusing on hisposition, itis clear thatwhen exercising investment powers, he must meet the duty of care specified in s 1 of the Trustee Act 2000. This is to take reasonable care in all the circumstances (taking account of any particularskillshehasorprofesses).Theexactscopeofthisdutyremainstobeelucidatedby the courts, but because Alex is not, and does not purport to be, an investment professional(who,after theActmayowehigherduties),hisdutymaywell equate totheold common law standard of having to take such care as an ordinary prudent man of business would exercise when considering making an investment for the benefit of others (Learoyd v Whitely (1887)). Moreover,inexercisingthispower,itisperfectlyinorder forAlextoemployanagent(s11 of the Trustee Act 2000), provided that, because this is an asset management function (that is, investment), such delegation is either in writing or evidenced in writing (s 15 of theTrustee Act 2000). Applying this law to our case, it appears that Alex is in breach oftrust because even if he believed that James was a suitable person to act in this capacity (that is, assuming that Alexhasdischargedhisdutyof care with respecttothe appointment:query James’s inexperience),theappointmentisnotinwritingor evidencedinwriting.Inconsequence, all loss caused by the breach canbe recovered from Alex and possibly from Bernard (see below) (Target Holdings Ltd v Redferns (1995); Swindle v Harrison (1997)). Note, however, that Alex (and possibly Bernard) is liable because of his failure to properly appoint. He is not liable because James has made a poor choice of investment because, even if such a poor choice amountedtoabreachoftrust, s23 oftheTrustee Act 2000 makes it clear that a trustee is only liable for the acts of agents (such as James) if the appointment was effective (as inour case) or ifthe trustee failed inhisduty to review the actionsofthe agent (of which in our case there is no evidence). Assuming then that Alex has committed a breach of trust, what is the position of Bernard?Clearly,BernardisnotvicariouslyliableforAlex’sactions(sees23oftheTrustee Act 2000),butitmaywellbethat Bernardhasfailedinhisownduties tosupervisethe trust properly by failing to question Alex about his proposed dealings (Styles v Guy (1849)). A so-called ‘passive’ trustee cannot escape liability for breach of trust if that passivity itselfamountstoaneglectofdutybreachingthedutyofcareoftheTrustee Act 2000. ThiscouldbethecaseinrespectofthefirstamountofmoneypaidtoJamesand,ifso, AlexandBernardarejointly andseverallyliabletothebeneficiaries.It seemsunlikely that Bernardcanbeheldresponsiblefor thesecondpaymentofmoneytoJamesunlesshewas soinattentiveofthe trust’s affairs soas tofail in hisduty.There is noevidence tosupport thisandconsequentlyBernardshouldbeabletoclaimacontributionfromAlexunder the Civil Liability (Contribution) Act 1978. This brings us to the measure of loss. As is made clear, the second transaction actually makesaprofitfor the trustand,withoutdoubt,thisprofitmustbeheldfor thebeneficiaries, whether deriving from a breach oftrust or not(Vyse v Foster(1874)). The real issue is whether the trustees will be able to set offthe gainsmade by the second transaction againstthe lossesmade inthe first(Dimes vScott(1828)).Thegeneralprinciplefrom Dimes is that this is not permitted unless the ‘two’ transactions are so interdependent that one follows inextricably from the other (Bartlett v Barclays Bank Trust Co (No 2) (1980)). Thatlimited exception is unlikely to apply here, leaving Alex (and possibly Bernard) liable to compensate for the loss caused to the beneficiaries by the breach in respect of the first investment (there being no loss with respect to the breach over the second set of investments). Itis also clear that abreach oftrustis committed when Perky persuades the trustees tosellthe furniture andheirlooms and touse themoney forhispersonalbenefit and for donations to charity. Such instigation of a breach of trust by the beneficiary will not only prevent Perky claiming against the trustees for any loss arising out of these breaches (LifeAssociation ofScotland vSiddal(1861)),it may also resultin his interest being confiscated to indemnify the trustees in so far as they are required to make restitution to the trust estate (Chillingworth v Chambers (1896) and s 62 ofthe Trustee Act 1925). In this connection, itis quite possible (even likely)that Perky is aware that his request amounts to a breach of trust (so satisfying Re Somerset (1894)) and his chances of avoiding the impounding of his interest are slim. However, any loss not coveredfrom the use of Perky’s interest will have to be met by the two trustees and it is unlikely in the circumstances ofthis case that they will have a defence under s 61 of the Trustee Act1925. Finally, ifthe personal actions againstthe trustees failto recover the full loss to the trust estate,there is thepossibility thatthebeneficiaries couldtrace the funds fromthe saleof the furniture to Perky’s sports car (Perky not being a bona fide purchaser for value) and possiblyalsotracetheheirloomstothepersonnowpossessingthem.Note,however,this maywellproveimpossibleifthecurrentpossessor isapurchaser ingoodfaith(ReDiplock (1948)). Question 43 George, a wealthy banker, comes to you for advice about a number of financial arrangements he wishes to make for his family and others. He has already drawn up a trust deed which appoints Abbott and Hardy as his executors and trustees and charges them with distributing: (a) a reasonable amount ofthe money from my account at the Bounty Bank, within three yearsofmydeath,between such ofmy employees asmy wife shall determine, the remainder to be divided equally between my children; and (b) the residue of my estate to the inhabitants of my old village of Stanbrooke in such proportions asmy trustees shall intheir discretion determine. During your discussions with George, it transpires that he has several bank accounts at theBountyBankandthathis employeesnumberover5,000. Furthermore, yourown researches revealthatthe village of Stanbrooke now formspart of Greater London and is now officially called the London Borough of Stanbrooke. He seeks your advice on all of his proposals. How to Read this Question This problem question raises a number of interesting issues on aspects of certainties of subjectmatterandobjects,constructionofGeorge’sintentionastowhetherhewishesto createapowerofappointmentordiscretionary trustandwhichispreferable. How to Answer this Question ThisquestionrequiresyoutoevaluatethevariousproposalsputforwardbyGeorgeinthe lightofthe three certainties requiredtoestablish a validtrust.In particular,this problem raises preliminary questions about certainty of subject matter and calls for a distinction tobedrawnbetweentrusts andpowers,as thiswilldefine thenatureofthe trustees’ duties.Finally, asGeorgeintends tomake anumberof classgifts – thatis,gifts toagroup ofpeoplewhoarenot namedindividuallybutdefinedby reference toa sharedcharacteristic – it is necessary to consider whether the objects of his trusts or powers satisfy the requirement for certainty of objects.Answer Structure This diagram identifies some of the relevant points in answering this question. Answer (a) ReasonableAmountofMoneyfromGeorge’sAccountat the Bounty Bank, etc. Itis clear that George intends to transfer the money in his ‘account’to his executors and trustees for themtoholdatthedirectionofhiswife.The firstpointmustbe toadvise George that there is a danger that his disposition will be void for uncertainty of subject matter,irrespectiveofwhether itisa trustorapower.There are twoproblems inthis regard. On the one hand, the property held to his wife’s direction is said to be ‘a reasonableamount’ofmoney standinginabankaccount.This is indeterminate anditisunclear overwhatproportionofthemoneyGeorge’swifemayexerciseherdiscretion. Up for Debate Thebroadnatureofdiscretionarytrustsanditspopularityasataxavoidancetool 37 MLR643.There isapparentuncertaintyof subjectmatter.InReGolay (1965),atrustof‘reasonable income’ was held to be certain (reasonableness being an objective limitation that could be decided by the court), but the best advice would be to warn George not to rely on the court adopting a similarly generous construction of his will. He should be specific about the amount given to his wife’s discretion. Likewise, and in any event, there is manifest uncertaintyof subjectmatter,giventhat Georgehasnotidentifiedfromwhichofhis accountsattheBountyBankthemoneyistobedrawn(see,byanalogy,BoycevBoyce (1849)).This shouldbe curedby amore accuratedescriptionofthe specific