(A)    The Nature and Classification of Trusts
The nature of trusts

History
•    One would convey land to a friend or family member for the use of the beneficiaries
•    Perpetually prevent property from falling into the hands of someone higher up in the feudal order
•    The Statute of Uses 1535  if any conveyance done for the “use” of someone else, legal property belongs to them and they pay taxes.
•    “Uses upon uses” A conveys to B for the use of C. C wouldn’t pay taxes
•    Trust has become valuable commercial tool, not only used by wealthy families etc, but also used today as investment vehicles  Trustees have entrepreneurial role for the beneficiaries, who still have beneficial ownership.
•    It is used in superannuation.
•    The Rule in Saunders v Vautier  A sole beneficiary of legal age can call for the property to be transferred to them absolutely.
•    No requirement of privity in trust, or meeting of minds etc as in contract.

Definitions

Pettit’s Definition
A trust is an equitable obligation, binding a person (who is called a trustee) to deal with property over which he has control (which is called the trust property) either for the benefit of persons (who are called beneficiaries or cestui que trust) of whom he may himself be one, and any one of whom may enforce the obligations, or for a charitable purpose, which may be enforced at the instance of the Attorney-General, or for some other purpose permitted by law though unenforceable.

Jacob’s definition:
The trustee must hold legal or equitable interest in property, he must be under a personal obligation to deal with that property for the benefit of the beneficiaries, and his obligation must be annexed to the trust property.

Essential Elements:
•    Trustee holds legal or equitable title to property
•    There must be identifiable property for there to be a trust
•    Trustee has a fiduciary obligation to hold that property for the benefit of others (beneficiaries).
•    Breach of this obligation attracts both personal and proprietary consequences
•    Can’t hold trust for yourself  that would make you the absolute owner

Classification of trusts

Express Trust
•    Created by express declaration, which can be found either in an agreement (will, contract) or common intention held by the parties to the trust
•    Require 3 certainties to be recognised
1.    Certainty of intention
2.    Certainty of subject matter  which property
3.    Certainty of objects  Who the beneficiaries are or how they are to be identified
•    Public or Private (i.e. charitable or not)
•    Fixed or discretionary
Fixed: Trustee must pay each beneficiary a proportion of the trust income fixed by the trust deed/common intention. The trustee thus simply manages the trust property and has no further discretion

Discretionary: Exists whenever the trustee has a discretion as to: (1) what proportion of the income should be paid to each beneficiary and/or (2) which of the beneficiaries is to receive income including giving all to one at the exclusion of others

Resulting Trust
•    Implied?
•    E.g. where a person buys property in the name of another where there was no intention to make a gift.

Constructive Trust
•    Comes from verb to construe ‘not to construct’
•    Trust imposed by the court irrespective of the parties’ intentions in circumstances where it would be unconscionable for the legal title holder to deny the beneficial interest claimed by another.
•    Oughtred Case

(B)    Distinction Between Trusts and other Legal Relationships
Distinction between trusts and other relationships

Fiduciaries
•    A trust is a fiduciary relation, but every fiduciary relation is not a trust. A fiduciary is not a trustee where there is no property vested in the fiduciary which can be described as trust property
•    E.g. Co director owes duty to the corporation but they don’t hold property on trust for shareholders. The corporation owns the property absolutely and equitably, not the directors.

Clay v Clay

Facts: Woman was guardian for children, she bought house from trustees of husband. She kept it as a home for children. Trustees fritted away trust and money from the house. They then attempted to bring action against mother, claiming she was a guardian therefore a trustee.

Held: She owed fiduciary duties but this did not make her a trustee for the house
•    See discussion about difference between legal relationship and trust

Executors
•    Executor’s ability to hold estate is not encumbered by any interests until administration of the estate is complete.
•    “The principal duties of an executor are to get the assets of the deceased, to pay his debts, to pay legacies given by the will, and to distribute the assets.”
•    Consider Livingstone’s case

Bailment
•    Bailee is not a trustee because a bailee acquires possession only of personal property and legal ownership of the property. Bailment is a common law doctrine.
•    It is a transfer of possession for limited use not legal ownership of property
•    Applies only to chattels in possession (choses in possession not choses in action)
•    E.g. Take jacket to dry cleaner  Cleaner is a bailee and you are bailor. Dry cleaner is not trustee, they don’t have legal ownership, you do
•    Doesn’t involve creation of separate legal interests

Agency
•    Common law doctrine
•    Fiduciary relationship whereby a principal appoints an agent (legal position) to act on his behalf (e.g. bring principal into binding
contractual arrangements with a third party)
•    Not everyone who calls themselves an agent in common parlance is an agent. E.g. A real estate agent is not a legal agent, they don’t sign the contract for you.
•    An agent does not get legal title to any property, although he may get possession

When does an agent become a trustee?
•    An agent becomes a trustee only when they hold property legally for the principal
•    Not all agency arrangements – even those which involve the agent handling property or receiving money – will create a trust relationship.
•    We look at the terms of the agency agreement, the relationship the parties created and the obligations between them
•    Paul v Constance  trust arises when we see an intention that trust arises when there is property being held by one who is conscience bound to another.

