essential trusts, 3rd edition (essential series)

ESSENTIALTRUSTS

THIRD EDITION

CavendishPublishing

Limited

London • Sydney

Titles in the series: Company LawConstitutional LawContract LawCriminal LawEmployment LawEnglish Legal SystemEuropean Community LawEvidenceFamily LawGCSE LawJurisprudenceLand LawMedical LawSuccessionTort LawTrusts

ESSENTIALTRUSTS

THIRD EDITION

Andrew Iwobi, LLB, PhDSenior Lecturer in LawSwansea Law School

CavendishPublishing

Limited

London • Sydney

Third edition first published in Great Britain 2001 by CavendishPublishing Limited, The Glass House, Wharton Street, London WC1X9PX, United KingdomTelephone: +44 (0)20 7278 8000 Facsimile: +44 (0)20 7278 8080Email: [email protected]: www.cavendishpublishing.com

© Iwobi, A 1997First edition 1995Second edition 2000Third edition 2001

All rights reserved. No part of this publication may be reproduced,stored in a retrieval system, or transmitted, in any form or by anymeans, electronic, mechanical, photocopying, recording, scanning orotherwise, except under the terms of the Copyright Designs and PatentsAct 1988 or under the terms of a licence issued by the CopyrightLicensing Agency, 90 Tottenham Court Road, London W1P 9HE, UK,without the permission in writing of the publisher.

Iwobi, AndrewEssential Trusts—3rd ed—(Cavendish Publishing Essential Series) 1. Trusts and trustees—England 2. Trusts and trustees—Wales I. Title 346 4'2'059

ISBN 1 85941 675 6

Printed and bound in Great Britain

I re-dedicate this book to my darling wife, Uzoand my wonderful children, Ify and Chuka

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Foreword This book is part of the Cavendish Essential series. The books in theseries are designed to provide useful revision aids for the hard-pressedstudent. They are not, of course, intended to be substitutes for moredetailed treatises. Other textbooks in the Cavendish portfolio mustsupply these gaps.

The Cavendish Essential Series is now in its second edition and is awell established favourite among students.

The team of authors bring a wealth of lecturing and examiningexperience to the task in hand. Many of us can even recall what it waslike to face law examinations!

Professor Nicholas Bourne AMGeneral Editor, Essential Series

Conservative Member for Mid and West Wales

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Contents

Foreword vii

1 The General Nature of the Trust 1

2 Creation of Express Private Trusts 11

3 The Constitution of Trusts 39

4 Resulting and Constructive Trusts 49

5 Charitable Trusts 89

6 The Administration of Trusts 123

7 Breach of Trust 165

Index 189

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1 The General Nature of theTrust

You should be familiar with the following areas:

• definitions of the trust• the basic elements of the trust concept and their significance• the relationship between trusts and other analogous

arrangements known to English law

Some definitions

The leading textbooks contain various definitions of the trust. Forexample:

Underhill

A trust is an equitable obligation binding on a person (who is called atrustee) to deal with property over which he has control (which is calledthe trust property), for the benefit of persons (who are called thebeneficiaries or cestuis que trust) of whom he may be one and any ofwhom may enforce the obligation.

Keeton and Sheridan

A trust is the relationship which arises wherever a person called thetrustee is compelled in equity to hold property, whether real or personaland whether by legal or equitable title, for the benefit of some persons(of whom he may be one and who are termed the beneficiaries) or forsome objects permitted by law in such a way that the real benefit of

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the property accrues not to the trustee, but to the beneficiaries or otherobjects of the trust.

The main elements of the trust

It has been observed in Hanbury’s Modern Equity that of the manyattempts which have been made at defining a trust none has beenentirely successful. In the same vein, Eveleigh J has remarked, in Allen& Others v Distillers Co (Biochemicals) (1974), that ‘no one has yetsucceeded in giving an entirely satisfactory definition of the trust’.This is scarcely surprising as the trust is such a multi-faceted devicewhich has been employed in a diverse range of settings. Variouscommentators have therefore suggested that it is more instructive todescribe rather than define the trust. A convenient way of describingthe trust is to elaborate on the key elements which emerge from thevarious definitions.

Equity/equitable jurisdiction

This is an acknowledgment of the historical fact that the trust is a creatureof equity rather than the common law. It owes its origin and present-dayexistence to the willingness of the Chancellors to compel any person whoundertook to hold property on behalf of another to give effect to hisundertaking in circumstances where the common law judges refused tointervene. The involvement of the Chancellors in the evolution of thetrust and its forerunner, the use, has been well documented and referencemay be made to Hanbury and Martin’s Modern Equity, 15th edn, pp 3–11; Pettit’s Equity and the Law of Trusts, 8th edn, pp 1–4, 11–16; or Pearceand Stevens, The Law of Trusts and Equitable Obligations, pp 78–80 for fulleraccounts.

Obligation/compelled

A trust gives rise to duties which are imperative such that failure tocarry them out renders a trustee liable for breach of trust.

Trustee-beneficiary (or cestui que trust)

The existence of a trust involves a relationship which, in mostdefinitions, is presented as a simple bipartite one between trusteesand beneficiaries. In reality, however, trusts, particularly in the

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commercial sphere, often involve more complex multipartiterelationships. Unit Trusts, for instance, normally entail a tripartiterelationship between trustees, fund managers and investors.

It is noteworthy that Keeton and Sheridan’s definition refers notonly to human beneficiaries but also to objects permitted by law. Thisreflects the emergence of the charitable trust as a vehicle for fulfillingpurposes beneficial to the community at large.

Property

Trusts do not exist in a vacuum but by reference to some species ofreal or personal property which constitutes the subject matter of thetrust. Note in this connection: • anything which is capable of being owned may be held on trust;• where the person creating the trust (who is known as the settlor or

testator) owns a legal estate or interest in the trust property, it isusual for his legal title to become vested in the trustee;

• where the settlor or testator owns an equitable interest, however, itis this interest and not the legal title which vests in the trustee.

Duality of ownership

The most significant feature of the trust is the manner in which itseparates legal ownership of trust property from its equitable orbeneficial ownership.

Historically, the common law considered the trustee as the ownerof the trust property and even to this day recognises him as the legalowner of such property.

Equity for its part sought to ensure that any benefits derived fromthe trust property went to the beneficiary. This initially meant that thebeneficiary had a right in personam enforceable against the trustee. Indue course, however, the beneficiary came to be recognised as theequitable owner of the property. His equitable ownership subsistedalongside the legal ownership of the trustee. The effect of this wasthat the beneficiary acquired a proprietary interest in the trustproperty which he was entitled to enforce in rem against the wholeworld except a bona fide purchaser for value without notice. For a recentanalysis of the essential distinction between the beneficiary’spersonal rights against the trustee and his rights in rem, see Webb vWebb (1994).

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Trusts and related concepts

In seeking to understand the nature of the trust it is useful to compareit with various other concepts familiar to English law.

Trusts and bailment

Bailment entails delivery of goods for specified purposes on thecondition that on the fulfilment of such purposes the bailee will returnthem to the bailor or deliver them according to his directions. Examplesof bailment include: hire of a car; deposit of an item for repair orsafekeeping; consignment of goods for delivery to a third party.

As with a trust, a bailment entails the reliance by one person onanother person to whom he has entrusted his property. Thus, forinstance, a direction by A to B to keep a piano for A’s infant son C untilC turns 21, may give rise to a trust in some circumstances and abailment in others.

In spite of this, the trust and bailment differ materially in a numberof respects: • bailment originated from the common law; trusts from equity;• the subject matter of any bailment consists of goods but the subject

matter of a trust may be any form of property whatsoever;• bailment passes special property (possession) while the trust

ordinarily requires the settlor to divest himself of general property(ownership) in favour of the trustee;

• by virtue of such ownership the trustee can pass a good title to apurchaser in good faith and for value. Except in certain instancesallowed by statute (for example, under the Factors Act 1889) thebailee is incapable of passing a good title to a third party.

Trust and contract

A contract is an agreement between parties which is intended to createlegal relations. There are several material differences between a contractand a trust. In particular: • trusts are enforceable only in equity, while contracts are enforceable

both at law and in equity;

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• a trust imposes an obligation on the trustee to hold property on thebeneficiary’s behalf, whereas the obligations imposed by a contractdo not always relate to property, for example, a contract may arisewhere A agrees to give B music lessons if B does A’s laundry;

• a party who wishes to enforce a contract must show that hefurnished consideration unless it is under seal. In the case of a trust,once the property becomes vested in the trustee, the trust may beenforced by the beneficiary, even if he furnished no consideration;

• the rules of privity which determine who may sue in contract donot apply to trusts. This means that a beneficiary may sue to enforcea trust without needing to show that he was party to an agreementto create it, whereas a person cannot ordinarily sue on a contractunless he was party to the agreement, for example:

(a) S agrees with T that S will transfer his car to T on trust for B. Bcan enforce the trust against T once the car is transferred;

(b) by contrast, X agrees to pay Y £5,000 and Y, in return, agrees totransfer Y’s car to Z but fails to do so. Z could not sue Y forbreach of the contract even though it was for his benefit, sincehe was a stranger to the agreement between X and Y. SeeTweddle v Atkinson (1861), Dunlop v Selfridge (1915); Scruttonsv Midland Silicones (1962). (But under Contracts (Rights ofThird Parties) Act 1999, a person who is not a party to acontract may in his own right enforce a term of the contract ifthe contract expressly provides that he may, or the termpurports to confer a benefit on him: s 1(1).)

Trusts and contracts are, however, not always mutually exclusive: • On the one hand, a prospective settlor and his beneficiary may enter

into a contract to create a trust. For example, S agrees with B that Swill transfer property to T on trust for B. If S fails to transfer theproperty, B can enforce the agreement against him provided B hasfurnished consideration.

• On the other hand, the benefit of a contract may be the subject matterof a trust. For example, X and Y enter into a contract under which Yis to confer a benefit on Z, and X contracts expressly or impliedlyas a trustee of the benefit on Z. In such an event, if Z does not receivethe benefit, X is obliged as his trustee to take legal action on hisbehalf. If X fails to do so, it emerges from cases like Lloyds v Harper(1880) and Les Affréteurs Réunis Société Anonyme v Leopold Walford(1919) that Z, himself, may rely on the trust to enforce the benefit.

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It does not, however, follow that a trust will invariably be importedinto every contract between two parties for the benefit of a third. Onthe contrary, it is clear from cases like Vanderpitte v Preferred AccidentInsurance Corp (1933) and Re Schebsman (1944) that it is only where thecontracting parties intended the benefit to be held on trust for the thirdparty that he can enforce the benefit himself.

Trusts and agency

An agency arises where one person (the agent) has the express orimplied authority to act on behalf of another (his principal). Both theagent and the trustee are responsible for furthering the interests ofothers and there are marked similarities between them, most notably: • the trustee and agent are both fiduciaries who must exercise utmost

good faith in carrying out the trust or agency (but see, now, TrusteeAct 2000, Chapter 6 below);

• they must both account for any unauthorised profit or benefitsreceived by virtue of their office;

• each is enjoined by law to perform their duties personally, insteadof delegating them (but see, now, Trustee Act 2000, Chapter 6 below).

There are, however, significant differences between the two concepts: • agency is founded on agreement (except agency of necessity);

whereas agreement is not a prerequisite for declaring a trust;• the primary task of an agent is to bring his principal into contractual

relations with third parties. By contrast, any dealings a trustee mayhave with third parties will be purely incidental to the properadministration of the trust;

• agency is in the nature of a personal relationship. There is norequirement that the principal must place property in the hands ofthe agent and even where property is entrusted to the agent, thereis no accompanying transfer of ownership. A trust, on the otherhand, is a proprietary relationship, albeit one in which the trustee’sownership is merely nominal or custodial;

• in the event of a trustee’s insolvency, the fact that the beneficiaryhas a proprietary interest in the subject matter of the trust meansthat he can lay claim to the property concerned in priority to thetrustee’s other creditors. On the other hand, where an agent becomesinsolvent, owing money to his principal, since their relationship

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is personal, the common law equates the principal to an ordinarycreditor. The effect of this is that he is not normally entitled topayment out of the agent’s assets in priority to other creditors. See,for example, Lister v Stubbs (1890).

Trusts and powers

A power, as explained in Freme v Clement (1881), is an authorityconferred by a donor on a donee to deal with or dispose of propertyowned by the donor. Different types of powers may be conferred ondonees for various purposes.

There are parallels between trusts and powers, since both trusteesand donees of powers are entrusted with responsibility for the propertyof others. The resemblance between trusts and powers is especiallyevident where the power of appointment is concerned. Under such apower, the donee (also called the appointor) is authorised to nominatepersons (who are called appointees) in whom interests in specifiedproperty will vest.

The essential distinction between trusts and powers stems fromthe fact that a trust is imperative and a power is discretionary. Onaccount of the imperative nature of the trust, equity has longmaintained that the beneficiaries who are the objects of the trust are insubstance the owners of the trust property.

By contrast, where a power of appointment is concerned, the objectsof the power own absolutely nothing unless and until the appointorchooses to appoint any part of the property to them. Until then, allthey have is an expectancy that the power will be exercised in theirfavour. At this point, equitable ownership is deemed to vest inwhosoever is entitled to the property in default of appointment,although the latter is liable to be divested upon the exercise of thepower.

One notable consequence of this is that in the case of a trust, whereall the intended beneficiaries are sui juris, it is open to them to bringthe trust to an end and require the property to be conveyed to themunder the rule in Saunders v Vautier (1841). The objects of the power,on the other hand, are in no position to direct the appointor to transferto them the property which is the subject of the power.

Furthermore, where a trustee fails to carry out the terms of the trusthe can be compelled to do so by the court on the insistence of thebeneficiaries, and the court will as a last resort carry out the trust

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itself (for example, where the trustee dies without performing the trustand there are no other trustees). In the case of a power of appointment,however, the court will neither compel the appointor to make anappointment nor will the court undertake the exercise of the power ifthe appointor refuses to or dies without having done so.

There are, however, certain developments in the law which havetended to blur the distinction between trusts and powers. Theseinclude:

• The conferment of powers on trustees: A notable feature of modern-day trusts is that they not only require the performance of duties ofan imperative nature but also provide for the exercise of powers bytrustees. In effect, trusts and powers are now capable of subsistingwithin the same arrangement.

• The extension of the test for certainty of objects for powers to discretionarytrusts: Under a discretionary trust, the settlor typically entrusts thetrustees with the responsibility for determining the manner in whichproperty should be distributed among the members of a specifiedclass. Similarly, under a power of appointment, the donee/appointor is authorised to exercise his discretion in distributingproperty among the members of a class.

A common feature of discretionary trusts and powers ofappointment is that, to be valid, the class of objects must besufficiently certain to enable the trustee or appointor to ascertainwhether a given person is or is not within the class. See Re Gulbenkian(1970) and McPhail v Doulton (1971). In this specific respect, theyboth differ from fixed trusts in favour of a class, which, as we shallsee in Chapter 2 are valid only if it is possible to draw up acomprehensive list of all those within the class.

• The emergence of trust powers: The distinction between trusts andpowers is further blurred by the emergence of what has beenvariously labelled the trust power or power in the nature of a trust.The trust power is an arrangement which on its face appears togive rise to an ordinary power of appointment, but which insubstance is treated as a trust by the courts. In effect, a trust power‘is one which in default of its exercise will be exercised by the courts’per Hoffman LJ in Clarkson v Clarkson (1994).

This super-imposition of trusts on arrangements which wouldotherwise be regarded as powers is exemplified by a line of casesgoing back to Burrough v Philcox (1840). T had left property to S andD specifying that the survivor of the two was to dispose of


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the property in their will amongst such of T’s nephews and niecesas the survivor saw fit. S, who survived D, died without makingany such disposition and the nephews and nieces sought an orderthat the property should be divided among them. The materialclause in T’s will was framed in terms indicative of a power and itmight therefore have been expected that, as no appointment hadbeen made, the objects would have no claim. Their claimnevertheless succeeded because the court could discern anunderlying intention on T’s part that a trust would arise in favourof the whole class in the absence of any appointment. Note, however,subsequent cases such as Re Weekes (1897), Re Combe (1925) and RePerowne (1951) which emphasise that the decision in Burrough vPhilcox will only apply where there is evidence that the donorintended the members of the specified class to benefit if no selectionwas made.

• The erosion of the principle that trusts are imperative and powers arediscretionary:(a) Fiduciary powers: It was seen that because powers are

discretionary, the courts are not prepared to take any actionwhere a power is not exercised. This must now be qualifiedin the light of the decision in Mettoy Pensions Trustees Ltd vEvans (1990) which establishes that where a power is held ina fiduciary capacity such that the donee is bound to considerits exercise, the court may in certain circumstances interveneto compel its exercise where the donee is not in a position todo so.

(b) Trusts of imperfect obligation: It is the case that trusts for certainpurposes (such as the upkeep of animals) are recognised asvalid, even where there are no human beneficiaries to compelthe trustees to perform them. The willingness of the courts touphold these so-called trusts of imperfect obligationcontradicts the fundamental distinction between theimperative character of trusts and the discretionary nature ofpowers.

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2 Creation of ExpressPrivate Trusts


• the three certainties which must be present before a trust canvalidly be declared

• the formal requirements laid down by statute for inter vivosdeclarations of trust and dispositions of equitable interests

• the formal requirements laid down by statute for the creationof testamentary trusts and the avoidance of these requirementsby means of secret trusts

The three certainties

The basic principles

In creating an express trust the settlor must ensure that his declarationis framed in clear, unambiguous terms in order to allow the trustees todischarge their duties properly, minimise the scope for controversyand litigation and enable the courts to carry out the trust if this becomesnecessary. It was thus laid down in such cases as Wright v Atkyns (1823)and Knight v Knight (1840) that the declaration must be certain in threerespects: • the intention to create a trust must be manifest—certainty of intention

(or words);• the property to be held on trust must be certain—certainty of subject

matter;• the beneficiaries must be certain—certainty of objects.

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Certainty of intention (or words)

A trust imposes an obligation on the trustee to hold property inaccordance with the settlor’s directions. Consequently, a trust will bedeemed to have been validly declared only where it is certain that thesettlor intended to create such an obligation.

Ascertaining the settlor’s intention

The settlor’s words

Where it has to be determined whether a trust was intended in anygiven case, the starting point is to consider the language in which thedeclaration was framed, to see whether the settlor’s words aresufficiently imperative to reflect the obligatory character of a trust. ‘Trust’

The most obvious way for a settlor to denote his intention to create atrust is to employ the words ‘trust’ or ‘trustee’ in his declaration. Atthe same time it is evident from the decision in Tito v Waddel (No 2)(1977), that it is not in every conceivable instance where assets areexpressed to be held on trust that the courts will conclude that a trustin the conventional sense has been created. Other imperative words

Given that equity is more concerned with substance than form, thecourts have made it clear in such cases as Re Kayford (1975), Re MultiGuarantee Co Ltd (1987) and Re English & American Insurance Co Ltd(1993), that a settlor may express an intention to create a trust withoutusing the word ‘trust’ or its derivatives. Alternative expressions, suchas beneficial interest, are recognised as appropriate words for creating atrust (see Re London Wine Co (Shippers) Ltd (1975)). Equally, where thesettlor uses such words as ‘I require’ or ‘I direct’ this usually indicatesan intention to create a trust. See, for example, Funnel v Stewart (1996)where the word ‘direct’ was construed as mandatory. The effect of precatory words

The position is less clear-cut where precatory words are employed. AsBrowne-Wilkinson VC explained in Re Hetherington (1989), this istypically the case ‘where there is a gift to an individual and then asuper-added requirement prefaced by such words as confidence [wish,desire, hope, etc]’.

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Before Lambe v Eames (1871)

Until the latter part of the 19th century the Chancellors tended to regarda gift accompanied by precatory words as being indicative of anintention to impose a trust on the donee (see, for example, Harding vGlyn (1739); Palmer v Simmonds (1854); Hart v Tribe (1854); and Gully vCregoe (1857)). The turning of the tide

A change of approach was, however, heralded by Lambe v Eames (1871),where a testator left property to his widow, specifying that ‘it is to beat her disposal as she thinks fit for herself and her family’. The courttook the view that these words were not intended to create a trust andheld accordingly that the widow was absolutely entitled to the propertywith no more than a moral obligation in favour of her family.

This decision has been reinforced by a host of subsequent cases inwhich the courts have refused to enforce as trusts, gifts accompaniedby one form of precatory words or another, including: • Mussoorie Bank v Raynor (1882): ‘Feeling confident that she will act

justly toward our children’;• Re Adams & Kensington Vestry (1884): ‘In full confidence that she

will do what is right as to the disposal…as between my children’;• Re Diggles (1888): ‘It is my desire…’;• Re Hamilton (1895): ‘I wish them…’;• Re Williams (1897): ‘Absolutely, in the fullest confidence that she

will carry out my wishes’;• Re Conolly (1910): ‘I specifically desire’; and• Re Johnson (1939): ‘I request that…’. Exceptional cases where precatory words give rise to trusts

It is not an absolute rule that the use of precatory words in making agift invariably precludes the possibility of a trust. The true position assummed up by Lopes LJ in Re Hamilton is that the court will notordinarily enforce a declaration framed in precatory terms as a trust‘unless on the consideration of all the words employed it comes to theconclusion that it was the intention of the testator to create a trust’.

This position is well illustrated by Comiskey v Bowring-Hanbury(1905). Here T left property to W ‘absolutely, in full confidence’ that Wwould make such use of it as T would have done and that at W’s

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death she would leave it to one or more of T’s nieces as W saw fit. Thewords ‘in full confidence’ would ordinarily have been construed asprecatory (see Re Adams & Kensington Vestry). However, T also specifiedthat if W did not leave the property to one or more nieces, there wouldbe a gift over to all of them. This, in the court’s view, signified that Tintended to create a trust rather than an outright gift in W’s favour(see, also, Re Steele’s WT (1948)). Conduct indicative of an intention to create a trust

Occasionally, the courts have been able to deduce an intention to declarea trust from a combination of words and conduct, where words alonewould be insufficient. In Paul v Constance (1977), C was co-habitingwith P, having separated from his wife, D. He received £950 as damagesfor personal injury which he put in a deposit account. The accountwas in C’s name but he repeatedly told P it was as much hers as his.After C’s death both P and D claimed the balance in the account. Itwas held that C’s statements, coupled with the fact that the accountwas in practice operated by him and P as a joint account, indicatedthat he intended to hold the money on trust for himself and P. See,also, England v Pepper (1989).

Other cases, such as Re Kayford (1925) and Re English & AmericanInsurance Co (1994) establish that where a company receives funds fromcustomers on the footing that it will segregate the funds from its otherincome and assets, this signifies an intention to hold such funds ontrust for the customers, even where no trust has been specificallydeclared. See, also, Re Chelsea Cloisters (1980); Proudfoot v FederalInsurance (1996) and Re Lewis’s of Leicester (1996). (Contrast, however,with Re Multi Guarantee Co (1987).)

Certainty of subject matter

Certainty of subject matter involves two requirements. Outlining theserequirements, Oliver J declared in Re London Wine Co (1975) that:

To create a trust it must be possible to ascertain with certainty notonly what the interest of the beneficiary is, but also to what property it isto attach.

Certainty as to the trust property

Once it is established that a trust was intended, it is necessary todetermine what property is held on trust. The trust is liable to fail


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unless the property is clearly identifiable. For example, if a testatorwho owns several houses in Swansea is unwise enough to devise ‘myhouse in Swansea’ to T to hold on trust for B, the trust is unlikely to beenforced by the court.

Uncertainty regarding the trust property is most likely to presentproblems in the following contexts. Where the trust relates to property forming part of a larger quantity

This type of situation is liable to arise where, for instance:

• A who has just won £100,000 on the football pools, declares that hewill hold £50,000 out of this amount on trust for his son B withoutsetting the £50,000 apart; or

• S who owns £10,000 worth of shares in British Telecom puts themin T’s name, directing T to hold £5,000 worth of these shares ontrust for C, without specifying the actual shares.

It appears from Re London Wine Co that declarations made in theseterms do not operate to create a trust. Here a company sold wine tocustomers on the understanding that, pending delivery, it would storethe wine in warehouses at the customer’s expense. Customers paid inadvance for their orders and were given certificates of title describingthem as beneficial owners of particular consignments but the companydid nothing to segregate the consignment from the rest of its stockuntil delivery was due. It was decided that these consignments werenot held on trust for the various customers. The court’s reasoning wasthat even if the company sought by this arrangement to create a trust,the subject matter was uncertain since the actual consignments werenot set apart from the company’s other stock; the trust would thereforefail. See, also, Re Stapylton Fletcher (1995).

Also instructive is Re Goldcorp Exchange Ltd (1994). Here customerspurchased bullion from Goldcorp for future delivery on the terms thatthey were purchasing non-allocated metal. In spite of the fact that eachcustomer received a certificate of ownership and the right to delivery ongiving seven days notice, the Privy Council held that this did not imposea trust over Goldcorp’s stock of bullion in favour of the customers whoaccordingly did not acquire equitable interests in any part of the stock.

A different conclusion was reached, however, in Hunter v Moss (1993).M, the registered owner of 950 shares in ME Ltd, which had an issuedshare capital of 1,000 shares, declared himself a trustee of 5% of the issuedshare capital in favour of H, without stating which shares out of his 950

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would be held on trust. M subsequently repudiated the trust, claiming,on the authority of Re London Wine Co, that it was invalid for uncertaintyof subject matter. The trial court accepted that where tangible assets, suchas wine, were concerned, specific appropriation, in the mannercontemplated by Re London Wine, was required, since it was quite possiblethat different batches of the same stock might vary in quality or condition.By contrast, intangible assets such as the shares in the present case allcarried identical rights and it made no difference which of M’s 950 shareswere held on trust for H. Consequently, the court had no difficulty inholding that the subject matter of the trust was sufficiently certain, eventhough M had not identified the particular shares involved. This decisionwas subsequently upheld by the Court of Appeal. Where relative words are employed in defining the property

A trust is liable to fail for uncertainty where the property is defined interms that are susceptible to variable interpretations.

This was so in Palmer v Simmonds (1854), where T directed that thebulk of her residuary estate was to go to specified beneficiaries since itwas impossible to determine what T meant by the term ‘bulk’. A similarline of reasoning was adopted in Re Kolb (1962), where T’s will containeda clause directing his trustees to invest in ‘blue chip’ securities. Thecourt considered the expression ‘blue chip’ to be subjective, and, as Thad given no indication as to what he meant by the expression in thepresent context, the clause was held to have failed for uncertainty.

A more flexible approach was adopted in Re Golay’s WT (1965), whereT made a will directing his executors to pay a ‘reasonable income’ to Bwithout specifying what he meant by this. The court refused to holdthat the subject matter was uncertain since ‘reasonable income’ importedan objective standard, capable of being measured by the court havingregard to the standard of living to which B was accustomed. Where property is given to one person subject to a gift over of anunspecified part of the property to some other person

A situation of this nature arose in Sprange v Barnard (1789), where Tleft a sum of money to H, directing that at H’s death any part of thissum, which he did not require, was to go to A, B and C equally. Becauseof the uncertainty regarding what part of the sum would remainunused when H eventually died, the court held that there was no validtrust in favour of A, B and C. See, to the same effect, Re Minchell’s WT(1984). Contrast, however, with Re Last (1958).


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Certainty as to beneficial interests

If the trust makes provision for more than one beneficiary, thedeclaration must be framed in terms which makes it possible toascertain their respective beneficial entitlements.

The issue of certainty of beneficial interest arose in Boyce v Boyce(1849), where T devised his houses to trustees on trust to convey to hisdaughter M whichever one she might choose, with the other to go tohis other daughter, C. M died before choosing and it was held that thetrust in C’s favour would fail because M’s death made it impossible toascertain which of the houses constituted C’s share of the trust property.

Another instructive case is Curtis v Rippon (1820), where T leftproperty to W, trusting that W would make such use of it as would befor her own good and that of their children and ‘remembering alwaysthe church and the poor’. It was held that there was no trust for thechildren, the church or the poor as it was uncertain which part of theproperty W was obliged to hold for their benefit. Exceptions

It is not in every instance where the beneficial interests have not beenspecified with sufficient precision that a trust will fail: • The trust will not fail where the testator or settlor has given the

trustees the discretion to determine the entitlements of the respectivebeneficiaries in any manner they think fit.

• In some instances, the courts are prepared to save the trust fromfailure by invoking the maxim ‘equality is equity’ as the basis fordetermining the shares of the beneficiaries.

• In one notable case, the court went as far as to sanction the drawingof lots as a mechanism for determining the entitlement of themembers of a class of beneficiaries. See Re Knapton (1941).

Certainty of objects

The beneficiary principle

The requirement that the objects of a trust must be certain is based onthe recognition that ‘a trustee would not be expected to be subject toan equitable obligation unless there was somebody who could enforcea correlative equitable right’ per Roxburgh J in Re Astor’s ST (1952). Inthe same vein, Evershed MR declared in Re Endacott (1960) that ‘a trust

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not being a charitable trust in order to be effective must haveascertained or ascertainable beneficiaries’.

A notable consequence of the beneficiary principle is that trustswhich are expressed to be for purposes rather than persons willgenerally be unenforceable. For example, as Russell J signified in ReHummeltenberg (1923), a trust for the purpose of training poodles todance will fail in this account.

Purpose trusts are enforceable, however, where:

• the purpose is charitable (see Chapter 5);• the purpose is one that benefits ascertained or ascertainable persons

(see Re Osoba (1978); Re Denley’s DT (1969));• the trust is a trust of imperfect obligation: for example, a trust for

the upkeep of particular animals (see Re Dean (1899); Mitford vReynolds (1848)); or a trust for the erection or maintenance of aspecified tomb or monument (see Mussett v Bingle (1876); Pirbrightv Salwey (1896); Re Hooper (1932)).

Determining whether the beneficiaries are sufficiently certain in relationto gifts to named individuals

Where the settlor or testator, in declaring the trust has specifically namedthe beneficiary or beneficiaries (for example, ‘£10,000 to T on trust formy friend John Doe’), there is little likelihood that the gift will fail unlessthere is evidence that he knows two or more persons so named. Gifts to individuals identified by description

Where a settlor does not name the object of his bounty but employs adescriptive term, the issue at stake is whether the descriptionindisputably fits a particular person. A gift of this nature is unlikely tofail for uncertainty, where, for instance, T in his will leaves £10,000 ontrust for A’s eldest son and at T’s death A has two sons aged 21 and18. By contrast, there would be uncertainty if T leaves £10,000 on trustfor A for life, remainder to his wife, and at the time of the gift A is notmarried but later marries and divorces twice, and remains a divorceeat the time of his death. Gifts to persons as members of a class

Where property is left on trust, not for specified individuals, but formembers of a class, the requirement of certainty dictates that thetrustees must be in a position to identify who belongs to the class.


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In many cases, this requirement is easily fulfilled. There will be nodifficulty, for instance, where T in his will devises Blackacre to trusteeson trust for his children and it is well known that T was survived bytwo sons and a daughter. Equally, where T leaves £10,000 on trust forthe surviving members of the England football squad who won the1966 World Cup, there is every likelihood that the identities andwhereabouts of the intended beneficiaries can be discovered by delvinginto official records.

However, it is not every gift expressed to be for the benefit of themembers of a class that will be attended by such certainty. As seenfrom Brown v Gould (1972); Re Baden’s DT (No 2) (1973) and AnangelAtlas and Others v Ishikawajima-Harima (No 2) (1990), such a lack ofcertainty may be evident on a number of different levels: • the language used to define the class may be susceptible to several

meanings, thus giving rise to conceptual uncertainty;• the language which is used may be certain, but the means of

discovering who falls within the class may be unavailable, thusgiving rise to evidential uncertainty;

• there may be no difficulty in identifying every member of the class,but the element of ascertainability may be lacking in the sense that itis impossible to determine the whereabouts of every single memberof the class;

• the class as defined may be so wide and amorphous that the trustis rendered administratively unworkable.

In determining whether the objects of a trust are sufficiently certain,the courts are guided by different tests, depending on whether thetrust is a fixed or a discretionary trust. Fixed trusts

There is a fixed trust where the settlor or testator prescribes the interestsor shares of the beneficiaries.

The fixed trust may be in favour of named persons; for example,£10,000 on trust for A, B, C and D in equal shares; or £10,000 on trustfor E and F for life, remainder to G and H. In such instances therequirement of certainty of objects presents no problems.

