Chapter 1

On-the-Spot Question

Would you say that from the fourteenth century the Chancellor and subsequently, the Court of Chancery had consciously set out to undermine the jurisdiction of the King’s Courts?

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Answer

It was unlikely that the Chancellor would have deliberately set out to undermine the jurisdiction of the King’s Courts. Generally the circumstances that had led to the increase in Court of Chancery’s jurisdiction in equity, prior to 1873, were due to factors within control of the King’s Courts. The single most important factor for the expansion of jurisdiction in the Court of Chancery was the reluctance of the common law judges to embrace aspects of fairness and justice in their judicial rulings. This prompted disgruntled litigants to seek alternative rulings from the King’s senior legal adviser. The rulings initially by the Lord Chancellor and subsequently by the Court of Chancery comprised the rules of equity which improved the system of English law. In some instances the Court of Chancery was forced to issue ‘common injunctions’ designed to stay common law orders in order to give effect to equitable rules. This had the effect of antagonising common law judges until the issue was resolved by the King in favour of equity, see the Earl of Oxford case. This resolution of conflict of law and equity was endorsed in the Judicature Act 1873.

On-the-Spot Question

Read Rochefoucauld v Boustead in the law report and consider whether the court decided that it was a genuine case of:

(i) an express trust created by the settlor but excluded from the formal

requirements of s 7 of the Statute of Frauds (now s 53(1)(b) of the Law of Property Act 1925), or

(ii) a constructive trust created by the court that was exempt from the requirements of writing under s 8 of the Statute of Frauds 1677 (now s 53(2) of the Law of Property Act 1925)?

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Answer

In Rochefoucauld v Boustead the court decided that it was entitled to suspend the operation of s 7 of the Statute of Frauds 1677 (the predecessor to s 53(1)(b) of the Law of Property Act 1925) when, in the opinion of the court, a party to a trust had attempted to promote a fraud by setting up the statutory requirements as a defence to an action in respect of a trust of the property. This principle has been extended to constructive trusts, see Bannister v Bannister and Re Densham, which are exempt from the requirements of s 53(1)(b) by virtue of s 53(2) of the Law of Property Act 1925.

Chapter 2

On-the-Spot Question

How did equity develop as a separate system of principles? What major changes were made by the Judicature Acts 1873/75?

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Answer

Rules of equity were created as ad hoc principles that achieved justice for the benefit of parties who were disillusioned by the process adopted by the common law courts. These rules were pioneered initially by the Lord Chancellor and subsequently by the Court of Chancery as a separate layer of legal principles until the advent of the Judicature Act 1873/75. In many instances equitable principles conflicted with common law rules and in these cases equity prevailed. An example is the institution of the trust. In other cases equity complimented the law by creating new procedures (inquisitorial system) and remedies (such as specific performance and injunctions)  for aggrieved parties, referred to as the auxiliary and concurrent jurisdictions of equity.

The Judicature Acts 1873/75 fused the administration of law and equity so that it was no longer necessary for a litigant to go to a court of equity in order to gain equitable relief. In addition the Acts resolved disputes between law and equity by a declaration in favour of the latter.

On-the-Spot Question

Do you think that the maxims of equity serve any useful purpose in contemporary trusts law?

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Answer

The maxims of equity were developed as a collection of vague mottos to illustrate the application of equitable principles in appropriate cases. They were essentially afterthought statements that encapsulated some equitable principles. There are only a limited number of maxims and in contemporary trusts law the maxims, far from being guiding principles, are useful only if the principle decided by the court without the constraints of a maxim may be illustrated by a maxim.

Chapter 3

On-the-Spot Question

Trevor holds 5,000 shares in Barclays Bank plc upon trust for David absolutely. The shares are currently valued at £8,000. David is 17 years old and wishes to purchase a car for £7,500. The trustees have refused a request from David to sell the shares and distribute the proceeds to him.  Would David be entitled to direct Trevor to transfer the legal title to the shares to him and thereby terminate the trust? 

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Answer

Since David has not attained the age of majority (i.e. 18) the rule in Saunders v Vautier will not operate and he will not have the capacity to terminate the trust by instructing Trevor to sell the shares and distribute the proceeds to him. This is the position despite the fact that David is the sole beneficiary and does not suffer from mental deficiency.

On-the-Spot Question

(a) How would you distinguish an express trust from an implied trust?

(b) How would you distinguish a resulting trust from a constructive trust?

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Answer

(a) An express trust is created in accordance with the express intention of the settlor. In accordance with the Milroy v Lord rule there are two modes for creating such a trust – by the settlor declaring himself a trustee of specific property for the benefit of identifiable beneficiaries or transferring property to named trustees on trust for identified or identifiable beneficiaries. An implied trust does not arise out of the express intention of the settlor but is created by the courts in accordance with the implied intention of the transferor (resulting trusts) or in the interests of justice and fairness (constructive trust). The rationale underlying the constructive trust is to prevent a legal owner of property from denying the claimant an interest in the property (constructive trust). The constructive trust arises irrespective of the implied intention of the transferor.

