Nature and Constitution of Trusts
(A) The Nature and Classification 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
continued
Re Baden’s Deed Trusts, McPhail v Doulton (1971) AC 424 (HOL)
Facts:
“Clause 9(a): The trustees shall apply the net income of the fund in
making at their absolute discretion grants to or for the benefit of any
of the officers and employees or ex-officers or ex-employees of the
company or to any relatives or dependants of any such persons in such
amounts at such times and on such conditions (if any) as they think fit
and any such grant may at their discretion be made by payment to the
beneficiary or to any institution or person to be applied for his or
her benefit…
Clause 10: all benefits being at the absolute
discretion of the trustees, no persons shall have any right title or
interest in the fund otherwise than pursuant to the exercise of such
discretion…”
Court of Appeal: Held to be a mere power, and valid
On appeal, House of Lords (majority not including Upjohn LJ):
It
was a trust power: the class of beneficiaries was huge, there was no
gift over in default. “Absolute discretion” was regarding who to select
and not whether a selection was made, so it was in fact a trust power.
But the test of certainty for a trust power was same as for a bare
power. So the question of validity was later remitted to Chancery.
Wilberforce LJ (HOL decision):
• The distinction between a trust power and a mere power is often “artificial”.
• Validity therefore ought not to depend on “such delicate shading”
• The Broadway Cottages test of “list certainty” should be discarded
•
“The test for validity of trust powers ought to be similar to that
accepted…in Re Gulbenkian’s Settlements for powers, namely that the
trust is valid if it can be said with certainty that any given
individual is or is not a member of the class”
• This does not mean there is a complete assimilation of trust powers with mere powers
• In the case of mere powers, a court will not compel exercise but will intervene to prevent capricious exercise.
• In the case of trust powers, if a trustee fails to exercise the power, the court will exercise it.
•
“Loose class” requirement: even where the words used are clear (i.e.
there is semantic certainty), a gift may fail if the definition of
beneficiaries is so hopelessly wide as not to form anything like a
class so that the trust is administratively unworkable. (example: “all
the residents of Greater London”)
Re Badens Deed Trusts (No. 2) (1973)
Facts:
Case remitted to the Chancery Division to determine whether the trust
was sufficiently certain under the criterion certainty test. Brightman
J held the power was valid. There was an appeal to the Court of Appeal.
Issue: whether the words “dependants” and “relatives” were sufficiently criterion certain.
Held: Appeal dismissed
• “Dependants” has been judicially defined, so it does not infringe the criterion certainty rule.
• “Relatives” 3 different approaches
Sachs
LJ: held that it was not necessary to be able to state with certainty
that a certain claimant was not within the class. So long as the class
is conceptually certain, it becomes “a question of fact to be
determined on evidence whether any postulant has on inquiry been proved
to be within it: if he is not so proved then he is not in it”. He held
that even the widest meaning of the word “relative” did not produce
uncertainty.
Note: There only needs to be semantic certainty that even one person falls into the class. (Least rigid approach)
Megaw
LJ: held that “the test is satisfied if, as regards at least a
substantial number of objects, it can be said with certainty that they
fall within the trust”, even if it cannot be provided that others are
in or out. So “relatives” is sufficiently certain.
Stamp LJ:
considered that the court needed to be able to say of any given
individual that he or she is, or is not a member of the class in order
to satisfy the test. It is not enough that there is one person, or a
group of people, whose membership of the class is clear if about others
there is significant uncertainty. He notes that the view of the Court
of Appeal (in McPhail v Doulton) was rejected by the House of Lords,
and yet the criterion certainty test as interpreted by Sachs LJ might
be satisfied by just one claimant. Stamp LJ said the court ought to
construe “relations” to mean “next of kin”, or in the case of a living
person “nearest blood relations”. On this construction he held the
power was valid. (Toughest test)
Note Jacobs: Re Badens has
generally been followed at lower levels in Australia, i.e. there may be
a subtly different approach to what they call the same criterion
certainty test. However the test for determining certainty of trust has
not been decided in the High Court yet.
Hybrid Power
Re Manisty’s Settlement
Facts:
Concerned a “hybrid power” or “intermediate power” rather than a
special power. Trustee had a list and a power to add other persons to
list at any stage. Appointer wanted to add widow of the settlor to the
list.
Issue: Can the settlor validly grant power on trustees to
1. select beneficiaries from list A, and
2. add any person to that list except persons in list B?
Held: Hybrid power was valid.
Templeman
J: “If a person within the ambit of the power is aware of its existence
he can require the trustees to consider exercising the power and in
particular to consider a request on his part for the power to be
exercised in his favour. The trustees must consider this request, and
if they decline to do so or can be proved to have omitted to do so,
then the aggrieved person may apply to the court which may remove the
trustee and appoint others in their place…[the trustees] are bound…to
consider at all times during which the trust is to continue whether or
not they are to distribute any and if so what part of the fund and, if
so, to whom they should distribute it…”
Templeman J disagrees
that this confers too much power on trustees and other appointers
citing with approval Harman J from Re Gestetner: “The settlor had good
reason, I have no doubt, to trust the persons whom he appointed
trustees; but I cannot see here that there is such a duty as makes it
essential for these trustees, before parting with any income or
capital, to survey the whole field and to consider whether A is more
deserving of bounty than B.”
When does it really matter whether a power is a trust or a bare power?
What happens to the trust property if the donee of the power fails to exercise the power?
• In the case of a mere power, it goes to those entitled to the gift over in default
• In the case of a trust power, a court of equity can appoint a new trustee or decide itself.
If there is an improper exercise of power who has standing to complain?
• In the case of a mere power, those entitled to the gift over in default have standing to complain of fraud on a power
• In the case of a trust power, beneficiaries (potential beneficiaries) have standing to complain of a breach of trust.