Re Kayford

Facts: A mail order business gets into financial distress, so its accountants set up a separate bank account to hold deposits and payments by its mail order customers, to be drawn only after delivery of goods. The object was to allow the company to fully refund payments to customers should it go into liquidation. The issue was determining who owned the money in this account when the company went bankrupt.

Held: The question is whether in substance a sufficient intention to create a trust has been manifested. The arrangement between the parties involved payment of the money into a separate account, indicating a ‘sufficient intention’ that it would be held on trust for the mail order customers. Also, identify the property is identifiable as personal property and we know to whom the beneficial interest belongs. (Hence the three certainties are satisfied).

Equitable Charge:
“The chargor is under no personal obligation to confer the contemplated benefit on the chargee (person in whose favour the charge is e.g. bank).  If the benefit is not conferred, the chargee may enforce the security by taking proceedings in equity… The chargor is not a fiduciary.”
•    The chargor owns the property legally and beneficially but subject to an equitable charge in favour of the chargee. They are not a trustee and have no fiduciary obligation to the chargee, only a contractual obligation to sell the property.
•    The chargee does not have a personal equitable right in respect of the property (unlike a beneficiary in a trust).
•    The chargee has a proprietary right enforceable by equity against the property i.e. if chargor doesn’t satisfy the security interest, there may be a judicial selling of the property, the proceeds of which will be used to satisfy the charge. The chargee can claim only enough proceeds to satisfy the charge.
•    If it is a trust property, it must be used for the benefit of the beneficiaries perpetually. If it is a charge, the chargor owns the property outright once the charge is paid.

Associated Alloys Pty Ltd v ACN

Facts: Vendor (Alloys) agreed to supply sheet metal to the purchaser subject to retention of title clause in a contract which stated:
“In the event that the [buyer] uses the goods/product in some manufacturing or construction process of its own or some third party, then the [buyer] shall hold such part of the proceeds of such manufacturing or construction as relates to the goods/product in trust for the [seller]. Such part shall be deemed to equal in dollar terms the amount owing by the [buyer] to the [seller] at the time of the receipt of such proceeds.”

The third party (person buying the manufactured goods) had paid some but not the entire purchase price for the products. The buyer went into liquidation.

The flaw in this arrangement is that the raw materials are manufactured into goods by the buyer, along with the labour and costs. Goods go to the buyer, become book debts when buyers purchase on credit and then proceeds get paid. Here the seller retains legal title even thought the property has changed, because the clause gives them a right to the goods and debts etc. Without the clause, legal title is transferred and a bank with a floating charge would get the property if the buyer became insolvent.

Issue: Did this create a charge (which would have to be registered under the Corporations Act to be enforceable against liquidators), or a trust – in which case the seller could claim ownership of the property in the hands of the buyer.

NB: The concept of a floating charge: some assets change or are intangible (e.g. debts customers owe). A floating charge hovers over all the assets you own from time to time and it only crystallises when chargor defaults on a loan or a company goes bust.

Held (Ct of Appeal): This is an equitable charge because there is a mixture of property interests here. The arrangement is defeasible, as it can be undone by payment. This clause was effective however it had to be registered to be enforceable against liquidators.

Held (HCA): overturned the decision and said it created a trust and not an equitable charge.

Majority: This clause was novel. It was held that the word “proceeds” in the clause could be confined to actual monies paid by the third party and not to the book debts. This allowed the equation to operate with certainty. Hence it could be construed as a trust given the parties had manifested appropriate intention to create a trust.
Inclusion of the book debts would be problematic as it would be difficult to determine when the buyer was actually in receipt of the intangible obligation and moreover, it would be difficult to equate a chose in action in dollar terms to the amount owing to the seller at the time of receipt of the proceeds.
It was outside the Corporations law definition of a charge because “proceeds” did not include book debts and if it had, the charge would fail anyway for want of registration.  
Although the clause is effective, the seller could not receive relief for breach of trust.  The seller failed to bring evidence of where the money in the bank was from and if it was actually the proceeds. Need the money trail, have to know what property you are claiming trust over.

Kirby J (dissent): The clause created a charge that was void for registration.

Gift subject to Condition

Re Gardiner

Facts: Gift to son in father’s will – “to Ivor, on condition that he pay Albert 1000 pound within two years”. Ivor and Albert were both executors of the will (there were also 5 other sons). Ivor didn’t fulfil the condition.

Held: The stipulation was a condition, not a trust or a charge or a mere  personal obligation. If condition is not satisfied, gift fails (whole contract fails) and the terms of the will are not followed. Neither son got the property, and the gift passed to the next of kin (the 5 other sons) on an intestacy (so they shared the property equally).

Muschinski v Dodds
Facts: Constructive trust case involving de-facto couple living together. M gives D an interest in property
on the condition that their relationship continues. The relationship failed.