(b)  A resulting trust is one which ‘springs back’ in favour of the transferor. It is created by the court based on an inferred relationship of trustee and beneficiary. Such trusts may arise from the unexpressed but presumed intention of the transferor in two circumstances. The first is where the transferor purchases, or voluntarily transfers, property in the name of the transferor. The circumstances are such that the location of the legal title is clear but the ownership of the equitable interest may be unclear. Prima facie the equitable interest will be presumed to be retained by the transferor. This is a presumed resulting trust which may be rebutted by evidence to the contrary. The second type of resulting trust arises when the transferor disposes of the legal title to a party but fails to dispose of the entire equitable interest. In these circumstances the court will imply that the undisposed equitable interest may be acquired by the transferor.

A constructive trust is much broader than a resulting trust and is created by the court by reference to the conduct of a fiduciary, who may be a trustee or other person with special duties. This trust arises independently of the intention of the parties and the occasions that give rise to such trusts have been deliberately left open by the courts to ensure that the trustee does not allow his duties to conflict with his interest. Thus, if a trustee abuses his position by renewing a lease of trust property in his favour without authority the new lease may be held on trust for the original beneficiaries. His attempt to obtain a personal advantage may be regarded as contrary to the duty of loyalty that is expected of trustees.  

On-the-Spot Question

A settlor who creates an express trust in law is treated as having dispossessed his interest under the trust. The trustee is regarded as the owner of the property on behalf of the beneficiaries. Under the trust the interests are divided between the trustees, who acquire legal ownership, and the beneficiaries, who acquire equitable interests. Once the trust is created the settlor, as settlor, is treated as a stranger to the trust and has no ‘locus standi’ to enforce the trust or to recover his original property.

Why would a person who wishes to benefit another enlist the trust institution?

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Answer

There are many reasons why a settlor may wish to separate the legal and equitable interests in property and thereby create an express trust. The motives of the settlor are essentially subjective and may include the need to benefit a financially immature beneficiary, to create a secret trust by his will in order to benefit some object which the settlor does not wish to be in the public domain, to promote commercial objectives like pension funds or unit trusts, to benefit customers who have partially paid the purchase price of goods without receiving the same.

Chapter 4

On-the-Spot Question

Is it a matter of some speculation as to whether a settlor may intend to create a trust?

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Answer

The issue of whether a settlor intends to create an express trust is considered by the courts by construing all the facts of the case – oral statements, statements in writing and the conduct of the settlor. This is done on an objective basis. Accordingly, in marginal cases it could be argued that the setllor’s apparent intention is the subject of some speculation. The clearer the evidence of the settlor’s intention the easier it would be to determine whether he intended to create a trust. The question whether the settlor intended to adopt the trust institution to benefit the equitable owner is distinct from a mere intention to benefit another simpliciter.

On-the-Spot Question

What are precatory words and what is the effect of use of such expressions in wills?

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Answer

Precatory words are expressions of entreaty such as confidence, wish or hope used in wills to indicate the testator’s aspirations concerning his property. These expressions are so ambiguous that at first sight it will be unclear whether a trust of property was intended. The current approach of the courts is to construe the will as a whole and the surrounding circumstances to determine whether the testator intended to create a trust of the relevant property. The effect is that it is speculative whether such words were intended to create a trust.

On-the-Spot Question

Would a trust be more efficient to protect customers as opposed to the law of contract?

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Answer

The trust institution is generally more effective to protect customers as opposed to the law of contract. Under the trust, customers acquire an equitable interest in the property by way of a trust. This is an ‘in rem’ interest in the property which is separate from the settlor’s property. This interest may only be defeated at the instance of the bona fide purchaser of the legal estate for value without notice. Under the law of contract the customer does not acquire the property itself but merely a right to the property which may be enforceable in damages. The vendor in breach of contract retains the ownership in the property which may be acquired by the creditors, including the customers.

On-the-Spot Question

How would you reconcile Re London Wine Co with Hunter v Moss?

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Answer

In Re London Wine the question in issue was whether property in the wine had passed to the customers without segregation from the bulk. In commercial law property in the goods had not passed to the customers under the Sale of Goods Act 1979, for the goods were not identified with sufficient precision. Equally the court decided that in trusts law the test for certainty of subject matter was not complied with and no trust was created.

In Hunter v Moss the Sale of Goods Act was not applicable to the intended transfer of shares in a private company. Instead, the court decided that the subject matter of  the transfer constituted fungibles (indistinguishable items of property). In these circumstances the quantification of the shares to be held on trust was sufficient to identify the subject matter of the trust. In short the court was capable of attaching an order on the relevant shares, despite the non-identification of the shares by reference to their share certificates. The shares were of one type and the specification of the quantity to be transferred was sufficient to identify which shares were subject to the trust.

On-the-Spot Question

What is the effect of the distinction between uncertainty of trust property and beneficial interest?