On the other hand, a fixed trust may be declared in favour of the membersof a designated class; for example, £100,000 on trust for all the employeesof a specified organisation in equal shares. In trusts of this nature, the settlor’sdirections can only be carried out where the size of the class and identities

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of all the members are known to the trustees or capable of ascertainment.It has accordingly been held in IRC v Broadway Cottages Trust (1955), ReGulbenkian’s ST (1970) and McPhail v Doulton (1971) that for such trusts,the test for certainty is whether it is possible to make a comprehensive list,which accurately includes the names of all those who are beneficially entitled,while excluding all those who fall outside the class.

Where it is not possible to draw up such a list, the trust will fail,whether this is due to conceptual or evidential uncertainty. For example,a gift of £10,000 on trust for ‘my old friends’ in equal shares will failon the basis of conceptual uncertainty (see Re Gulbenkian and Brown vGould (1972)); as would a gift on the same terms for the benefit of ‘allthose persons who have a moral claim on me’ (see Re Baden’s DeedTrusts (No 2) (1973)). On the other hand, where trustees are given£100,000 to be divided equally among all those who were pupils of anamed school between 1930 and 1939 there will be no conceptualuncertainty regarding the class. Assuming, however, the school’srecords were all destroyed in a bombing raid during the Second WorldWar, the gift may fail on account of evidential uncertainty unless thematerial information can be derived from some other source.

By contrast, where there is conceptual as well as evidential certaintybut the whereabouts or continued existence of some of the beneficiariescannot be ascertained, it has been argued that this will not make thegift fail, since the share of such beneficiaries can be paid into court.See Emery (1982) 98 LQR 551. Discretionary trusts

A settlor who declares a trust in favour of a class may, instead of fixingthe shares to be taken by individual members, confer a discretion onthe trustee to determine their shares. Prior to 1970, the test for certaintyfor such discretionary trusts was that applicable to fixed trusts (see ReOgden (1933); IRC v Broadway Cottages (1955), and Re Sayer (1957)).This meant that even if the trustee was content to distribute the trustproperty among a limited section of the discretionary class alreadyidentified by him, the trust was nevertheless liable to fail if it wasimpossible to list every member of the class. McPhail v Doulton (1971)

Since 1970, when the House of Lords delivered judgment in this case,discretionary trusts have been subject to a different test. In this case, Bexecuted a deed establishing a fund for the benefit of the employees


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of a company. By cl 9 of the deed, the trustees were given a discretionto apply the income of the fund in making grants to or for the benefitof officers and employees or ex-officers and ex-employees of thecompany and their relatives and dependants. It was common groundin the trial court and the Court of Appeal that if cl 9 created adiscretionary trust it would fail for uncertainty of objects, since it wouldprove impossible to draw up a comprehensive list of all the relativesand dependants of employees. To avert this possibility both courtsfound that cl 9 did not create a discretionary trust but a power. Thisenabled them to hold that it did not fail for uncertainty since a lessstringent test had been formulated for powers in such cases as ReGestetner (1953); Re Gulbenkian and, most recently, Hinves v Brooks(1990). These authorities had established that where a power wasconcerned, the decisive issue was whether it could be said with certaintythat any individual is or is not a member of the class in whose favour thepower was exercisable. By contrast, the House of Lords found that cl 9created a discretionary trust rather than a power. By a majority of threeto two, the House rejected the prevailing view that the test for certaintyfor a discretionary trust ought to be the ‘comprehensive list test’preferring, instead, to adopt the ‘is/is not’ test applicable to powers.Elaborating on this, Lord Wilberforce explained that trustees of adiscretionary trust were not bound to consider every potentialbeneficiary and thus it was not necessary to be able to ascertain all thebeneficiaries for the trust to be valid. All that was required was for thetrustees to be able to survey the whole field to gain a general impressionas to its size and for them to be able to say whether any given claimantfell within or outside the field.

The case was then remitted to the High Court (under the name ReBaden’s Deed Trust (No 2)) to determine whether cl 9 and, in particular,the terms ‘relatives’ and ‘dependants’ satisfied the new test andBrightman J held that they did. In the ensuing appeal, it was contendedthat even on the basis of the ‘is/is not’ test, the term ‘relation’ wasuncertain since it could not be conclusively determined that one personwas not the relation of another. In rejecting this contention, the Court ofAppeal indicated that the term ‘relation’ was not conceptually uncertain,which would undoubtedly have invalidated the trust. In the view ofSachs and Megaw LJ, even if there was a measure of evidential uncertaintysurrounding whether a person was not the relation of another this didnot mean that the trust would fail on the basis of the ‘is/is not’ test.According to Sachs LJ, whether a person fell within the class of relationsof employees was a question of fact and if a person was not proved to

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be a relation of an employee then he should be treated as not beingwithin the class for purposes of the trust. For his part, Megaw LJ reasonedthat when dealing with a class such as relations, once it was possible tosay that a substantial number of persons are within the class, the trustwould be deemed valid even if it could not be said whether some otherpersons fell within or outside it. By contrast, Stamp LJ chose to adopt astrict literal approach to the ‘is/is not’ test. In his view, if the term relationwas construed as persons descended from the same ancestor the trustwould have failed for uncertainty as the appellants contended. He,however, took the term to mean next of kin or nearest blood relations,and held that the class as so defined was sufficiently certain, since itcould be said of any given person whether he was within or outside it. Curing uncertainty by reference to opinions of third parties

Commentators like Hanbury and Martin maintain that where the classof beneficiaries is defined in terms that import an element of conceptualuncertainty into the trust, this uncertainty may be cured where thesettlor provides that the trustee or some third party is to determinethe meaning to be ascribed to such terms. In Re Tuck’s ST (1978), forinstance, a settlor made a gift for the benefit of persons of Jewish bloodwho continued to worship according to the Jewish faith, directing thatin case of dispute or doubt as to who would qualify, the opinion of theChief Rabbi would be conclusive. It was held that even if there wasuncertainty as to what was meant by worshipping according to theJewish faith, this direction made the gift valid.

On the other hand, other commentators (such as Matthews (1983)NLJ 913 and Riddall in Law of Trusts) express doubts as to whetherconceptual uncertainty can be cured, arguing that: if the description of the class was conceptually uncertain then it wouldbe no more possible for a private person to make a rationaldecision…than it would be for the court to do so. Failure on the ground of administrative unworkability

Another important dimension of Lord Wilberforce’s judgment inMcPhail was his assertion that a discretionary trust would be void ifthe meaning of the words used in defining the objects thoughconceptually certain ‘is so hopelessly wide as not to form anythinglike a class so that the trust is administratively unworkable’ (forexample, a discretionary trust in favour of all the residents of Greater


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London). Lord Wilberforce did not proffer any persuasive reason whya discretionary trust should be void on this account and McKaysuggested in (1974) 38 Conv 269 that there was no justification for hisview on the basis of either administrative feasibility or judicialexecution. Despite such reservations, the notion of administrativeunworkability was adopted in R v District Auditor ex p West YorkshireMetropolitan CC (1986), where Lloyd J held that a trust in favour of anyor all or some of the inhabitants of West Yorkshire was void on thisbasis.

Although the criterion of administrative unworkability wasformulated in the context of discretionary trusts, it seems that it willalso be material where a fixed trust is declared in favour of a classwhich is so hopelessly wide that it would be entirely impracticable forthe trustees to share the property among the class (see Riddall, p 29). Trusts with a power of selection

Where the trustee or a third party is empowered to select beneficiariesfrom a specified class, the settlor will sometimes be deemed to haveintended that the members of the class should take equally in defaultof selection (as happened for instance in Burrough v Philcox (1840)). Insuch cases, the test for powers/discretionary trusts will at the outsetdetermine whether the class is sufficiently certain. But if the selectionis not made, a fixed trust comes into being, and whether or not theclass is sufficiently certain will now depend on the stricter test laiddown in IRC v Broadway Cottages (1955). Gifts which are expressed to be subject to a condition precedent

A distinction is drawn between a discretionary trust in favour of aclass and a gift or series of individual gifts subject to a conditionprecedent. The latter is a gift which does not confer on the prospectivedonee an interest in the property unless and until he has met aparticular condition or qualification. For instance: • if S gives £500,000 to T with directions to distribute this sum among

the old friends of S in whatever shares T may determine, adiscretionary trust comes into being;

• by contrast, if S gives the £500,000 to T with instructions to pay£100 to each of S’s old friends, this gives rise to a series of gifts infavour of each person who fulfils the condition or descriptionprescribed by S.

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Where a gift of this nature is concerned, the basis for determiningwhether the objects of the gift are sufficiently certain is to considerwhether it is possible to say of at least one person that he or she satisfies thecondition or description. This test is less rigorous than the test fordiscretionary trusts laid down in Re Allen (1953) and endorsed in ReBarlow’s WT (1979). Here, T had directed her executors to allow anymember of her family or any friends of hers to purchase any paintingsbelonging to her at prices below their true value. Ordinarily, ‘friend’would be regarded as a conceptually uncertain word. However,Browne-Wilkinson J held that friendship as employed here was nomore than a condition or qualification for exercising the option topurchase and that once there were any persons, who, on account oftheir long standing social connection with T, fitted the description, thegift would be valid.

Formalities for the creation of trusts

The process of establishing the existence and terms of a trust isgreatly facilitated where it is embodied in writing or supported bydocumentary evidence. However, equity did not at the outsetrequire writing or any other formalities for the creation of expresstrusts.

Statute has since intervened with the result that writing is now aformal requirement with regard to both inter vivos and testamentarytrusts. The most important of these provisions are set out in the Lawof Property Act (LPA) 1925 (inter vivos trusts) and the Wills Act (WA)1893 (testamentary trusts).

Inter vivos trusts

Trusts of pure personalty

Where the subject matter of a proposed trust is personalty, writing isnot required for the declaration of trust to be effective (see Petty v Petty(1853); Re Kayford (1975) and Paul v Constance (1977)).

Trusts of land

For centuries, land was the most valuable asset a person could ownand a high premium has traditionally been placed on the preventionof fraud in dealings connected with land. To this end, it has been afeature of English law since the enactment of the Statute of Frauds

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1677 that dealings in land must either be done in writing or supportedby written evidence.

With specific reference to trusts of land, s 53(1)(b) of the LPAprovides that a declaration of trust respecting land or an interest inland must be manifested and proved by some writing signed by someperson able to declare the trust.

This requirement is especially important to purchasers of land heldon trust in the light of the provision in s 14(2) of the Trustee Act 1925that the purchase price must be paid to at least two trustees.Appropriate documentation helps ensure that such purchasers areaware that the land is held on trust and reduces the risk of inadvertentnon-compliance with the ‘two trustee’ rule.

A recent example of the operation of this provision is seen in Bristol& West Building Society v Pritchard (1994) where Mr and Mrs P, whowere the registered owners of a house, mortgaged it to the BuildingSociety. The Building Society subsequently obtained a possession orderin respect of the house, whereupon the three children of Mr and Mrs Pclaimed an equitable interest in the house on the ground that it hadbeen conveyed to Mr and Mrs P by Mr P’s mother on the footing thatthey would hold it on trust for the children. This claim was, however,rejected by the court which held that even if such a trust had in factbeen declared, it was not supported by evidence in writing as requiredby s 53(l)(b).

It is noteworthy that the actual declaration need not be in writing.A document acknowledging a prior oral declaration will be admissibleunder s 53(l)(b) if executed before the date on which legal action istaken to enforce the declaration (see Forster v Hale (1798); Childers vChilders (1857) and Mcblain v Cross (1871)).

The proper party to sign the document is the person able to declarethe trust (that is, the owner of the land or interest therein which is thesubject matter of the trust). The signature of an agent will not suffice(see Re Northcliffe (1925)).

Given that the requirement of writing was introduced to preventfraud, the courts have been prepared to dispense with it in cases wherethey find that it is being used as a cloak for fraud. Thus, in Rochefoucauldv Bousted (1897), A was the mortgagor of property in Ceylon. Themortgagee sold the property to B, who then sold it for a larger sumthan he paid for it. A claimed that B held the property on trust for herand was liable to account to her for the proceeds of the subsequentsale. There was no written evidence of the trust but the court foundsufficient proof that B had orally undertaken to hold the property on

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trust for A, and concluded that it would be fraudulent for B to denythe trust because writing was absent. To prevent this, the undertakingwas enforced as an express trust.

In more recent cases such as Bannister v Bannister (1948) and Hodgsonv Marks (1971), the courts have preferred to give effect to verbalundertakings to hold land on trust, not as express trusts but as resultingor constructive trusts, relying on the fact that s 53(2) of the LPA providesthat the requirement of writing does not extend to these categories oftrusts.

Subsisting equitable interests

The owner of an equitable interest in property (whether arising undera trust or by other means) may wish to transfer the benefit of his interestto some other person. This can be done in three ways: • by declaring himself a trustee of the interest for the benefit of the

donee;• by assigning the interest to some other person to hold on trust for

the donee;• by assigning his interest directly to the intended donee. In this regard s 53(1)(c) of the LPA provides that: …a disposition of an equitable interest or trust subsisting at the timeof the disposition must be in writing, signed by the person disposingof the same or by agent thereunto lawfully authorised in writing. The requirement of writing in this context stems from the fact thatequitable interests are intangible, which means that unless successivetransfers are well documented, spurious claims are likely to proliferateand trustees as well as potential purchasers of such interests will find itdifficult to ascertain where equitable ownership lies in any given case. Points of divergence between s 53(1)(b) and s 53(1)(c)

There are several points of divergence between s 53(1)(b) and s 53(1)(c).In particular: • s 53(1)(b) applies only to trusts of land; whereas s 53(1)(c) applies

with equal force to an equitable interest in personalty (see Grey vIRC (1960) and Vandervell v IRC (1967)); and in land (see Ivin v Blake(1993));


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• under s 53(1)(b), written evidence of a prior oral disposition willsuffice, while under s 53(1)(c) the disposition itself must be in writing;

• it has been decided in Veale v Commrs of Customs & Excise (1996)that for a declaration of trust of land under s 53(1)(b) to be effective,the writing must contain all the terms of the trust. By contrast, itwas accepted in Re Tyler’s Trust Deed (1967) that a documentdirecting a trustee to hold a subsisting equitable interest on trustwould satisfy the requirement of writing in s 53(1)(c) even if therelevant document did not contain all the terms of the trust;

• s 53(1)(c) allows the relevant document to be signed by an agentwhile s 53(1)(b) does not;

• finally, the inclusion of the word subsisting in s 53(1)(c) means thatwhere a person who owns a legal estate or interest in propertydeclares a trust of such property, this will not be covered by thisprovision. Such a declaration will operate to create a new equitableinterest rather than dispose of a subsisting equitable interest. If,however, the property in question is land or an interest therein,such a declaration will be subject to the requirement in s 53(1)(b).

Which dispositions fall within the ambit of s 53(1)(c)?

There has been a certain amount of debate concerning the types ofarrangements which can properly be regarded as dispositions for thepurpose of s 53(1)(c). Many of the cases in which the courts have hadto pronounce on such arrangements have involved disputes over thepayment of stamp duty and other taxes. These cases will be dealt withunder the following headings. Assignment of equitable interest to trustee

Where S, the owner of an equitable interest, sets out to assign thisinterest to B, or to T to hold on trust for B, such an assignment will bea disposition within the meaning of s 53(1)(c) and will thus be void ifit is not made in writing. Direction to trustee to hold on trust for another party

Where S transfers property, to which he is absolutely entitled, to T ashis nominee, so that the legal title is vested in T but S remainsbeneficially entitled to the property, and S directs T at a later date tohold the property on trust for B, this direction is a disposition andmust therefore be in writing. See Grey v IRC (1960). See, also, Crowden& Another v Aldridge (1993) where Grey v IRC was reviewed.

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Transfer of legal title by trustee on the direction of the beneficiary

Where S, after transferring property to T to hold as his nominee, directsT to transfer the property outright to B (rather than to hold it on trustfor B), it emerges from Vandervell v IRC (1966) that this will not betreated as a disposition. In effect, once T, acting pursuant to S’sinstruction, effectively passes the legal title to B, there is no furtherneed for S to divest himself of his equitable interest by means of awritten disposition in B’s favour. Declaration of new trust by trustee with consent of beneficial owner

Where T, who is holding property on a resulting trust for S, declares himselfa trustee of the property for B’s benefit with S’s knowledge and consent,it appears from Re Vandervell (No 2) (1974) that this is not treated as adisposition under s 53(1)(c). Instead, it operates to extinguish the resultingtrust in favour of S and replaces it with a trust in favour of B even whereS has executed no document divesting himself of his equitable interest. Oral contract to assign a subsisting equitable interest

Where the owner of an equitable interest agrees orally to assign it toanother person for valuable consideration, judicial opinion is dividedon the applicability of s 53(1)(c) to such an arrangement. A situation ofthis nature arose in Oughtred v IRC (1960). In this case, 200,000 shareswere held on trust for M for life, with remainder to her son, S. Theyentered into an oral contract under which S agreed to surrender hisinterest in the shares to M in exchange for other shares owned by M.Together with the trustees, M and S later executed a deed declaringthat the 200,000 shares were now vested in the trustees on trust for Mabsolutely and the trustees also executed a deed transferring the sharesto M. The issue at stake was whether ad valorem stamp duty waspayable on the transaction. Upjohn J held that, on making the oralcontract, S had become a constructive trustee of his equitable interestin the shares for M. Writing was not required to achieve this result,since s 53(2) excepted constructive trusts from the requirement ofwriting in s 53(1). This meant that ad valorem stamp duty, which waspayable on instruments transferring beneficial ownership of shares,was not payable here, as beneficial ownership passed to M, not underthe trustee’s deed of transfer, but under the oral contract.

This was, however, reversed by the Court of Appeal, and on furtherappeal to the House of Lords, the majority of the Law Lords, includingLord Denning, agreed with the Court of Appeal that ad valorem stamp


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duty was payable on the deed of transfer. In coming to this conclusion,he stated that he did not think that the oral agreement was effective totransfer M’s equitable interest to S.

In his view, s 53(1)(c) clearly made writing a necessity to effect sucha transfer and s 53(2) did not do away with this necessity.

An opposing viewpoint was expressed by Lord Radcliffe, whodelivered one of the two dissenting judgments. Lord Radcliffe, likeUpjohn J, held that under their oral contract, S had become the trusteeof his equitable interest for the benefit of M and that s 53(2) served toensure that the trusteeship would not fail for non-compliance with s53(1)(c).

Recent cases such as United Bank of Kuwait v Sahid (1995) and Nevillev Wilson (1996) suggest that opinion remains divided on whether therequirement of writing in s 53(1)(c) can be dispensed with where thereis an oral contract to assign an equitable interest. In United Bank ofKuwait v Sahib (1995), Chadwick J appeared to favour the stanceadopted by Lord Denning in Oughtred, arguing that ‘it cannot be rightthat an oral contract can transfer an equitable interest in property whenan oral disposition cannot’. This view was however expressed per obiter,since the judge himself conceded that it was not necessary to decidethe point in the case before him.

On the other hand, in Neville v Wilson (1996), the Court of Appealdecided, in line with the reasoning of Lord Radcliffe, that an oralagreement relating to the transfer of the equitable interest in shareswas not rendered ineffectual by the fact that it did not comply with s53(1)(c). In this case, shareholders of J Ltd informally agreed to liquidatethe company. J Ltd was the registered owner of all the shares in U Ltd,apart from 120 shares which were held by two directors of U Ltd asnominees for J Ltd. The agreement provided inter alia that the assets ofJ Ltd (including its equitable interest in the 120 shares) were to bedistributed rateably among its shareholders. The court had todetermine whether this unwritten agreement would operate to conferon each individual shareholder an equitable interest in the 120 shares,proportionate to his shareholding. Nourse LJ held that the effect ofthe agreement was that each shareholder agreed to assign his interestin the other shares of U Ltd, in consideration for the assignment bythe other shareholders of their interest in his aliquot share. In so doing,each shareholder became a constructive trustee of the shares for allthe others, so that every shareholder acquired an equitable interest inthe shares by virtue of s 53(2), even though there had been no writtendisposition as required by s 53(1)(c).

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Declaration of self as trustee

Where T holds property on trust for S and S proceeds to declare himselfa trustee of his interest for B’s benefit, will s 53(1)(c) apply? It appearsfrom Grainge v Wilberforce (1889) and the judgment of Upjohn J in Greyv IRC, that the effect of such a declaration with nothing more is that Bwill be in a position to require T to convey Blackacre according to B’sdirections, with S dropping out of the picture. In effect, such anarrangement is more in the nature of a disposition as contemplated bys 53(1)(c) than an ordinary declaration.

The position is less clear cut where S, in declaring the trust, reservesfor himself some active responsibilities as a trustee (for example, wherethe trust in question is a discretionary trust in favour of B and otherbeneficiaries). It has been suggested on the authority of Re Lashmar(1891) that in such an event S does not drop out of the picture, whichmakes the arrangement more akin to a declaration than a disposition.This is disputed by Green (1984) 47 MLR 395, pp 395–99, who contendsthat it is more appropriate to treat it as a disposition which musttherefore be in writing in accordance with s 53(1)(c).

Testamentary trusts

Statutory formalities for testamentary gifts

A person who wishes to dispose of his property on his death isordinarily required to execute a will. Such a will is required to complywith the formalities in s 9 of the Wills Act 1837 as amended by s 17 ofthe Administration of Justice Act 1982. It must be in writing and signedby the testator or some other person by his direction and in his presence.This signature must be made or acknowledged by the testator beforetwo or more witnesses and each witness must sign the will oracknowledge his signature in the testator’s presence.

This requirement applies not only where the testator wishes theproperty to pass outright to the intended beneficiary, but also wherehe wishes it to be held on trust for the beneficiary. The terms of thetrust must be set out in the will or in a codicil or in some other documentincorporated by reference into the will.

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Secret trusts

Occasions have often arisen in which a testator (T) has devised orbequeathed property in his will to a devisee (D) or a legatee (L) andduly notified D or L that he wishes him to hold the property on trustfor the benefit of a third party (B) who is not mentioned in the will. Inother instances, T leaves property to D or L, but extracts an undertakingfrom D or L that when D or L dies he shall in turn leave the property toB, as happened in Ottaway v Norman (1972).

In either of these instances, any claim by B will fail under thecommon law, since his interest has not been specifically provided forin T’s will. By contrast, equity has shown itself to be less rigid in itsapproach to situations of this nature and will in appropriate instancescompel D or L, as the case may be, to give effect to T’s intention byimposing a secret trust on him.

Secret trusts are capable of arising not only where wills are involved,but also where T, in our example, refrains from making a will becausethe person to whom the property will devolve if T dies intestate promisesto hold it on trust for B once T dies (see Stickland v Aldridge (1804)). Fully secret trusts distinguished from half secret trusts

A fully secret trust (FST) arises where no indication is given in the willof the existence of the trust, such that on the face of it the person towhom the property is left is to take beneficially; for example, whereT’s will contains a legacy of £10,000 in favour of L, but before or afterexecuting the will, T directs L to hold the sum on trust for B when hereceives it.

A half secret trust (HST) arises where it is clear on the face of the willthat the person to whom the property is left is to hold on trust, but thebeneficiaries are not disclosed in the will; for example, where T leaves£10,000 to L with a direction to hold the sum on trust for objectscommunicated to him, and, before executing the will, T instructs L tohold the sum on trust for B.

Note: It is not in every instance where T specifies that L should applythe property in a manner communicated elsewhere, that a HST comesinto being. T might, for example, leave £10,000 to L stating in the willthat he does so ‘in full confidence’ that L will apply this sum ‘towardsthe objects which I have communicated to him’ (or employing otherwords which can be construed as equally precatory). It would seemthat this will not constitute a HST, since L can argue with justificationon the strength of Lambe v Eames that a trust has not arisen on the face

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of the will. There might nevertheless be a FST, provided thecommunication referred to in the will was framed in sufficientlyimperative terms to impose a trust (see Re Spencer’s Will (1887)). Conditions for the enforcement of the FST

As explained by Brightman J in Ottaway v Norman (1972), threeconditions must be present before a fully secret trust will be upheld,namely: intention, communication and acceptance. Intention

T must employ words which evince a clear intention on his part toimpose a binding obligation on L to hold the property left to him ontrust for B. If the words suggest that T intended to leave it open to L todecide whether or not to apply the property for B’s benefit, there willbe no FST. In McCormick v Grogan (1869), T left all his property to L inhis will, stating in an accompanying letter addressed to L that, ‘I leaveit entirely in your good judgment to do as you think I would if living’.It was held that there was no FST. There was also no trust in Re Snowden(1979), where T left her residual estate to her brother, stating that hewould know what to do and asking that he should ‘see to everybodyand look after the division for her’. Communication

The relevant intention must be communicated by T to L during T’slifetime. The communication may be made either before or afterexecuting the will. If T dies without communicating his intention, Lwill be entitled to take the property beneficially even if evidence lateremerges establishing that T, in fact, intended L to be a trustee (seeWallgrave v Tebbs (1855)).

The terms of the trust (especially the nature/identity of the propertyand the intended beneficiaries) should ordinarily be specified in thecommunication. This means, for instance, that where T communicateshis intention to create the trust to L but does nothing more in his lifetimeto communicate its terms, and a letter containing the terms comes tolight after T’s death (as happened in Re Boyes (1884)), the FST will fail.At the same time, it was emphasised by Kay J in Re Boyes that if aletter setting out the terms was handed over by T to L, even if it wascontained in a sealed envelope not to be opened by L until T’s death,this would be treated as constructive communication, and L would bebound by the trust (see, also, Re Keen (1937)).


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Acceptance

Effect will be given to the FST only where L has accepted that he willcarry out the trust. Where there is no such acceptance because T’sintention was not communicated, L will be entitled to take the propertybeneficially (Wallgrave v Tebbs (1855)).

The position is less certain where S has communicated his intentionto L who has declined to hold as trustee, but T nevertheless leaves theproperty to him. One possibility is that L will hold on a resulting trustfor T’s estate, on the premise that the communication has negativedany intention to make an outright gift. Another possibility is that Lwill be entitled to take beneficially, since it is equally arguable that byleaving the property to L, knowing full well that L had declined thetrust, T was evincing an intention that L should take beneficially.

Acceptance will in most cases be express, but the courts aresometimes prepared to imply acceptance on the basis of tacitacquiescence, where T’s intention has been communicated to L andhe remains silent (see Moss v Cooper (1861) and Ottaway v Norman).

Once the details of the intended trust have been communicated toand accepted by L, any additions to the subject matter or objects willonly be enforceable if duly communicated and accepted. In Re ColinCooper (1939), T bequeathed £5,000 to L1 and L2, stating in the willthat they were to hold on trust. The terms of the trust had been madeknown to and accepted by them before the will was executed. T laterexecuted a codicil increasing the legacy to £10,000, without notifyingL1 and L2. It was held that the first £5,000 was subject to the secrettrust but not the second £5,000. This case was concerned with a HST,but the principle enunciated would seem equally applicable to FSTs. Acceptance where there are two or more legatees/devisees

Where T makes a will which on its face passes property to L1 and L2but intends that they should hold it as co-trustees for B, both L1 andL2 will be bound by the trust provided the intention has been dulycommunicated to and accepted by them.

Where the trust is communicated to L1 alone, there is the problemof whether his acceptance is binding on L2 or whether L2 will take ahalf share of the property beneficially. This problem was addressed inRe Stead (1900), by Farwell J, who signified that the position woulddepend on whether it was contemplated in the will that L1 and L2would hold as tenants in common or joint tenants.

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Tenants in common

Where the property passes under the will to L1 and L2 as tenants incommon (for example, ‘to L1 and L2 in equal shares’), each of them istreated as having a separate and distinct, albeit undivided interest inthe property. Accordingly, where L1 alone accepts that he will hold iton trust, Re Stead establishes that L2 will not be bound by the trust. Joint tenants

Where the intention is that L1 and L2 shall hold the property as jointtenants (for example, ‘to L1 and L2 jointly’ or ‘to L1 and L2’) aquestionable distinction has been drawn by Farwell J betweencommunication/acceptance before the execution of the will andcommunication/acceptance after its execution.

If the gift is to L1 and L2 jointly and, before the will was executed L1accepted that he and L2 would hold it on trust, L2 is bound by the trust.By contrast, if the communication/acceptance occurred after the willwas executed, L2 will not be deemed to be bound by the trust. FarwellJ was not entirely convinced of the merit of this distinction and it hasbeen criticised by B Perrins in (1972) 88 LQR 237 and by textbook writerssuch as Parker and Mellows, and Pettit. Significantly, however, no latercase has overturned the decision in Re Stead and it still represents thelaw. Conditions for the enforcement of the HST

Whereas FSTs have been judicially enforced for many years, the courtswere less forthcoming in according recognition to HSTs untilcomparatively recently. It was only in Blackwell v Blackwell (1929) thatit was decisively settled by the House of Lords that it would enforcesuch trusts. In this case, the court upheld a legacy of £12,000 given byT to L1-L5 on trust ‘for purposes indicated by me to them’.

Intention, communication and acceptance are as material to HSTsas they are to FSTs. Intention

A HST is by definition one in which the existence of the trust is manifestin the will. A HST is therefore incapable of arising unless the materialintention to impose the trust is proclaimed with sufficient certainty byT in the will itself.


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Communication

A HST will fail if it has not been effectively communicated to L. Thus,for instance, in Re Atkinson (1978) a gift to trustees to sell certain propertyand divide the proceeds between such worthy causes as had beencommunicated by the testator to the trustee, did not give rise to a halfsecret trust because the intended objects were never communicated.

The question of what amounts to effective communication wasconsidered at some length in Re Keen (1937), where T bequeathed£10,000 to his executors ‘to be held on trust and disposed of by them…as may be notified by me’. Before executing the will, T handed theman envelope listing the objects of the trust, directing them not to openit till he died. It was held: • that the words ‘as may be notified by me’ suggested that the objects

would be communicated after the will was executed, whereas thehanding over of the sealed envelope was in effect communication beforeexecution, and that the trust would fail on account of this inconsistency;

• that even if the mode of communication adopted was consistentwith the future communication referred to in the will, the rule inthe case of HSTs was that the objects must be communicated beforethe trust was executed. The present trust also failed on this ground.This prior communication rule was also accepted in Blackwell vBlackwell (1929) and was confirmed more recently in Re Bateman’sWT (1970). This is somewhat surprising, given that FSTs are deemedenforceable, whether the communication of the testator’s intentionwas before or after execution. J Mee pointed out in [1992] Conv202, that this distinction between FSTs and HSTs has been ‘almostuniversally reviled’ and this is borne out by the criticisms of theprior acceptance rule by others such as Holdsworth (1937) 53 LQR501; and Sheridan (1951) 67 LQR 413.

Acceptance

As far as acceptance is concerned, the applicable rules are similar forboth types of secret trust. The only noteworthy points concern thesituation under a HST where two or more persons are named in thewill as co-trustees. The basic rule here is that they will hold the propertyas joint tenants so that the aspect of the decision in Re Stead dealingwith the position of tenants in common is immaterial to HSTs.Moreover, because of the requirement that communication must bemade before the will is executed, it follows that acceptance by any oneof the co-trustees will invariably bind the others.

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The basis for the enforcement of secret trusts

Fraud

The traditional justification which has long been advanced forupholding secret trusts, even though they do not comply with theformalities laid down by statute, is the prevention of fraud. In McCormickv Grogan (1867), for instance, Lord Westbury observed that ‘thejurisdiction which is invoked here is a jurisdiction which is foundedaltogether on personal fraud’; while in Blackwell, Lord Sumnerexplained that ‘for the prevention of fraud, equity fastens on theconscience of the legatee, a trust’.

The difficulty with this approach is that the character of thefraudulent design which warrants the enforcement of secret trusts isnot entirely clear.

One view associates fraud with unjust enrichment, and proceeds onthe premise that not giving effect to the trust enables the legatee or deviseeto take the property beneficially, thereby unjustly enriching himself. See,for example, Drakeford v Wilkes (1747) and McCormick v Grogan.This explanation is, however, open to question on two grounds. • It has been argued that if the paramount consideration is to prevent

unjust enrichment, all that is required would be to direct theproperty to be held on a resulting trust for the testator.

• Even if unjust enrichment provides a rationale for enforcing a FST,the same is not true of a HST which affords little scope for thelegatee/devisee to claim the property beneficially.

An alternative explanation put forward by the courts is that the fraudstems not from the possibility of unjust enrichment but from the veryfact that unless the trust is upheld, the wishes of the testator will be thwartedand the beneficiaries will be deprived of their entitlement. See, for example,Riordan v Bannon (1876) and Re Fleetwood (1880) and the judgments ofViscount Sumner and Lord Buckmaster in Blackwell v Blackwell (1929).