Imagine two alternative contracts of agency

1.    P appoints A to find buyers for P’s produce. The terms of the agreement are:
•    A may contract with B on behalf of P
•    In order to fulfil the contract with B, A will take delivery of produce from P on the basis that A bear all the risks from the moment of delivery
•    B may discharge the obligation to pay for the produce by paying A.
•    A is to pay P for the produce within 30 days, whether or not A has received payment from B.
•    As long as the agent is solvent, principal will get what they bargained for.
These terms do not create a trust over any receipts A holds from the sale of produce

2.    P appoints A to find buyers for P’s produce. The terms of the agreement are:
•    A may contract with B on behalf of P.
•    A is to take delivery of produce as P’s bailee, and deliver to B.
•    B may discharge the obligation of payment for produce by paying A
•    A is to receive payments into a separate account for P
•    A is authorised to make withdrawals from that account to satisfy P’s obligation of paying A an agreed amount for A’s services
These terms would create a trust. Principal does not lose ownership when agent exchanges the property for proceeds. If agent is insolvent, these proceeds from sales are held on trust for the principal who is the beneficiary.
   
Cohen v Cohen

Facts: Jewish couple flee Germany. Wife leaves before husband and authorises him to enter into agreements on her behalf regarding property she left in Germany. Wife sues husband for money he owed. The Statute of Limitations had expired for a claim in debt, so she tried arguing that he held the property on trust (avoids perpetuity problem) and thus was obliged to replenish the trust fund.
There were three claims:
1)    She authorised husband to sell personal chattels and use the proceeds to buy business equipment for himself (which he was allowed to export). He would then repay her out of his own funds.
2)    There was money from sale of furniture and he failed to give her this money
3)    He made an insurance claim for jewellery – received 120 pounds but spent only 40 to replace jewellery. He held the remains for himself.

Held: Claim was not stale, he was held to be a trustee in claims 2 and 3 only. In claim 1, he was given permission to use money for himself (to buy business equipment) and there was no obligation to give money to his wife. He was not bound to keep this money separate, but was entitled to mix it with his own and deal with it as he pleased. When called upon to hand over an equivalent sum of money he was not a trustee but a mere debtor. (Quoted Channell J in Henry v Hammond)
In claims 2 and 3, she hadn’t authorised him to deal with the property on his account and there was a clear intention that he simply account the money received to his wife. This money was attached to the property so the husband was held to be a trustee regarding claims 2 and 3.
•    Meagher J looked at what kind of rules the statute imposed on agents

Walker v Corboy
Facts: Produce agent, who sells produce on behalf of farmers (principal) goes into receivership. Agent is owed money by purchasers who bought the produce on credit. Can the farmers claim ownership of the debts owed by the purchasers (i.e. did the agents hold those debts on trust)? Or, should the debts be treated as part of the assets of the agent, which would satisfy all the creditors, who held a floating charge over the assets. Farmers claimed the proceeds from the potatoes (debts) belonged to them; hence they claimed that the agents were holding the property on trust for them. I.e. they attempted to jump the queue of creditors.

Held (NSW Ct of Appeal): While a trust may be the normal result in a simple case, there is no universal or inflexible presumption and the task of the court is to determine the intentions of all the parties having regard to all the facts.
Priestley JA: There is not even a prima facie rule in more complex cases. He also rejected the view that one should be disinclined to apply equitable doctrines in a commercial situation.
Clarke JA: Agreed that there is no such principle, but said the court should be cautious in applying equitable doctrines in commercial transactions.
Meagher JA: noted the ‘general reluctance of courts to extend the law of trusts into ordinary commercial transactions.’ Adopted Cohen and said it was a question of intention whether the agent is bound to keep the proceeds separate from his own money.

- Decided on all of the facts that the farmers handed the property to agents and agents were not trustees, they had good title and it was a creditor-debtor relationship between the agent and the farmers.

Debtors:
•    Debtor has a common law obligation to pay the creditor. The debt is a personal obligation and doesn’t attach to property whereas a beneficiary has both a personal and a proprietary right.
•    In cases of insolvency, property held by a bankrupt on trust for another person, is not available to other creditors. Therefore a beneficiary can assert proprietary rights over the trust property, unaffected by creditors’ claims. If there is only a debt, upon bankruptcy an unsecured creditor will receive a rateable distribution out of the bankrupts estate.

Principle
“It is clear that if the terms upon which the person receives the money are that he is bound to keep it separate, either in a bank or elsewhere, and to hand that money so kept as a separate fund to the person entitled to it, then he is the trustee of that money and must hand it over to the person who is his cestui que trust. If on the other hand, he is not bound to keep the money separate, but is entitled to mix it with his own money and deal with it as he please, and when called upon to hand over an equivalent sum of money, then he is not a trustee but a mere debtor ” – Henry v Hammond per Channell J

Continued on page 2