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Answer

Uncertainty of trust property as a whole involves the occasion where the subject matter of the intended trust has been expressed so vaguely that it is impossible for the court to distinguish which property is and is not subject to the trust. The effect is that no trust is capable of existing and the transferee takes the property beneficially, or in the event of an intended self-declaration of trust the intended settlor becomes entitled to retain his property. In the event of uncertainty of beneficial interest (assuming certainty of rust property) the interest to be acquired by the intended beneficiaries being unclear, the intended express trust fails but a resulting trust will arise in favour of the settlor.

On-the-Spot Question

What justification, if any, was there in McPhail v Doulton (sub nom Re Baden) to change the test for certainty of objects?

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Answer

The rationale in McPhail v Doulton for changing the test for certainty of objects in respect of discretionary trusts involves a fundamental difference with fixed trusts and an apparent similarity with a power of appointment in terms of the class of objects. In the case of discretionary trusts and powers of appointment the potential beneficiaries comprise a class of objects. Individuals from the class of objects do not acquire an interest in the property until the trustees distribute the property to them. Before this event the individual members of the class acquire a ‘hope’ or ‘spes’ of acquiring a benefit. Whereas in the case of a fixed trust, the beneficiaries enjoy a specific interest in the property from the date of the creation of the trust. Accordingly a broader test for certainty of objects was justified in the case of discretionary trusts.

On-the-Spot Question

Why did the court restrict the principle of administrative unworkability to discretionary trusts as distinct from powers of appointment?

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Answer

The court restricted the principle of administrative unworkability to discretionary trusts as distinct from powers of appointments because of the fundamental differences between discretionary trusts and powers of appointment. A discretionary trust is mandatory i.e. the trustees are required to exercise their discretion but have a judicial discretion as to how the discretion may be exercised, whereas a power of appointment entitles the trustees to exercise their discretion i.e. it is permissive. Accordingly, a failure on the part of the trustees to exercise their discretion under a discretionary trust may amount to a breach of trust and will be remedied by the court. This would not be possible where the class of objects is so hopelessly wide so as not to form a class (administratively unworkable) and would have stultified the authority of the court only in respect of discretionary trusts.

On-the-Spot Question

Would the approach in Re Barlow be applicable in respect of a gift of £1,000:

(a) ‘to my friends in equal shares’

(b) ‘£10 to each of my friends’

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Answer

The approach of the court in Re Barlow would not be applicable in the case of a gift of £1,000 to my friends in equal shares. The reason being that the quantum of the gift will vary with the size of the class of objects. The broader the class of objects the smaller the eventual interest that will be acquired by each object. Hence the entire class of objects needs to be ascertained. Whereas a gift of £10 to each of my friends from a limited fund of £1,000 indicates the maximum number of beneficiaries who may benefit (100 friends) and the sum to be acquired remains fixed (£10 each). In this event the quantum of the gift to be taken by each beneficiary does not vary with the size of the class. Such a gift is subject to the Re Barlow approach and may be valid. In Barlow the court issued guidelines in order to clarify the expression, friends’.

On-the-Spot Question

To what extent has the Baden litigation clarified the law of certainty of objects in respect of discretionary trusts?

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Answer

In one sense the Baden test for certainty of objects for discretionary trusts has clarified the test for certainty of objects by introducing the ‘any given postulant’ test. However the many different judicial approaches to the test have created an element of uncertainty in the application of the test, see the three approaches of the Court of Appeal in Re Baden No.2 and the two approaches advocated in Re Tuck, one of which was applied in Re Barlow. 

Chapter 5

On-the-Spot Question

How would you reconcile the principle in Richards v Delbridge with Re Ralli?

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Answer

In Richards v Delbridge, the court decided that an imperfect transfer of property to the intended donee will not be treated as a perfect self-declaration of trust by implication, with the intended donor being treated as a trustee. The maxim, ‘equity will not perfect an imperfect gift or trust’ was applicable. In Re Ralli, the settlor expressly adopted both modes for the creation of an express trust by covenanting to transfer the relevant property to the third party trustee and expressly declaring that, pending the transfer to the third party trustee, she (the settlor) will hold the property on trust for the beneficiaries. It was decided that once the transfer was achieved during the settlor’s lifetime the trust was perfect.

On-the-Spot Question

Alvin owns 5,000 shares in Moneyco Ltd, a private company. Alvin wishes to transfer these shares to Bertram and on 30th July 2011 executes a share transfer form which he sends along with the share certificates to the registered office of Moneyco Ltd. On 10th August 2011 the company pays a dividend of £250 to Alvin in respect of the shares. On September 1st 2011, the company registers Bertram as the new owner of 5,000 shares.

Is Alvin a trustee of the dividend of £250 in favour of Bertram?   

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Answer

Alvin may become a constructive trustee of the dividend of £250 for Bertram. The reason being that on 30th July 2011 Alvin may have done everything that was required of him to transfer the shares to Bertram, see Re Rose and Pennington v Waine. What was left to complete the transfer (i.e. registration of Bertram as the new owner of the shares) was outside Alvin’s control. The registration was completed on 1st September 2011, which marks the transfer of the legal title to the shares to Bertram. The effect is that the equitable interest may be effectively transferred under the Re Rose principle at some time before the legal title.  