This explanation is favoured by Hodge, who maintained in (1980)40 Conv 341 that the prevention of fraud, as thus perceived, is equallymaterial whether one is dealing with a FST or a HST.

By contrast, others, such as Oakley (Constructive Trusts, p 118),consider it impossible to regard this argument as a valid justificationfor recognising secret trusts. He maintains that it is inappropriate torefer to the terms of the secret trust as the wishes of the testator and todescribe those entitled under the secret trust as beneficiaries, unless

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evidence of the terms of the trust is admitted contrary to the WA (1837);and he concludes that ‘it is not possible to use as justification foradmitting evidence contrary to the provisions of the Act, facts whichcan only be proven if such evidence is admissible’. The ‘Dehors’ theory

In the light of the unresolved difficulties inherent in the fraud theory,an alternative explanation has gained widespread acceptance amongjudges and academic commentators. This is that, contrary to initialappearances, they are not trusts created by will but arise dehors (thatis, outside and independent of) the will. According to Lord Warrington,in Blackwell, ‘what is enforced is not a trust imposed by will, but onearising from acceptance by the legatee of a trust communicated to himby the testator’. See, also, statements to the same effect by DankwertsJ in Re Young (1951) and Megarry VC in Re Snowden (1979).

According to this theory, the declaration of the trust is inter vivos,consisting of the communication and acceptance which occur in thetestator’s lifetime. Accordingly, it need not comply with the formalitiesof the WA 1837. The relevance of the will in the present connection isthat it operates to vest the property in the legatee/devisee, therebyenabling the beneficiary to enforce it against him.

Two notable cases serve to illustrate how far the courts are preparedto go in their acceptance of the dehors theory, namely: • Re Young (1951), which decided that despite s 15 of the WA (which

precludes a witness to a will from taking a benefit under it) abeneficiary under a secret trust would not lose his benefit simplybecause he witnessed the testator’s will.

Note: that if it is the legatee/devisee who attests the will, Oakley (p120) suggests that in the case of a FST, since the legatee/devisee takesbeneficially on the face of the will, the trust will fail. But where a HST isinvolved once the will makes it clear that the legatee/devisee is to takeas a trustee, it appears from cases like Cresswell v Cresswell (1868) thatthe trust will not fail. • Re Gardner (No 2) (1923) which held that where a beneficiary under

a secret trust died before the testatrix, this would not extinguishthe beneficiary’s interest, as would happen if the trust arose underthe will rather than outside it. This has, however, been roundlycriticised in that although the trust had undoubtedly been declared,

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the property had not vested at the time of the beneficiary’s deathand equity would deem it to have lapsed.

Note: if a legatee/devisee predeceases the testator, in the case of a FST,the position as stated by Cozens-Hardy LJ in Re Maddock (1902) is thatthe gift will lapse. In the case of a HST, it seems on the authority ofsuch cases as Re Smirthwaite (1871), that the trust will not lapse becausethe trustee who has been named in the will dies before it takes effect.

Are secret trusts express trusts or constructive trusts?

There has been considerable debate regarding the status of secret trusts.Commentators such as Pettit, Oakley and Rickett (1996) 60 Conv

303, p 306, favour the view that secret trusts should be treated as expresstrusts. This accords with the proposition that they are inter vivosdeclarations of trust which arise dehors the will.

By contrast, several judges, such as Brightman J in Ottaway v Norman(1972), Nourse J in Re Cleaver (1981) and Morritt J in Re Dale (1993)have expressed the view that secret trusts are constructive trusts, andthis has been echoed by Hodge in [1980] Conv 341. This is consistentwith the notion that secret trusts are enforced in order to prevent fraud.

Others such as Sheridan (1951) 67 LQR and Hayton and Marshallsuggest that HSTs are undoubtedly express trusts, whereas FSTs whichhave been traditionally associated with the fraud theory can properlybe regarded as constructive trusts.

The express-constructive trust debate is especially relevant wherethe subject matter of a secret trust is land. The issue at stake iswhether the communication of the trust must be evidenced in writingin accordance with s 53(1)(b) of the LPA 1925. Such writing will beneeded if the trust is express, but not if it is constructive. The positionhas not yet been decisively resolved by the courts. However, it hasbeen held in Re Baillie (1886) that a HST was unenforceable in theabsence of written evidence. The implication of this is that the courtregarded such a trust as an express trust which had to comply withthe statutory formalities. On the other hand, in Ottaway v Norman, aFST was upheld as valid even though it was not evidenced in writing.This tends to suggest that Brightman J perceived it as a constructivetrust which, by virtue of s 53(2) of the LPA 1925, was not subject to therequirement of writing in s 53(1)(b). See, also, the New Zealand caseof Brown v Porau (1995).

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3 The Constitution of Trusts


• the essential connection between the constitution of trusts andtheir enforceability

• the significance of the maxim that equity will not perfect animperfect gift in the context of the constitution of trusts

• the applicable rules where a settlor declares himself a trusteeof property already vested in him

• the formal procedures necessary for the constitution of a trustwhere the settlor seeks to transfer property to other personsto hold on trust

• the various circumstances in which a trust is capable ofenforcement in equity or at law, where these procedures havenot been fully complied with

Vesting of property as a condition forenforcement of trusts

Once a prospective donor or settlor declares his intention to make anoutright gift or create a trust, the enforceability of the gift or trustdepends primarily on whether or not it is completely constituted. A giftor trust is deemed to be completely constituted from the time theproperty becomes vested in the donee or in the trustee on behalf of thebeneficiary.

Where such vesting has occurred, it is no longer open to the donoror settlor to assert any beneficial claim to the property (see Re Bowden(1936)). For his part, the beneficiary/donee acquires a proprietaryinterest, which the courts will enforce against the donor/settlor as wellas the trustee (if any), regardless of whether the beneficiary/donor

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has furnished any consideration in return (see, for example, Jeffreys vJeffreys (1841); Paul v Paul (1882)).

Conversely, where the settlor declares his intention to make a giftor create a trust but the declaration is not accompanied or followed byvesting, the gift/trust is said to be incompletely constituted. Thedeclaration may be enforceable against the settlor by a decree of specificperformance or the award of damages, if the intended beneficiaryfurnished consideration. Where no consideration has been furnishedthe operative principle in this regard, as affirmed in the leading caseof Milroy v Lord (1862), is that equity will not assist a volunteer to perfectan imperfect gift. Here, S executed a voluntary deed purporting totransfer shares in L Bank to T to hold on trust for B, the plaintiff. Thetransfer had to be registered by L Bank before the shares would vest inT. To this end, S executed a power of attorney authorising T to take thenecessary steps to effect the registration, which T failed to do before Sdied. It was held that B as a volunteer acquired no enforceable interestunder this incompletely constituted trust. (See, also, Western-Kaye vWestern-Kaye (1986).)

Declaration of self as trustee

Where a prospective settlor chooses to declare himself a trustee of hisproperty for the benefit of another, the property will in the ordinary coursealready be vested in him. Accordingly, the trust is completely constitutedimmediately the declaration is made. The immediate constitution of thetrust in such circumstances will not be affected by the fact that at thematerial time, the intended beneficiary is unaware of the declaration (seeMiddleton v Pollock (1876); Standing v Bowring (1885)).

Before a beneficiary can enforce a trust on this basis, the court mustbe satisfied, having regard to the settlor’s words (or his words andconduct as in Paul v Constance (1977)) that his intention is to hold theproperty on trust. Where the material intention is to transfer propertyto a trustee to hold on trust, but the transfer is ineffective, as in Milroyv Lord (1862) it will not be enforced by treating it as a declaration bythe settlor of himself as trustee. Similarly, an ineffective outright gift isnot enforceable by treating the donor as a trustee (see Jones v Lock (1865);Richards v Delbridge (1874); Hemmens v Wilson Browne (1993) and Vealev Commrs of Customs & Excise (1996)).

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Finally, where there are statutory formalities governing thedeclaration of the trust, these must be duly observed by the settlor. Inparticular, where the property concerned is land, effect will be givento the declaration only if it is in writing or evidenced in writing asrequired by s 53(1)(b) of the LPA.

Transfer to trustees and outright gifts

Where the settlor opts to create a trust with another person as thetrustee (or to make an outright gift), it will be completely constitutedwhen the property has been transferred to the trustee (or donee) in themanner prescribed by law. The law requires different modes of transferfor various species of property.

Legal estates and interests

Freehold estates in land and leases for three or more years

A deed is required for the conveyance of freehold land as well as thecreation or assignment of a lease, where the term involved is three ormore years (see ss 52 and 54 of the LPA 1925). Thus, for instance, inLiverpool CC v AG (1995) where a written offer was made by the ownersof Allerton Hall, Liverpool to transfer the Hall and surrounding estatesto the Council for use as a museum and public park and accepted inwriting by the Council, it was held that this did not operate to constitutethe trust. It was only when the legal estate was conveyed to the Councilthat the trust became fully constituted.

Chattels

These may be transferred either by a deed of gift or delivery. See Cochranev Moore (1880); Thomas v Times Books (1966); and Jaffa v Taylor Gallery(1990). Regarding delivery, the case of Re Cole (1964) is noteworthy.Here H said to W when she came to live with him in a house boughtand furnished by him, ‘It’s all yours’. It was held that there was noeffective transfer of the contents of the house to W, since H’s wordsand conduct were not sufficiently clear and unequivocal to amount todelivery.

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Shares in a company

A transfer of shares requires the execution of an appropriatememorandum of transfer and registration in the company’s shareregister as required by ss 182–83 of the Companies Act 1985 and s 1 ofthe Stock Transfer Act 1963.

Choses in action

These can only be assigned at law through the procedure in s 136 ofthe LPA 1925 which provides that the assignment must be (i) absolute;(ii) in writing; and (iii) communicated in writing to any party againstwhom it is to be enforced.

Copyright

Writing is needed for the effective assignment of copyrights (see s 90(3)of the Copyright Designs and Patents Act 1988).

Equitable interests

Where the owner of an equitable interest seeks to make an outrightgift of his interest or pass it to another person to hold on trust, s 53(1)(c)requires the disposition to be in writing.

The position where every effort is made to vestthe property

In the eyes of the common law, property is incapable of vesting in adonee unless the appropriate formalities governing transfer have beencomplied with in the minutest detail. A less stringent approach hasbeen adopted by equity, which now regards a gift or trust as completeand enforceable by the beneficiary, once the settlor or donor has doneeverything in his power to divest himself of the property, even thoughthe law requires some further task (such as registration) to beperformed by a third party.

Thus, if S, the owner of shares in a company or registered land,seeks to make a gift of the shares or land to B and accordinglyexecutes a transfer form in favour of B (or in favour of T on trust forB) which he hands over with the appropriate certificate, the transferwill be deemed to be effective in equity, even though legal title will

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not pass until it is duly registered (see Re Rose (1952) and Mascall vMascall (1984)).

By contrast, where the court concludes that S has not yet doneeverything required by law to divest himself of his title (for example,if official consent which is needed before he can proceed with thetransfer has not yet been received), the gift will remain incomplete inthe eyes of equity even if the transfer forms have been duly signed byhim (see Re Fry (1946)). In effect, this gift will be unenforceable in equity,unless supported by consideration.

The position where vesting occurs by other means

Situation A

Where a property owner expresses an intention to make an immediategift of the property but dies without having transferred it to theintended donee, the gift will ordinarily fail. However, if the owner’sintention persists till his death and the property then becomes vestedin the donee as his personal representative, this operates to perfect thegift, making it enforceable by the donee under the rule in Strong v Bird(1874) as affirmed by such cases as Re Stewart (1908), Re Freeland (1952)Re Gonin (1979), Simpson v Simpson (1973), Re Burrage (1993) and Collierv Calvert (1996). Situation B

Where S declares his intention to transfer property to T to hold ontrust for B and the property becomes vested in T in a different capacity,it emerges from Re Ralli’s WT (1964) that Strong v Bird applies byanalogy, so that T will be able to enforce the trust on B’s behalf.However, the court in Re Ralli took no account of Re Brooks’ ST (1939).In this earlier case, S had declared that he would transfer any propertyhe might acquire in future to L Bank as trustee. When S subsequentlybecame entitled to certain funds held by L bank under a differentsettlement, the court declined to enforce the declaration of trust againstthe property which had come to the bank in another capacity.

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Situation C

Where X agrees with Y for valuable consideration that, when Y dies, Xwill pass some benefit to B, and on Y’s death his estate becomes vestedin B as his personal representative, it appears on the authority of Beswickv Beswick (1968) that this will entitle B to enforce the benefit against X.

Circumstances in which a gift is enforceablewithout vesting

Marriage settlements

A settlement qualifies as a marriage settlement if three conditionsoutlined by Lord Goff in Re Densham (1975) are satisfied: • it must have been made in anticipation of a forthcoming marriage

or, if made after the marriage, must be the result of an agreement inanticipation of the marriage;

• in the case of a settlement made in anticipation of marriage it mustbe expressed to be conditional on the marriage taking place;

• its purpose must be to encourage or facilitate the marriage. Where a settlor promises to settle property on trustees pursuant to amarriage settlement, and the marriage takes place but vesting has notyet occurred, the trust is nevertheless enforceable in equity by thetrustees on behalf of the husband and wife and their issue as seenfrom such cases as Pullan v Koe (1913). The reason for equity’swillingness to assist in perfecting such gifts is that it regards thehusband, wife and issue as having provided notional considerationby virtue of the marriage. The courts will also treat the children ofeither spouse from an earlier marriage as falling within the marriageconsideration, provided they are satisfied that the interests of suchchildren are closely linked with those of the issue of the marriage (seeAG v Jacobs-Smith (1895)).

Where the marriage settlement provides that the property is to passto the next-of-kin or some other third party if the husband and wifedie without issue, such a third party is not deemed to come within themarriage consideration. Accordingly, the settlor’s promise is notenforceable on behalf of the next of kin (see Re D’Angibau (1880); RePlumptre’s Settlement (1910); Re Pryce (1917)).

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Enforcement of covenants to settle under the common law

Under the common law, a covenant (that is, a promise under seal) isenforceable by the award of damages against the covenantor even ifthe covenantee is a volunteer. By contrast, where no consideration hasbeen furnished, the fact that a promise to transfer property is underseal will not ordinarily render it enforceable in equity by a decree ofspecific performance (see Jefferys v Jefferys (1841); Re D’Angibau (1880);and Re Ellenborough (1903)).

The common law attitude to the enforcement of covenants meansthat where A and B are parties to a voluntary deed under which Acovenants to transfer property belonging to him to B, but fails to doso, B may recover damages against him (see Cannon v Hartley (1949)).

The position is less certain where a settlor, S, covenants to transferproperty to a trustee, T, to hold on trust for B. It has been decided in RePryce (1917); Re Kay’s Settlement (1939); and Re Cook’s ST (1965), thatwhere such a covenant is not performed, B cannot compel T to bringan action for damages, while T, for his part, will be directed by thecourt not to do so. In Re Cook, for instance, FC had, upon theresettlement of family property, covenanted with the trustees that ifcertain paintings belonging to him were sold, the proceeds would bepaid to them to hold on trust for his children who were volunteers.After the paintings were sold, it was held that the trustees were not totake any action to enforce the covenant, at law or in equity.

The position adopted in these cases has received some support fromLee in (1969) 85 LQR 236, but has been widely criticised by suchcommentators as Elliot (1960) 76 LQR 100; Hornby (1962) 78 LQR 228;Barton (1975) 91 LQR 236; and Meagher and Lehane (1976) 92 LQR427. Elliot, in particular, draws attention to the fact that the year beforeRe Pryce was decided, the court had, in Re Cavendish-Browne (1916),allowed T to claim damages on behalf of B, for the breach of a voluntarycovenant by S to settle property left to her under two wills.

It is difficult to reconcile these conflicting authorities, although it isnoteworthy that Re Cavendish-Browne involved a covenant to settleexisting property, whereas the other three cases involved covenantsto settle after-acquired/future property. This suggests that while it isat least arguable that a trustee may claim damages in the case of acovenant to settle existing property or a definite sum of money, thisremedy will not avail him where the covenant relates to futureproperty.

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Enforcement in equity where there is a trust of thecovenant

Where a voluntary covenant by S to settle property on T on trust for Bis breached, B might wish to enforce the covenant without relying onT. Equity provides a means of enforcement by B, if, in the court’sopinion, S intended that the right to sue on the covenant would beheld on trust for B. Where this is the case, the right to sue is treated asa chose in action and the trust of this chose in action becomescompletely constituted when the covenant is made, even if the propertywhich S covenanted to settle on trust has not yet been transferred to T.

The leading case in which a covenant was enforced on this basis isFletcher v Fletcher (1844). Here S, by a voluntary deed, covenanted withT that within a year of S’s death his executors would pay £60,000 to Ton trust for B. T, who had no wish to accept the trust, sought directionsfrom the court on the effect of the covenant. Although the trust of theproperty was not perfected, since the £60,000 had not yet been paid toT, it was held that from the date of the covenant there was an effectivetrust of the promise to convey, which B could enforce in equity bysuing in his name. This decision is not entirely satisfactory as therewas no clear evidence that S intended the right to sue to be held ontrust. It is also noteworthy that in Re Cook’s ST, Buckley J held thateven if a trust of a covenant would be enforceable where the promiserelated to specific property or a specific sum of money (the £60,000 inFletcher), this will not be the case where the promise concerns futureproperty (as in Re Cook).

Gifts made in expectation of death (donationes mortiscausa)

A donatio mortis causa (DMC) is a gift made in the donor’s lifetime,which is expressed to be conditional upon and intended to take effecton his death. As Buckley J observed in Re Beaumont (1902), a DMC isamphibious in nature since it is not a regular inter vivos gift takingeffect in the donor’s lifetime, nor is it a fully fledged testamentary giftwhich must comply with the requirements governing the testamentarydisposition of property.

In Cain v Moon (1896), Russell CJ laid down three conditions whichmust exist for a DMC to be valid:

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• the gift must have been made in contemplation of the donor’simpending death;

• the donor must intend that the property is to revert to him if thecontemplated death does not occur;

• the subject matter of the gift (or the means of gaining control of it)must be delivered to the prospective donee.

Where the subject matter of the DMC is a chattel and this has beendelivered to the donee or trustee or he has been given the means ofgaining access to it (for example, the key to the place where it is kept),the gift is perfected as soon as the donor dies. See, for example, Woodardv Woodard (1995).

On the other hand, where the nature of the property is such thatthe steps taken by the donor would not constitute an effective intervivos transfer, title to the property does not vest automatically in thedonee/trustee on the donor’s death but passes to the personalrepresentatives of the donor. However, as Lindley LJ emphasised inRe Dillon (1890), ‘The principle of not assisting a volunteer to perfectan incomplete gift does not apply to a DMC’. Equity will thereforeintervene to compel the personal representatives to complete thetransfer. For instance, if the subject matter of the gift is a negotiableinstrument which was not endorsed by the donor (as in Re Mead (1880));or money in a deposit account (as in Birch v Treasury Solicitor (1951));or a house in respect of which no deed was executed (as in Sen v Headley(1991)), the courts may be prepared to enforce it as a valid DMC.

Enforcement under the doctrine of proprietary estoppel

This doctrine contemplates that where a property owner has by hiswords or conduct represented to another person that the other personis entitled to an interest in the property, thereby inducing that otherperson to act to his detriment, the owner will be estopped in equityfrom denying the truth of the representation. The doctrine has beeninvoked in cases where a land owner has made an incomplete transferof an interest in land and the transferee has relied to his detriment onthe belief that the transfer is effective. In such circumstances, equitywill compel the owner to transfer the property or do whatever else isnecessary to give effect to the transferee’s interest, as seen in Dillwyn vLlewellyn (1862), Pascoe v Turner (1979) and Durant v Heritage & Hamilton(1994). As emphasised in this latter case:

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…the principle of proprietary estoppel can be far reaching in its effects.A plaintiff who successfully makes out his claim to a proprietaryestoppel can come out of court entitled to an interest or right usuallyin real property even though when he went into court:

(1) he had no legal estate or interest in the property;(2) he had not made a contract to acquire an estate or interest; and(3) he was not a beneficiary under a completely constituted trust.

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4 Resulting andConstructive Trusts


• the operation of the presumptions of resulting trust andadvancement and the rules governing their rebuttal

• the circumstances in which resulting trusts arise automatically• the general nature of the constructive trust• the rise and decline of the new model constructive trusts• the main headings under which constructive trusts are

traditionally enforced• the relevance of resulting and constructive trusts in the context

of disputes over the family home

Resulting trusts

Every express trust derives its force from a conscious declaration oftrust by the settlor. There are, however, many situations in which trustsare capable of arising where no such declaration was made or where atrust has been declared but its terms do not cover the situation inquestion. A trust which arises in such circumstances may be either aresulting trust or a constructive trust. The enforceability of both types oftrust is reinforced by s 53(2) of the LPA 1925, which provides that theyneed not comply with the formalities which govern the creation ofexpress trusts.

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The general nature of resulting trusts

Where one person (A), transfers or directs the transfer of property towhich he is beneficially entitled to another person (B) without expresslydeclaring B a trustee of the property, equity will in certaincircumstances compel B to hold it on trust for A. A trust of this natureis known as a resulting trust.

The traditional premise upon which resulting trusts were imposedin the absence of any formal declaration of trust by A, was that A, intransferring or directing the transfer of the property, was presumed tohave intended that B would hold it on trust for him.

This notion that all resulting trusts were enforced on the basis ofthe transferor’s presumed or implied intention was called into questionin Re Vandervell’s Trust (No 2) (1974), where Megarry J sought todifferentiate between two species of resulting trusts, namely: • presumed (or implied) resulting trusts, which arise either where one

person transfers property to or purchases property in the name ofanother without intending to make an outright gift; and

• automatic resulting trusts, which are imposed where a settlor createsa trust that fails to dispose of his entire beneficial interest in thesettled property. According to Megarry VC, this type of resultingtrust ‘does not depend on any intentions or presumptions but isthe automatic consequence of [the settlor’s] failure to dispose ofwhat is vested in him’.

Significantly, however, in Westdeutsche Landesbank Girozentrale vIslington LBC (1996), Lord Browne-Wilkinson was not convinced bythis distinction between presumed and automatic resulting trusts. HisLordship’s view is that even those types of resulting trusts whichMegarry J characterises as automatic are in reality enforced, becauseequity presumes an intention that the undisposed equitable interestshould revert to the settlor.

In similar vein, Hayton in his Commentary and Cases on the Law ofTrusts suggests that the distinction between presumed and automaticresulting trusts is a distinction without a difference, since automaticresulting trusts are imposed because the settlor is presumed to expectthe property to result to him so far as it has not been fully disposed of.As Hayton, however, concedes, Megarry’s dichotomy betweenpresumed and automatic resulting trusts is useful for expositorypurposes and is adopted below.

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RESULTING AND CONSTRUCTIVE TRUSTS

Presumed resulting trusts

Voluntary transfer of property

Personal property

Where A transfers personal property owned by him to B for noconsideration, a resulting trust is presumed under which B must holdthe property for A’s benefit, unless he can prove that A intended anoutright gift to him (see Standing v Bowring (1885); Re Howes (1905); ReVinogradoff (1935); Re Muller (1953); Thavorn v BCCI (1985); andSilverwood v Silverwood (1997)). Real property

Before 1925, a voluntary conveyance of real property by its owner alsogave rise to a presumption of a resulting trust in his favour. The positionis no longer as clear cut, in the light of s 60(3) of the LPA 1925, whichprovides that: …in a voluntary conveyance, a resulting trust for the grantor shall notbe implied, merely by reason that the property is not expressed to beconveyed for the use or benefit of the grantee. Opinions differ regarding the true import of s 60(3). Somecommentators such as Edwards and Stockwell, Pettit and the authorsof Snell suggest that the effect of the provision is that on a voluntaryconveyance of land, a resulting trust will no longer be presumed butwill only be imposed if there is evidence that this was the grantor’sintention. Others, such as Hanbury and Martin, and Parker andMellows favour the view that the provision ‘does not preclude theimplication of a resulting trust on general equitable principles’.

In the judicial sphere, the position seems to be equally uncertain.In Hodgson v Marks (1971), Russell LJ acknowledged that it was‘debatable’ whether a resulting trust would be presumed on thevoluntary conveyance of land, while in Tinsley v Milligan (1993) LordBrowne-Wilkinson stated that it was ‘arguable’ whether the positionregarding the presumption of resulting trust upon a voluntaryconveyance of land had been altered by the 1925 legislation.Unhelpfully, however, neither judge took the opportunity to clarifythe position and the law therefore remains unsettled.

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Purchase in the name of another

Where A provides the money for the purchase of real property (whetherfreehold or leasehold) and directs that it should be conveyed orassigned to B or registered in B’s name, a resulting trust will bepresumed. B will be deemed to hold the legal title on trust for A, unlessthere are indications that A intended to make an outright gift to him.Note in this connection the dictum of Eyre CB in Dyer v Dyer (1788), asaffirmed in more recent cases such as Pettitt v Pettitt (1970) and Gross vFrench (1975).

By the same token, where A pays for the purchase of personal propertyin the name of B, a resulting trust will also come into being, unlessthere is evidence of a contrary intention (see, for example, Fowkes vPascoe (1875); Shepherd v Cartwright (1955); Crane v Davis (1981)).

Contributions

As Arden LJ declared in JA Pye (Oxford) Estates v Ambrose (1994), ‘inthe absence of any evidence to the contrary…a resulting trust arisesfrom direct contributions to a property by a person other than the legalowner’. In effect, a resulting trust comes into being not only where Aprovides the entire purchase money, but also where the money iscontributed by A and B. In this connection, the following points shouldbe noted: • If A and B contribute towards the purchase of property and the

conveyance is in B’s name, the legal title will be vested in B, but Aand B will be entitled to equitable interests proportionate to theirrespective contributions (see Bull v Bull (1955); Dewar v Dewar (1975);Sekhon v Alissa (1989); Harwood v Harwood (1991); Tinsley v Milligan(1993); and Garvin-Mack v Garvin-Mack (1993)).

• If A and B contribute the purchase money and the property isconveyed to both, unless there is evidence to the contrary, a resultingtrust will be presumed under which their respective beneficialinterests will be determined by their contributions (see Springette vDefoe (1992) and Tagoe v Layea (1993)).

• Even if B did not contribute at the outset towards the purchase ofproperty but the property is purchased by means of a mortgagetaken out in A’s name, a resulting trust will be presumed in B’sfavour, if B contributes substantially towards paying off themortgage.

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• Where the property has been purchased at an undervalue (forexample, one contributor gets a discount under a right-to-buyscheme; or the vendor sells the property at below market value as aspecial favour to one contributor), this will be taken into account inquantifying the entitlement of that contributor (see Springette v Defoeand Pye v Ambrose).

The presumption of advancement

The presumption of resulting trust which arises where A voluntarilytransfers property to B or purchases property in B’s name, is reversedif A happens to be B’s husband or father or stands in loco parentis to B.Traditionally, equity has taken the view that in such cases A has anobligation to provide for B, with the result that A will be presumed tohave intended to make an outright gift to B of the property sotransferred or purchased. The presumption which arises in thisconnection is known as the presumption of advancement.

Husband and wife

The presumption of advancement has long been recognised where ahusband transfers property to his wife or purchases property in theirjoint names or in her name alone. The operation of this presumptionwas declared to be ‘perfectly settled’ by Malins VC in Re Eykin’s WT(1877), and has been affirmed in a long line of cases including Thornleyv Thornley (1893); Gascoigne v Gascoigne (1918); and Tinker v Tinker (1970).

In the past few decades, however, wives have increasinglycontributed in their own right to the upkeep of the family so that thesame weight is no longer attached to the supposition that the husbandis under an obligation to provide for his wife as in bygone years. Inresponse to this trend, the courts, while acknowledging that thepresumption continues to operate in favour of wives, are moreconcerned with discovering the true intention of the spouses in eachcase and will only fall back on the presumption where there is noevidence of such intention. See the comments of Evershed MR in Silverv Silver (1958), and Lord Diplock in Pettitt v Pettitt (1970).

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Mistresses

The presumption of advancement does not apply where a mantransfers property to or purchases property in the name of his mistress(see Soar v Foster (1858); Diwell v Farnes (1959) and Garvin-Mack vGarvin-Mack (1993)). By the same token, the presumption does notapply where a man transfers property to a woman to whom he isengaged, and the engagement is subsequently broken (see Mossop vMossop (1988)).

Husbands

The presumption does not arise in favour of a husband where his wifetransfers property to him or purchases property in his name or theirjoint names (see Mercier v Mercier (1903); Pearson v Pearson (1965); andHeseltine v Heseltine (1975)).

Father and legitimate child

The relationship between a father and his legitimate child is onewhich for centuries has been held to give rise to a presumption ofadvancement where the father transfers property to the child orpurchases property in the child’s name (see Lord Grey v Lady Grey(1677); Crabb v Crabb (1834); Re Roberts (1946); and Shepherd vCartwright (1955)).

Mothers

There is no corresponding presumption where mother and child areconcerned, the rationale being that the duty to provide for a childordinarily lay with the father (see Re De Visme (1863) and Bennet vBennet (1879)). It was, however, accepted in Bennet and reiterated inWard v Smiling (1994) that ‘in the case of a mother it is easier to provea gift than in the case of a stranger: in the case of a mother, very littleevidence beyond the gift is wanted, there being very little motiverequired to induce a mother to make a gift to her child’.

A person in loco parentis

A person in loco parentis is one who according to Lord Eldon in Ex pPye (1811) ‘puts himself…in the position of the person described asthe lawful father of the child’ (see, also, Powys v Mansfield (1837)).

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Where A stands in loco parentis to B and either transfers property toB or purchases property in B’s name, a presumption of advancementwill arise in favour of B (see Ebrand v Dancer (1680), grandfather-grandchild; Re Paradise Motor Co (1968), stepfather-stepson and Beckfordv Beckford (1774), father-illegitimate child).

Rebutting the presumptions

The presumptions of advancement and resulting trust are bothrebuttable. Indeed, the modern judicial attitude suggests thatcomparatively little weight is now attached to the presumptions in theresolution of property disputes. In McGrath v Wallis (1995), for instance,the presumption of advancement was described as a judicial instrumentof last resort where there is no other evidence upon which the courtscan proceed. A similar view was expressed regarding the presumptionof resulting trust in Stockholm Finance Ltd v Garden Holdings Ltd (1995),which signified that the two presumptions are counterparts to eachother and are both readily rebuttable by comparatively slight evidence. Rebutting the presumption of resulting trust

This presumption will ordinarily be rebutted by evidence which provesthat the transferor or purchaser of property intended to make anoutright gift to the transferee. In Fowkes v Pascoe (1875), for example, awoman bought stock in the joint names of herself and her infantrelative. While accepting that this did not raise a presumption ofadvancement in the infant’s favour, the court concluded that the onlyrational inference to be drawn in the circumstances was that sheintended that, on her death, the infant would take the stock beneficiallyand not hold it on a resulting trust. More recently, in Ward v Snelling(1995), W, a wealthy woman, opened two Swiss bank accounts infavour of her daughter and grandson and paid $173,000 into eachaccount. The evidence disclosed that: • in making the transfers, W’s purpose was to avoid taxes and death

duties on assets which she would otherwise have left to her daughterand grandson in her will;

• W knew very well what she was doing in financial matters andhad excellent advice available to her;

• After opening the accounts, W did not reserve for herself any powersto operate these accounts nor did she make herself a signatory tothe accounts;

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• W never drew on the accounts, nor did she give any indication thatshe wished to keep the income from the accounts.

On the strength of this, the court concluded that the presumed resultingtrust in W’s favour had been rebutted and that the payments wereoutright gifts to her daughter and grandson. Rebutting the presumption of advancement

Where the relationship between the parties is such that thepresumption of advancement applies, this can equally be rebuttedwhere the evidence shows that the material intention was that theproperty would be held on trust. This was the case, for instance, inScawin v Scawin (1841), where a father purchased stock in his son’sname and the son later admitted that he was aware that his father didnot intend that the stock should pass as an outright gift to him. Again,in Warren v Gurney (1944) where a father purchased a house in hisdaughter’s name, his retention of the title deeds, coupled with hiscontemporaneous declarations were held to rebut the presumption ofadvancement operating in her favour. Also, in Marshall v Crutwell (1875)and Simpson v Simpson (1992), where two husbands transferred theirbank accounts into the names of their wives, the presumption ofadvancement was rebutted because there was evidence in each casethat this was done purely for convenience since both husbands werevery ill and could not undertake banking transactions. But contrastthis with Re Figgis (1968). The rules in Shephard v Cartwright (1955)

Where the evidence relied on to rebut the presumption of resultingtrust or advancement consists of acts or statements, the admissibility ofsuch evidence is governed by the decision in Shephard v Cartwright(1955). In this case, a man purchased shares in the names of his wifeand children and then proceeded to act as if he was beneficially entitledto the shares. In deciding whether evidence of the man’s conduct wasadmissible to rebut the initial presumption of advancement, the Houseof Lords formulated two rules: • acts or declarations made before or at the time of the transfer or

purchase are admissible either for or against the maker;• acts and declarations made after the transfer or purchase has been

concluded are admissible in evidence only against the maker.