sourceofthe subjectmatteroftheproposedtrust/power,perhapsbyuseofanaccountnumber. Georgeshouldalsobe advisedthatthisdispositioncouldbe construedintwoways,each investinghiswifewithdifferent responsibilitiesandhavingfundamentallydifferentconsequences for his employees. First,this could be a non-exhaustive discretionary trustin favour of his employees, with a fixed trust in equal shares for his daughters of that amountofmoneywhichremainsundistributed.Second,thiscouldbeapowerofappointment given to his wife – probably as a non-fiduciary – with a fixed trust in default of appointmentforhisdaughtersinequalshares.Thematter isnotacademicbecause,ifthe firstconstructionisadopted,George’swifewillbeunderadutytodistributeatleastsome moneyamongsttheclassofemployees,whocanthenberegardedasbeneficiariesunder a trust able to compel her to do so. If, on the other hand,the second construction is adopted,George’swifewillhaveamerepower todistributeamongtheemployees,which she may or may not exercise as she chooses. The employees would be merely objects of the power with no enforceable claim to the property, with the daughters being regarded as the beneficiaries in default under the fixed trust. Clearly,forbothGeorge’swifeandthe employees, resolutionofthisissueisimportant.The disposition itself gives little away, although leaving the ‘remainder’ to his daughters does suggest anintentionto benefit atleast someof his employeesand hence aduty to distribute(adiscretionarytrust)mightbe implied.Conversely,itis raretosee thepowerofdiscretion under a discretionary trust being given to someone who is not a trustee (the wife), anditmightbethoughtthatthereferencetoGeorge’sdaughtersisintendedtobeagift over in defaultof appointment,thus indicatinga power (MettoyPensionTrustees Ltd vEvans (1990)).Toavoidthisconfusion,Georgeshouldbeadvisedtoindicateclearlyboththenature ofhiswife’sdutiesandthe rightsofhis employees.However,inatleastone respect,itdoes not matter whether this is a discretionary trust or power because, since McPhail v Doulton (1971), the test for certainty of objects for discretionary trusts and powers has been the same. Moreover,itis likelythatitispossibletosaywithcertaintywhetheranygivenpersonis,or is not,an‘employee’,andthustheclassofbeneficiariesorobjects(asthecasemaybe)is certain.Thiswouldbe sowhetherStampLJ’s,SachsLJ’sor MegawLJ’sanalysisofthe ‘isor is not’testputforwardin ReBaden(No2)(1973),is acceptedas correct,for thereappear tobe no evidential problems such as would trouble Stamp LJ. Finally, if this disposition is construedtobe adiscretionarytrust,Georgeshouldnotfear thathisdispositionwillbe voidfor ‘administrativeunworkability’.There isnothinghere tocomparewiththe trustin Rv District Auditor ex p West Yorkshire MC (1986), as the class of 5,000 does not seem too disparate or large to prevent his wife making a rational selection. Likewise, ifthis is a power,there is no ‘capriciousness’herewithinthemeaninggivenbyTemplemanJinReManisty(1974).(b) The Residue of his Estate to the Inhabitants of my Old Village of Stanbrooke, etc. This is clearly an attempt to establish a discretionary trust in favour of a class of beneficiaries defined by reference to a geographical condition. The intention is clear from the wordsusedbyGeorge(thatis,thetrustees shalldistribute),andthesubjectmatter is certain.Any difficulty thatthere may be arises from doubts as to the certainty ofthe objectsofthe intendeddiscretionary trust.There are three issueshere,the firstof which may be resolved by construction of George’s disposition. Thefirstpotentialdifficultyarisesfromthefactthatthe‘village’ofStanbrookeapparently is no more, having been subsumed by the London Borough ofthe same name. However, although this appears to raise questions concerning the certainty of the objects of the class,itwillnotbefataltothe validityofGeorge’sdiscretionarytrust.Forexample,itmay be possible to identify the old village and, in any event,there is no reason why, on a benevolent construction of the terms of the trust, the London Borough should not be takentobethe relevantgeographicallimitation.Thematter is reallyoneof ascertainabilityoftheclassrather thanofcertaintyproper.However,theseconddifficulty ismore pressing:whether,under theMcPhailtestofcertaintyofobjectsfordiscretionarytrusts,it is possible to say with