On-the-Spot Question

Sam executes a deed with Tom and Jerry agreeing to transfer 5,000 shares in Marks and Spencer plc to them to hold upon trust for David absolutely. Sam fails to transfer the shares to Tom and Jerry. Would a trust for David be created under the Fletcher v Fletcher rule?

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Answer

Since Sam failed to transfer the shares to the intended trustees, Tom and Jerry, no express trust had been created by Sam, see Milroy v Lord, Richards v Delbridge. The Fletcher v Fletcher rule which creates a trust of a chose in action (intangible personal property) will not be applicable because the principle has been restricted to ‘debts enforceable at law’, see Re Cook. Debts involve the relationship of creditor and debtor in respect of obligations to transfer cash sums. Accordingly, David will not be treated as a beneficiary.

On-the-Spot Question

Harold and Tom hold 50 gold coins upon trust for Charlie. Is s 53(1)(c) of the Law of Property Act 1925 applicable if Charlie:

(i) Orally directs the trustees to hold the coins on trust for Eric?

(ii) Orally declares himself a trustee for Eric?

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Answer

Since Charlie is a beneficiary under a subsisting trust, s 53(1) (c) of the Law of Property Act 1925 will be applicable to ‘dispositions’ by Charlie of his equitable interest. Romer LJ in Timpson’s Executors v Yerbury classified dispositions into four categories which include both directions to the trustees to hold the property on trust for another beneficiary (Grey v IRC) and self declarations of trusts. The effect is that both attempts by Charlie to benefit Eric are intended dispositions within s 53(1)(c) and are required to be in writing in order to be effective. This is the position despite the subject matter being personal property.

Chapter 6

On-the-Spot Question

Would the following directions create purpose trusts?

(a) a legacy of £5,000 to use the income to maintain my pet cat, Tiddles, for the remainder of her life. Any surplus income and the capital to be shared equally between my nephews and nieces.

(b) I declare that the windows and doors of my house, Rose Cottage, be boarded up for a period of 10 years from the date of my death.

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Answer

(a) The income from the legacy for the maintenance of the cat,Tiddles, for life has the effect of creating a private purpose trust. This is exceptionally treated as valid under the Pettingall v Pettingall rule as a concession to human weakness. But such a trust is subject to the rule against perpetuities. However, in this case the court will take judicial notice of the lifespan of the animal and if it does not exceed the perpetuity period (21 years for private purpose trusts) it will be regarded as valid.

(b) The surplus income and capital to be shared equally between the testator’s nephews and nieces is not a purpose trust but a traditional ‘fixed’ (or non-discretionary) family trust. Provided that the ‘list’ test for certainty of objects is satisfied, this trust will be valid. The list test involves the trustees drawing up a comprehensive list of all the objects. There is no suggestion that this is not possible.

(c) The restriction on boarding up the windows and doors of Rose Cottage has the potential for creating a private purpose trust and will be void under the general rule laid down in Morice v Bishop of Durham i.e. the lack of beneficiary principle. Alternatively the court has the power to evaluate the usefulness of the restriction and if it is treated as capricious, the restriction may be lifted as in Brown v Burdett. The effect is that the beneficiary under the will who is entitled to Rose Cottage may acquire the property free from the limitation.   

On-the-Spot Question

Clarence made the following dispositions in his will:

‘(a) £2,000 per annum to be used to maintain my grave for as long as the law allows;

(b) £1,000 per annum to maintain my pet dog, Fido’. 

Consider the validity of Clarence’s dispositions.

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Answer

(a) The maintenance of specific graves in a cemetery is treated as a valid private purpose trust provided that the grave is capable of identification. There may not be a problem here in ascertaining the grave of the testator. But the private purpose trust is subject to the common law perpetuity period of 21 years. The reference to the period, ‘as long as the law allows’ is an acknowledgement of the perpetuity period, see Re Hooper, and the gift will be valid for 21 years.

(b) The legacy to maintain Fido is treated as creating a valid private purpose trust for the benefit of a specific animal and falls within the Pettingall v Pettingall principle. As dogs do not live beyond the common law perpetuity period of 21 years, the court will take notice of this fact and determine that the perpetuity period has not been infringed.

On-the-Spot Question

To what extent would you regard the construction of the residuary gift by will in Re Lipinski as similar to the Re Denley principle?