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On the strength of the second rule, it was held that the husband’sconduct after the purchase of the shares would not be admissible inhis favour to rebut the presumption of advancement. See, also, Ward vSmiling where the trial court relied on these rules in holding that thepresumption of resulting trust had been rebutted.

Evidence of illegal conduct Illegality and the presumption of advancement

Where, in furtherance of some illegal purpose, A purchases propertyin B’s name or transfers property to B who happens to be his wife orchild, it has been held in Gascoigne v Gascoigne (1918); Re Emery’sInvestment Trusts (1959); Chettair v Chaettair (1962); and Tinker v Tinker(1970), that A cannot seek to rebut the presumption of advancementin B’s favour by adducing evidence of his illegality. This refusal toallow such tainted evidence has been justified primarily by invokingthe maxim that he who comes into equity must come with clean hands.

The inadmissibility of evidence of illegality to rebut the presumptionof advancement has, however, been circumscribed by Tribe v Tribe(1995). Here, T, who transferred shares to his son because he fearedthat judgment would be awarded against him in impending litigation,was allowed to rely on this to rebut the presumption of advancementin the son’s favour since he withdrew from his illegal purpose beforeit was carried into effect. Illegality and the presumption of resulting trust

Where A transfers property to B or purchases property in B’s name, incircumstances which give rise to the presumption of resulting trustand the transfer or purchase is made in pursuance of an illegal purpose,the applicable principles are to be found in the decision of the Houseof Lords in Tinsley v Milligan (1993). Here, T and M, who were in alesbian relationship, contributed to the purchase of property whichwas conveyed into T’s name to enable M to make fraudulent housingbenefit claims on the DSS. Their relationship later broke down and Mhad to leave the property, but brought an action claiming that the legaltitle to the property was vested in T on resulting trust for both of them.T contended that M should not be allowed to adduce evidence of thefraud perpetrated on the DSS in order to substantiate her claim. TheHouse of Lords held that since there was a presumption of resulting

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trust in M’s favour she did not have to rely on her illegality to establishher entitlement and her claim was therefore allowed.

This decision has since been followed in Garvin-Mack v Garvin-Mack(1993) and Silverwood v Silverwood (1997). In the latter case, S, whowas nearly 88, had signed a written mandate under which £21,218was withdrawn from her building society account and deposited inequal shares in the building society accounts of her two grandchildren.Once this was done, S was able to claim income support and the costof her residential care from the DSS. When S died a few years later, herexecutor sued the grandchildren, claiming that they held the moneypaid into their accounts on resulting trust for S’s estate. Thegrandchildren contended that the executor could not rely on thepresumption of resulting trust in S’s favour, since the money had beenpaid into their accounts for the illegal purpose of misrepresenting S’smeans to the DSS. The court rejected this contention, holding on theauthority of Tinsley v Milligan that the presumption of resulting trustin W’s favour meant that there was no need to rely on her illegality inorder to establish her entitlement.

The differentiation between the presumptions of resulting trust andadvancement as far as illegal conduct is concerned has not beenfree from criticism. In particular, Nourse LJ, while conceding inSilverman that he was bound by Tinsley v Milligan, neverthelessopined that ‘it is not easy to understand or to see any public or anyother policy or advantage behind a rule which regulates a claimant’sright to recover solely according to whether the transferee is hiswife or child…on the one hand, or his brother, grandchild or anyone else on the other’. Similar concerns have been voiced by JudgeWeekes in Tribe v Tribe, as well as by academic commentators, suchas Martin, in her Modern Equity, and Stowe, who wrote a highlycritical review of Tinsley v Milligan in (1994) 57 MLR 441.

Automatic resulting trusts

As Lord Diplock observed in Vandervell v IRC (1966), ‘equity abhors abeneficial vacuum’. Accordingly, where S transfers property to T undera trust which leaves some or all of the beneficial interest undisposedof, equity will automatically fill this vacuum by requiring T to holdthe outstanding equitable interest on a resulting trust for S. Suchautomatic resulting trusts are capable of arising in a variety of contexts.

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Where S has not effectively declared the intended trustbut the property has become vested in T

Where S intends to create a trust and accordingly transfers the trustproperty to T, but the trust cannot take effect because it has not beenproperly declared, T will hold the property on a resulting trust for Sor, if S is dead, for his estate. Thus, in Re Keen (1937), where the courtdeclined to enforce a half secret trust declared by a testator because ithad not been properly communicated, a resulting trust arose in favourof the testator’s estate. Again in Re Vandervell (No 2) (1974), S arrangedto transfer shares owned by him to the Royal College of Surgeons butretained an option to re-purchase them for £5,000. S empowered thetrustees of his children’s settlement to exercise this option withoutstating the persons for whose benefit they were to hold the re-purchased shares. It was decided that the option to purchase wassubject to a resulting trust in favour of S.

Where a validly declared express trust fails becauseconditions attached to the trust are not fulfilled

Where, for instance, S transfers money to T, directing T to accumulatethe capital and income and pay it to S’s infant son B, if B attains theage of 21, the trust will fail if B dies at the age of 17, and the fund willbe held on a resulting trust for S.

By the same token, where property is transferred to trustees undera marriage settlement, the trust is conditional on there being a validmarriage, so that if the marriage is void ab initio, the trust will fail anda resulting trust will arise in the settlor’s favour (see Re Ames’ Settlement(1946) and Essery v Cowlard (1884)).

Where the trust duly takes effect but fails to dispose ofthe entire beneficial interest

Where for instance S transfers property to T, directing T to hold it ontrust for B for B’s life but omits to state the person who is to take beneficiallyon B’s death, T will be compelled to hold the property on trust for S.Cases in which resulting trusts are imposed on account of failure to disposeof the entire beneficial interest often stem from bad drafting. As HarmanLJ aptly put it in Re Cochrane (1955), ‘a resulting trust is the last resort towhich the law has recourse when the draftsman has made a blunder orfailed to dispose of that which he sets out to dispose’.

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Where a surplus is left after a trust has been carried out

Where a trust is created which specifies that the trust fund is to beapplied towards a particular purpose, and the purpose is achievedwithout exhausting the fund, it has been decided in some cases thatthe surplus will be held on a resulting trust for the settlor orcontributors. In Re Trusts of the Abbott Fund (1900), a trust was set upfor the upkeep of two deaf and dumb old ladies. When the two ladiesdied, the court held that the balance of the trust fund went on a resultingtrust to the contributors. In Re Gillingham Bus Disaster Fund (1958), asizeable sum of money had been raised by the mayors of three townsthrough a public appeal launched in response to a serious accidentinvolving a squad of marine cadets. Only a part of this money wasneeded to meet the funeral expenses of the cadets who had died andto take care of those who had been injured, as other financialarrangements existed for these purposes. The court held that the restof the money was subject to a resulting trust for the contributors.

These cases must be contrasted with Re Andrew’s Trust (1907) andRe Osoba (1979). In Re Andrew’s Trust, several persons had subscribedto a fund set up for the stated purpose of educating the infant childrenof a deceased clergyman. After the children had all been educated, itwas held that the balance of the fund would not result to the subscribers,but would pass to the children. In Re Osoba, O directed in his will thathis residuary estate was to be applied towards educating his daughterup to university level. It was held that there would be no resulting trustof the property to O’s estate after she completed her university education.The court in each case took the view that the material intention was tomake absolute gifts to the beneficiaries and that the references to theprovision of education merely indicated the motive uppermost in theminds of the respective donors.

Where an unincorporated association has ceased to existleaving surplus funds

Where several persons come together to form an unincorporatedassociation it is common for them to generate funds by subscriptions,fines, donations, fund raising activities, etc. If the association issubsequently dissolved or otherwise becomes defunct, the courts areoften called upon to determine what should happen to the association’ssurplus funds and other assets. As signified by Gardner in a review ofthe decided cases in (1992) 56 Conv 41, two distinct judicial approacheshave emerged.

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The resulting trust approach

While an unincorporated association is still in existence, its funds/assets are commonly held on trust by the treasurer, the Committee orspecifically designated trustees. In the light of this, the courts haveheld in several cases that if the association ceases to exist, these fundsor assets will be held on a resulting trust. In Re Printers’ and Transferers’Society (1899), for instance, a society had been formed to raise fundsby weekly contributions to fight for improved working conditions formembers and support them if they took industrial action. When thesociety was dissolved, it had 201 members and funds of over £1,000.The court held that the sum would be subject to a resulting trust forthose who were members at the time of dissolution in proportion totheir contributions. In Re Hobourn Aero Components Etc Fund (1946), afund had been set up during the Second World War with contributionsfrom the employees of a company to assist those employees on warservice or who were the victims of air raids. At the end of the war, thefund had a cash surplus, which Cohen J decided was to be held on aresulting trust. However, unlike in the Printers’ and Transferers’ case,Cohen J concluded that the resulting trust arose in favour ofcontributors past and present, relative to their contributions. Morerecently, in Davies v Richards & Wallington Industries (1990), anoccupational pension scheme was wound up and, after makingprovision for outstanding entitlements of employees, there was asurplus. It was held that the part of the surplus representing theemployer’s contribution would go on a resulting trust to the employer.

The contractual approach

An unincorporated association will usually have a constitution or someother set of rules which define a member’s rights and obligations inrelation to the association as well as other members. The constitutionrepresents the contract that binds the members together and disputesbetween them fall to be determined primarily by reference to its terms.Accordingly, the courts have increasingly preferred to determine whois entitled to the assets of a defunct association, not on the basis of aresulting trust, but in the light of this contract.

This approach was initially adopted in Cunnack v Edwards (1892).Here, a friendly society was formed in 1810 to raise funds throughsubscriptions, fines etc for the payment of annuities to widows of itsmembers. By 1892, when the last of these widows died, the societyhad a surplus of £1,250 in its coffers. The personal representatives ofsome members claimed that this sum would pass under a resulting

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trust to the estates of the members. The court held that each membercontracted with the society that on paying his contribution he therebydivested himself of all interest in the money, in return for the benefithis widow would receive on his death. There was therefore no basisfor a resulting trust and the money would pass to the Crown as bonavacantia.

This decision was followed in Re West Sussex Constabulary etc FundTrusts (1971) which held that on the dissolution of a benevolent fundthe monthly subscriptions of members would not revert to them undera resulting trust, since they had contracted to receive benefits forthemselves and their families in return for relinquishing their claimsto any money subscribed to the fund.

In the case of Re Bucks Constabulary Friendly Society (No 2) (1979), itwas again affirmed that where an unincorporated association ceasesto exist, its surplus assets will be dealt with in accordance with thecontract between the members rather than on the basis of a resultingtrust. However, Walton J noted that when Cunnack v Edwards wasdecided, the legislation governing friendly societies forbadedistribution of surplus funds, but the modern legislation did not. Heconcluded from this that, on the dissolution of the Bucks ConstabularyFund, the money in the fund fell to be distributed among the membersfor the time being in accordance with the contract between them (see,also, Re GKN Bolts and Nuts Ltd Sports and Social Club (1982) and NewsGroup Newspaper Ltd v SOGAT 82 (1986)).

Where the contract dictates that the surplus should be distributedamong the members in the event of dissolution, they will be entitledto equal shares, unless the contract provides for a different mode ofdistribution as was the case in Re Sick and Funeral Society of St John’sSunday School, Golcar (1973).

Payment of money with a stipulation that the moneyshould be applied for a particular purpose

Where A pays money to B, on the basis that it should only be appliedtowards a specified purpose, it has been established in Barclays Bankv Quistclose Investments (1970) that if the purpose cannot be carriedout, a resulting trust will arise. In this case, R Company was unable topay dividends it had declared on its shares and borrowed moneyfrom Q to enable it to pay the dividends. The money was put in aspecial account at B Bank which was notified that it could only beused for this purpose. R Company went into liquidation before

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paying the dividends and the bank sought to retain the money tocover debts owed to it by R Company. The House of Lords rejectedthe bank’s claim and held that as the dividends could no longer bepaid, the money was subject to a resulting trust in Q’s favour (see,also, Carreras Rothmans Ltd v Freeman Mathews Treasure Ltd (1985) andRe EVTR (1987)).

Note, however, that where two parties enter into a businesstransaction under which one party makes a payment to the otherwithout requiring it to be kept and applied for a particular purpose,the money paid will not be subject to a Quistclose-type trust (seeGuardian Ocean Cargoes Ltd v Banco Do Brasil (1994), Anglo Corporationv Peacock (1995) and Twinsectra v Yardley (1996)).

Payment of money for a purpose which is ultra vires andhence void

In Westdeutsche Landesbank Girozentrale v Islington LBC (1996), the banksought to recover over £1 million which it had paid the Council underan interest rate swap agreement which was held to be ultra vires. Theclaim succeeded before the Court of Appeal, which held on theauthority of Sinclair v Brougham (1914) that money paid under ultravires transactions would be held by the recipient on resulting trust forthe payer. However, Sinclair v Brougham was overruled by the Houseof Lords, which held that such payments were recoverable at law asmoney had and received, and not held on resulting trust by therecipient of such payments.

Constructive trusts

The general nature of constructive trusts

The problem of definition

A number of definitions of the constructive trust have been profferedin the leading textbooks. For instance, Hanbury and Martin define itas ‘one which arises by operation of the law and not by reason of theintention of the parties, express or implied’; Snell defines it as ‘oneimposed by equity in order to satisfy the demands of justice and goodconscience without reference to any express or implied intention ofthe parties’; while Pettit, in much the same vein, defines it as ‘oneimposed by equity, regardless of the intention of the owner of property’.

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None of these definitions is wholly satisfactory. In the first place, tocategorise constructive trusts as trusts imposed by equity is somewhatmisleading since the essence of every trust is that it is enforced byequity. Again, the assertion that they arise by operation of law is notconclusive as a defining characteristic because, as Gardner points out,in An Introduction to the Law of Trusts, all trusts arise by operation ofthe law in the sense that ‘trusts are legal obligations and only the lawcan place legal obligations on people’.

It has accordingly been observed by Edmund-Davies LJ in Carl ZeissStiftung v Smith & Co (No 2) (1969) that ‘English law has no clear cutall-embracing definition of the constructive trust’. This is due in largemeasure to the fact that the constructive trust is the residual categorywhich according to Hanbury and Martin ‘is called into play where thecourt desires to impose a trust and no other suitable category exists’.Consequently, as Edmund-Davies LJ remarked, ‘its boundaries havebeen left perhaps deliberately vague so as not to restrict the court bytechnicalities in deciding what the justice of a particular case maydemand’. Being the residual category, the constructive trust has beeninvoked in a disparate range of situations which cannot easily beencompassed within a single definition. It is thus less problematic,and probably more instructive, to focus attention instead on the mainsituations in which the courts have been prepared to imposeconstructive trusts.

Traditional and new model constructive trusts

The traditional approach

In English law, the traditional view of the constructive trust is that it isa substantive institution in much the same way as an express or resultingtrust. As thus conceived, the constructive trust, like other trusts, isdesigned to vindicate pre-existing proprietary rights by drawing upona body of precisely formulated and generally applicable principleswhich over the years have been well assimilated into the general lawof property.

An important feature of the traditional approach is that the courtshave been largely content to give effect to constructive trusts in alimited number of well defined situations, such as: • where a trustee or other fiduciary misappropriates property

entrusted to him or makes unauthorised profits from his office;

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• where a third party knowingly receives or assists in disposing oftrust property in breach of trust;

• where mutual wills have been executed by two testators;• where one person seeks to establish a legal claim to property by

taking undue advantage of statutory provisions designed to preventfraud at the expense of another;

• where a specifically enforceable contract of sale has arisen;• where legal title is obtained by unlawful killing. Another important feature of the traditional approach is that adistinction is drawn between the situations in which constructive trustswill be imposed and the remedies available for enforcing such trusts.Such remedies include: • a personal action against the constructive trustee;• recovery of the trust property; and• tracing into the proceeds of sale of such property.

The ‘new model’ approach

In the USA, the constructive trust is widely regarded not as asubstantive institution but as a remedial device to be invoked againstany person who acquires or retains property at the expense of another,thereby unjustly enriching himself. The chief attribute of the remedialconstructive trust is its flexibility. Instead of being confined in itsoperation to a limited range of well established situations like theinstitutional constructive trust, it has a wider remit as ‘the formulathrough which the conscience of equity finds expression’—per CardozoJ in Beatty v Guggenheim Exploration Co (1919).

In Re Sharpe (1980), the notion of a constructive trust as a remedy inthe American mould, was seen as a novel concept which has not gainedwidespread among English judges. The reluctance to embrace theremedial constructive trust has also been remarked upon in HalifaxBuilding Society v Thomas (1996) where the court observes that ‘Englishlaw has not followed other jurisdictions where the constructive trusthas become a remedy for unjust enrichment’.

Significantly, however, the flexibility of the American approachprovided the impetus for the emergence of the new model constructivetrust as a vehicle for extending the operation of the constructive trustbeyond its traditional frontiers. In practice, this meant that where in adispute relating to property, reliance on established principles would

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work unfairly against either party, the court, by invoking a constructivetrust of the new model, could adjust their respective entitlements witha view to redressing the balance. Lord Denning, who was the mostpowerful advocate of the new model, declared in Hussey v Hussey(1972), that it was ‘a trust imposed by law whenever justice and goodconscience require it’.

Main spheres of application

• The influence of the new model constructive trust was mostperceptible in disputes between spouses or co-habitees with regard tofamily property. Its earliest manifestation was in Heseltine v Heseltine(1971), where it was employed to prevent a husband from claimingbeneficially two sums of money that had been paid to him by hiswife. A strict application of the prevailing law would havesupported his claim, but Lord Denning felt that it would beinequitable as between the parties to allow this to happen. Alsorelevant are the cases of Cooke v Head (1972) and Eves v Eves (1975).In each case, the family home had been acquired in the name of themale partner but his mistress had done a great deal of physicalwork in improving the home. Lord Denning concluded that thiswas a sufficient reason for awarding a fair share of the beneficialinterest in the home to the respective mistresses (one-third in Cookeand one-quarter in Eves) and warranted the imposition of aconstructive trust against the male partner.

• Lord Denning was also actively instrumental to the introduction ofthe new model constructive trust into the sphere of contractual licenseson equitable grounds. As seen from Binions v Evans (1972), this wasintended to strengthen the licensee’s position by treating hispersonal right as an equitable proprietary interest enforceableagainst a third party assignee of the licensor who has notice of thelicence. See, also, DHN Food Distributors v Tower Hamlets LBC (1976)and Re Sharpe (1980).

• A constructive trust was similarly imposed in accordance withgeneral equitable principles in Peffer v Rigg (1977), in favour of theowner of an unregistered equitable interest, against a purchaser ofthe legal title with notice of the equitable interest.

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Criticisms of the new model constructive trust

Notwithstanding the eminent stature of Lord Denning, the new modelapproach has generated considerable disquiet among variouscommentators. In particular, RH Mausley (1977) 28 NILQ 123 callsinto question ‘the rule that in cases where the plaintiff ought to winbut has no legal doctrine or authority to support him, a constructivetrust will do the trick’.

Oakley, Constructive Trusts, and Hayton, in his contribution to Jowelland McAuslan’s work, Lord Denning: The Judge and the Law, maintainthat such a subjective approach is especially undesirable in disputesabout property rights. Both commentators echo the view of Bagnall Jin Cowcher v Cowcher (1973) that in determining property rights ‘theonly justice that can be attained by mortals is…the justice which flowsfrom the application of sure and settled principles’. A further criticismvoiced by Oakley is that the new model, by concentrating on the needto do justice between the parties to the dispute, might well prejudicerights of third parties not involved in the dispute.

The unease which has been voiced by these commentators hasbeen echoed by several Antipodean judges who have called intoquestion the legitimacy of the new model constructive trust in suchcases as Carly v Farrelly (1975); Allen v Snyder (1977) and Muschinski vDodds (1986).

The current situation

As the shortcomings of the new model have become increasinglyevident, English courts have been reluctant to follow Lord Denning’slead. Since the 1980s, the courts have not sought to extend the newmodel into other areas of the law. Even in those areas in which it wasinvoked in the past, they have been anxious to rein in the new modelconstructive trust by insisting that it will not be imposed arbitrarilybut within well defined limits and in accordance with settled principles.

In the first place, in disputes over the family home, the courts havenow established in cases such as Burns v Burns (1984); Grant v Edwards(1986); and decisively in Lloyds Bank v Rosset (1991), that a constructivetrust will no longer be imposed where the home is in the name of onepartner, simply because the judge deems it to be fair to the otherpartner. There must be a common intention that both partners shouldhave an interest in the property, and detrimental reliance on thisintention by the partner in whose favour the trust is imposed.

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Secondly, in connection with contractual licences, the courts are nowconsiderably more circumspect than they once were about imposingconstructive trusts. In Ashburn Anstalt v Arnold (1989), the Court ofAppeal acknowledged that the imposition of a constructive trust inBinions v Evans was justified because the assignee of the licensor notonly had notice of the licence, but was able to purchase at a reducedprice the property which was the subject of the licence. At the sametime, the court did not accept that a constructive trust ought to beupheld in favour of a licensee in every case where a licensor assignshis interest to a purchaser with notice, declaring that ‘We do not thinkit desirable that constructive trusts of land should be imposed oninferences from slender material’. This more stringent approach is alsoevident in IDC Group v Clark (1992), where Browne-Wilkinson VCdeclared: ‘In my judgment, the decision in Ashburn Anstalt does notwarrant the creation of a constructive trust unless there are specialcircumstances showing that the transferee of the property undertooka new liability to give effect to provisions for the benefit of third parties.’

Finally, the decision in Peffer v Rigg (1977) that a constructive trustwill be imposed on equitable grounds to protect the holder of anunregistered equitable interest against a purchaser with notice has nowbeen thrown into doubt by Williams & Glyn’s Bank v Boland (1981). Inthis case, the House of Lords affirmed that where registered land wasconcerned, the concept of notice had no relevance, so that a purchaserwould only be bound by a registrable interest if it appeared on theregister. It is only where the purchaser makes it expressly clear that heis purchasing the property subject to that specific equitable interest(as happened in Lyus v Prowsa Developments Ltd (1988)) that the courtwill now protect the interest by imposing a constructive trust (see,also, Chattey & Another v Farndale Holdings (1996)).

In the light of these developments, Pettit has been able to detect ‘amovement away from a revolutionary new model constructive trusttowards an evolutionary extension of the traditional constructive trust’.However, while it is clear from the foregoing that the new modelconstructive trust has now lost most of its momentum, the judgmentof Lord Browne-Wilkinson in the Westdeutsche case (1994) holds openthe possibility that English law may yet follow the USA and Canadaby adopting the remedial constructive trust at some future date

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The main categories of traditional constructivetrusts

Trustees and other fiduciaries as constructive trustees

Equity has long insisted that a person in a fiduciary position must notallow his interests to conflict with his duty and, in particular, mustnot, unless authorised, profit from his position (see Bray v Ford (1896)).

Who is a fiduciary?

It has been observed by Fletcher-Moulton J in Re Coomber (1911) that‘fiduciary relations are of many different types’; and by Slade J inEnglish v Dedham Vale Properties (1978), that ‘categories of fiduciaryrelations which give rise to constructive trusteeship should [not] beregarded as falling into a limited number of straitjackets or as beingnecessarily closed’.

The key feature of the fiduciary relationship is that one party (theprincipal) reposes confidence in another (the fiduciary). Commonexamples of such relationships are those between trustee-beneficiary,company director/promoter-shareholder; agent-principal andsolicitor-client. Indeed, the court went as far as suggesting in Readingv AG (1951) that a fiduciary relationship arises whenever one partyentrusts another with a job to perform. In this case, a British soldierstationed in Egypt had escorted several consignments of contrabandthrough Cairo, dressed in his uniform, thereby enabling lorries carryingthe contraband to cross checkpoints without being searched. It washeld that there was a fiduciary relationship between him and the Crownwhich entitled the Crown to recover the money he had made in theprocess.

Situations in which constructive trusts have beenimposed

The types of factual situations in which the courts have imposedconstructive trusts on fiduciaries are many and varied. They include:

Where a fiduciary has received remuneration to which he is not entitled

A trustee or other fiduciary is under a duty not to make unauthorisedpayments to himself or accept unauthorised payments out of fundsbelonging to his principal, or otherwise appropriate to himselfpayments received from third parties to which his principal is properly

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entitled. Where he does so he is liable to account as a constructivetrustee for the sums received, as seen in Sugden v Crossland (1856): £75paid to trustee by his successor as consideration for retiring from trust;Erlanger v New Sombrero Phosphate Co (1898): unauthorised sale at aprofit of company promoter’s property to the company; Williams vBarton (1927): commission received by trustee for bringing trustbusiness to his employers, a firm of stockbrokers; Re Macadam (1946):directors’ fees received by trustees who were appointed to the boardon the strength of power to appoint exercisable by the trust (but contrastwith Re Gee (1948) and Re Dover Coalfield Extension (1908)); and Guinnessplc v Saunders (1990): payment to company director under a contractnot approved by the board for negotiating proposed take-over ofanother company

Where a fiduciary enters into a transaction on his own behalf which heshould have pursued for his principal’s benefit

In such an event, the fiduciary will be obliged to hold any benefitsaccruing from the transaction on a constructive trust for his principal.The position in this regard is exemplified by: The rule in Keech v Sandford (1726)

According to this rule, where trust property includes a leaseholdinterest, the trustee is bound on the expiry of the term to seek a renewalon behalf of the trust, and if he renews the lease on his own behalf hewill be obliged to hold the new lease on constructive trust for thebeneficiaries even if it was the lessor who had declined to renew infavour of the trust.

The rule has subsequently been extended to other persons in afiduciary position, such as personal representatives, agents andpartners (see, for example, Re Biss (1902)). It has also been applied in asituation where a husband who held the lease of a matrimonial homeon trust for himself and his wife, purchased the leasehold reversion fromthe lessor (see Protheroe v Protheroe (1968)). Regal (Hastings) Ltd v Gulliver (1942)

The principle underpinning the decision in Keech v Sandford was re-affirmed in a different context in this case. Here, R Ltd formed asubsidiary company, A Ltd, to secure the leases of two cinemas. A Ltdhad a share capital of £5,000, but R Ltd only had the resources to payfor £2,000 worth of shares. The cinema owner would not grant the

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leases unless all the shares were fully paid up. The directors andcompany solicitor of R Ltd subscribed for the balance. Thisarrangement was never formally authorised or ratified by theshareholders as a body. R Ltd was later sold and in the process thedirectors made substantial profits from their share holding in A Ltd.The new owners of R Ltd sued in the company’s name to recover theprofits, and the directors were held to be accountable as constructivetrustees for these profits (see, also, Industrial Development ConsultantsLtd v Cooley (1972)).

Regal (Hastings) must, however, be contrasted with Commonwealthcases such as Peso Silver Mines Ltd v Cropper (1966) (Canada) andQueensland Mines Ltd v Hudson (1978) (Australia), in which the courtsdisplayed more sympathy towards directors who profited fromcommercial opportunities not taken up by their companies.

Use of confidential information by fiduciary for his own ends

Where a fiduciary exploits confidential information or knowledgeacquired in his fiduciary capacity for his own benefit he is placed inthe position of a constructive trustee with regard to such benefit. Inthe leading case of Boardman v Phipps (1967), B, a solicitor to a trust,and TP, one of the beneficiaries, were able to take over and profitablymanage a company in which the trust had a substantial share holdingby utilising information and opportunities which came their waypurely as a result of their connection with the trust. It was held by theHouse of Lords that, even though B and TP had acted honestly intheir dealings with the trust, they were liable to account as constructivetrusts for the profits accruing to them from the venture.

Receipt of bribes

Whereas in the situations outlined above, the fiduciary’s liability toaccount is enforced by means of a constructive trust, the positionhas long been different with regard to the receipt of bribes byfiduciaries. In this connection, it was established by the Court ofAppeal in Lister & Co v Stubbs (1890) that where a fiduciary accepts abribe, his principal will have a personal claim against him for theamount, but not a proprietary claim, as the fiduciary will not beregarded as a constructive trustee of it. Although this decision hasbeen followed in cases such as Powell and Thomas v Evans Jones & Co(1905); and Iran Shipping Lines v Denby (1987), it has been criticisedby Oakley, in Constructive Trusts and Hayton and Marshall. It is alsosignificant that the decision was recently called into question in the

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New Zealand case of Reid v AG For Hong Kong (1993), where thePrivy Council decided that a public servant who bought real propertywith bribes received in the course of his employment held theproperty on a constructive trust for the government. The decision inReid has itself been criticised by Watts (1994) 110 LQR 179, whoexpresses his doubts about the imposition of a constructive trust ona bribe-taking fiduciary, thereby conferring on his principal (whomay have suffered no loss from the misapplication of his property) aproprietary remedy which could operate unfairly against othercreditors of the fiduciary.

The English courts have not yet made unequivocally clear whetherthey will adopt the Privy Council’s view in Reid, in preference to thatof the Court of Appeal in Lister. It is, however, of some significancethat in Halifax Building Society v Thomas (1996) the Court of Appealrefused to impose a constructive trust on the authority of Reid,against T who had fraudulently obtained a mortgage from HBS bymisrepresenting his residence and creditworthiness. The house hadsince been sold by HBS and the mortgage fully discharged from theproceeds of sale, and HBS now claimed that T was a constructivetrustee of the surplus proceeds for the benefit of HBS. The courtrejected this claim, holding that the relationship between T and HBSwas that of debtor and creditor and that T’s wrongdoing did nottranslate HBS into the owner of the entire beneficial interest by wayof constructive trust. In coming to this conclusion, the court notedthat no such trust arose in Lister, where a debtor-creditor relationshiphad similarly been found to exist. While acknowledging that Listerhad been subjected to much criticism and disapproval in Reid, thecourt nevertheless declined to follow Reid by imposing a constructivetrust on the surplus proceeds.

Strangers as constructive trustees

Where a trustee (or other fiduciary) improperly allows property orfunds entrusted to him to fall into the hands of strangers, he will beliable for any loss occasioned to the beneficiaries. Where the trustee isnot in a position to make good the loss, considerable scope exists forimposing a constructive trust on the stranger. This may be done onany of the following grounds, namely: • that the stranger has wrongly assumed responsibility for

administering the trust (as a trustee de son tort);

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• that the stranger is as an accessory who has assisted the trustee orother fiduciary in disposing of property. In the past, such liabilityhas been dealt with under the heading of ‘Knowing Assistance’. Inthe wake of the Privy Council’s decision in Royal Brunei Airlines vTan (1995), however, ‘it is now more appropriate’, as Oakley pointsout in (1996) 10 Trust Law International 53, ‘to refer to this form ofliability as accessory liability rather than as liability for knowingassistance’.

• that the stranger has knowingly received such property from thetrustee or other fiduciary.

Strangers who will not be liable as constructive trustees

There are three situations in which a stranger will not be affixed withliability as a constructive trustee. Where the stranger acquires trust property as a bona fide purchaser forvalue without notice

See Pilcher v Rawlins (1872). Where the stranger has received trust property or funds as an innocentvolunteer

In such instances, the beneficiary can trace the property into the handsof the volunteer if it still exists in some traceable form. However, thevolunteer is not deemed to stand in a fiduciary position with regardto the beneficiary. Consequently, he will not incur the liability of aconstructive trustee if the property has passed out of his hands withouthis being aware of the trust (see Re Diplock (1948); Re Montagu’s ST(1987); Agip (Africa) Ltd v Jackson (1992), and the Westdeutsche case). Where the stranger is an agent acting on the trustee’s behalf

It is commonplace for trustees to delegate certain aspects of theirresponsibilities to agents like solicitors, stockbrokers or valuers andto entrust such agents with trust funds or property. In such an event,the position as outlined by Bacon VC in Lee v Sankey (1872), is that ‘amere agent of trustees is answerable only to his principal and not tothe cestui que trust in respect of trust monies coming into his handsmerely in his character as an agent’. Subsequent cases such as Barnes vAddy (1874); Mara v Browne (1896) and Williams-Ashman v Price and

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Williams (1942) have also confirmed that an agent acting on behalf of atrust will not ordinarily be liable as a constructive trustee for any lossto the trust estate once he has acted honestly in the performance of hisagency. See, also, the Trustee Act 2000, Chapter 6 below.