certainty whether any given person is, or is not, an ‘inhabitant’ of Stanbrooke. Much depends on whether the description ‘inhabitant’ is conceptually certain (compare Sachs LJ in ReBaden (No 2)),for there is unlikely to be any evidential difficulties once the class is geographically defined. In this sense, Stamp LJ’s interpretation in Baden will not cause difficulties. Thus, if ‘inhabitant’ can be said to be certain – perhaps construedtomean ‘resident’ – George’sdiscretionary trustwill be valid.This is the most likelyresult,giventhecourt’spreferenceforvalidityratherthaninvalidity.Note,also,that in R v District Auditor ex p West Yorkshire MC (1986), a discretionary trust for ‘inhabitants’ didnotfailthe ‘isor isnot’testof certainty.Finally,there isalways thedanger thata court woulddecidethataclassdefinedgeographicallywas‘administrativelyunworkable’inthe sameway thatthecourtinWestYorkshirewentontoholdthediscretionary trust void even though it had passed the ‘is or is not’test. In that case,there were some 2.5 million potential beneficiaries and it must be a question of degree in each case whether the trusteescanexercisetheir responsibilitiesunder thetrustinthelightofthesizeandcompositionofthe class.Ifthere isadangerofthis inour case – andtosome extentitwill depend on the geographical construction given to the trust – George would be best to definehisclasswithgreaterprecisionsoasnottooverburdenhistrustees. Question 44 Mark, who has recently died, made a will in 2013 in which he made the following dispositions: (a) my houses in Southwark and Suffolk on trust for my daughters, Amanda and Barbara,for their lifetimesandthenceinequal sharesbetweensuchofmyother kinsfolk now living as may be resident in the London Borough of Southwark, save onlythatnopersonoftheProtestantfaithshallbeentitledtoanyportion;(b) the residue of my estate toCharles and David upon trustfor such charitable or philanthropic objects as my trustees shall select. Consider the validity of the above dispositions. How to Read this Question Thistwopartproblemquestionrequiresyoutodealwiththetestsfor certaintyofobjectsin respectofaprivate,fixedtrustandthetestofexclusivityinrespectofpubliccharitabletrusts How to Answer this Question In answering this question youare requiredtodeal with principlesof certainty of objects in respect of fixed trusts. In this case itis the expression ‘kinsfolk’that may cause some difficulty as well as the religious bar. The second part of the question raises issues concerningthevalidityofcharitabletrusts,inparticularthetestforcertaintyofobjects. Answer Structure This diagram collects the main issues relevant to the problem. Up for Debate immoral butit appears thatthey are valid, see Re Lysaght (1966).Answer (a) The Houses in Southwark and Suffolk It is clear from the wording of the first disposition in Mark’s will that a trust is intended. Although use ofthe word ‘trust’ does not always impose a trustin law (Tito v Waddell (No2)(1977)),there isnothinghere tosuggestotherwise. Likewise,the subjectmatterof the trustis certain,always assumingMarkdidown houses in SouthwarkandSuffolk.The problem is, then, one of certainty of objects. Clearly, there is no difficulty with the life interests given to Mark’s daughters, who are both named. The disposition will operate under the Trusts of Land and Appointment of Trustees Act 1996, with Amanda and Barbara being given the rights to possession, etc., established by that statute. The problem ariseswith the classof persons entitledto the reversionary interests,being‘my kinsfolk now living as may be resident in the London borough of Southwark’ and then subjectto anexclusion against anyperson ofthe Protestant religion. First, itis necessary to determine the nature ofthe trust affecting the two houses for this will help determine whether there is certainty of objects of the reversionary class. The housesaregiveninequalshares tothe‘kinsfolk’,etc.,andthusMarkhasfixedinadvance theshareofeachpersonwithintheclass.Thetrusteeshavenodiscretiontoapportionthe trustproperty amongthe classbut mustdivide it up equally.This isa fixedtrust and because the court must be able to execute the trust in default of the trustees and divide theproperty equally,the testof certaintyoftheobjects is the ‘complete list’testlaid down in IRC v Broadway Cottages