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Answer

Oliver J in Re Lipinski endorsed the principle laid own by Goff J in Re Denley, although it is debatable whether the Denley principle was applicable to the facts of Re Lipinski in the first place.  In Lipinski a testamentary gift was made to an unincorporated association inter alia to construct new buildings for the association. Oliver J construed the gift, not as a private purpose trust, but as a trust for the benefit of the contract-holding members of the association.  The association was capable of satisfying the tests for certainty of objects and the perpetuity rule. The effect was that he felt entitled to draw an analogy with the Denley rule. But the difficulty here was that the Denley rule was fundamentally different to the circumstances existing in Re Lipinski.  In Denley, Goff J decided that the transfer of land to trustees to permit its use as a sports centre for the benefit of employees of a company created not a purpose trust, but a traditional private trust for the benefit of the employees of the company. These employees complied with the tests for certainty of objects and the perpetuity rule. But the trust involved a large fluctuating class of beneficiaries, not intended to own the land and strictly with no power to terminate the trust. The equitable interest, in reality, must have been suspended during the continuation of the trust. In Lipinski, the gift was to an unincorporated association where the rules of the association allowed the members to change the constitution and authorise a distribution to themselves. On this basis there was no suspension of the equitable interest as existed in Re Denley. 

Chapter 7

On-the-Spot Question

How would you reconcile Dingle v Turner with Oppenheim v Tobacco Securities Trust on the issue of the public benefit?

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Answer

The Oppenheim principle is to the effect that the public benefit test will not be satisfied where the class of beneficiaries is identified by a personal nexus in contract i.e. the employees of a company. However, in Dingle v Turner the court decided that trusts for the relief of poverty constitute an exception to the general rule. Accordingly, a trust for the education of the children of poor employees of a company or for the benefit of the settlor’s poor relations does not lack the necessary public benefit for charitable purposes despite the personal nexus. This concession has been restricted to trusts for the relief of poverty. The essential distinction in this context is between gifts for the relief of poverty amongst poor people (charitable) and gifts to particular persons who may be treated as poor (non-charitable) without necessarily relieving the misery of poverty.

On-the-Spot Question

Consider whether the following dispositions under the will of Alfred create charitable trusts:

1. £10,000 to my executors to distribute amongst such persons or charitable objects as they shall decide in their discretion;
2. £500,000 to the Birmingham City Council upon trust to purchase a suitable site in Birmingham for a football field for the use of all inhabitants of Birmingham
3. £100,000 to the University of London upon trust to establish and maintain in perpetuity a School of Law Reform.

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Answer

1. £10,000 to the executors to distribute amongst such person or charitable objects is likely to fail as a charitable trust on the ground that the objects are not exclusively charitable, see s 1(1a) of the Charities Act 2011. If the conjunction, ‘or’ is construed disjunctively the effect is that non-charitable persons (objects) may be entitled to benefit as an integral part of the gift and will certainly fail as a charitable gift.
2. £500,000 to the Birmingham City Council to purchase a site to be used as a football field is capable of being construed as a charitable gift on several grounds. Section 3(1)(g) of the Charities Act 2011 refers to the advancement of amateur sport as a charitable purpose. Since there is no specification that professional football is required to be promoted by the gift, it is safe to assume that it is amateur football that will be advanced by the gift. The objects refer to ‘all the inhabitants of Birmingham’ and this group may be sufficiently large to satisfy the public benefit test.  In addition, the purpose may be charitable under s 5 of the Charities Act 2011 in that the facilities are provided in the interests of social welfare and the basic conditions specified in the section are capable of being satisfied.
3. £100,000 to the University of London to set up and maintain a School of Law Reform is undoubtedly charitable for the advancement of education and other purposes beneficial to the community respectively under ss 3(1)(b) and (m) of the Charities Act 2011. London University is clearly a charitable institution and the gift is to such body. The School of Law Reform involves identifying the occasions when the law needs modification, complemented by proposals for changes. It is not a political purpose for the proposals may or may not lead to changes in the law. It is for Parliament to determine whether the law ought to be modified to reflect improvements in the law. In addition, charities are exempt from the rule against perpetuities and it is immaterial that the School will be maintained in perpetuity.

On-the-Spot Question

To what extent has the Charities Act 2011 (the successor to the Charities Act 2006) created clarity in the law of charitable purposes?

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Answer

The Charities Act 2011 (which repealed and replaced the Charities Act 2006) has created some clarity in the law of charities in consolidating some 13 charitable purposes. In the vast majority of instances these specific purposes were charitable prior to the introduction of the Act. In any event the construction that had been placed on the stated purposes by the courts will continue to be applied following the enactment. To this extent the enactment generally amounts to a consolidation of the law regarding charities.

Chapter 8

On-the-Spot Question

Read the judgment of Lord Wilberforce in Barclays Bank v Quistclose and consider the following questions:

(a) What conditions are required to be satisfied in order to trigger the so called Quistclose trust?

(b) Critically consider Lord Wilberforce’s analysis of a ‘primary trust’ for the creditors

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Answer

(a) The pre-requisites of the Quistclose principle involve a loan, and possibly other transfers of property, to the defendant, subject to the condition that the subject matter of the transfer is to be used for a specific purpose only. The effect is that general property in the transfer does not pass to the defendant until the stipulation is satisfied. The consequence is that the transferor retains some beneficial interest in the subject matter of the transfer. In these circumstances if the property is not used for the stated purpose, a resulting trust will arise in favour of the transferor.