As Gardner explains in (1996) 112 LQR 56, this benevolent judicialattitude towards agents arose partly from a sense of simple justiceand partly from the fear that if the liability of the agent was stricter,many would be deterred from acting as trustees.

Where, however, the agent goes beyond his duties and proceeds tointermeddle in the administration of the trust by doing acts which arecharacteristic of a trustee, this may render him liable as a trustee deson tort. Furthermore, where an agent is adjudged to have acted in amanner which shows dishonesty or want of probity, he may be liableas a constructive trustee, either for knowing receipt or knowingassistance (see Carl-Zeiss Stiftung v Herbert Smith (1969)).

Imposition of a constructive trust on a trustee de son tort

Under the law relating to administration of estates, a stranger whowithout obtaining a grant of probate or letters of administrationproceeds to administer a deceased person’s estate is an executor de sontort and will be answerable for any impropriety in administering theestate. By the same token, cases such as Mara v Browne (1896) establishthat where a person who is not a trustee and who has no authorityfrom the trustee becomes involved in administering the trust estate,he is a trustee de son tort and will be liable under a constructive trust tothe beneficiaries for the trust assets, as well as for any loss occasionedby him.

Liability as an accessory

The courts have long accepted that a stranger to a trust who assists atrustee in committing a breach of trust will be liable as a constructivetrustee for any loss occasioned by the breach. As far back as 1874,Lord Selborne declared in Barnes v Addy that such liability would beimposed on a stranger who had ‘assiste[d] with knowledge in adishonest or fraudulent design on the part of the trustees’. In muchthe same vein, Esher MR signified in Soar v Ashwell (1893) that astranger would be liable where he ‘knowingly assisted in a fraudulentand dishonest disposition of the trust property’.

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Where misappropriated property or funds have been disposed ofby a stranger on the instructions of a dishonest trustee or other fiduciarythis will be not ordinarily be treated as a case of knowing receipt, butwill be dealt with in the context of accessory liability (Agip (Africa) Ltdv Jackson).

Moreover, as seen from Eaves v Hickson (1861) and the Westdeutschecase, a stranger may be liable as an accessory where he assists in orfacilitates a breach of trust without having ever been in receipt of trustproperty or funds. As Pettit points out, however, imposing aconstructive trust on a stranger who has never received trust propertyis somewhat anomalous, for, on general principles, a person becomesa trustee only if he has property vested in him. Even if it is acceptedthat a stranger who assists in disposing of property without everreceiving it is a constructive trustee, his liability is personal rather thanproprietary and the remedy of tracing cannot be pursued against himin respect of such property.

Elements of accessory liability

In Baden Delvaux & Lecuit v Société Générale etc (1983), Peter Gibson Jlaid down four conditions for the imposition of accessory liability:

Condition 1: Existence of a trust or other fiduciary relationship.Condition 2: Existence of a dishonest and fraudulent design on the

part of the trustee/fiduciary. In articulating this second requirement,Peter Gibson J was reiterating a principle initially established in suchearly cases as Barnes v Addy (1874), and Soar v Ashwell (1893). Thereare, however, recent pronouncements to the contrary by the PrivyCouncil in Royal Brunei Airlines v Tan (1995) and the Court of Appealin Twinsectra v Yardley (1996). In the light of these pronouncements,the current legal position appears to be that a person may be heldliable as an accessory whether or not the trustee or fiduciary has beenfraudulent or dishonest.

Condition 3: Provision of assistance by a stranger to the trustee orfiduciary.

Condition 4: Guilty knowledge on the part of the stranger.Barnes v Addy and Soar v Ashwell emphasised that the stranger’s

assistance must have been given ‘knowingly’ or ‘with knowledge’.This requirement was explored more fully in Baden Delvaux wherePeter Gibson J identified five categories of knowledge which could beascribed to a stranger, namely:

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• actual knowledge that the trustee is engaged in a fraudulent breachof trust (Category (i));

• knowledge which would have been available if the stranger hadnot wilfully shut his eyes to the obvious (Category (ii)); or had notwilfully and recklessly failed to make such enquiries as a reasonableand honest person would have made (Category (iii));

• knowledge of circumstances which would indicate the facts to anhonest and reasonable man (Category (iv)); or which would put anhonest and reasonable man on enquiry (Category (v)).

There has never been any doubt that a stranger with actual knowledgeof the trustee’s breach would be liable as a constructive trustee. Equally,it has been widely accepted that a stranger who has wilfully shut hiseyes to the obvious or wilfully and recklessly failed to pursuereasonable enquiries will be treated on the same footing as if he hadactual knowledge. In the words of Millet J in Agip (Africa) v Jackson(1989), ‘conduct within categories (ii) and (iii) is dishonest and thosewho are guilty of it cannot complain if for purposes of civil liabilitythey are treated as if they had actual knowledge’. See, also, to the sameeffect the judgment of Vinelott J in Eagle Trust plc v SBC Securities (1991).

The position has never been as clear-cut where the extent of thestranger’s knowledge falls into the fourth or fifth category. Cases suchas Selangor United Rubber Estates Ltd v Cradock (No 3) (1968) and KarakRubber Co v Burden (No 2) (1972) suggested that these categories ofknowledge could give rise to liability. Peter Gibson J endorsed this inBaden Delvaux, but suggested that in the commercial context at least,liability would not be imposed on the basis of such knowledge, savein exceptional circumstances.

The view which has gained currency, however, is that a strangershould be affixed with liability as an accessory only if there had beendishonesty or want of probity on his part. On this view, knowledgewithin categories (iv) or (v), which are indicative of lack of care ratherthan dishonesty, would not render a stranger liable as an accessorySee Carl-Zeiss Stiftung v Herbert Smith; Belmont Finance Corp v WilliamsFurniture Ltd (No 1) (1979); Re Montagu’s ST (1987); Lipkin Gorman vKarpnale Ltd (1989); Eagle Trust plc v SBC Securities (1991); and PollyPeck International v Nadir (No 2) (1992).

This emphasis on dishonesty has been taken even further by LordNicholl in Royal Brunei Airlines v Tan (1995) where his Lordship held:

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• that dishonesty is a necessary ingredient of accessory liability;• that dishonesty is for the most part to be equated with conscious

impropriety and that carelessness is not dishonesty;• that ‘knowingly’ is better avoided as a defining ingredient in

determining the liability of an accessory, and the Baden scale ofknowledge is best forgotten.

Soon after Tan was decided, Rimer J in Brinks Ltd v Abu Saleh (No 3)(1995) attempted to re-introduce the concept of knowledge as arequirement for the imposition of accessory liability. His attempt toundermine the decision in Tan by returning to concepts which hadbeen specifically rejected in that case has been criticised by Oakleywho suggests in (1996) 10 Trusts Law International 53, that it shouldnot be followed. Further weight is added to this by the Court of Appealin the Twinsectra case, where it held that the elements of accessoryliability ‘can be taken to have been authoritatively settled… in RoyalBrunei Airlines v Tan’.

The problem with disregarding the element of knowledge in themanner suggested by Lord Nicholl in Tan is that even if dishonesty isadopted as the yardstick for imposing liability on an accessory, establishingsuch liability will usually necessitate an inquiry into the accessory’s stateof knowledge. Consequently, as Gardner points out in (1996) 112 LQR 1:‘it is doubtful that the new law of direct reference to a concept of dishonestyobviates any need for an exegesis upon cognisance.’

Knowing receipt or dealing

Cases in which a constructive trust will be imposed on a stranger onthe basis of knowing receipt of trust property fall into three broadcontexts: (i) Where the recipient is aware at the outset that the property has

been transferred to him in breach of trust. For example:(a) where a beneficiary under a trust knows that he has received

more than his share of the trust property; he will be obligedto hold the surplus on a constructive trust; or

(b) where a creditor is aware that the debt due to him has beenpaid not from the debtor’s personal resources, but from fundsheld by him as a trustee or fiduciary (see Nelson v Larholt(1948) and International Sales and Agencies Ltd v Marcus (1982)).

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(ii) Where the recipient had no notice of the trust at first, but, havingbecome aware of the trust, deals with the property in a mannerthat is inconsistent with the rights of the beneficiaries. Forexample, where a trustee transfers trust funds to an innocentvolunteer and the latter uses the money to buy property in hisown name after he learns of the trust, he will hold the propertyon a constructive trust (see Re Diplock (1948)).

(iii) Where the recipient knew of the trust from the beginning withoutthe initial receipt being in breach of trust, but he then deals withthe property in a manner which is inconsistent with the trust.

The types of knowledge required

Judicial opinion has been divided with regard to which of the fivecategories of knowledge outlined in Baden will serve to render therecipient liable as a constructive trustee. A number of pre-Baden casessuch as Selangor United Rubber Co v Cradock (No 3); Karak Rubber Co vBurden (No 2) (1972) and Belmont Finance Co v Williams (1979) favouredthe view that knowledge within any of the categories would sustainliability for knowing receipt.

By contrast, in Re Montagu’s ST (1987), Megarry VC held that forpurposes of knowing receipt, ‘knowledge is not confined to actualknowledge but includes at least knowledge of types (ii) and (iii) in theBaden case… Whether knowledge of the Baden types (iv) and (v) sufficesfor this purpose is at best doubtful; in my view it does not’. This viewwas subsequently endorsed by Alliot J and the Court of Appeal inLipkin Gorman v Karpnale (1989) and has been reinforced by Vinelott Jin Eagle Trust plc v SBC Securities (1991), and Knox J in Cowan De GrootProperties Ltd v Eagle Trust plc (1992).

On the strength of these decisions, Pearce and Stevens haveconcluded that ‘the weight of authority of recent cases supports theview that a constructive trust will only be imposed upon the recipientof trust property who had knowledge within the first three categoriesof the Baden classification. Only in such circumstances will he haveacted with the moral culpability justifying the imposition ofconstructive trusteeship’.

On the other hand, in Agip v Jackson (1989), Millet J stated that arecipient of property for his own benefit will be liable as a constructivetrustee if he received it with notice, actual or constructive. He thenwent on, in El Ajou v Dollar Land Holdings plc (1993), to equateconstructive notice with a failure by a recipient to pursue inquiries ‘in

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circumstances in which an honest and reasonable person would haverealised that the money [received] was probably trust money’. Theimplication of this is that, contrary to Re Montagu, something akin tonegligence of the type contemplated by categories (iv) and (v) willsuffice for the purpose of knowing receipt.

Doubts have also been expressed about the decision in Re Montaguby commentators, such as Harpum (1987) 50 MLR 1, Gardner (1996)112 LQR 56, p 85, as well as Millet J, himself, writing extra-judiciallyin (1991) 107 LQR 71. Indeed, Millet J, at p 82 of his article went so faras to propose that the recipient’s liability should be receipt-based ratherthan knowledge-based. In other words, such liability should arise oncehe had unjustly enriched himself through obtaining the property, evenif he had no knowledge or means of knowledge that the property wastransferred in breach of trust.

The issue of determining which of the Baden categories will giverise to liability for knowing receipt is further complicated by the factthat ‘these are not rigid categories with clear and precise boundaries.One category may merge into another’. Scott LJ, who drew attentionto this fact in Polly Peck International v Nadir (No 2) (1992), sought tosimplify matters by suggesting that the real question to be addressedin cases of knowing receipt is whether the circumstances in whichsuch receipt occurred should have made the recipient suspicious ofthe propriety of the transaction. It remains to be seen whether thisapproach will ultimately commend itself to the House of Lords whenit has occasion to deal with a dispute relating to knowing receipt.

Trusts of the family home

Where a couple (whether married or unmarried) have set up hometogether, subsequent events, such as the breakdown of the relationshipor the bankruptcy or death of either party, often give rise to disputesconcerning their respective interests in the family home. Where therelationship has broken down, the dispute will usually be between thecouple, but where the material event is bankruptcy, death etc, theopponent is often a third party such as a trustee in bankruptcy, mortgageeor personal representative. Depending on the circumstances, the courtmay find it appropriate to settle the dispute: (i) by exercising itsjurisdiction under the Matrimonial Causes Act (MCA) (1973); (ii) bygiving effect to any express declarations the couple may have maderegarding their beneficial interests in the property; (iii) by imposing aresulting trust or (iv) by imposing a constructive trust.

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Sections 24 and 25 of the MCA 1973

Where a dispute about the matrimonial home arises in the context ofproceedings for divorce, judicial separation or nullity, the MCA 1973empowers the court to make whatever order is just and practicable inthe circumstances, without being bound by the strict rules of propertylaw. To this end it may order either spouse to transfer or settle propertyfor the benefit of the other spouse or their children; and may vary anysubsisting agreements or settlements they have made regardingproperty.

Cases outside the ambit of the MCA 1973: Reliance cannot be placedon the provisions of the MCA 1973 where the dispute is between: • one spouse and a third party: for example, Re Densham (1975) (wife

versus husband’s trustee in bankruptcy); Midland Bank v Dobson(1986); Lloyds Bank v Rosset (1991); Midland Bank v Cooke (1995); andMcHardy v Warren (1994) (wife versus husband’s trade creditors);

• unmarried partners: for example, Cooke v Head (1972); Eves v Eves(1975); Burns v Burns (1984); Grant v Edwards (1986); Hammond vMitchell (1991); Springette v Defoe (1992); Huntingford v Hobbs (1993);Drake v Whipp (1995) and Clough v Kiley (1996) (man-mistress); andTinsley v Milligan (1992) (homosexual partners).

Where disputes about the family home do not come within the scopeof the MCA 1973, the beneficial interests of spouses or co-habitees aredetermined according to the general rules of property law. As LordDiplock pointed out in Gissing v Gissing (1971), this means that theapplicable principles are those of the law of trusts.

Express declarations regarding beneficialinterests of partners

In most instances, a party who claims a beneficial interest in thefamily home will base his or her claim on a resulting trust orconstructive trust. However, there is no need to invoke the doctrine ofresulting or constructive trusts if, at the time the property wasacquired, there was an express declaration concerning the beneficialinterest that party is to have in the property. The position in thisregard was clearly stated by Slade LJ who declared in Goodman vGallant (1986), that where a conveyance of property ‘contains anexpress declaration of trust which comprehensively declares the

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beneficial interests in the property or in the proceeds of sale, there isno room for the application of the doctrine [since] the declarationcontained in the document speaks for itself’.

Resulting trusts of the family home

Where the legal title to the family home is vested in one partner alone,having been purchased in the name of that partner (usually the man),the other partner (whether a wife or mistress) may be entitled to abeneficial interest in the property under a resulting trust. Accordingto Dixon in (1988) Denning LJ 27, this resulting trust may be immediateor cumulative.

Immediate resulting trust

Where at the time of purchase, the wife or mistress made a directfinancial contribution towards the purchase price, a resulting trust willbe presumed in her favour, which takes effect immediately the propertyvests in the man.

By the same token, where property is purchased in the name of amistress with contributions from her partner, a resulting trust will alsobe presumed in his favour.

In both instances, the resulting trust entitles the contributor to abeneficial interest in the property in proportion to the amountcontributed.

Where, however, a husband contributes to the purchase ofproperty in his wife’s name, the operative presumption is ofadvancement. It nevertheless appears from Silver v Silver (1958) andPettitt v Pettitt (1970) that less weight will now be attached to thispresumption than in the past.

Cumulative resulting trust

Where the legal title to the family home is in one partner’s name, butthe other partner contributes substantially towards paying off themortgage on the property, such cumulative contributions will entitlethe contributor to an equitable interest in the property (see Burns vBurns (1984); Winkworth v Edward Baron (1986) and Lloyds Bank v Rosset(1991)). Even though in Rosset, Lord Bridge described trusts arising inthe foregoing circumstances as constructive trusts, it is more appositeto classify them as resulting trusts, particularly where the contributor

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claims a beneficial interest proportionate to his or her contribution(see Hanbury and Martin, p 264, and Dixon, p 31).

There may also be instances where a partner has not contributed tothe purchase price or mortgage repayments but has contributedfinancially towards household expenses, thereby enabling thepartner in whom the legal title is vested to pay off the mortgage. Suchcontributions will give rise to a trust in the contributor’s favour, ifthey were made pursuant to a common intention and are referable tothe acquisition of the property. In Burns v Burns (1984), Fox LJexpressed the view that the term ‘resulting trust’ is not inappropriatewhere contributions of this nature are concerned, and Dixon suggeststhat a trust based on such contributions would be a cumulativeresulting trust. However, the preferable view which emerges fromcases such as Midland Bank v Cooke (1995) is that a trust arising in suchcircumstances will be a constructive trust rather than a resultingtrust.

Constructive trusts of the family home

Constructive trusts have featured prominently in disputes relating tothe family home since the early 1970s. The two landmark cases whichset out the principles upon which constructive trusts will be imposedin this sphere are Pettitt v Pettitt (1970), and Gissing v Gissing (1971).These cases established that where the legal title to the home is in thename of one partner, a claim by the other partner to a beneficial shareunder a constructive trust will succeed if a common intention that theclaimant will acquire an interest in the home has been expressed orcan be inferred, and the claimant has relied on this to his or herdetriment. See Gardner (1993) 109 LQR 263.

In a line of cases which included Cooke v Head (1972), Eves v Eves(1975) and, most recently, Hall v Hall (1982), Lord Denning, whileaccepting whole-heartedly that the constructive trust could be invokedin determining entitlement to the family home, chose to treat it as adiscretionary formula for adjusting the property rights of spouses andco-habitees in order to achieve a fair and just solution between them(the new model approach).

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Since Lord Denning’s departure from the Court of Appeal, therehas been a discernible movement in favour of a return to the moreorthodox principles expounded in Pettitt and Gissing. This means inessence that a spouse or co-habitee will no longer be awarded anequitable interest under a constructive trust simply because the judgeperceives this to be fair and just, but will be entitled to such an interestonly where the requisite common intention and detrimental relianceare established.

This reversion to orthodoxy was first signalled in a number of casesdecided by the Court of Appeal in the 1980s, most notably: • Burns v Burns (1984): here, an unmarried couple, co-habited together

for 19 years, 17 of which were spent in a house bought by the malepartner (M). For most of this period, the female partner (F) stayedat home to take care of M and their children. When F resumed work,she used some of her earnings for household bills and redecorationcosts but never contributed directly to the acquisition of the house.When they separated, the court held that F had not acquired anequitable interest under a constructive trust since the court foundno intention common to both parties that she would have an interestin the house, and nothing to show that M had done anything tolead her to change her position in the belief that she would acquiresuch an interest.

• Midland Bank v Dobson (1986): here, H and his wife, W, lived in ahouse purchased partly from the proceeds of sale of another houseowned by H’s mother and partly by a mortgage taken out by H.The legal title was vested in H, who repaid the mortgage withoutany financial contribution by W. H later mortgaged the house toMidland Bank as security for a loan to a company of which he wasa director. When the company defaulted on the loan, and the Banksought possession of the house, W asserted an equitable interest inthe house under a constructive trust. While the court accepted thatH and W had made oral declarations which showed a commonintention that W was to have a beneficial interest in the house, herclaim failed on the ground that she had not been induced by thatcommon intention to act to her detriment.

• Grant v Edwards (1986): in this case, another unmarried couple, Mand F, set up home in a house which was purchased in M’s name.At the time of the purchase, M persuaded F that it was best if thehouse was conveyed to him alone, so as not to complicate herpending divorce proceedings. M paid the initial deposit on the house

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as well as all the mortgage instalments, while F contributedsubstantially towards meeting their joint household expenses. Thecourt held that M’s reason for not putting the house in their jointnames pointed to a common intention that F would have anequitable interest in the house, which F had acted on to her detrimentby contributing towards their domestic expenses to an extent thatenabled M to pay the mortgage. F was accordingly awarded abeneficial half share of the house under a constructive trust.

The aforesaid Court of Appeal decisions were subsequently reinforcedby the judgment of the House of Lords in Lloyds Bank v Rosset (1991).In this case, H and his wife, W, decided to purchase and renovate adilapidated house to be used as their family home. H was a beneficiaryunder a trust and the purchase price was paid by the trustees who,however, insisted that the house had to be conveyed to H alone. Tomeet the renovation costs, H took out an overdraft with Lloyds Bankwhich was secured by a charge on the property. He did not consult W,who assumed that the renovation would be financed out of trust funds.W devoted considerable time and effort to planning and supervisingthe renovation and also did some decorating. When H failed to repaythe overdraft, the Bank sought possession of the house, but this wascontested by W.

The Court of Appeal decided in W’s favour, holding, on theauthority of Grant v Edwards, that she had an equitable interest in thehouse under a constructive trust. On further appeal to the House ofLords, Lord Bridge took the opportunity to clarify the principles to beapplied where a spouse or co-habitee claimed an equitable interest inthe family home. According to him, the claimant could establish suchan interest either by: (a)showing that both partners had an express agreement, arrangement

or understanding (however imprecisely framed or imperfectlyremembered), that the property was to be shared and that he or shehad acted to his or her detriment or altered his or her position inreliance on their common intention; or

(b)proving that he or she made direct contributions to the purchaseprice either initially or by paying mortgage instalments, fromwhich the court could infer a common intention that the propertywas to be shared. In this latter connection, later cases have heldthat qualifying contributions will include: a wedding gift ofmoney which goes towards the purchase price (McHardy v

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Warren (1984) and Midland Bank v Cooke (1995)); and a loan toboth spouses to cover the deposit on the house (Halifax BuildingSociety v Brown (1995)).

On the basis of these principles, Lord Bridge rejected W’s claim to anequitable interest, since there was no express agreement between Hand W which pointed to a common intention that W would acquiresuch an interest, and she had not contributed directly to the purchaseprice of the house.

Reliance has been placed on the dictum of Lord Bridge in Rosset, ina host of subsequent cases. Thus, for instance: • In Hammond v Mitchell (1991), M and F began living together after

M separated from his wife. Two years later, M bought a bungalowwhich he had conveyed into his name. He told F that he did so fortax reasons and because of his imminent divorce, and assured herthat a half share of the bungalow would be hers when they gotmarried. M paid all the bills on the property while F met some ofthe household expenses. F also assisted M in his business and whenM sought a loan for his business ventures, F allowed the bungalowto be used as security. Waite J treated M’s explanation for havingthe property conveyed into his own name and his assurances to Fas evidence of an express agreement that the bungalow was to beshared. He also found that F had acted to her detriment by acceptingthe risk of putting up the bungalow as security for the loan andawarded her an equitable half share in the bungalow.

• In Springette v Defoe (1992), M and F, who had been co-habitingtogether in a rented council house, received an offer from the councilto buy it for £14,445. This price took account of a 41% discountgiven to F on account of her having been a council tenant for manyyears. The couple took out a joint mortgage of £12,000 to financethe purchase. Of the remaining £2,445, M paid £180 and F paid therest. When the relationship broke down, a dispute arose regardingtheir respective beneficial interests in the house. The house wasregistered in their joint names and the trial judge awarded themequal shares, on the ground that there was a common, albeituncommunicated, intention between them that each would take50% of the house. The Court of Appeal rejected this findingregarding the common intention of the parties. According to thecourt, Rosset made it clear that such a common intention had to befounded on an express agreement or understanding between the

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parties, and there was no evidence that M and F had ever discussedtheir shares. In the absence of such a common intention, the courtnevertheless held that the financial contributions of both partiesgave rise to a resulting trust with F’s interest being assessed as 75%(including her 41% discount) and M’s at 25%.

• In Midland Bank v Cooke (1995), on the other hand, a spouse’sfinancial contribution to the acquisition of the matrimonial homewas treated in an entirely different light. Here, H and W beganmarried life in a house which was purchased in H’s name. Thepurchase price of £8,500 was financed by a mortgage of £6,450and a wedding gift of £1,100 from H’s parents, with the balancebeing paid out of H’s savings. The mortgage instalments werepaid out of H’s earnings. Although W did not contribute towardspaying the mortgage, she devoted her earnings as a teacher tothe costs of running the home. After some years, the initialmortgage was replaced by a new one in favour of Midland Bank,which now sought possession of the house. In response, Wclaimed that she was beneficially entitled to a half share of thehouse, which overrode the Bank’s interest under the mortgage.

The trial judge held that W’s beneficial interest depended on hercontribution to the purchase price, which he quantified at 6.74%,representing a half share of the £1,100 wedding gift. On appeal,Waite LJ, who delivered the Court of Appeal judgment, agreed withthe trial judge that W’s share of the wedding gift was to be treated asa direct contribution which gave her a beneficial interest in thehouse. He, however, went on to hold that in so far as there was noexpress agreement or understanding between H and W as to thebeneficial share she was intended to take, the court was not boundto deal with the matter on the strict basis of the trust resulting fromtheir cash contributions to the purchase price. Rather, it wouldassume that they intended their respective interests to be assessedby undertaking a survey of the whole dealings between them.Taking everything into account, he concluded that the couple’spresumed intention was that they would share the beneficialinterest in the house equally, and accordingly awarded W a halfshare. (See, also, McHardy v Warren (1984).)

• Despite the concerns of commentators such as Dixon in (1997) Conv67, and O’Hagan (1997), that Waite LJ may have gone too far in hisquest for flexibility within the family property regime, Drake v Whipp(1995) (which was decided soon after Cooke) favoured a ‘broad

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brush’ approach not entirely dissimilar to that advocated in Cooke.In Drake, M and F, who had been living together outside marriage,purchased a barn for conversion into a home. M paid 60% of thepurchase price, while F paid 40% and it was conveyed into M’sname. M contributed a further £116,000 to the conversion costs,while F contributed about £13,000 and also paid for their food andother household expenses. When the relationship broke down andF claimed a beneficial interest in the property, the trial judge heldthat there was a resulting trust in her favour, entitling her to abeneficial share of 19.4% based on her contribution to the totalpurchase and conversion costs. On appeal, it was held that thedispute should have been dealt with on the basis of a constructiverather than a resulting trust. Peter Gibson LJ discovered that therewas evidence of an express understanding between the parties thatthe woman would have a beneficial interest which, coupled withthe inference to be drawn from her contributions, pointed to aconstructive trust in her favour. He then held that she was entitledunder this trust to a one-third share of the beneficial interest.

• It emerges, however, from Clough v Kiley (1996) that this broad brushapproach has no place where the parties not only evince a commonintention that the beneficial interest in the family home is to be shared,but also specify the share to be taken by each partner. In this case, Mbegan an affair with F who was going through a divorce. A yearlater, they decided to purchase a farm, consisting of a farmhouse inpoor condition and an adjoining granary which was suitable forconversion into a cottage. M had an outstanding mortgage on anotherhouse and his building society would not grant him two simultaneousmortgages. The mortgage to purchase the farm was therefore takenout in the name of M’s son, with M assuming responsibility for therepayments. The farmhouse needed extensive renovation, which Malso paid for, while F cleaned the house, sanded the floors, paintedthe inside and outside, supervised the renovation work and cateredfor the workmen. After the renovation of the farmhouse wascompleted, and the couple had moved in, work began on convertingthe granary and F played an active role in this, as she had done in therenovation of the farmhouse.

Soon after the couple moved into the farmhouse, M applied fora bank loan to discharge the mortgage in his son’s name so thatthe son could convey the farm to him. The bank would onlyapprove the loan if F signed a document confirming that shehad no interest in the farm. She agreed to do so, only after M assured

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her that they each had a 50% share in the property which wasunaffected by her signing the document. When M later ran intomoney problems, F, who by then had received £18,000 under herdivorce settlement, paid £12,500 out of this into M’s bank account,some of which went towards clearing his overdraft and the rest onconverting the granary. In requesting this money, M again reassuredF that she had a 50% share of everything he owned.

The couple later became engaged but the relationship broke downand F commenced proceedings, claiming a half share of the farm.The trial judge found ample evidence of an express commonintention that F was to acquire a beneficial interest in the farm. Hewas also satisfied that F’s active involvement in the renovation, hersigning of the bank document on M’s persuasion and her financialassistance to M, amounted to detrimental reliance. He concludedthat a constructive trust had arisen and, after taking stock of theirrelationship, decided that her fair share was a quarter. On appeal,the Court of Appeal, having reviewed the evidence, held that Mand F had expressly agreed to share the farm equally and that thetrial judge was wrong not to give effect to this agreement. The courtaccordingly awarded F a half share.

• Finally, it has recently been held in Re Schupman (1997) that aconstructive trust may arise in favour of a spouse or co-habitee onthe strength of Lloyds Bank v Rosset (1991), not only where the legaltitle to the family home is vested in the other partner, but also whereit is vested in a company owned by that other partner.

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5 Charitable Trusts


• the advantages of charitable trusts vis à vis private trusts• the basis for determining which purposes are charitable and

the four categories of charitable purposes• the public benefit requirement• the requirement that a trust must be exclusively charitable• the nature and effect of the cy-près doctrine

For centuries, public-spirited persons have sought to promote thegeneral good of their society and the well being of their fellow citizensby donating part of their wealth to charity. Some donors have beencontent to make gifts to voluntary bodies established for charitablepurposes to assist in carrying out these purposes. Others have preferredto appoint trustees of their own choice to hold property on trust forpurposes which are charitable.

The significance of charitable status

Responsibility for deciding whether a trust or voluntary body ischaritable lies with the courts and the Charity Commissioners in theirrespective spheres of operation. Where a trust or voluntary body isadjudged to be charitable, this is an acknowledgment that it is of suchbenefit to the public that it merits special treatment under the law.Charitable trusts therefore enjoy several advantages not available totrusts within the private domain:

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• A private trust will generally fail unless the intended beneficiariesare identified with sufficient certainty. By contrast, a charitable trustis capable of being enforced by the Attorney General where thesettlor merely outlines a purpose without referring either directlyor indirectly to human beneficiaries. For example, if a testator leaves£10,000 ‘to A and B on trust for charitable purposes’ withoutanything more this will be valid.

• A private trust will ordinarily fail where it is impossible to carryout the settlor’s intention whereas the operation of the cy-prèsdoctrine means that a charitable trust is much less likely to fail onthis account.

• Charitable trusts are capable of enduring for much longer periodsthan private trusts and there are currently many charities fundedby endowments which are several centuries old. Such trusts arevalid because the rule against perpetual duration which seeks toensure that trust capital is not preserved for an excessively longperiod does not apply to charities.

• Charities enjoy tax advantages that are unavailable to privatetrusts or non-charitable bodies, for example, exemptions fromincome tax, capital gains tax, corporation tax, value added tax,stamp duties and relief from non-domestic rates. This, above otherreasons, is why charitable status is considered especially desirableand explains the involvement of the Inland Revenue in manycharity cases.

The requirements of a valid charitable trust

A charitable trust must satisfy three requirements, namely: • the purposes or objects of the trust must be charitable;• the trust must promote some public benefit;• the trust must be wholly and exclusively charitable.

Charitable purposes

In ordinary usage, the words ‘charity’/‘charitable’ connote the idea ofgoodwill or benevolence towards one’s fellow men. As LordMacNaghten emphasised in Commissioners of Special Income Tax v Pemsel(1891) the popular meanings of these words are not identical with their

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legal meanings. Accordingly, it is not all purposes which may beregarded as charitable in the popular sense that will be charitable inthe legal sense. By the same token, the fact that a donor considers thepurpose of his gift to be charitable does not invariably make itcharitable in the eyes of the law (see Re Hummeltenberg (1923) and RePinion (1965)).

Viscount Simonds stated in IRC v Baddeley (1955) that there is nolimit to the number and diversity of ways in which a man may seek tobenefit his fellow men. It is thus not surprising that Parliament andthe courts have been unable to provide a single all-embracing definitionof charity in the legal sense. The nearest we have to a statutorydefinition is s 96(1) of the Charities Act (CA) (1993) which definescharity as meaning ‘any institution, corporate or not, [including anytrust]… established for charitable purposes’.

This definition is not entirely helpful as it does not elaborate onthe types of purposes which are charitable. Accordingly, in order todetermine whether a purpose is charitable, it is still necessary torefer to the preamble to the Charitable Uses Act (CUA) 1601 as thecourts have done for centuries. The approach adopted by the courtshas been: • to recognise as charitable any trust whose purpose fits into any of

the categories of purposes that were specifically declared to becharitable by the CUA 1601; and

• to extend, by analogy, the range of recognised charitable purposesto include those which come within the spirit and intendment ofthe CUA 1601. As Lord Wilberforce observed in Scottish Burial ReformSociety v Glasgow City Corporation (1968), this pragmatic approachhas enabled the courts over the centuries to develop the law in thisfield in a manner which has kept pace with changing social trends,needs and attitudes.