Held (Per Dawson and Brennan JJ): if one party gives gift to other (property) on condition that relationship thrives and the relationship subsequently fails, the property goes back to the donor.

“A donee may take the property given either as a trustee or a beneficiary and, if beneficially, he may take it subject to defeasance if the assurance should not be fulfilled or subject to a personal obligation to fulfil the assurance…”  per Brennan J

“Such a condition, whilst not a condition of forfeiture and falling short of creating a trust or a charge, may give rise to a personal equitable obligation analogous to a contractual obligation, enforceable by compensation or, in an appropriate case, by specific performance…”  per Dawson J

Gift Subject to personal obligation

Countess of Bective v FCT
Facts: Trust gave income to Countess so she could pay maintenance etc for a child of the marriage. Is the income hers and therefore taxable or the child’s (via a trust)? Federal Commissioner of Taxation wants to tax this money but Countess claims she has no beneficial interest and it was on trust for a 16 year old who at that time was not entitled to pay tax.

Held (per Dixon J): Four alternative ways to analyse this gift
1.    It could be an absolute gift with merely precatory words of motive, intention, or “hope” as to what to do with the gift. – this bears no legal obligation
2.    Could be a condition  imposing an equitable obligation to perform if the gift is accepted (even if the obligation is more onerous than the gift is worth)
3.    Equitable Charge – Property comes charged. An obligation must be met out of the property, and any left over belongs to the donee (who cannot defeat the charge by rejecting the gift).
4.    Trust  If you read all the words could be interpreted that the recipient acquires no beneficial interest in the fund  this was held here
Countess had to use the whole fund for the benefit of the child and not her own benefit  It was a trust and she didn’t have to pay tax. The child got the benefit of gross amount.

Gill v Gill
•    2nd alternative above
Facts: Father died leaving farm to son with instructions that son should look after unmarried sisters until they were married. He had to allow them a room to sleep, allow them to collect so many eggs and so much milk for their use and some modest income. How should such strange stipulations be given effect (especially when dispute arises 13 years after father’s death)?

Held: Two classes of condition are identified
1.    True conditions which operate merely to divest an estate or to prevent the vesting of an estate  requires certainty so that it is possible at any given moment to say where the property is vested.  
2.    Conditions for the benefit of third parties attached to the possession of property (e.g. property given to beneficiary on condition that he maintain certain persons  creates a quasi-contractual relationship)

What the testator intended depends on the language used to describe the obligation, the nature of the property and the nature of the obligation. The conditions of the present will were not conditions of forfeiture and if they were, the court would treat them as undefined and thus unenforceable. It was an absolute gift and the son was conscience bound.
    There was no intention that the son forfeits the property if the condition was not fulfilled and there was no intention that the sisters retain a beneficial interest which attached to the farm, so there is no trust. Sister is entitled only to income and sustenance, not a share of the farm due to the gift returning to the estate.
    The condition was a personal obligation which could be enforced in equity against the son at the suit of the individual for whom the benefit has been created (sisters). It is the second category condition  damages could only be given for breach of the quasi-contract

Contracts

Differences between trust and contract
•    Trust is equitable; contract is legal
•    Trust does not rely on any consensus from beneficiaries. They need not even know of their entitlements (no “consensus ad idem”)
•    A valid trust is enforceable by beneficiaries, without them giving any consideration
•    A trust can benefit a beneficiary who was not a party to it making, nor even alive at the time of the making of the trust (no privity rule)
•    A trust confers proprietary remedies including a right to trace; contract confers personal remedies (right to damages)

Contracts for benefit of third Parties:

Coulls v Bagot’s Executor and Trustee Co
Facts: Coulls signed an agreement with a company for payment of royalties to himself and his wife, as joint tenants, for 10 years. Question was whether the royalties were effectively assigned to her or if they were payable to the executor of Coulls’ estate. If A contracts with B that, for consideration moving from A, B will provide a benefit to C and B fails to do so. Does B hold A’s promise on trust for C? I.e. since C cannot enforce the contract, can trust be used to overcome the doctrine of privity of contract?

Held (per Windeyer J): C cannot sue B at law as C was not a party to the contract. Discusses conflicting authorities, some of which state that A can enforce the contract on B but will only be entitled to nominal damages because A has not suffered any loss (C has suffered loss). This is contentious and there is no reason why A could not recover substantial damages.
However specific performance was an available remedy because interests in land were involved and damages would be an inappropriate remedy. If A chose this course and obtained judgment against B, A would be enforcing his own right to have the contract performed and not C’s right. The transaction between A and C would be wholly gratuitous but C could not dictate to A what redress to seek.
C cannot seek relief in equity unless A’s right to enforce the contract is held on trust for C. There was no trust here. The contract was only between Mr Coulls and the company so she could not compel proceedings to enforce it, she was not entitled to royalties.

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