(b) In Quistclose, Lord Wilberforce reasoned that a ‘primary’ trust had been created by the transferor requiring the transferee of the fund to pay a dividend (stated purpose). Since this trust failed because the transferee went into liquidation before the dividend  could be paid, a resulting trust in favour of the transferor had arisen. The difficulty with the ‘primary’ trust analysis is that it assumes the existence of an express trust. However such an intended express trust will fall foul of the ‘beneficiary’ principle, for there is no person (or beneficiary) with the capacity to enforce the trust. In short such a trust, in substance, is a private purpose trust that will fail.

On-the-Spot Question

To what extent may the maxim, ‘he who comes to equity must come with clean hands’ that was applied in Tinker v Tinker be reconciled with the principle adopted by the House of Lords in Tinsley v Milligan?

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Answer

In Tinker v Tinker the relevant maxim was applied to the facts with the effect that Mr Tinker was prevented from relying on an intended unlawful purpose in order to establish a claim on equitable principles. Whereas in Tinsley v Milligan the House of Lords decided that the application of the maxim in blanket form would have had the effect of promoting an injustice. Instead, each case is to be judged on its own merits. In Tinsley the defendant, who had an interest in the property based on equitable rules was entitled to rely on this principle (resulting trust) in the first place. She was not trying to use the unlawful activity to gain an interest, but had such an interest. On this basis the maxim had no application to the facts of the case.  In any event the application of the maxim would have been disproportionate.

On-the-Spot Question

Do you think that the classification of resulting trusts by Megarry J in Re Vandervell Trust (No2) into ‘automatic’ and ‘presumed’ is comprehensive enough to deal with the variety events that create resulting trusts?

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Answer

There are many ways of classifying resulting trusts. In Re Vandervell Trust (No2), Megarry J classified such trusts into ‘presumed’ and ‘automatic’ trusts. The presumed resulting trust arises, in the absence of evidence to the contrary, when property is purchased in the name of another or property is voluntarily transferred to another. In other words the legal title to property is vested in the sole (or joint names with the transferor) name of a third party or transferee. The legal owner is presumed to hold the property on resulting trust for the purchaser in proportion to the amount of the purchase price provided by the purchaser or transferor.   The automatic resulting trust arises whenever the beneficial interest in property (in whole or in part) remains undisposed. Such trust arises in order to fill a gap in ownership.

Lord Browne –Wilkinson in Westdeutsche Bank did not fully agree with Megarry J ‘s classification and declared that there are two types of resulting trusts, presumed (as described above) and a resulting trust of the surplus of property. He added that resulting trusts arise from the common intention of the parties. Unlike a constructive trust, a resulting trust is not imposed against the intentions of the trustee.

Professor Birks theory is that both types of resulting trusts are based on the intention of the settlor/ transferor and to prevent unjust enrichment. Whereas Swadling propounds the argument that the resulting trust is a default mechanism which returns the equitable interest to the transferor whenever the ownership of the property is incomplete.  Lord Millett in Air Jamaica emphasised the relevance of intention in the creation of resulting trusts but he added that a resulting trust may arise whether or not the settlor/ transferor intended to retain a beneficial interest in the property, as illustrated by Vandervell v IRC.

Chapter 9

On-the-Spot Question

Distinguish a constructive trust from an express and resulting trust. Explain the justification for the constructive trust and identify the various meanings of such trusts.

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Answer

A constructive trust is created whenever the court decides that it would be unconscionable for the legal owner of property to deny the claimant an equitable interest in the property. On occasions when a trustee abuses the confidence reposed in him by procuring an unauthorised profit derived from the trust property, or becomes unjustly enriched at another’s expense, the court may impose a constructive trust on the party who acted with impropriety. These are occasions when the courts feel that it is inequitable for a person to retain the equitable interest for his own benefit.  Constructive trusts are ‘institutional’ or ‘remedial’. An institutional constructive trust is one created by the courts from the date of the misconduct by the trustees; whereas a remedial constructive trust is a judicial remedy that arises from the date of the court order.

An express trust is one created in accordance with the express intention of the settlor. The settlor is required to transfer the relevant property to third party trustees subject to the terms of the trust manifested in favour of the beneficiaries. Alternatively, the settlor may expressly declare himself a trustee for the benefit of the objects (that is, self-declaration of trust).

Resulting trusts are implied trusts which spring back in favour of the settlor/transferor in accordance with his implied intention. The trust is a default mechanism and may be created in order to fill a gap in ownership, or in respect of a surplus of trust funds left over after the trust purpose has been fulfilled.  In addition, a ‘resulting trust’ may be created by the courts in accordance with the presumed intention of the settlor. The settlor or his estate is presumed to be the equitable owner. An occasion giving rise to this presumption is the purchase of property in the name of another.

On-the-Spot Question

Should the receipt of a bribe or secret commission by a fiduciary be subject to the broad notion of a constructive trust?