The purposes enumerated in the CUA 1601, and those falling withinits spirit and intendment, have been classified into four headings byLord MacNaghten in the Pemsel case, namely: • the relief of poverty;• the advancement of education;• the advancement of religion; and• other purposes beneficial to the community.

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The relief of poverty

The preamble to the CUA 1601 refers to ‘the relief of aged, impotentand poor people’. This has been construed disjunctively so that a trustwill be charitable if its beneficiaries are poor but not aged or sick (seeRowntree Housing Association v AG (1983)).

In seeking to ascertain whether a trust is for the relief of poverty, aninitial difficulty stems from the fact that poverty, as Evershed MRremarked in Re Coulthurst (1951), ‘is a word of wide and somewhatindefinite import’. He suggested as a general proposition that personscan fairly be regarded as poor if they have to ‘go short’ in the ordinaryacceptation of the term, regard being had to their status in life and soon. What amounts to poverty may thus range from utter destitutionto the relative deprivation felt by those who have known better times.

The most obvious way of creating trusts for the relief of poverty isfor prospective settlors to employ the words ‘poor’/‘poverty’ as inAG v Peacock (1676) and Re Darling (1896); or similar terms such as‘needy’: Re Reed (1893) and Re Scarisbrick (1951); ‘indigent’: Weir v Crum-Brown (1908); ‘limited means’: Re Gardom (1914); or ‘fall[en] on evildays’: Re Young’s WT (1953), etc.

Even where the word ‘poor’ or a similar expression has not beenused it may still be possible to deduce from the nature and context ofa gift that it is to relieve poverty. In Biscoe v Jackson (1877) a legacy forthe foundation of a cottage hospital and soup kitchen was held to havebeen intended by the testator to benefit the poor. Also, in Re Lucas(1922) a fund, out of which modest payments were to be made to theoldest respectable inhabitants of Gunville, was held to have beenintended for the benefit of the aged poor in the locality, because of thesmall amounts involved.

However, a trust will not be classified as charitable under thisheading, where it is not exclusively for the benefit of the poor in generalor a particular class of poor persons. In Re Gwyon (1930), a fund toprovide clothing for boys in Farnham was held not to be for the reliefof poverty since there was nothing to indicate that only the children ofthe poor could receive such clothing. Again, in Re Sander’s WT (1954),a scheme intended to provide houses for the working classes in a givenlocality was held not to be for the relief of poverty since not all thosebelonging to ‘the working classes’ were poor persons. Contrast withRe Niyazi’s WT (1978).

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Finally, as Peter Gibson J emphasised in the Rowntree case, a giftwill only be valid under the present heading where the application ofthe trust fund is intended to relieve needs which are associated withthe condition of poverty, in so far as the persons in such a conditioncannot alleviate such needs from their own resources or can only doso with difficulty.

The advancement of education

The preamble to the CUA 1601 specifically refers to ‘maintenance ofschools of learning, free schools and scholars in universities’ and ‘theeducation and preferment of orphans’. In line with this, the ancientuniversities and public schools have for centuries been recognised ascharitable foundations and the same status has been been accorded tonewer universities, colleges and schools. Purposes falling within theterms of the preamble, which the courts have upheld as charitableinclude the endowment of professorships and lectureships (AG vMargaret & Regius Professors In Cambridge (1682)); the provision ofstipends for fellows and scholars of a college (The Case of Christ’sCollege Cambridge (1757)) and the award of prizes in schools (ReMariette (1915)).

Since the CUA 1601 was enacted, it has come to be recognised thatthe advancement of education encompasses much more than the mereprocess of learning in a classroom environment. As Wilberforce Jobserved in Re Hopkins’ WT (1964), ‘the word “education” must beused in a wide sense, certainly extending beyond teaching’. InIncorporated Council of Law Reporting v AG (1972), Buckley LJ describededucation in this extended sense as ‘the improvement of a useful branchof human knowledge and its public dissemination’.

Examples of purposes that have been upheld as charitable in theeducational sphere include the following.

Research

There is no difficulty in recognising as charitable, the conduct ofresearch in such fields as medicine, science or technology, sinceadvances in these fields are likely to be of demonstrable practicalbenefit to the community.

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The position is less clear cut where the research is into areas ofknowledge which are unlikely to have far-reaching practicalapplications, as seen from cases such as Re Shaw’s WT (1952), and ReHopkins’ WT (1964). In Re Shaw’s WT, the proposed research was intothe advantages of replacing the existing 26 letter alphabet with a 40letter alphabet. Harman J considered that the object of such researchwas ‘merely the increase of knowledge’ and held that it was notcharitable. A more liberal view was taken in Re Hopkin’s WT, whereresearch by the Francis Bacon Society with a view to locating the Bacon-Shakespeare papers was held to be charitable. In reaching thisconclusion, Wilberforce J signified that research would be consideredcharitable if it was of educational value to the researcher or so directedas to lead to something that would pass into the store of educationalmaterial or improve the sum of communicable knowledge in aparticular area.

The principles to be applied in determining whether any givenresearch is charitable have been clarified by Slade J in Re Besterman(1980) and McGovern v AG (1981). He states that: 1 A trust for research will ordinarily qualify as charitable if (a) the

subject matter of the purported research is a useful subject of study;(b) it is contemplated that the knowledge acquired as a result of theresearch will be disseminated to others; and (c) the trust is for thebenefit of the public or a sufficiently important section of the public.

2 In the absence of a contrary context the court will be readily inclinedto construe a trust for research as importing subsequentdissemination of the results.

3 For a trust for research to be charitable, it is not necessary (a) forthere to be a teacher/pupil relationship; or (b) that the persons tobenefit from the knowledge to be acquired should be persons whoare in the course of receiving education in the conventional sense.

Relying on these principles, Slade J held in Besterman (1980) that abequest to the Taylor Institute, Oxford, which was engaged inundergraduate and postgraduate teaching and research into medievaland modern European languages, was charitable. By the same token,in McGovern (1982) he accepted that research by Amnesty Internationalinto human rights issues was essentially charitable, but decided thatAmnesty International was not a charity because its other objects werepolitical.

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Compilation and publication of educational material

In Incorporated Council of Law Reporting v AG (1972), a non-profit makingbody engaged in publishing law reports was held to be charitable (see,also, Re Stanford (1924) (publication of a new English dictionary), andJoseph Rowntree Fund v Commrs for Customs & Excise (1994) (maintenanceof computer database by a University Department for use by the JosephRowntree Fund in its charity work)).

Museums etc

The courts regard the foundation and maintenance of such amenitiesas museums, libraries, zoological gardens, etc to be of sufficienteducational value to be charitable (see British Museum Trustees v White(1826); Re Lopes (1931); and Liverpool CC v AG (1995)).

Learned/professional bodies

It is clear from a host of cases that various learned societies andprofessional bodies are deemed to be engaged in activities whichcontribute to the advancement of education and are therefore to beaccorded charitable status (see Royal College of Surgeons v NationalProvincial Bank (1952); Royal College of Nursing v St Marylebone BC (1959);Institute of Civil Engineers v IRC (1932) and CITB v AG (1973)).

Artistic activities

Cases such as Re Shakespeare Memorial Trust (1923), Royal Choral Societyv IRC (1943) and Re Delius (1957), show that advancement of educationincludes promoting various art forms. As Greene MR put it in RoyalChoral Society v IRC: A body of persons established for the purpose of raising the artistictaste of the country is established for educational purposes becausethe education of artistic taste is one of the most important things inthe development of a civilised human being. By contrast, in Re Pinion (1965), a gift of an art studio and its contents,with directions for it to be converted into a museum to be open to thepublic was held not to be charitable. Experts testified that the collectionwas no more than a haphazard assembly of objects with little artistic

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or aesthetic merit, and the court decided that no useful educationalpurpose could conceivably be served by ‘foisting such a pile of junkon an unsuspecting public’.

Sports and pastimes

A trust to promote sports or leisure among a group of persons is notgenerally treated as charitable. The courts have, however, acceptedthat the provision of sporting facilities or the promotion of variousgames either in a particular school or among students or pupilsgenerally is charitable in the educational sphere, since recreation iswidely regarded as an important facet of a child’s education.

Thus, in Re Mariette (1915), a gift to a school, to enable it to buildSquash and Eton Fives courts for its pupils was upheld as charitable.Also, in IRC v McMullen (1981) a trust to provide facilities for pupilsat schools and universities for football or other games or sports washeld to be charitable.

An issue raised in Re Dupree’s DT (1945) that remains unresolved iswhere the line is to be drawn between sports and pastimes that areeducational and those that are not. Vaisey J held in this case that anannual youth chess competition was charitable, but in so doingdeclared: One feels, perhaps, that one is on a rather slippery slope. If chess, whynot draughts? If draughts, why not bezique and so on to bridge andwhist and by another route, to stamp collecting and the acquisition ofbird’s eggs?

Students’ Unions

Almost every university or college has a students’ union which existsprimarily to promote the welfare of its student body. As seen fromBaldry v Feintuck (1972), London Hospital Medical College v IRC (1976),AG v Ross (1986) and Webb v O’Doherty (1991), such unions have beenrecognised as charitable on the footing that their activities serve toadvance the main educational purpose of their parent university/college.

One point that emerges clearly from the decisions in Baldry v Feintuck,AG v Ross, Webb v O’Doherty and Union of Students of Warwick Universityv Commrs of Customs & Excise (1995), is that in so far as unions are accorded

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charitable status on the premise that their purposes are educational,they can be restrained from devoting their funds to overtly politicalcauses. This accords with the well established principle that: Political propaganda masquerading…as education is not educationwithin the [preamble to the CUA 1601]… In other words it is notcharitable [per Vaisey J in Re Hopkinson (1949)]. See, also, Bonar Law Memorial Trust v IRC (1933), Re Bushnell (1975)and McGovern v AG (1981).

The advancement of religion

The repair of churches is the only religious purpose expressly set outin the CUA 1601. However, within a few years after the Act came intoforce, the courts began to accept other religious purposes as charitable.For example, in Pember v Inhabitants of Kington (1639), a gift to maintaina preaching minister was pronounced to be charitable. Today, a widerange of purposes and organisations are recognised as charitable withinthe religious sphere.

Advancement of religion in the context of Christianity

When the CUA 1601 was enacted, Christianity was the only religionknown to the vast majority of the population. Consequently, theadvancement of religion has been overwhelmingly associated withChristianity, and the courts have recognised as charitable a host ofChristian denominations including: • the Church of England (Re Barnes (1930) and Re Tonbridge School

Chapel (No 2) (1993));• the Roman Catholic Church (Re Hetherington (1989), Re Flynn (1948)

and Re Schoales (1930));• the Baptist Church (Re Strickland’s WT (1936));• the Unitarians (Re Nesbitt’s WT (1953)); and• the Exclusive (Plymouth) Brethren (Holmes v AG (1981)). Within the realm of Christianity, gifts for a wide range of purposeshave been held to be charitable. These include: • the upkeep of the clergy (Middleton v Clitheroe (1798), Re Williams

(1927) and Re Forster (1939));

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• the promotion of the missionary work of bodies such as the ChurchMissionary Society (Re Clergy Society (1856) and the Society for thePropagation of the Gospel in Foreign Parts (Re Maguire (1870));

• the support of religious communities which undertake spiritual,pastoral or social work involving contact with the outside world(see Re Banfield (1968), but contrast with Gilmour v Coats (1949));

• the saying of masses for the dead (Re Hetherington (1989)) and thepreaching of sermons (Re Parker’s Charity) (1863));

• the erection and maintenance of churches, chapels etc, or partsthereof such as a stained glass window (Re King (1923)); a chancel(Hoare v Osborne (1866)); church bells (Re Pardoe (1906)); the gallery(AC v Day (1900)); the church organ (AG v Oakover (1736)) or themaintenance of graveyards and monuments attached to the church(Re Vaughan (1886); Re Douglas (1905), and Re Eighmie (1935)).

Even where a gift is not expressed to be for a specific purpose of areligious nature, the courts have often been able to deduce from thelanguage that the gift is intended to further the cause of Christianityand is therefore charitable, as in Re Darling (1896) where the materialwords were ‘to the service of God’ and (Re Barker’s WT (1875)), wherethe gift was ‘for God’s work’.

In the same manner, where a donor makes a gift to an official suchas a bishop or vicar, who by virtue of his office performs religiousfunctions, without specifying any purposes, the courts have held insuch cases as Re Ganard (1907); Re Flinn (1948); and Re Rumball (1956),that this will be a valid charitable gift for the advancement of religion.

Finally, the courts have displayed a high degree of tolerance even toobscure sects on the fringes of Christianity. In Thornton v Howe (1862),Romilly MR upheld as charitable, a trust for the publication of thewritings of Joanna Southcott, whose followers believed that she waswith child by the Holy Spirit and would give birth to a new messiah,even though the judge, apparently, regarded this belief as foolish anddevoid of foundation. Also, in Re Watson (1973), Plowman J upheld ascharitable a trust to propagate the Scriptures as expounded in the worksof a certain Hobbs, who was the leader of a small group ofundenominational fundamentalist Christians, despite evidence that theworks had no intrinsic merit. Again, in Funnell v Stewart (1996), a bequestto a small religious healing movement, which carried out its healingsessions and religious services from the home of the testatrix, was heldto be charitable. It even emerges from Orme and Durst v Associated

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Newspapers Ltd (1980) that trusts set up by the Unification Church (the‘Moonies’) had been registered as charities.

The charitable status of non-Christian faiths

In Thornton v Howe (1862), Romilly MR observed that ‘the Court ofChancery makes no distinction between one sort of religion andanother’. This view was echoed a century later in Neville Estates vMadden (1962), by Cross J, who affirmed that ‘as between religions thelaw stands neutral, but it assumes that any religion is better than noreligion at all’. In line with this he held that a trust created to buildand run a synagogue was a valid religious trust.

As British society has grown increasingly multicultural, this liberalapproach has also been adopted in dealing with other faiths. Thus, forinstance, a host of organisations which promote religions such as Islam,Hinduism and Sikhism have now been registered as charities by theCharity Commission (see, for example, Birmingham Mosque Trust Ltd vAlavi (1992)).

The position of non-religious bodies which promoteethical standards and principles

While most religions seek to regulate the conduct of adherents byimposing strict moral codes, the essence of religion is a belief in anddevotion to a higher unseen power which is deemed to be worthy ofworship and reverence. Accordingly, an ethical or moral society whichis not concerned with the worship of a supernatural being will not becharitable in the religious sense (see Re South Place Ethical Society (1980),and United Grand Lodge v Holborn BC (1957)).

Other purposes beneficial to the community

Some of the purposes set out in the CUA 1601 (notably the relief of theaged and impotent and the repair of bridges, causeways, havens,seabanks and highways) are not concerned with promoting educationor religion or relieving poverty and have thus been categorised as otherpurposes beneficial to the community.

In addition, over the years, the courts have responded to changingsocial conditions by treating as charitable under this residual category,gifts for a wide range of other purposes not expressly provided for inthe preamble. Even where no purpose is specified, but a trust is

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declared for the inhabitants of a named locality, it qualifies as acharitable trust under this heading, as seen in Goodman v Saltash Corp(1882) and Peggs v Lamb (1993).

In determining which purposes are charitable under the fourthheading, various judges have favoured different approaches. On theone hand, in Williams Trustees v IRC (1947), Lord Simmonds opinedthat when a new purpose is being considered, the courts must besatisfied not merely that it is beneficial to the community, but that it isbeneficial in a manner adjudged to be within the spirit and intendmentof the CUA 1601. On the other hand, in ICLR v AG (1972), Russell LJadvocated a more flexible approach, arguing that where the purposein question is one that appears to be demonstrably beneficial to thecommunity or of general public utility, effect should be given to itunder the fourth heading, unless there is some good ground forotherwise excluding it.

The categories of purposes which the courts have had to deal withunder the fourth heading include the following.

The welfare of the aged and the impotent

A trust for the benefit of the elderly is charitable, whether its purposeis to provide them with direct financial aid (as in Re Lucas (1922) andRe Robinson (1951)) or to provide them with facilities and services suchas accommodation (as in Re Cottam’s WT (1955) and Joseph RowntreeMemorial Trust Housing Association Ltd v AG (1983)).

Such a trust will be valid, whether it is expressly stated to be forthe elderly or for persons over a specified age (60 in Re Glyn’s WT(1950) and 65 in Re Robinson/Re Cottam’s WT), or for persons in anestablishment such as a nursing home for the elderly (as in ReBradbury (1950)).

As Dankwerts J emphasised in Re Glyn’s WT, it is not necessarythat the intended beneficiaries must be poor as well as elderly for thetrust to be charitable. Note, however, the problem posed by Megarry(1951) 67 LQR 164 and (1955) 71 LQR 16 on whether there can be acharitable trust for elderly millionaires.

The relief of the impotent

Where a trust is intended to alleviate the condition of persons afflictedby sickness, injury, disease, or other physical or mental ailments, thiswill render it charitable. Purposes that have been upheld as charitableinclude:

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• the funding of hospitals which do not operate for private profit(see Re Smith’s WT (1962) and Re Resch’s WT (1969));

• establishing a home for the nurses in a hospital (see Re White’s WT(1951));

• promoting the well being of patients by providing accommodationfor their relatives (see Re Dean’s WT (1950));

• providing assistance to persons with particular disabilities such asblindness (see Re Lewis (1955));

• caring for persons addicted to alcohol, drugs etc (see Re Banfield(1968)); or persons in need of recuperation from stress-inducedconditions (see Re Chaplin (1933));

• the training of medical and nursing personnel (see Royal College ofNursing v St Marylebone Corpn (1959)); and

• the conduct of medical research (see Steel v Wellcome CustodianTrustees Ltd (1988)).

The provision and maintenance of public works andamenities

The courts have upheld as charitable, trusts for building or maintainingbridges and highways (AG v Governors Of Harrow School (1754) andForbes v Forbes (1854)); the supply of water to a town (Jones v Williams(1767)); the provision of a hall for the public (Re Spence (1938)), and theerection of public statues or other memorials to honour nationally orinternationally renowned persons (see the Report of the CharityCommissioners for 1981).

The relief of human suffering or distress

Disasters

Where an appeal fund is set up in response to a particular accident ordisaster, such a fund may be accorded charitable status. This was thecase, for instance, with the appeal fund launched in 1966 in the wakeof the Aberfan Disaster, in which a huge coal tip collapsed, killing 116children and 28 adults.

Where the stated object of the appeal is to alleviate suffering anddeprivation caused to disaster victims or their families, thoseadministering the fund may claim charitable status on the basis that itis for the relief of poverty, even where the class of potential beneficiariesis small.

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Even if the appeal is not framed in such specific terms, the fundmay still be deemed charitable if the class of potential beneficiaries issufficiently large to constitute an appreciable section of the community.In Re North Devon and West Somerset Relief Fund Trusts (1953), an appealfund was launched in response to the Lynmouth flood disaster of 1952,inviting the public to contribute to the relief of those affected by thedisaster. After examining the terms of the appeal, Wynn-Parry Jdeclared that he was unable to discover ‘any intention to benefit thispart of the community in any way which the law did not regard ascharitable’, and therefore concluded that the fund was charitable.

The position is different where an appeal is made in terms whichare not exclusively charitable. In Re Gillingam Bus Disaster Fund (1958),an appeal which was launched after an accident in which some Marinecadets were killed and others injured, and it was stated that the fundwas to be applied towards the funeral expenses of the dead and thecare of the injured and that any surplus was to be used for worthycauses. Harman J refused to hold that the fund was charitable, on theground that while charitable purposes were undoubtedly worthycauses, not every worthy cause was charitable in nature.

Emergency/rescue services

Gifts to bodies involved in relieving human suffering by dealing withlife-threatening emergencies are treated as charitable under thisheading (see Thomas v Howell (1874) and Re Wokingham Fire BrigadeTrusts (1951)).

The improvement of national security

One of the purposes specified in the preamble to the CUA 1601 is the‘setting out of soldiers’. This has been enlarged by the courts to coverother purposes which serve to enhance the efficiency or morale of thearmed forces, such as improving the shooting ability of soldiers (ReStephens (1892)); or protecting the UK from attack by hostile aircraft(Re Driffil (1949)).

Gifts to various units of the army have also been recognised ascharitable in cases such as Re Lord Stratheden and Campbell (1894), ReGood (1905) and Re Gray (1925). In Re Gray, for instance, the gift inquestion was to the sixth Dragoon Guards to promote shooting, fishing,cricket, football, polo etc. Contrast this, however, with IRC v Glasgow(City) Police Athletics Association (1953). Here an association to promote

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sports and general pastimes within a police force was refused charitablestatus.

The encouragement of good citizenship or moral welfare

Where a gift is for a purpose designed to encourage good citizenshipor uplift the moral tone of the society it will be charitable under thefourth heading. Thus, for instance, in Re South Place Ethical Society(1980), Dillon J decided that although a body engaged in the studyand dissemination of ethical principles was not charitable in thereligious sphere, it was charitable under this heading.

Gifts for a wide range of purposes have also been held to becharitable in the present context. These include: • the discouragement of the traffic in drink (Re Hood (1931));• the institution of prizes for the best kept gardens in a parish (Re

Pleasants (1923));• the purchase of camp sites for Boy Scouts (Re Webber (1954)).

The well being of animals

Gifts and bodies which are intended to promote the welfare of animalshave been upheld as charitable in cases such as University of London vYarrow (1857), Re Wedgwood (1915) and Re Moss (1949). The rationalefor this is that kindness to animals tends to check any inborn humantendency to cruelty and is therefore beneficial to society.

It is, however, clear from Re Grove-Grady (1929) and National Anti-Vivisection Society v IRC (1948) that not all purposes connected withanimal welfare qualify as charitable. In the first case, a gift to a societywhose objects included establishing a refuge for animals againstmolestation or destruction by man was held not to be charitable. Inthe court’s view, it conferred no benefits on mankind by offeringadvantages to animals that were useful to man or by allowingobservation or research; nor did it necessarily offer protection toanimals generally. In the latter case, the Anti-Vivisection Society whoseprimary goal was the banning of experiments using animals, wasdenied charitable status on the ground that the benefits yielded bysuch experiments outweighed any interest to be served bydiscontinuing them.

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Recreation and sports

It was decided in Re Hadden (1932) and Re Morgan (1955) and re-affirmed in IRC v Guild (1992) and Oldham BC v AG (1993), that theprovision of playing fields, parks and other recreational facilities forthe general public or those living in a particular locality is charitable.

In addition, sporting activities or facilities which are not open tothe public may qualify as charitable because they are linked with theeducation of the young (IRC v McMullen; Re Mariette); or promote theefficiency of the armed services (Re Gray).

Except in the situations outlined above, the courts have decided insuch cases as Re Nottage (1895), Re Clifford (1911) and Re Patten (1929)that the promotion of sport or the provision of recreational amenitiesare not charitable purposes.

In another line of cases including IRC v City of Glasgow Police AthleticsAssociation (1953), Williams Trustees v IRC (1947) and IRC v Baddeley(1955), bodies which were set up for purposes that might otherwisehave been upheld as charitable, were denied charitable status on theground that their purposes were framed in terms which included apurely social or recreational dimension. In Baddeley, land was conveyedto a Methodist mission to establish a community centre. The centrewas to provide facilities for religious services and for the social andphysical training and recreation of Methodists and those likely tobecome Methodists, who were living in West Ham and Leyton.Whereas the gift would clearly have been charitable had the proposedcentre been exclusively for religion, the inclusion of the social-recreational element and the fact that the recreational amenities wouldnot be open to the public led the House of Lords to conclude that itwas not charitable.

This decision placed in doubt the status of civic amenities, such asvillage halls and community centres, as well as the Women’s Instituteand miners’ welfare associations, which were hitherto deemed to becharitable. The Recreational Charities Act (RCA) 1958 was enacted toclear these doubts. In summary, the Act states that it is charitable to provideor assist in the provision of facilities for recreation or other leisure-timeactivities if these facilities are provided in the interests of social welfare.

In order to fulfil the social welfare requirement, it must beestablished that the facilities: • have been provided with the object of improving the condition of

life of persons for whom they are primarily intended; and

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• are available either:(a) for the use of the public at large or the female members of the

public; or(b) on a more restricted basis for persons who by reason of

infirmity, disability, youth, age, social/economiccircumstances have need for such facilities.

The RCA 1958 fell to be considered in IRC v McMullen (1981) in relationto a trust sponsored by the Football Association to promote socceramong pupils and university students. The trial judge and the majorityof the Court of Appeal concluded that facilities would be charitableunder the Act, only if they would benefit those who were consideredto be deprived or in some form of need. Not all pupils or studentswho might benefit from the present trust were in such need and thetrust was thus held not to be charitable under the RCA 1958. BridgeLJ, however, dissented, arguing that it was not a strict requirement forthe conferment of charitable status under the Act, that use of thefacilities must be confined to the deprived. His position hassubsequently been endorsed in IRC v Guild (1992), where the Houseof Lords accepted that a council-owned Leisure Centre was charitablewithin the meaning of the RCA 1958, even though access to it was notrestricted to the deprived or needy.

The requirement of public benefit

As a general rule, a trust is not charitable if it is for the benefit ofpersons belonging to the benefactor’s private circle, whom he wouldnaturally feel obliged to provide for; but is charitable only if it isintended to benefit the wider community or the public at large insome way. The issue of public benefit has assumed immenseimportance since the Second World War, when great increases inpersonal and corporate taxes have made the fiscal advantagesenjoyed by charities particularly attractive. Remarking on this trend,Lord Cross in Dingle v Turner (1972), spoke of the temptation ‘to enlistthe assistance of the law of charity in private endeavours in order togain tax benefits’. While the law does not object to legitimateactivities in the private domain, policy considerations dictate thatonly those which are of wider public benefit deserve to be subsidisedin this manner by the taxpayer.

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The degree of strictness with which the courts approach the issueof public benefit depends on which of Lord MacNaghten’s headingsthey are dealing with in any particular case, and we must thereforeexamine the public benefit requirement under each heading.

Trusts for the relief of poverty

A gift to specified persons who happen to be poor will not be deemedto be charitable however numerous they may be. On the other hand,as pointed out by Jenkins LJ in Re Scarisbrick (1951) and Templeman Jin Re Cohen (1973), a gift to the poor members of a class to relieve theirpoverty will be charitable, even if the class is small and personallyconnected to the donor.

To begin with, it has long been established in such cases as Isaac vDefriez (1754), that where the object of a trust is to relieve povertyamong the donor’s relatives, notwithstanding the narrowness of theclass and the personal nexus, the gift will be regarded as charitable.Although the charitable status of gifts to poor relations was questionedin Re Compton (1945), it has since been re-affirmed in cases such as ReScarisbrick (1951), Re Cohen (1973) and most recently in Re Segelman(1995).

As with gifts to poor relations, the courts have also recognised ascharitable, gifts for the relief of poverty among: • members of a friendly society (Re Buck (1896));• fellow members of the donor’s club (Re Young (1951));• the employees of a given firm or company (Re Gosling (1900), Gibson

v South American Stores Ltd (1950) and Dingle v Turner (1972)). This recognition that gifts to the poor members of what is essentially aprivate class are charitable has led Hanbury and Martin to concludethat ‘the requirement of public benefit has been reduced in the field ofpoverty almost to vanishing point’.

Trusts for the advancement of education

Where a trust is for a purpose other than the relief of poverty, thepublic benefit requirement is applied more stringently. In order forsuch a trust to be charitable, it must, in the words of Lord Westbury inVerge v Somerville (1924), be for the benefit of the community or anappreciably important class of the community.

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The effect of the public benefit requirement in the educational sphereis illustrated by Re Compton (1945), which involved a trust for educatingthe descendants of three named persons. In deciding whether it wascharitable, the Court of Appeal had to determine whether the intendedbeneficiaries were an appreciable section of the community. Accordingto the court, a designated group would form an appreciable section ofthe community if (i) they were not numerically negligible, and (ii) thequality that distinguished them from the community at large was notone which depended on their relationship to a particular individual.Applying this test, the court held that the present trust was notcharitable.

The Compton test was adopted in Oppenheim v Tobacco Securities Trust(1951) where the House of Lords had to decide whether a trust for theeducation of the children of employees and former employees of atobacco company was charitable. The class was not numericallynegligible as there were over 110,000 employees. This was notconclusive, however, for as Lord Simonds emphasised in the leadingjudgment, ‘a group of persons may be numerous, but if the nexusbetween them is their personal relationship to a single propositus or toseveral propositi they are neither the community nor a section of thecommunity for charitable purposes’. The nexus between the potentialbeneficiaries in this case was their relationship to a single employer.In the court’s view, this was sufficiently personal to prevent the trustfrom being charitable.

Lord MacDermott, however, dissented, arguing that the Comptontest ought not to be treated as being of general applicability andconclusiveness. In his view, the issue of whether a group constituted asection of the community, was one of degree, to be dealt with on thefacts of each case rather than on the basis of any hard and fast ruleinherent in the test. His judgment vividly highlights the contradictionsand difficulties flowing from a strict application of the test and similarviews were expressed per obiter by Lord Cross in Dingle v Turner.

Following the Oppenheim decision, those seeking to create trusts toeducate the children of employees have sometimes set up educationaltrusts ostensibly for the public while arranging for the trustees to usemost of the trust fund to educate the employees’ children. Thus, in ReKoettgen (1954), a trust was set up to offer commercial education tomembers of the public unable to afford it, but the trustees were directedto accord preference to families of the employees of a named companyin respect of up to 75% of the trust fund. The trust was held to becharitable. By contrast, in IRC v Educational Grants Association Ltd (1967),

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an association was set up for the advancement of education in generalterms but derived its funds from the Metal Box Co Ltd. The associationclaimed a tax rebate for a particular period on the basis that it was acharitable body. The court found that during the period in question,between 76% and 85% of its income had been paid towards educatingthe children of persons connected with the company and thereforeheld that it was not entitled to the rebate. Another instructive case isRe Dominion International Group (1996). In this case, L a director of twocompanies arranged for these companies to make payments into thefunds of Cygnus, a registered charity, which would in turn makecontributions to St George’s Educational Trust, an Isle of Man charity,on the understanding that the latter would award public schoolscholarships to L’s children. The court had no difficulty in holdingthat such payments were not charitable in nature.

Trusts for the advancement of religion

In the sphere of religion as in the sphere of education, the courts areprepared to uphold a gift as charitable only if it is deemed to be ofbenefit to the public or a section thereof. However, whereas the Comptontest prescribes that in the realm of education the recipients of the benefitmust not be numerically negligible, the law appears to be more liberalin the religious sphere, since charitable status has been accorded toobscure sects with a minimal following in cases such as Thornton vHowe (1862), Re Watson (1973) and Funnel v Stewart (1995). In thisconnection, the material consideration is whether the essential purposeis to make available a religious service or activity to those members ofthe public who wish to avail themselves of it, even though very fewchoose to do so.

By contrast, where the material purpose is to encourage religiouspursuits in an environment completely insulated from the public, thecourts are less inclined to regard the purpose as charitable. This isvividly illustrated by the case of Gilmour v Coats (1949) which involveda gift of £500 to a Carmelite convent run by a community of cloisterednuns who devoted themselves entirely to prayer and contemplationand did not engage in any activities whatsoever outside theircommunity. The House of Lords held that the community’s activitiesdid not satisfy the requirement of public benefit and the gift wastherefore not charitable.

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The decision in Gilmour v Coats cast doubt on the correctness ofcases such as Re Caus (1934), which had held that gifts for the sayingof masses were charitable. Significantly, however, in the case of ReHetherington (1989), where a testatrix left £2,000 for the saying of massesfor the repose of her soul and the souls of her husband, parents andsisters, it was held that the gift satisfied the public benefit requirementon two grounds: • The gift could properly be construed as requiring the masses to be

said in public. Such a public celebration of a religious rite wouldhave such an edifying effect on those attending that this would bea sufficient public benefit.

• The sum dedicated to saying masses would help provide stipendsfor priests, thereby assisting in the endowment of the priesthood.

Trusts for other purposes beneficial to the community

The public benefit requirement is central to the validity of trusts comingwithin the fourth heading, since the common denominator by whichthey are defined is that they must be for purposes that are of benefit tothe community. This means that whatever advantages or entitlementsare conferred by a trust under this heading must, as stated in Verge vSomerville (1924), be available to the community or an appreciablesection of the community.