Trust (1955). It must be possible to draw up a complete listofallThomas’s‘kinsfolk’whocurrentlyresideintheboroughofSouthwark. Thismayprove difficult, notbecause ofthe residence restriction,for that should be easy enough to determine, but because ‘kinsfolk’ is an imprecise concept. It will only be possible todrawupa listof kinsfolk ifweknowwhat‘kinsfolk’ actuallymeans. Suchinherent uncertaintyintheconceptusedbyMarktodefinehisclassmayprove fatalunlessthe courtis prepared to redefine the conceptfor the trustees in the same way thatthe Court ofAppealredefined‘relatives’inReBaden(No2)(1973).Thisshouldnotberuledoutsince acourtofequitywillgenerallyprefervaliditytoinvalidity,especiallyifthetrustees’duties are not otherwise difficultto perform evidentially. Finally, even ifthe court adopts a benevolent attitude to the fixed trust, there is still the requirement that no person may have a share if he or she is ‘ofthe Protestant religion’.Clearly,the pointis that‘not being a Protestant’ is to be a condition precedent for entry to the class of beneficiaries. Consequently,thescopeoftheconditionprecedentmustalsobecertainbecause,otherwise, it will be impossible to determine who has been excluded. The test of certainty for conditionsprecedentisthatitmustbepossibletosaywithcertaintywhetheroneperson would or would notfulfil the condition (Re Allen (1958) and Re Barlow (1979)). As is clear from Re Tuck (1978), a conditionprecedent relatedtoreligion canbe regardedas certain under this test although, in that case, a third person was given the task of deciding who fell within the religious condition. Subjectthen to it being possible to define what qualifies a person as ‘a Protestant’, the condition precedent will be valid. If the fixed trust for the class fails,a resultingtrustfor the residuarybeneficiarieswill arise.(b) Residue to Charles and David upon Trust ... The first question in issue is whether this gift of the residue ofthe estate is charitable. In the problem,the willtransfers ‘The residue ofthe estate toCharles and Davidupon trust for such charitable or philanthropic objects’. This raises the question as to whether the test for charitable objects is satisfied. Charitable trusts, like private trusts, are subjectto a test of certainty of objects.A charitable trustis subjectto aunique testfor certainty of objects, namely, whether the objects are exclusively charitable. This is affirmed in s 1(1)(a) of the Charities Act 2011. In other words, ifthe trustfunds may be used solely for charitable purposes the test will be satisfied. Indeed, it is unnecessary for the settlor or testator to specify the charitable objects which are intended to acquire the trust property:provided thatthe trustinstrument manifests a clear intention to devote the funds for ‘charitable purposes’, the test will be satisfied. Referringbacktotheproblem,thequestioninturnconcerns the constructionofthe expression ‘or’. If this conjunction is used disjunctively, as is the norm, it would follow thatthe testfor certainty of charitable objects will not be satisfied asotherwise philanthropic objects that are not charitable would, in theory, be entitled to benefit. In Chichester Diocesan Fund v Simpson (1944), a testator directed his executor to apply the residue of his estate ‘for such charitable or benevolent objects’ as they may select. The executors assumed that the clause created a valid charitable gift and distributed most of the funds to charitable bodies. The court decided that the clause did not create charitablegiftsandthereforethegiftswerevoid.Asimilar resultwasreachedinAttorneyGeneraloftheBahamas vRoyalTrust(1986).The effectwillbethat aresultingtrust for the testator’s residuary estate will arise. There is a possibility that the court may, on construction, decide that the non-charitable purposes are merely incidental to the maincharitable purposes: seeVerge vSomerville (1924). However,there is verylittle evidenceonthefactsoftheproblemthatmay supportthis contention.Likewise,the doctrine of severance may be too remote a possibility in order to rescue the charitable gift. Severance maybe adopted ifpart ofthe funds have beendevoted for charitable purposes and the remainder (or part) disposable for non-charitable purposes; see Salisbury v Denton (1857). In this problem there is very