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Answer

In Attorney General for Hong Kong v Reid the Privy Council decided that the receipt of a bribe by or behalf of a fiduciary becomes trust property by way of a constructive trust. The effect was that the claimant became entitled to trace the property in the hands of the defendant or his successors in title (in rem action) except the bona fide purchaser of the legal estate for value without notice. It is difficult to fathom why in Reid property in the bribe was not acquired by the recipient of the bribe but instead was acquired by the principal. Whereas in the recent case of Sinclair v Versailles the Court of Appeal refused to follow Reid and decided that the property in the bribe is acquired by the defaulting trustee but is accountable to the claimant in a personal action to account. In Sinclair the court relied on a long line of authorities to the same effect.

On-the-Spot Question

The definitive principles laid down by the House of Lords in Stack v Dowden (2007) have the potential for creating a high degree of uncertainty for they are tantamount to the creation of the remedial constructive trust.

Discuss.

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Answer

One possible effect of the ‘default’ constructive trust principles that are applicable to proprietary interests in the family home is the unrestrained constructive trust that was advocated by the Court of Appeal in the 1970’s. This involved an element of ‘palm tree’ justice in the sense that the court retained a discretion to determine what was fair to the parties by reference to the facts of each case. It is true that Baroness Hale was at pains to distance herself from principles of unrestrained discretion and to lay down guidance for the courts to adopt a structured approach based on settled principles of common intention between the parties. The difficulty lies in the evaluation of judges of the notion of the ‘imputed intention’ of the parties.  

On-the-Spot Question

The principles requiring communication of the terms of a half secret trust to be made before or at the time of the execution of the will cannot be justified. Do you agree?

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Answer

1. The principle in half secret trusts is that the communication (and acceptance) of the terms of the trust is required to be made before or at the time of the execution of the will. If so, the terms may be admitted in court to prove the trust. On the other hand, if no such communication has been made, the terms of the trust may not be proved and a resulting trust will arise, see Blackwell v Blackwell. The justification for this principle is that no one is allowed to take property beneficially under a fraud committed by another. However, no such principle exists for fully secret trusts which are subject to a much broader principle. It is difficult to justify the half secret rule of communication. Some commentators have suggested that the restricted communication principle is based on confusion by the extension of the probate doctrine of incorporation by reference. The probate doctrine allows unattested documents executed before, or at the time of, the will and referred to in the will to be read in conjunction with the will. Some Commonwealth jurisdictions have refused to adopt this principle in view of the discrepancy in approach.

On-the-Spot Question

To what extent do you consider the law regarding dishonesty to be settled in a claim for dishonestly assisting another in a fraudulent transaction?

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Answer

The test for dishonesty appears to be settled following the decisions in Barlow Clowes v Eurotrust, Abou-Ramah v Abacha and Starglade v Nash. The test of dishonesty in a claim for dishonest assistance was originally laid down in Royal Brunei Airlines v Tan. Although Lord Nicholls inTan laid down an objective standard he added that dishonesty involves subjective elements. This approach was arguably confused by Lord Hutton in Twinsectra v Yardley who advocated a combined  objective and subjective standard, akin to the criminal law test laid down in R v Ghosh. This had the potential for allowing the defendant to set his own standards of dishonesty which would have been overgenerous in trusts law. The courts subsequently developed the law by re-interpreting the test laid down in Twinsectra. The effect is that there is wealth of case law on the subject with the merit of clarity in the standard that is applicable to determine dishonesty.

Chapter 10

On-the-Spot Question

In what circumstances, and by whom, may a trustee be appointed to or removed from office?

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Answer

On the creation of a new trust trustees may be appointed by the trust instrument or persons nominated in the settlement. In the absence of such provisions, new trustees may be appointed under the provisions specified in s 36(1) of the Trustee Act 1925. As a last resort, the court may appoint trustees under s 41 of the Trustee Act 1925.

A trustee may be removed from office in one of the following five ways:

(a) by virtue of a power contained in the trust instrument;

(b) under s 36 of the Trustee Act 1925;

(c) in the circumstances specified in ss 19 and 20 of the Trusts of Land and Appointment of Trustees Act 1996; or

(d) under the rule in Saunders v Vautier, where the beneficiaries are of full age and sound mind and absolutely entitled to the settled property; or

(e) by virtue of a court order under s 41 of the Trustee Act 1925 or the inherent jurisdiction of the court.

On-the-Spot Question

Tom is a trustee of a fund held in trust for the beneficiaries contingently on attaining the age of 30. The beneficiaries are Albert, Bertram and Colin, aged 20, 17 and 15 respectively.

Consider whether Tom has the power to make payments to the beneficiaries before each attains the age of 30.

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Answer

Tom has the discretion under s 31 of the Trustee Act 1925 to make maintenance payments out of income to beneficiaries under the age of majority. This would include Bertram and Colin. These payments may be made to, or on behalf of, the infant beneficiaries until they attain the age of majority. The trust funds may be used for routine recurring purposes such as food, clothing, rent and education.

Each of the three beneficiaries may receive capital payments or advancements at the discretion of Tom by virtue of s 32 of the Trustee Act 1925. Advancements are payments to provide long term commitments such as starting a business or the purchase of a home. S 32 of the 1925 Act lays down the maximum amount of 50% of the presumptive share of the capital of each beneficiary.