The operation of the requirement under this heading wasconsidered in Williams Trustees v IRC (1947). In this case, one reasonwhy a trust for the benefit of Welsh people in London failed wasthat the Welsh in London did not form an appreciable section of thecommunity. Also instructive is IRC v Baddeley (1955), where theintended beneficiaries were members/would-be members of theMethodist Church in an area of London. The House of Lords heldthat the requirement was not satisfied since the benefit wasintended not for the whole community or the inhabitants of a givengeographical area, but for what was essentially a class within aclass.

A difficulty that arises in this connection is that opinions willsometimes differ on whether a designated group of persons in a givengeographical area constitutes a section of the community or a privateclass. Thus, for instance, as Lord Cross indicated in Dingle v Turner(1972), a trust for the benefit of the rate-payers of the Royal Boroughof Kensington and Chelsea may be construed by some as a charitable

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trust for a section of the community and by others as a trust for afluctuating body of private individuals.

Finally, once it is clear that the purpose of a trust is to confer somebenefit on the public or an appreciable section thereof, the fact thatonly a limited number of people may wish to take advantage of it willnot be a basis for holding that it is not charitable. As Lord Simondsobserved in this connection in Baddeley: ‘A bridge which is availablefor all the public may undoubtedly be a charity and it is indifferenthow many people use it. But confine it to a selected number of persons,however numerous and important, it is then not clearly a charity.’

The requirement that the trust must beexclusively charitable

The general rule is that if a trust is framed in terms which enable thetrustees without being in breach of trust to apply any part of the trustfund to a non-charitable purpose, it will fail.

Thus, in Williams Trustees v IRC (1947), a trust that waspredominantly for charitable purposes in the educational spherenevertheless failed because one of its purposes was the promotion ofsport and recreation among Welsh people living in London, whichwas not charitable. This was also the case in IRC v City of GlasgowPolice Athletics Association (1953), where the association had a charitabledimension (improving the efficiency of the police) and a non-charitabledimension (catering for the recreational and social needs of itsmembers). See, also, Blackpool Marton Rotary Club v Martin (1988),another case involving an organisation which combined social andrecreational pursuits with charitable activities.

More recently, in IRC v Oldham Training & Enterprise Council (1996),the charitable status of the Oldham TEC was in issue. Its objects as setout in its Memorandum of Association included: • the promotion and provision of vocational education, training and

retraining for the inhabitants of Oldham;• the improvement of the skills of the local workforce; and• the development of industry, commerce and enterprise of all forms,

and training through activities such as the provision of advice anddiagnostic services for individual businesses and start-up assistanceto prospective entrepreneurs.

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The court accepted that the first two objects were indisputablycharitable but decided that the third object was not, since the benefitsit conferred were directed to promoting the interests of privateindividuals engaged in trade, or entrepreneurial activities. The TECwas accordingly denied charitable status since its objects were notexclusively charitable.

Substitution of the word ‘charitable’ with words of widerimport

Quite often, the failure of an intended charitable gift on the groundthat it is not exclusively charitable is caused by poor drafting. Themost common pitfall for unwary draftsmen is the use of words whichin ordinary parlance carry the same general connotation as the term‘charity’ but which have been held to be of wider import than thenotion of charity in the legal sense. In Morice v Bishop of Durham (1805),a gift to the Bishop of Durham to be applied by him, ‘to such objects ofbenevolence and liberality’ as he should most approve, failed becauseits objects were not exclusively charitable. And in Re Gillingham BusDisaster fund (1958), it was held that a disaster appeal made on thebasis that part of the fund would be applied to ‘worthy causes’ wasnot exclusively charitable, since certain causes might conceivably beworthy without being charitable.

Combination of the word ‘charitable’ with words of widerimport

The courts sometimes have to pronounce on the validity of a trustwhere the draftsman has employed words which in themselves wouldbe construed as charitable, together with words of wider import.

The ‘or’ case

If the word ‘or’ appears between multiple purposes, one of which ischaritable and the other of wider import, the courts will ordinarilyconstrue the ‘or’ as disjunctive and hold that the gift is not exclusivelycharitable. See Blair v Duncan (1902): charitable or public; Re Diplock(1951): charitable or benevolent; AC v NPB (1924): charitable orpatriotic; and Houston v Burns (1918): public, benevolent or charitable.

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These may, however, be contrasted with Re Bennett (1920), whichheld that a gift ‘for charity or other public purpose’ was charitable. Inthe court’s view, the use of the word ‘other’ in the present contextsignified that the type of public purpose contemplated by the donorwas ejusdem generis with charity. Also, in Guild v IRC (1992), a gift forestablishing a public leisure centre ‘or some similar purpose connectedwith sport’ was held to be charitable.

The ‘and’ cases

Where the word ‘and’ appears between two expressed purposes, thefirst of which is charitable and the second non-charitable, the wordswill generally be construed in a conjunctive manner. Consequently,any word of wider import which if employed in isolation wouldencompass non-charitable purposes will be qualified by theaccompanying charitable purpose, such that the trust will be regardedas exclusively charitable. Thus, in Blair v Duncan (1902), the courtremarked that if the material phrase had been ‘charitable and public’,rather than ‘charitable or public’, effect might have been given to thetrust because the words could have been read as charitable gifts of apublic character or vice versa (see, also, Re Sutton (1885): charitableand deserving and Re Best (1904): charitable and benevolent).

On the other hand, where a trust is expressed to be for more thantwo purposes and the word ‘and’ is inserted between the last twopurposes, such a trust is not regarded as exclusively charitable (see ReEades (1835): religious, charitable and philanthropic; and Williams vKershaw (1920): benevolent, charitable and religious).

Situations in which inclusion of non-charitable purposeswill not invalidate a charitable trust

Where the charitable object of the trust is facilitated by non-charitablepurposes

A gift or organisation may be regarded as charitable even where itsobjects permit a certain amount of expenditure of a non-charitablenature, if such expenditure facilitates the carrying out its charitablepurposes. In Re Coxen (1948), a sum of over £200,000 was left on trustfor the Court of Aldermen of the City of London for the followingpurposes:

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• £100 for a dinner at their annual meeting to discuss the affairs ofthe trust and £1, 1s to each alderman for attendance;

• the balance to be applied by them for them in support of a specifiedmedical charity. The trust was held to be charitable.

Where the non-charitable dimensions of the trust are incidental to itsmain charitable object

• As Lord Cohen explained in IRC v Glasgow Police Athletics Assn (1953),a trust will be recognised as charitable where its ‘main purpose…ischaritable and the only elements in its constitution and operationwhich are non-charitable are merely incidental’. This reasoning wasadopted in Incorporated Council of Law Reporting v AG (1972), whereit was contended that the publication of law reports by the Councilwas not exclusively charitable, since legal practitioners often benefitedfrom fees earned by using such reports. The court held that themonetary benefit to legal practitioners was incidental to the mainpurpose of the reports which was to provide material for the academicstudy of law; and the trust was thus charitable.

Where there is the possibility of severance or apportionment

If it can be deduced from the terms of a trust that a specific part of theproperty or funds is intended to be applied towards a charitablepurpose and the balance towards a non-charitable purpose, the giftwill not necessarily fail in its entirety. As far as possible, the courtswill be prepared to sever and give effect to the charitable purpose tothe exclusion of the non-charitable purpose. This was the case inSalusbury v Denton (1857), where a testatrix directed that part of a legacyshould be applied towards the foundation of a charity school and theremainder for the benefit of her relations.

Where the Charitable Trusts (Validation) Act 1954 applies

The Charitable Trusts (Validation) Act (CT(V)A) 1954 is specificallyconcerned with trusts created by instruments coming into effect before16 December 1952. Where provision is made in such a trust instrumentfor purposes which are partly charitable and partly non-charitable butthe entire property can, consistently with the terms of the instrument,be applied towards the charitable purposes, such an ‘imperfect trustprovision’ is validated by the Act, which prescribes that the trust willtake effect as if it were exclusively for the charitable purposes.

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The operation of the CT(V)A 1954 is well illustrated by Re Wykes(1961), where a trust for ‘benevolent or welfare purposes’, was held tobe valid on the ground that consistently with the terms of the trust thewhole fund could be applied towards such established charitablepurposes as the relief of poverty. Other relevant cases include Re Mead(1961) and Leahy v AG of New South Wales (1959).

The cy-près doctrine

Where a charitable trust has been validly declared, a variety ofcircumstances may render it impossible, impracticable or inappropriateto carry out the donor’s charitable purpose. The cy-près doctrine wasevolved to deal with such situations. Where it applies, effect will begiven to the donor’s charitable intention by means of a scheme underwhich the property will be devoted to a purpose which as nearly aspossible resembles his original charitable purpose.

On the other hand, where all the requirements for the creation of acharitable trust have not been satisfied, the cy-près doctrine cannot beinvoked. Thus, in Re Gillingham Bus Disaster Fund (1958), where thecourt held that a disaster appeal which referred, inter alia, to worthycauses was not exclusively charitable, the doctrine could not be reliedon to render the appeal fund charitable. Also in Re Jenkins WT (1966),where a testatrix left property to be shared equally among seven namedorganisations, six of which were charitable while the seventh was not,the court declined to apply the doctrine to the share of the non-charitable organisation.

Where the doctrine applies, responsibility for devising a suitablescheme lies with the Charity Commission or the courts. Section 13(5)of the CA 1993 imposes a duty on the trustees of the relevant charityto implement the scheme so devised. The trustees cannot on their owndetermine the manner in which property should be applied cy-près(apart from trustees of some small charities, who may do so withinlimits imposed by s 43 of the CA 1993).

The scope of the doctrine

In discussing the scope of the doctrine, it is necessary to distinguishbetween the position before 1960 and the position since the enactmentof the CA 1960.

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The position before 1960

Before the enactment of the CA in 1960 the doctrine was applicable intwo situations: • Where there was a surplus after a specified charitable purpose had

been duly accomplished. This is exemplified by Re King (1923),where a testator left £1,500 to install a stained glass window in achurch. As the cost of a suitable window was about £800, it washeld that the balance should be spent on a second window.

• Where it was impossible or impracticable to carry out the purposeof the trust. The application of the doctrine on this ground is wellillustrated by Biscoe v Jackson (1887). A testator left £10,000 to charity,directing his trustees to use £4,000 out of it to provide a soup kitchenand cottage hospital for the parish of Shoreditch. As the law thenstood, this was impossible, since it required land already held inmortmain. No such land was available in the area. The court heldthat the money should be used for other purposes beneficial to thepeople of Shoreditch.

Also, in Re Burton’s Charity (1938), trustees were required to pay trustincome to the vicar of a parish to enable him to appoint three or morecurates for the parish. Rises in stipends payable to curates made itimpossible for the income to support three curates, and the courtapproved a scheme modifying the terms of the gift to enable the incometo be used to pay only two curates.

By contrast, the doctrine was inapplicable where the intendedcharitable purpose was neither impossible nor impracticable but hadbecome manifestly outdated, was adequately catered for by the welfareservices or no longer represented an efficient use of resources. In ReWeir Hospital (1910), premises which a testator left for use as a hospitalwere unsuited to this purpose and the Charity Commissionersapproved a scheme to use them as a nurses’ home. The court declaredthe scheme ultra vires on the ground that the stated purpose was neitherimpossible nor impracticable.

To get round this constraint, the courts took a liberal view of whatamounted to impossibility in such cases as Re Dominion Students’ HallTrust (1947). Here, a trust set up to promote a spirit of commoncitizenship and closer ties among the peoples of the British Empire,ran a hostel which was restricted to students of European origin. Thecourt acknowledged that the operation of the trust as it stood was not

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entirely impracticable but granted a cy-près order removing thisrestriction, on the ground that its retention would defeat its main object.

The position since 1960

The CA 1960 extended the operation of the doctrine to a variety ofcircumstances which do not necessarily involve impossibility orimpracticability. Under s 13 (now superseded by s 13 of the CA 1993)the original purposes of a charitable gift can be altered to allow thetrust property to be applied cy-près in the following circumstances: • where the original purpose has as far as possible been fulfilled;• where the original purpose cannot be carried out at all or cannot be

carried out according to the directions given or the spirit of the gift;• where the original purpose provides a use for only part of the

property;• where the property and other property applicable for similar

purposes can be more effectively pooled together and suitablyapplied towards common purposes;

• where the gift was made by reference to a class of persons orgeographical area that has since ceased to be a unit or otherwiseceased to be practicable or suitable. A case in point is Peggs v Lamb(1993), which concerned two charities for the benefit of the freemenof Huntingdon. The court held that in view of the decline in theirnumbers and having regard to the spirit of the gift, the freemenhad ceased to be a suitable class by reference to which the charitablepurposes could be carried out. Consequently, a cy-près scheme wasneeded to enlarge the class to cover all the inhabitants ofHuntingdon;

• where the original purpose has, since it was laid down, beenadequately provided for by other means; or ceased to be charitablein law; or ceased to provide a suitable and effective method of usingthe property. In Re Lepton’s Charity (1972), for example, trustees ofland were directed in 1715 to pay £3 out of the annual income ofthe land to the Protestant minister of a town and apply theremainder, amounting to £2 per annum, to the poor of the town. By1967, the annual income of the trust was nearly £800. The courtheld that paying a pittance of £3 to the minister out of the greatlyincreased annual income did not represent a suitable and effectivemethod of using the property and approved a cy-près schemewhereby the minister would receive £100 a year.

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Initial and subsequent failure

An important factor in determining whether a cy-près order can bemade is whether the charitable purpose was incapable of fulfilmentwhen the gift was made or the trust created (initial failure); or onlybecame incapable of fulfilment after the gift or trust had come intoeffect (subsequent failure).

Initial failure

Where there has been initial failure of the charitable purpose, the crucialissue is whether the donor wished the property to be appliedexclusively for the specified purpose or had an ‘overriding intentionto devote [the property] to charity in general’ (per Harman J in ReSanders’ WT (1954)).

The cy-près doctrine has no place where the donor intended theproperty to be applied for the specified purpose and no other one. InRe White’s Trust (1886), a testator bequeathed stock worth £1,000 toofficers of the Tinplate Workers Company to purchase land on whichto build almshouses for poor tinplate workers. The company couldnot obtain a suitable site and did not, in any case, have the funds tomaintain an almshouse. The court found that the testator did notcontemplate that the legacy could be used for any other purpose. Inview of this, the gift could not be saved by applying the cy-près doctrineand therefore failed (see, also, Re Rymer (1895); Re Wilson (1913) andRe Good’s WT (1950)).

By contrast, if the court can discern a general (or paramount)charitable intent underlying the gift, the cy-près doctrine will apply ifthe stated purpose fails at the outset. For instance, in Biscoe v Jackson(1957), the testator’s original purpose could not be fulfilled becausesuitable land was unavailable for the proposed soup kitchen andcottage hospital. However, the fact that the money to be used for thispurpose was to be taken from £10,000 left to charity by the testator ledthe court to conclude that he had a general charitable intent, and tomake a cy-près order (see, also, Re Lysaght (1966) and Re Woodhams(Deceased) (1981)).

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Gifts to non-existent charities

The question of whether there has been initial failure so as to require ageneral charitable intent on the donor’s part has been especiallyproblematic in the context of gifts to non-existent charitable bodies. Inthis connection, the following principles have emerged from thedecided cases: • Where there is a gift in favour of a charitable body which went out

of existence before the gift took effect, there will be no initial failureif, in the court’s view, the institution has continued in some otherform. It follows that the gift is valid without any need to prove ageneral charitable intent as required by the cy-près doctrine. This isseen in Re Faraker (1912). Here, £200 was left to Mrs Bailey’s Charity,Rotherhithe. A charity called Hannah Bayley’s Charity had beenfounded in 1765 to assist poor widows in the town. This and severalother local charities had in 1905 been consolidated under a schemeby the Charity Commission for the benefit of the poor in Rotherhithe.The court held that the scheme did not operate to destroy the Bayleytrust, but simply meant that its activities were being carried outthrough a different machinery. Consequently, there was no initialfailure and the legacy would pass to the new scheme.

However, if the gift is to an incorporated charity which accordingto its constitution can be dissolved and its assets distributed, it hasbeen held in Re Stemson’s WT (1970) that the charity will be incapableof continuing in another form after dissolution. This means that agift to it after dissolution will fail unless the donor is shown to havehad a general charitable intent.

• Where a gift is made to a charitable body that no longer exists andthe gift was made for its purposes, there will be no initial failure ifsuch purposes can be fulfilled by other means.

In determining whether a gift to a charitable body is for its purposes,Re Vernon’s WT (1972) is instructive. Buckley J decided in this casethat a gift to an unincorporated association by name, withoutanything more, takes effect as a gift for its purposes and so will notfail if the charity had ceased to exist at the date of the gift. This wasfollowed in Re Finger’s WT (1972), where a bequest by a testatrix toan unincorporated charity which no longer existed at her death washeld not to have failed as its purposes could still be carried out byother bodies so that there was no need to have recourse to the cy-près doctrine to save the gift.

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In the case of a gift to an incorporated charity, on the other hand,the two aforementioned cases have held that it will take effect as agift to the charity beneficially, rather than as a gift for its purposesand this has recently been re-affirmed in Re ARMS Ltd (1996). Asseen from Re Finger’s WT, where the testatrix also made a bequestto an incorporated charity which no longer existed at her death, theeffect of construing it as a gift to the charity beneficially is that itwill fail and thus can only be devoted to charity if the cy-près doctrineapplies.

• Where a gift is for a charity which never existed, it will fail from theoutset but the courts are inclined to ascribe to the donor a generalcharitable intent and having done so to apply the gift cy-près. Thisis evident from Re Harwood (1956) where a testator, who died in1934, left £300 to the Peace Society in Belfast and £200 to the WisbechPeace Society. There had been a Wisbech Peace Society but it hadceased to exist by 1934, whereas the Peace Society of Belfast hadnever existed. Farwell J held that the gift to the Wisbech PeaceSociety would fail since he could not discover a general charitableintent. At the same time, he held that the gift to the Peace Society inBelfast was applicable cy-près since he could discern a generalintention to benefit societies whose object was the promotion ofpeace.

• Where a gift is made to several bodies and all but one of these bodiesis charitable, opinion is divided on whether the cy-près doctrineapplies to the share of the non-charitable body. In Re Satterthwaite’sWT (1966), a testatrix directed that her residuary estate should beshared among a number of institutions concerned with animalwelfare, all of which were charitable except the London AnimalHospital. No charity of this name had ever existed but the plaintiff,who was a vet, had, before the testatrix made her will, run a practiceunder that name and now claimed that he was entitled to a share ofthe fund. The court held that the gift was essentially one for a non-existent charitable institution, and that since all the other institutionsnominated by T were existing charitable bodies, there was aparamount charitable intention, and the share due to the LondonAnimal Hospital would be applied cy-près for other animal welfarepurposes.By contrast, in Re Jenkins WT (1966), a legacy was directed to beshared equally between six charitable bodies and a non-charitablebody, and Buckley J refused to allow the one-seventh share in favourof the non-charitable body to be applied cy-près.

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The position with regard to funds raised by publiccollections

Section 14 of the CA 1993 covers situations where funds have beendonated by the public for a charitable purpose that fails. It providesthat any such donation will be applied cy-près, if the donor either failsto reclaim it or disclaims any entitlement to it after prescribedadvertisements and inquiries have been made by the collecting charity.

Where the contributions are made by means not adapted todistinguishing one gift from another (for example, collecting boxes)or are the proceeds of lotteries and other such fund raising activities,the money may be applied cy-près without any need for advertisementsor enquiries. In effect, it is conclusively presumed that each contributorintended to make an out and out gift to charity.

Subsequent failure

Where a gift is made for a charitable purpose which the trustees havebegun to carry out, or for the benefit of a charitable body which wasundoubtedly in existence at the time it was made, the property inquestion will remain in the charitable domain, notwithstanding thatthe purpose in question is no longer possible, practicable, suitable etc;or that the charitable body has ceased to exist. In such instances, thecase will be one of subsequent failure and the position of the law isthat, in determining the destination of the property, the cy-près doctrinewill apply, regardless of whether the donor had a general charitableintent.

Thus, in Re King (1923), T’s residuary estate was bequeathed forthe installation of one stained glass window in a church. The windowwas installed for £800 and Romer LJ held that the balance should beapplied cy-près towards installing a second window. (But note ReStanford (1924) where, in similar circumstances, the court surprisinglyheld that the surplus would go on a resulting trust to the estate of thedonor.)

Where a gift is made to a charity which went out of existence afterthe gift came into effect, the case will be dealt with as one of subsequentfailure. This is evident from Re Slevin (1891). Here T left a legacy for anorphanage. The orphanage was in existence at the time of T’s deathbut was closed soon thereafter, before T’s will was administered. Itwas held that the gift would be applied cy-près without regard for T’scharitable intent since the fact that the orphanage was in being when

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the gift took effect on T’s death meant that the case was one ofsubsequent failure.

Another instructive case is Re Wright (1954). Here, T died in 1993leaving property in her will for B for life, and directing that on B’sdeath, this property was to be used to found a convalescent home forimpecunious gentlewomen. The scheme was practicable in 1933, butby the time B died in 1942 it had become impracticable. It was heldthat this was not a case of initial failure since the property had beeneffectively dedicated to charity when T died in 1933. Consequentlythe property would be applicable cy-près without reference to whetherT had manifested a general charitable intent. (See, also, Re Moon (1948),where a similar conclusion was reached.)

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6 The Administration ofTrusts


• the rules which govern the appointment, retirement andremoval of trustees

• the standard of care required of paid and unpaid trustees andthe rules governing the remuneration of trustees

• the main duties of trustees• the main powers exercisable by trustees• the rules governing the variation of the terms of a trust

The appointment, retirement and removal oftrustees

The appointment of trustees

Capacity

As a general rule any legal person with the capacity to own propertymay be appointed a trustee. Note in particular that: • aliens are incapable of owning an interest in a British ship and cannot

hold such property on trust (s 17 of the Status of Aliens Act 1914 asamended by the British Nationality Act 1948);

• infants are incapable of holding legal estates in land by s 1(6) of theLaw of Property Act (LPA) 1925. In addition, s 20 of the LPA providesthat ‘The appointment of an infant to be a trustee in relation to anysettlement or trust shall be void’. It was, however, held in ReVinogradoff (1935) and Re Muller (1953) that an infant may be a trusteeunder a resulting trust.

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In addition to human beings, certain corporate entities includingthe Public Trustee and a host of trust corporations run by variousfinancial institutions are often appointed either as ordinary trusteesor custodian trustees.

How many trustees may be appointed?

As far as trusts of personalty are concerned, there is no restriction onthe number of initial trustees. However, a sole trustee is not to berecommended for reasons of accountability. Equally, it may becumbersome to have too many trustees and it is rare to appoint morethan four. Moreover, where a subsisting trust has less than four trustees,there is scope for appointing additional trustees under s 36(6) of theTrustee Act (TA) 1925 provided the number of additional and existingtrustees does not exceed four.

With regard to real property, the appointment of a sole trustee isnot prohibited. It is, however, usual to appoint two or more trustees,since s 14(2) of the TA 1925 provides that a sole trustee under asettlement or trust of land cannot give a valid receipt if the land is soldexcept where the trustee is a trust corporation. Under s 34(2) of the TA1925 a maximum number of four trustees is prescribed in cases ofsettlements and dispositions creating trusts of land. This, however, issubject to several exceptions, the most important being where the trustrelates to land held for charitable, ecclesiastical or public purposes.

It is also possible to the settlor to prescribe a minimum or maximumnumber of trustees in the trust instrument. It has, however, been heldin this connection in Re Duxbury’s ST (1995) that where the trustinstrument required no less than two trustees, this did not precludethe appointment of the Public Trustee as a sole trustee.

The initial trustees

It is the prerogative of the settlor to appoint the first trustees. This isusually done in a will or other trust instrument. In the case of an intervivos trust (but not a testamentary one), the settlor may be one of thesetrustees.

In the years after assuming office, the initial trustees may begin todie off. In order to ensure that a trustee’s death does not disrupt thecontinuity of the trust, it is the practice to vest the trust property in thetrustees as joint tenants instead of tenants in common. The effect of thisis that if one trustee dies the trust property will vest in the survivors

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by virtue of the right of survivorship (jus accrescendi). If no new trusteesare appointed the property will ultimately vest in the last survivorand on his death will vest in his personal representatives, under s 1 ofthe Administration of Estates Act 1925 and s 18(2) of the TA 1925.

Where there are no initial trustees to administer the trust

A longstanding maxim of equity proclaims that a trust will not fail forwant of trustees. On the strength of this maxim, the courts have beenable to give effect to testamentary trusts not only where all the trusteesappointed by the will have died before the testator as seen from ReSmurthwaite (1871) but also where no trustees have in fact been namedin the will as seen from Dodkin v Brunt (1868).

In the case of inter vivos trusts, where the settlor has executed aconveyance or transfer to named trustees who were alive at the dateof the conveyance or transfer, the trust will not fail even if all the trusteesthereafter disclaim the trust or die without having taken any steps toadminister it (see, for example, Jones v Jones (1874) and Mallott v Wilson(1903)). On the other hand, where the material conveyance or transferinter vivos has not named any trustees or the trustees named in it diedbefore it was executed, Pettitt, as well as Edwards and Stockwellsuggest that the trust will be incompletely constituted and as suchequity will not intervene to prevent its failure.

Subsequent trustees

The process of administering a trust may stretch out over many yearsand the need may arise from time to time to appoint new trustees inplace of or in addition to the serving trustees. A settlor whoanticipates this possibility may insert into the trust instrument anexpress power to appoint new trustees. In most instances, however,the settlor is content to rely on the statutory formula set out in s 36 ofthe TA 1925.

Appointment under s 36 of the TA 1925

The statutory powers conferred by s 36 encompass the appointmentof replacement trustees and additional trustees.

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Replacement trustees

Section 36(1) and (2) states that one or more persons may be appointedto fill a vacancy which has arisen or is liable to arise among existingtrustees in any of the following circumstances, namely where a trustee: • is dead;• has remained outside the UK for a continuous period of 12 months:

Re Walker (1901);• desires to be discharged from the trust;• either refuses to act; is incapable of acting (for example, by reason

of old age or mental disorder, etc); or is unfit to act (for example,due to conviction for criminal dishonesty or bankruptcy, as in ReWheeler and De Rochow (1896);

• is an infant; or• has been removed from the trust in the exercise of a power contained

in the trust instrument. In any of these circumstances, the power of appointing new trustees

is exercisable in order of preference by: • the person(s) nominated in the trust instrument to exercise the

statutory power;• the surviving or continuing trustee(s) for the time being;• the personal representatives of the last surviving or continuing

trustee. Where those who are entitled to exercise this statutory power are thesurviving or continuing trustees, an issue has arisen as to whether atrustee who is being replaced is entitled to participate in choosing hissuccessor. The difficulty in this connection stems from the fact that s36(8) states that the provisions in s 36 pertaining to a continuingtrustee include a refusing or retiring trustee if he is willing to act. Thisprovision is especially useful where a sole trustee seeks to retire orrelinquish office or where all the existing trustees seek to do so at thesame time; but its effect is less certain where, apart from the trusteebeing replaced, there are others who will continue in office. It appearsfrom Re Coates to Parsons (1886), that an appointment by the trusteeswho will continue in office, without involving the outgoing trustee,will not be void, and support for this is to be found in Re Stoneham’sST (1952), where it was held that the concurrence of a trustee who had

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remained abroad for 12 months was not necessary for theappointment of his replacement. Nevertheless, if the trustee beingreplaced is competent and willing to act, it is prudent for theavoidance of doubt that his involvement should be sought inselecting his replacement.

Additional trustees

Section 36(1) is primarily concerned with the appointment of newtrustees to replace existing ones, but also makes some allowance forappointment of additional trustees since it empowers the appointmentof one or more trustees in place of an outgoing trustee in thecircumstances outlined above.

Additional trustees may be appointed under s 36(6) of the TA 1925where no outgoing trustee is being replaced. Responsibility for suchappointments lies with the person empowered to do so in the trustinstrument or if there are no such persons, with the existing trustees.Additional trustees can only be appointed under s 36(6) where thereare no more than three incumbent trustees, and only if the number oftrustees after the appointment will not exceed four.

A further restriction introduced by s 36(6) was that additionaltrustees could not be appointed if one of the serving trustees was atrust corporation. This restriction was removed by the Trusts of Landand Appointment of Trustees Act (TLATA) 1996, so that additionaltrustees may now be appointed under s 36(6) where a trust is alreadybeing administered by a trust corporation.

Formalities for appointment

Any appointment of new trustees under s 36(1) or (6) must be inwriting. The common practice is to execute a deed which serves thedual purpose of satisfying the requirement of writing and ensuringthat the property is duly vested in the existing and new trustees asjoint tenants.

Appointment by the court

The courts possess substantial powers under s 41 of the TA 1925 toorder the appointment of new trustees. This may be done in place ofor in addition to existing trustees or where there are no trustees. Evenbefore the Act was passed, the court was competent to order the

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appointment of new trustees where necessary, in the exercise of itsinherent jurisdiction.

An appointment will be made by the courts under s 41 only whereit is expedient to make such an appointment, but it is found to beinexpedient, difficult or impracticable to do so either under the termsof the trust instrument or under s 36.

Situations in which judicial intervention in the appointment of newtrustees would be justified include the following: • where a person appointed as trustee is adjudged unsuitable, having

regard to the terms of the trust or his personal attributes, and thereis no other way of remedying the situation without the court’sassistance: see Public Trustee v Benjumaea (1994);

• where the last surviving trustee dies intestate and no one appliesto administer his estate;

• where all the trustees named in a will pre-decease the testator anddifficulties are encountered in administering his estate (see ReSmurthwaite (1871));

• where a person empowered to appoint new trustees by the trustinstrument or s 36 is incapable of doing so for reasons such asinfancy (see Re Parsons (1940)); old age or infirmity (see Re Lemann’sWT (1883) and Re Phelps’ ST (1885)); or because he is trapped behindenemy lines (see Re May’s WT (1941));

• where friction between the persons empowered to appoint newtrustees delays an appointment unduly (see Re Tempest (1866)).

Re Tempest is also significant in that, in this case, Turner LJ outlinedthe factors which the court will bear in mind in appointing new trustees,as follows: • the wishes of the settlor and the beneficiaries;• whether the appointee is likely to favour some beneficiaries at the

expense of others;• whether the appointment is likely to promote or impede the

execution of the trust.

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Involvement of beneficiaries in the appointment of new trustees

Even though Turner LJ signified in Re Tempest (1866) that account wouldbe taken of the wishes of beneficiaries in the appointment of newtrustees, the courts have always been loath to allow the beneficiaries’views to override the views of trustees or other persons invested withthe power to appoint new trustees. This is vividly demonstrated byRe Higginbottom (1892) and Re Brockbank (1948). In the latter, forinstance, there were two initial trustees, W and B. W sought to retireand the beneficiaries proposed that Lloyd’s Bank should be appointedin his place. When B opposed their proposal on the ground of costs,the beneficiaries sought the court’s assistance to carry through theappointment. The court held that, since the beneficiaries were all suijuris, they had the right to terminate the trust if they wished but whileit subsisted they had no right to control the exercise of the trustee’sstatutory power of appointment.

The position has now been materially altered by s 19 of TLATA1996, which provides that where no person is expressly nominated inthe trust instrument for the purpose of appointing new trustees, thebeneficiaries, if they are all of full age and capacity and absolutelyentitled to the trust property, may give directions to the trustees toappoint the person(s) specified in the directions as new trustees of thetrust.

The clear effect of this is that if Re Brockbank (1948) were to be decidedat the present day, the beneficiaries would have been able to prevailover the trustee in their choice of new trustees.

Accepting the appointment

Acceptance may be express or implied. Express acceptance may beoral, written or by deed. There will be implied acceptance where, forexample, a person who is appointed an executor and trustee in a willobtains probate of the will (see Mucklow v Fuller (1821) and Re Sharman’sWT (1942)). Indeed, acceptance will be inferred from any interferencewith the trust property by the appointee, unless there is some otherexplanation for the interference. Thus, in James v Frearson (1842), wherethe appointee gave directions concerning the sale of trust propertythis constituted acceptance. And, in Urch v Walker (1838), assigning alease to a beneficiary amounted to acceptance.