little evidence to support the contention that Mark, the testator, intended a division of the £5,000 for the different purposes.Alternatively,the legacywillbe validiftheword‘or’is construedconjunctively in the sense that only philanthropic objects that are charitable are entitled to benefit.Again,one would be hard pressed to convince a court of such construction. The court will look at all the circumstances of the case, including the entire will and evidence that exists outside the will,to ascertain the intention ofthe testator. The consequence is thatthe trust ofthe residuary estate willfail as a charity and the executors will be required to hold the same on resulting trust for the testator’s next of kin.Question 45 Alfred transfers £50,000 to trustees, Joe and Jerry ‘upon trusts to distribute all or such part ofthe income as they in their absolute discretion shall think fitfor the maintenance andtrainingofmyhousekeeper’sdaughter,Mary,until shegraduates fromuniversityor reaches the age of 25, whichever happens first’. Mary, aged 24, has recently graduated from BrickfieldUniversity. Advise Joe and Jerry. In a separate settlement Alfred transfers a valuable painting to William to hold on trust for the beneficiaries, Harold and Matilda absolutely. William decides to sell the painting at a ‘knockdown’ price toJerry in return for an ‘introduction fee’of£5,000. Shortly afterwardsJerryadvertisesthepaintingforsaleandsucceedsinsellingittoaverywealthy businessman. William has now disappeared and Harold and Matilda seek your advice as to what claims, if any, they may pursue. How to Read this Question This two part question concerns the nature of determinable interests and the possibility of a resulting trustfor the settlor,Alfred. The second part ofthe question involves a breach oftrust by William and Jerry’s liability to accountto the beneficiaries, Harold and Matilda. How to Answer this Question Youarerequiredtoanswer thisquestionbyaffirmingthatAlfredhascreatedadiscretionary trust of the income from the trust fund for Mary determinable on the occurrence of the specified events.Itis a question of construction to ascertain which event determines thetrustandtriggers theresultingtrustforAlfred.InthesecondpartWilliammaybe liable for breachesoftrustbut sincehehasdisappearedmay escape a claim.In any event it may be possible that Jerry has intermeddled with trust property and may be accountable to the beneficiaries on an equitable claim of knowingly receiving trust property for his ownuse. Up for Debate whattype offaultis involved? See S Gardner, ‘Knowing assistance and knowing receipt:taking stock’ (1996) 112 LQR 56.Applying the law This diagram identifies the main points that are relevant to the question. Answer (i) The issue in this problem is whether Mary’s beneficial interest terminates when she graduates from Brickfield University or, alternatively, whether her interest continues. If Mary’s interest terminates an automatic resulting trust will arise in favour of the transferor as a default mechanism. The transferor,Alfred, stipulatedtwo alternative events thatwilltrigger a termination of Mary’s interest – attaining the age of 25 and graduating from University and added ‘whicheverhappensfirst’.MaryhasrecentlygraduatedfromBrickfieldUniversity.This is the earlier event. What effect will this have in respect of the trust? It is a question of construction for the courts to decide whether this event amounts a determining event. One solutionisthat aresultingtrustarises.ThegraduationfromBrickfieldUniversityisa determinable condition that may signalthe end of Mary’s interestin the trust. This solution was adopted in ReAbbott (1900), where funds were raised for the benefit oftwoimpecunious ladies. On the death of the last surviving beneficiary, creating a surplus of funds,thecourtdecidedthataresultingtrustfor thecontributorshadarisen. Alternatively, the court may, on construction, decide that the ultimate intention of the transferor was to benefit Mary ‘out and out’ and education may be treated as the motive for the gift. This was the approach adopted in Re Andrews (1905) and Re Osoba (1979). There was a similarity in both of these cases in that the transfer on trust was for the education of the beneficiary and they were still capable of enjoying the benefit