On-the-Spot Question

How broadly has the expression ‘benefit’ under the Variation of Trusts Act 1958 been interpreted by the courts?

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Answer

The expression, ‘benefit’, under the Variation of Trusts Act 1958 has been interpreted very liberally by the courts and may include financial and moral benefits to be enjoyed by the beneficiaries. The essential determinant is whether the scheme as a whole is advantageous to the beneficiaries. This may not warrant the beneficiaries emigrating to a foreign country that has the reputation of being a tax haven.

On-the-Spot Question

To what extent may exclusion clauses protect trustees who act in breach of trust?

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Answer

Exclusion clauses that are validly inserted in trust instruments may have the effect of limiting the liability of trustees. Much depends on the wording of such clauses. Prima facie, any ambiguities inherent in such clauses are construed against the trustees. Such clauses are not, without more, void on public policy grounds. Moreover, provided the clause does not purport to exclude the basic minimum duties of the trustees, it may not be construed as being void for repugnancy to the trust. Some of the 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.

On-the-Spot Question

How would you reconcile the rule in Re Hallett with the rule in Re Oatway?

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Answer

There were many principles laid down in Re Hallett. One of the leading principles laid down in this case concerns tracing into a mixed fund.  If the trustee or fiduciary has mixed his funds with that of the beneficiary, or has purchased further property with the mixed fund, the beneficiary loses his right to elect to take the property acquired. The reason being that the property would not have been bought with the beneficiary’s money, pure and simple, but with the mixed fund. However, in the exercise of the exclusive jurisdiction of equity, the beneficiary would be entitled to have the property charged for the amount of the trust money.

In Re Oatway the court decided that where part of a mixed fund has been used to purchase an asset which is identifiable, and the remainder of the fund has been exhausted (the right to trace against the fund becoming otiose), the beneficiary may claim to trace against the asset acquired by the trustees. In short, from the point of view of the beneficiary, the trustee and his successors in title are prevented or estopped from claiming the interest acquired with the mixed fund.

Thus, Re Hallett involves the right to trace into the balance of a mixed fund whereas, Re Oatway concerns the right to trace into an asset bought out of the mixed fund where the balance of the fund has been dissipated.

Chapter 11

On-the-Spot Question

What principles are applicable by the courts in exercising its discretion to issue an order of specific performance?

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Answer

The remedy of specific performance, by origin and nature, is equitable and may only be ordered at the discretion of the courts. This remedy will not be ordered where common law damages would adequately compensate the claimant for his loss. There have been many permutations of this principle laid down by the courts. In addition, specific performance will not be ordered to enforce a voluntary contract or a contract that requires constant supervision by the courts or a contract that is wanting in mutuality.

On-the-Spot Question

What factors should be taken into account by the court when deciding whether or not to grant an order for an interim injunction?

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Answer

The principles governing the grant of an interim injunction were originally laid down by Lord Diplock in American Cyanamid Co v Ethicon Ltd. The issues were as follows:

(a) whether there was a serious question to be tried? This means that the claim must not be frivolous or vexatious.

(b) whether the balance of convenience justifies the grant of the remedy? In this respect the court would consider whether damages would provide an adequate remedy and whether the undertaking by the claimant as to damages would be regarded as adequate protection for the defendant. 

(c) whether there are other factors to be taken into account?

(d) As a last resort, where the court, having considered all of the above, is still unable to arrive at a decision it can take into account the relative strength of the parties’ cases.

On-the-Spot Question

On 12 April 2010, Charles made a loan to David of £50,000 in order to purchase 20,000 shares in Money Bags Ltd. The loan was repayable in 5 years time and interest was payable at the rate of 10% per annum. Under the agreement David was required to pay C £15,000 on 12 April each year for the next five years. In May 2012 Charles discovered that David had not purchased the shares from Moneybags Ltd and, more disturbingly, failed to repay any part of the loan. Charles’s inquiries reveal that David left the UK in November 2011 for a ‘short holiday’ in Morocco. David was recently seen in Oxford Street, London. He was confronted by Charles about the non payment of the first instalment of the loan. David told Charles that the money will be repaid after the sale of his restaurant in September 2012. Charles has lost trust in David and is very concerned that the money may never be repaid and David may disappear, if attempts are made to recover the money through the courts.

Advise Charles.

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Answer

Charles may be advised to apply to the court for an order charging the restaurant with the debt. The purpose is to protect the creditor, Charles, by informing him and the potential purchaser of his interest in the event of a sale of the property.  In addition Charles may sue David for the recovery of the loan and in the interim apply to the court for a freezing order. If Charles is capable of convincing the court that there is a serious risk that David may sell the restaurant (even a sham sale) and take the proceeds of sale out of the country, he may apply ex parte for a freezing order. This requires an undertaking in damages, full disclosure of the material facts and a ‘good arguable case’ that his chose in action requires protection.