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.