from the trust. In Osoba the courtinterpreted ‘education’ liberally and did not restrictitto formal education.In addition,the beneficiarieswere still capable of benefiting from the trust.If this approach is adopted in respect of the facts of this problem it would be possible for Marytoremainabeneficiaryandenjoytheincomefromthepropertyuntilatleastshe attains the age of25.Onattainingthat age,which isprecise and does not create any room for construction, Mary’s interest will terminate and a resulting trust will be set up for the transferor, Alfred. (ii) Thesecondelementoftheproblemraisesanumberofissues,althoughnowitisa questionofwhether the liability ofJerry (if any)lies inknowingreceiptordishonestassistance.It seems clear from the factsofthe problem thatthe painting was ‘sold’toJerry for his own personal use. This seems to be a case of knowing receipt, being a case whether thestrangerhasreceivedtrustpropertyforhisownuse(AGIP(Africa)LtdvJackson(1991)). As such, if Jerry is to be fixed with liability to account, and thereby be required to satisfy theclaimsofHaroldandMatildaoutofhisownresources,itisclear thathemusthave actedwithsomedegreeofknowledge.Thisrequiresanunderstandingthattheactionsof William were in breach of trust (Westdeutsche v Islington LBC (1996)), expressed in Akindele (2000), as to whether it would be ‘unconscionable’for Jerry to retain the benefit. Initially, of course, Jerry will claim that he is a bona fide purchaser for value of the painting and, in consequence, is not liable to account to the beneficiaries or be subject to claim involving tracing (Re Diplock (1948)). However, as the facts indicate, Jerry purchases the property for ‘a knockdown price’ and gives William an ‘introduction fee’. Although one must not speculate unduly,the clear inference here is thatJerry isnot bona fides.Of course,mere suspicion on his partthatWilliam is engagedinabreachoftrustmaynotbe sufficienttoestablish Jerry’s liability;hemusthave ‘knowledge’ofthe relevantfacts and act‘unconscionably’.Unfortunately,whatthismeansinpracticeisuncertain.Thelogicof the situation suggests that simple negligence (thatis, anyofthe five categories of knowledgeinBadenDelvaux (1983))shouldsuffice andthisis supportedby dictainseveral cases (International Sales Ltd v Marcus (1982); Belmont Finance Corporation v Williams Furniture (No 2) (1980); AGIP (Africa) Ltd v Jackson (1991); Box v Barclays (1998)). However, otherauthoritieshavemovedawayfromsuchanapproachandhaveplacedmoreemphasis on the ‘want of probity’ or deliberate fault of the stranger (that is, intention or recklessness).Thecasefor restrictingliabilityinthisfashionisstronglyarguedinReMontague (1987), and a spate of cases involving the alleged liability of professional financial advisers has tended to confirm this view (Cowan de Groot Properties v Eagle Trust plc (1992); Polly Peck International plc v Nadir(No 2) (1992)). In these so-called ‘commercial’ cases,the powerful nature ofthe constructive trust was emphasised and there were fears thatcommercial transactions would be hampered if mere negligence could trigger the personal liability ofthe stranger, especially as the stranger might well be liable in any event for breach of contract. As yet the matter is unclear and the decision in Akindele, that it is better tothinkintermsofunconscionability,maynotproveanymorehelpful.Inour case, while there is no doubtthatJerry was negligent,there is also evidence to suggestthat he was, at best, reckless and, at worst,that he conspired with William to defeatthe rights of thebeneficiaries,allforpersonalgain.Insuchcircumstances,thereisagoodchancethat he wouldbe heldliable toaccountforknowing receipt. Likewise,ifWilliam was available, he would have been liable for breach of trust in selling the property at below the market value and accountable for the ‘introduction fee’ as having derived a profitfrom his positionas trustee (Williams vBarton (1927);Box vBarclays (1998)).Further,ifthiswas abribe, William would be accountable for allowing his interests to conflict with his duties in accordancewiththeprinciplelaiddowninSinclairvVersailles(2011).Thissignificantcase refused to follow the constructive trust route laid down in Attorney General for Hong Kong v Reid(1994) [Show More]

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