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Where a person who is appointed a trustee decides to accept hisappointment he is obliged to do the following: • to disclose to the settlor or whoever has appointed him, any facts

or circumstances liable to occasion a conflict between his interestand his trust duties (see Peyton v Robinson (1823) and GalmerrowSecurities v National Westminster Bank (1993));

• to acquaint himself with the material details of the trust. In particular,he ‘ought to look into the trust documents and papers to ascertainwhat notices appear among them of incumbrances and other mattersaffecting the trust’ (per Kekewich J in Hallows v Lloyd (1888));

• to initiate investigations and take legal action where there aregrounds for suspecting that a breach of trust has been committed(see Harvey v Olliver (1877));

• to ensure that legal title to the trust property becomes jointly vestedin him and his co-trustees.

In the case of the initial trustees, the original trust deed itself usuallyfulfils the purpose of vesting. In the case of subsequent trustees, theprocess of vesting legal title in the new and continuing trustees hasbeen simplified by the automatic vesting provisions in the TA 1925. Inparticular, s 40(1) of the TA 1925 provides that where a new trustee isappointed by deed, the deed shall operate without any conveyance orassignment to vest the trust property in that trustee as joint tenantwith the existing trustees.

However, under s 40(4), certain types of property are excluded fromthe automatic vesting provision in s 40(1), namely: • land conveyed by way of mortgage for securing money owed to

the trust;• land held under a lease, which contains a covenant not to assign

without consent unless such consent has been given;• stocks and shares. In effect, these will only vest in the new trustees if the formalities forthe vesting of such property are observed.

Where trust property consists of or includes equitable interests, onassuming office, the trustees must ensure that such interests are dulyprotected by notice or registration.

In addition, where the trust property or any part of it remainsoutstanding at the time of the trustee’s appointment, he must take

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appropriate steps to obtain payment of the sum or secure the transferof the property involved as soon as it falls due (see Westmoreland vHolland (1871)).

Disclaimer

Any person named as a trustee may turn down the appointment bydisclaiming the trust before acceptance. A disclaimer may be in writing,or even oral. It is, however, advisable that a deed should be employedfor this purpose, because, as Leach MR pointed out in Stacey v Elph(1833), ‘such deed is clear evidence of the disclaimer and admits of noambiguity’. It was nevertheless accepted in this case that disclaimermay be implied from conduct, and this is reinforced by Re Clout andFrewer’s Contract (1924), where it was held that a trustee may be deemedto have disclaimed where he has made no effort to take up his positionfor a considerable length of time.

The retirement of trustees

A trustee may retire or seek to be discharged from the trust in thefollowing circumstances: • where the trust instrument expressly provides for retirement;• where all the beneficiaries are of full age and all consent to the

retirement;• where in the exercise of its inherent jurisdiction the court approves

the retirement of a trustee;• under s 36(1) of the TA 1925, provided there is somebody to fill the

vacancy;• under s 39 of the TA 1925, which enables a trustee to retire even

where it is not contemplated that a new trustee will be appointedin his place. Retirement under this heading is possible only if:(a) there will be at least two trustees or a trust corporation to

administer the trust when the trustee has been discharged;(b) the trustee executes a deed signifying his wish to retire; and(c) his co-trustees as well as any person with the power to appoint

new trustees consent by deed to the discharge. Note that unders 40(2) of the TA 1925 such a deed operates to divest theoutgoing trustee of the trust property and vest it in thecontinuing trustees;

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• under s 19 of TLATA 1996, which empowers beneficiaries who areof full age and absolutely entitled to the whole trust property toinitiate the process of dispensing with a trustee’s services by givinghim written notice to retire from the trust.

Removal of trustees

Trustees may be removed from office in a number of circumstances: • A trustee may be removed from office and replaced in the manner

and on the grounds prescribed by s 36(1) and (2) of the TA 1925.• Under s 41(1) of the TA 1925, the judicial appointment of a new

trustee sometimes entails the removal of an existing trustee.• In the exercise of the court’s inherent jurisdiction it has the power

to remove a trustee from office without replacing him. Thisjurisdiction is especially useful where trustees commit breaches oftrust. Thus, in Clarke v Heathfield (No 2) (1985), trustees administeringthe funds of the National Union of Mineworkers sought to keepthe funds out of the hands of court-appointed sequestrators bytransferring them abroad. This led the court to order the trustees’removal, on the ground that their actions had put trust funds injeopardy and made them unavailable for the purposes for whichthey had been contributed by union members.

Even where there has been no misconduct occasioning a breach of trust,the court may nevertheless remove a trustee if it appears that it wouldbe prejudicial to the proper performance of the trust for him to remainin office. Thus, in Letterstedt v Broers (1884), the court found that alltrust and respect between the trustees and beneficiaries had completelybroken down and concluded that the welfare of the beneficiaries dictatedthat the trustees should no longer continue in office.

The main duties and powers of trustees

The nature of the trustee’s responsibilities

The position of the trustee is one which carries heavy responsibilities.As Lord Hardwicke remarked in Knight v Earl of Plymouth (1747), ‘Atrust is an office [which] if faithfully discharged is attended with nosmall degree of trouble and anxiety’ and it is therefore ‘an act of greatkindness in anyone to accept it’.

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A trustee’s functions normally entail the performance of duties andthe exercise of powers. These duties and powers are defined primarilyby the trust instrument. In addition, some duties and powers haveeither been laid down by statute or spelt out by the courts in the exerciseof their general equitable jurisdiction.

Whereas the trustee’s duties are obligatory, his powers areessentially discretionary. As a fiduciary, the trustee must from time totime consider whether to exercise a particular power. See Re Hay’s WT(1981); but, having considered the matter, it is open to him to decideagainst exercising the power.

Where a trustee decides not to exercise a power or to exercise it in aparticular manner, he is not bound to provide reasons for his decision(see Re Beloved Wilkes Charity (1851); Re Londonderry’s ST (1965) andWilson and Another v The Law Debenture Trust Corpn (1995)). However,if the basis for the decision emerges and it is evident that he acteddishonestly, capriciously or without proper judgment, the court mayintervene to correct the decision (see Klug v Klug (1918), Re Manisty’sSettlement (1974) and Turner v Turner (1984)).

The unanimity rule

Where there are several trustees, each one must actively take part inadministering the trust. As far as trust duties are concerned, sincethese are obligatory in nature, all the trustees are bound to ensurethat they are performed. The notion that trustees must participatefully in trust affairs is also reflected in the rule that where there aretwo or more trustees, any decision to exercise a power must beunanimous. As Jessel MR remarked in this connection in Luke v SouthKensington Hotel Co (1879): ‘There is no law that I am acquainted withwhich enables the majority of trustees to bind the minority.’ The effectof the unanimity rule is illustrated by Re Mayo (1943), where propertywas held by three trustees on trust for sale with a power to postponesale. Two of them wished to postpone sale but the third favoured animmediate sale. It was held that the power to postpone sale could notbe validly exercised since there was no unanimity and consequentlythe trustees were bound by the duty to sell imposed by the trust forsale. Note, however, that with trusts for sale now being redesignatedas trusts of land, with a power to sell by TLATA 1996, it may well bethat, unlike in Re Mayo, the unanimity rule will now apply todecisions by trustees to sell.

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The unanimity rule does not, however, apply:

• where there is any provision to the contrary in the trust instrument(see Re Butlin’s WT (1976)); or

• where the trust in question is a charitable trust, in which case thedecisions of a majority of trustees will bind a dissenting minority(see Perry v Shipway (1859) and Re Whitely (1910)).

The trustee’s entitlement to remuneration

Historically, the office of the trustee was gratuitous and, as such, thetrustee was not expected to be paid for administering the trust. InRobinson v Pett (1734), for instance, Lord Talbot LC signified: ‘It is anestablished rule that a trustee…shall have no allowance for his careand trouble.’

Over the years, the responsibilities assumed by trustees have grownincreasingly complex and time consuming, often requiring the skillsof professionals such as solicitors and accountants or the expertise oftrust corporations. Such professionals and corporations are usuallyprepared to serve as trustees only if they are paid.

Remarking on this trend, Walker J declared in Paul v Preston (1996) that:

…social and economic conditions have changed enormously since thebasic principle of trusteeship being gratuitous was laid down in the18th century. Nowadays…it is extremely difficult to find suitabletrustees who are willing to take on the hard work and heavyresponsibilities [involved] for nothing. The situation relating to a trustee’s entitlement to payment under thetrust instrument is now governed by the Trustee Act (TA) 2000, whichreceived royal assent in November 2000, following a comprehensivereview by the Law Commission (see their report, Trustees’ Powers andDuties (Law Com No 260)). Essentially, the statute recognises thecharacter of remuneration, not as a benefit under the trust (as underthe old law), but as a payment for services. Section 28 sets out theposition following its implementation: • Except to the extent (if any) to which the trust instrument makes

inconsistent provision, sub-ss (2)–(4) (below) will apply to a trusteeif the trust instrument contains a provision entitling him to receivepayment out of trust funds in respect of services provided by him

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to or on behalf of the trust, and the trustee is a trust corporation oris acting in a professional capacity: s 28(1). A trustee acts ‘in aprofessional capacity’ if he acts in the course of a profession orbusiness which consists of or includes the provision of services inconnection with the management or administration of trustsgenerally or a particular kind of trust, or any particular aspect ofthe management or administration of trusts generally or a particularkind of trust, and the services he provides to or on behalf of thetrust fall within that description: s 28(5).

• The trustee is to be treated as entitled under the trust instrument toreceive payment in respect of services even if they are services whichare capable of being provided by a lay trustee: s 28(2). (A personacts as a lay trustee’ if he is not a trust corporation and does not actin a professional capacity: s 28(6).)

• Sub-section (2) (see above) applies to a trustee of a charitable trustwho is not a trust corporation only if he is not a sole trustee and tothe extent that a majority of the other trustees have agreed that itshould apply to him: s 28(3).

• Payments to which a trustee is entitled in respect of services will betreated as remuneration for services (not as a gift) for purposes of s15 of the Wills Act 1837 and s 34(3) of the Administration of EstatesAct 1925 (order in which estate is to be paid out): s 28(4).

The question of ‘reasonable remuneration’

Under s 29(3) of the TA 2000, ‘reasonable remuneration’ is defined, inrelation to the provision of services by a trustee, as ‘such remunerationas is reasonable in the circumstances for the provision of those servicesto or on behalf of the trust by that trustee’. Charges under the BankingAct 1987 may be made where an authorised institution under that Actprovides services as such: s 29(3). Subject to sub-s (5) (see below), atrustee who is a trust corporation, but is not a trustee of a charitabletrust, is entitled to receive reasonable remuneration out of the trustfunds for any services that the trust corporation provides to or on behalfof the trust: s 29(1). Subject to sub-s (5), a trustee who acts in aprofessional capacity, but is not a trust corporation, a trustee of acharitable trust or a sole trustee, is entitled to receive reasonableremuneration from the trust funds for services he provides to or onbehalf of the trust if each other trustee has agreed in writing that hemay be remunerated for the services: s 29(2).

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Under sub-s (5), a trustee is not entitled to remuneration under s 29if any provision about his entitlement to remuneration has been madeunder the trust instrument or any enactment or provision ofsubordinate legislation.

Remuneration of trustees of charitable trusts

Under s 30(1) of the TA 2000, the Secretary of State may by regulationsmake provision for the remuneration of trustees of charitable trusts(discussed in Chapter 5 above) who are trust corporations or act in aprofessional capacity.

Reimbursement of expenses

A trustee is entitled to be reimbursed from the trust funds, or may payout of the trust funds, expenses properly incurred by him when actingon behalf of the trust: s 31(1). This applies also to a trustee authorisedto exercise functions as an agent of the trustees, or to act as a nomineeor custodian: s 31(2).

Trustees may remunerate an agent, nominee or custodian out ofthe trust funds for services if he is engaged on terms entitling him tobe remunerated for those services, and the amount does not exceedsuch remuneration as is reasonable in the circumstances for theprovision of those services by him to or on behalf of that trust: s32(2). Trustees may reimburse an agent, nominee or custodian out oftrust funds for expenses properly incurred in the exercise of hisfunctions: s 32(3). (A custodian is one who is appointed toundertake the safe custody of assets or of any documents or recordsconcerning the assets: s 17(2).)

The trustee’s duties

The duty of care

Following the recommendation of the Law Commission that thereshould be a single statutory duty of care to be observed by trusteescarrying out particular functions, Pt I and Sched 1 to the TA 2000 setout details relating to the duty. Wherever the duty of care applies to atrustee, he must exercise such care and skill as is reasonable in thecircumstances, having regard in particular to any special knowledgeor experience that he has or holds himself out as having, and if he acts

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as trustee in the course of a business or profession, to any specialknowledge or experience that it is reasonable to expect of a personacting in the course of that kind of business or profession: s 1(1).

Under Sched 1, the duty of care applies to a trustee in the followingcircumstances: • when he is exercising the general power of investment or any other

power of investment, however conferred, and when carrying outduties under ss 4 and 5, relating to exercise of the power or reviewof investment;

• when exercising power to acquire land under s 8;• when entering into arrangements under ss 11, 16, 17, 18 and 22,

relating to the authorisation of an agent’s functions or theappointment of agents, nominees and custodians;

• when compounding liabilities in relation to s 15 of the TA 1925;• when insuring property under s 19 of the TA 1925;• when exercising power relating to reversionary interests, valuations

and audit, under s 22 of the TA 1925. It should be noted that the duty of care does not apply if, or in so far as,it appears from the trust instrument that the duty is not meant to apply:Sched 1, para 7.

Fiduciary duties

We saw in Chapter 4 that trustees and other fiduciaries are duty-boundto ensure that they do not permit their personal interests to conflictwith their duties. Equity has sought to safeguard against such conflictsby imposing on the trustee a number of important prohibitions andrestrictions.

Unauthorised profits

The most important of these safeguards is enshrined in LordHerschell’s assertion in Bray v Ford (1896) that a trustee ‘is not, unlessotherwise expressly provided, entitled to make a profit’.

In line with this principle, a trustee who receives a fee, commissionor other payment (apart from remuneration to which he may lawfullybe entitled) is liable to account to the beneficiaries for such a payment.This is seen from such cases such as Sugden v Crosland (1876); Williamsv Barton (1927) and Re Macadam (1946) (which have already been

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considered in Chapter 4 in the context of fiduciaries as constructivetrustees).

The trustee’s obligation not to allow his interests to conflict withhis duty has also found expression in the rule in Keech v Sandford(1726). According to this rule, where trust property consists of alease, the trustee is bound on the expiry of the lease to seek to renewit for the benefit of the trust and not for his own benefit. This rulehas been extended to situations where the trustee does not seek torenew the lease but to purchase the leasehold reversion (seeProtheroe v Protheroe (1968)).

Also relevant in the present context is Boardman v Phipps (1967)which decided that a solicitor to a trust (and by implication a trustee)who derived some material benefit from exploiting confidentialinformation that had come to him by virtue of his position would beliable to account for the benefit.

A point which emerges clearly from Keech v Sandford, Boardman vPhipps and Regal (Hastings) Ltd v Gulliver (1942) is that a trustee or anyother fiduciary will be liable to account for whatever benefit he hasobtained even where there has been no impropriety on his part. AsLord Russell observed in this connection in Regal (Hastings): ‘Theprofiteer, however honest and well intentioned, cannot escape thatrisk of being called upon to account.’ It appears, however, from ReDrexel Burnham (1994), that trustees who seek to embark on a courseof action which might lay them open to claims that they have profitedfrom allowing their interests to override their duties, may protectthemselves by applying to the court for approval.

Purchase of trust property by trustee

Where a sale of trust property is proposed, the trustees according toWynn-Parry J in Buttle v Saunders ‘have an overriding duty to obtainthe best price which they can get for their beneficiaries’. This duty isreinforced by the self-dealing rule. As seen from the judgment of MilletLJ in Armitage v Nurse (1997), the substance of this rule is that where atrustee purchases trust property from fellow trustees, the sale is liableto be set aside by a beneficiary whose right to do so does not dependon proof of loss or damage, but exists even if the sale was at anovervalue. In effect, a purchasing trustee can never obtain more thana defeasible title to the property and it makes no difference that hebought in good faith, for as Lord Eldon emphasised in Ex p James (1803),

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‘the purchase is not permitted in any case, however honest thecircumstances’.

The justification for the self-dealing rule is that a trustee who isboth the seller and buyer of trust property may be tempted tomanipulate the terms of the sale to his advantage or exploit knowledgeabout the property obtained in the his capacity as a trustee.

Purchase by retired trustees

A sale of trust property to a trustee may be set aside under the self-dealing rule even if it takes place after he leaves office, as happened inWright v Morgan (1926), unless the sale occurs long after he ceases tobe a trustee, as in Re Boles and British Land Co’s Contract (1902).

Indirect purchase through a third party

It is not permissible for the trustee to acquire trust property indirectlythrough its sale to a third party either as his nominee or with a view tohis repurchasing the property from the third party. In accordance withthis, the courts have held that: • where trust property is sold to a third party but, before it is conveyed

to him, a trustee contracts to repurchase the property from him, thetrustee is not entitled to enforce the contract (see Delves v Gray(1902));

• where trust property has been sold and conveyed to a third party atrustee can repurchase it only if the original sale was in good faith,and not with a view to reselling the property to the trustee (see RePostlethwaite (1888)). Where this was not the case, the beneficiariesare entitled to have the repurchase by the trustee set aside underthe self-dealing rule;

• where trust property is sold to a company in which a trustee has asizeable shareholding, it has been held in Re Thompson’s Settlement(1985) that this will be dealt with on the same footing as a sale tothe trustee and will therefore be set aside.

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Limits to the self-dealing rule

The courts will not set aside sales of trust property to trustees in thefollowing contexts: • where the trustee contracted to purchase the trust property before

becoming a trustee but the sale was completed after he had becomeone (see Re Mulholland’s WT (1949)), which has recently beenendorsed in Spiro v Glencrown Properties (1996);

• where the trust is a bare trust under which the trustee whopurchased trust property had no active duties to perform (see Parkesv White (1805) and Clark v Clark (1884));

• where there are special circumstances which render it inappropriateto set aside the sale as was the case in Holder v Holder (1968). Here atestator left two farms to his widow and children. His executorsincluded his son V who was also the tenant of the farms. Vpurported to renounce his executorship but this renunciation wasineffective as he had already taken a few minor steps inadministering the estate (for example, signing cheques andendorsing insurance policies). The farms were sold by auction bythe other executors to V. Seven years later an order was sought tohave the sale set aside under the self-dealing rule, but the orderwas refused on the following grounds:(a) V had never effectively assumed the duties of executor and

in particular had not been involved in arranging the auctionor instructing the valuer who had valued the farms.

(b) All the other beneficiaries knew that the reason why V hadrenounced the executorship was because he was interestedin buying the farms, and they had acquiesced in V’s purchaseof the farms for which he had paid a fair price.

(c) V had acquired no special knowledge of the farms in thecapacity of an executor and there was no basis for the otherbeneficiaries to look to him to protect their interests.

Purchase of beneficial interest by trustee

It is necessary to distinguish between the purchase of trust propertyby the trustee and the purchase by the trustee of a beneficiary’s interestin such property. This is because it has been established in cases suchas Ex p Lacey (1802) that the self-dealing rule does not apply to atrustee’s purchase of the beneficial interest.

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Such transactions are, however, governed by the ‘fair-dealing rule’.According to Megarry VC, in Tito v Waddell (No 2) (1977), the effect ofthe rule is that ‘if a trustee purchases the beneficial interest of any ofhis beneficiaries, the transaction is not voidable ex debito justitiae butcan be set aside by the beneficiary unless the trustee can show that hehas taken no advantage of his position and has made full disclosure tothe beneficiary and that the transaction is fair and honest’ (see, also,Coles v Trecothick (1804), Thomson v Eastwood (1877); Dougan vMacpherson (1902); and Hill v Langley (1988)).

Competing in business with the trust

A conflict may occur between the duties of a trustee and his personalinterest where the trust estate includes a business and the trustee isfound to be conducting a business of his own in competition with thetrust. A case in point is Re Thomson (1930). Here, the estate of a deceasedtestator included a yacht-broking business which was a going concern.One of his executors sought to set up a yacht-broking business of hisown in the same town, but an injunction was granted to prevent himfrom doing so because the court found that there was a distinctlikelihood of a conflict between his business interests and his duty asan executor. Contrast with Moore v McGlynn (1894).

The duty to distribute

The trustees must distribute the trust estate to those who are properlyentitled to it. Failure to do so renders them liable for breach of trust(see Eaves v Hickson (1861)).

Where the trustees are in doubt regarding the identity orwhereabouts of prospective beneficiaries, the matter may be resolvedby making preliminary enquiries and placing advertisements in themanner contemplated by s 27 of the TA 1925.

Where the entitlement of a beneficiary is not in doubt but it isuncertain whether he is still alive, the problem may be overcome byapplying for a Benjamin Order (see Re Benjamin (1902) and Re Green’sWT (1885)).

Where the trustees cannot resolve any matter concerning thedistribution of the trust estate on their own, they may apply to thecourt for directions. Moreover, where despite all the best efforts of thetrustees the beneficiaries cannot be ascertained or it is otherwiseimpossible or impracticable for the trustees to carry out the distribution,

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they may pay the trust fund into court as a last resort (see Re GillinghamBus Disaster Fund (1885)).

The duty to keep accounts and provide information

The duty to keep accounts is laid down in Pearse v Green (1819). Thereis, however, no requirement that the accounts must be audited,although under s 22(4) of the TA 1925, the trustees may arrange for anindependent accountant to audit the accounts.

Apart from accounts and other financial statements, beneficiariesmay also call for general information concerning the affairs of thetrust (see O’Rourke v Darbishire (1920)). The trustees are, however,entitled not to furnish information which will disclose to thebeneficiaries the manner in which they have exercised a discretionarypower (see Re Londonderry’s Settlement (1965) and Wilson v LawDebenture Trust Corp (1995)).

The trustee’s powers

In addition to the duties imposed on them, trustees are usuallyinvested with far-reaching discretionary powers which enable themto exercise their judgment in a wide range of matters concerning thetrust. The precise powers available to the trustees in any given caseare generally determined in the first instance by the trust instrument.In addition to such express powers, the trustees have at their disposala number of important statutory powers, unless the trust instrumentdirects otherwise. We refer below to powers relating to investment,acquisition of land, insurance, maintenance, advancement anddelegation.

The power of investment

Under the Trustee Investment Act 1961, where there were no relevantand specific powers set out in the trust instrument, trustees’ powersto invest were restricted. Trustees had to keep in mind thoseinvestments which they might make without obtaining advice (the‘narrower range investments’) (generally fixed interest securities)) andthe ‘wider range investments’ which might be made only after

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receiving advice. Trustees wishing to invest in equities were alsorestricted under the Act.

Part II of the TA 2000, referred to in the House of Lords by the LordChancellor as implementing the most important part of the report ofthe Law Commission, revises totally the power of the trustees to invest.(Sections 1, 2, 5, 6, 12, 13 and 15 of the 1961 Act cease to have effectexcept in so far as they are applied by or under any other enactment:Sched 2 to the TA 2000.)

Under s 3 of the TA 2000, a trustee may make any kind of investmentthat he could make if he were absolutely entitled to the assets of the trust.This general power of investment does not allow the trustee to makeinvestments in land other than loans secured on land (but note s 8below): s 3(3). Where the power is exercised, a trustee must have regardto ‘the standard investment criteria’: s 4(1). These criteria must also betaken into account when the trustee considers variations ininvestments: s 4(2).

The standard investment criteria in relation to a trust are: • the suitability to the trust of investments of the same kind as any

particular investment proposed to be made or retained and of thatparticular investment as an investment of that kind; and

• the need for diversification of investments of the trust, in so far asis appropriate to the circumstances of the trust.

Before the trustee exercises any power of investment, he must obtainand consider proper advice about ways in which the power ought tobe exercised, having regard to the standard investment criteria: s 5(1).This applies, also, to variations of investments: s 5(2). ‘Proper advice’is the advice of a person who is reasonably believed by the trustee tobe qualified to give it by his ability in, and practical experience of,financial and other matters relating to the proposed investment: s 5(4).Such advice need not be sought if the trustee reasonably concludesthat in all the circumstances it is unnecessary or inappropriate to doso: s 5(3).

The power to acquire freehold and leasehold land

Under s 8(1) of the TA 2000, a trustee may acquire freehold or leaseholdland in the UK as an investment, for occupation by a beneficiary, orfor any other reason. ‘Freehold or leasehold land’ means, in relation to

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England and Wales, a legal estate in land: s 8(2)(a). A trustee whoacquires land under this section has all the powers of an absolute ownerin relation to the land: s 8(3).

This power has no application in relation to a trust of property whichconsists of or includes land which (despite s 2 of TLATA 1996) is settledland, or a trust to which the Universities and College Estates Act 1925applies: s 10(1).

Power to insure

A trustee may insure any property which is subject to the trust againstrisks of loss or damage due to any event, and may pay the premiumsout of the trust funds: s 19 of the TA 1925, substituted by s 34(1) of theTA 2000. Where property is held on a bare trust, the power to insure issubject to any direction given by the beneficiary or each of thebeneficiaries that any property specified in the direction is not to beinsured except on specified conditions: s 19(2).

Property is held ‘on a bare trust’ if held on trust for a beneficiary offull age and capacity and absolutely entitled to the trust property, orbeneficiaries, each of whom is of full age and capacity, and who,taken together, are absolutely entitled to the trust property: s 19(3).

The power of maintenance

A trustee is ordinarily precluded from paying over to an infantbeneficiary any income arising from his beneficial interest while heremains an infant. It is incumbent on the trustees to retain such incomeand accumulate it with the capital until the infant attains majority atthe age of 18.

Instead of accumulating the income, the trustees may see the needto apply the entire income or part thereof towards meeting the routine,recurring expenses of the infant, for example, school fees, food,clothing, lodging. Before statute intervened, the trustees could do soonly where the trust instrument contained an express power ofmaintenance. Under s 31 of the TA 1925, however, trustees can nowexercise a statutory power of maintenance where the trust instrumentis silent. The section provides as follows: • Where trustees hold an interest in property for an infant beneficiary,

whether the interest is vested or contingent, they may in theirdiscretion pay to the infant’s parents or guardian, or otherwise apply

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towards the infant’s maintenance, education or benefit, such partof the income of the property as they think reasonable. This poweris exercisable, whether or not:(a) there is any other fund applicable to the same purpose; or(b) there is any person bound by law to provide for the infant’s

education or maintenance. • During the infancy of the beneficiary, as long as his interest

continues, the trustees shall accumulate any income not expendedon his maintenance, and invest it in authorised investments.However, it is open to the trustees in any given year, to carry overand apply income accumulated in preceding years towards themaintenance or education of the beneficiary in a subsequent year.

• Where the beneficiary attains majority or marries at an earlier ageand:(a) has a vested interest in the income; or(b) is entitled to the property from which the income arose in fee

simple or fee tail, the trustees shall hold such accumulationson trust for the beneficiary absolutely.

For example, if £10,000 is held on trust for B either in fee simple or forlife and B is 13, if the sum is invested and yields £1,000 a year, onreaching 18, B will be absolutely entitled to the accumulated sum of£5,000.• If the beneficiary’s interest is not yet vested, when he attains

majority, he does not become entitled to the accumulated income.From that time, however, the trustees must pay him the incomefrom the capital together with the income produced by anyaccumulated income until his interest becomes vested. If thebeneficiary’s interest fails before it becomes vested either becausehe dies or for any other reason, the income accumulated during hisinfancy will be treated as an accretion to the capital. For example, if£10,000 is given to trustees ‘on trust for B if he attains the age of 25’,assuming again that B is 13 and that the trustees invest the moneywhich yields £1,000 a year, B will not be entitled to the accumulatedincome of £5,000 at the age of 18. From that date, however, he willbecome entitled to the income on the £10,000 capital and on the£5,000 accumulated income until he attains the age of 25 (unlessthere is a provision to the contrary in the trust instrument, as in ReTurner’s WT (1936)). If B dies at 23, his interest fails and the £5,000will be treated as an accretion to the capital so that whosoever isentitled to the capital on B’s death will receive £15,000.

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• If an infant beneficiary dies before attaining majority or gettingmarried even if his interest was vested, any income not expendedon his maintenance will be treated as an accretion to the capital(but see Re Delamere’s ST (1984), which decided that where trusteesappointed income to an infant beneficiary absolutely, such incomewould not devolve with the capital under s 31 where the infantdied before attaining maturity).

Conditions for the exercise of the power of maintenance

• There must be nothing in the trust instrument pointing to a contraryintention on the settlor’s part (see Re Ransome (1957); IRC v Bernstein(1961); Re McGeorge and Re Turner’s WT (1936)).

• The beneficiary in respect of whom the power is exercisable mustbe below 18.

• The trust property or a share of it must be held on trust for thebeneficiary.

• The beneficiary must be entitled to the intermediate income.

When is the beneficiary entitled to the intermediateincome?

The intermediate income is the income derived from trust propertybetween the date of the gift and the date the infant beneficiary attainsmajority. As seen from Re Ransome (1957) and IRC v Bernstein (1961), abeneficiary will not be entitled to the intermediate income where thetrust instrument expressly directs the trustees to accumulate it or payit to someone else till the beneficiary attains majority. Conversely, thebeneficiary is undoubtedly entitled to the intermediate income, wherethis is expressly provided for in the trust instrument, as happened, forinstance, in Begg-McBrearty v Stilwell (1996).

Where there is no express provision in the trust instrumentregarding the intermediate income, a beneficiary’s entitlement to suchincome depends on the nature of the interest conferred by the gift.The applicable rules are derived from s 175 of the LPA 1925 and s31(3) of the TA 1925, as supplemented by the decisions of the courtsand can be summarised as follows:

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Improper exercise of the power of maintenance

Although it is at the discretion of the trustees to determine whether touse trust income for maintenance or to accumulate such income, theyare required to take proper care in exercising this discretion. Inparticular, they are required by the proviso to s 31(l) to have regard tosuch factors as the infant’s age, his requirements, other incomeavailable for his maintenance, and the general circumstances of thecase. Failure to take proper care in exercising the discretion may renderthe trustees liable to repay any income which is lost as a consequence(see Wilson v Turner (1883)).

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Maintenance from capital

While s 31 specifies that provision for maintenance must be made outof the income, the courts have the power, under s 53 of the TA 1925, toorder the disposal of an infant’s beneficial interest and the applicationof the capital and income towards his maintenance or towards theacquisition of some other capital investment.

Authorisation of maintenance by the court

In addition, where s 31 is inapplicable because the power ofmaintenance has expressly or impliedly been excluded in the trustinstrument, the court may, in the exercise of its inherent jurisdiction,authorise the use of the trust income for maintenance, as seen in ReCollins (1886).

The power of advancement

What is advancement?

Trustees are commonly empowered to apply trust capital for the‘advancement or benefit’ of beneficiaries. In its original sense,advancement entails making financial provision out of trust capitaltowards the establishment in life of a beneficiary before the beneficiarybecomes entitled to demand such capital. The power of advancementhas been construed in very wide terms by the courts and the followingapplications of trust funds have been held to constitute valid exercisesof the power: • buying an army commission for a beneficiary (Lawrie v Barnes

(1857));• purchasing a house for a doctor-beneficiary (Re Williams WT (1953));• providing money to pay off a beneficiary’s debts (Lowther v Bentinck

(1874));• paying for the passage of a beneficiary who is emigrating (Re Long’s

Settlement (1868));• assisting a beneficiary to start a career at the Bar (Roper-Curzon v

Roper-Curzon (1871); or to set up in business (Re Kershaw (1868));• providing out of the capital for the payment of medical and nursing

home expenses of an elderly and incapacitated beneficiary(Stephenson v Wishart (1987));

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• applying capital towards donations to charity on behalf of abeneficiary who was a young man of immense wealth (Re Clore(1966)); and

• the redistribution of capital by resettling such capital due to abeneficiary under a new trust, so as to take advantage of savingson estate duty (Pilkington v IRC (1964)).

The statutory power of advancement (s 32)

An express power of advancement may be conferred on trustees bythe trust instrument. If no such express power is found in the trustinstrument, the trustees may avail themselves of the statutory powerof advancement under s 32 of the TA 1925 unless they are precludedfrom doing so under the terms of the trust.

Under s 32, the trustees may pay or apply any capital money whichthey hold on trust for the advancement or benefit of a beneficiary inany of the following circumstances: • where the beneficiary has an absolute vested interest. The power

of advancement is usually exercised in this connection where thebeneficiary is an infant. Even if the infant has an absolute vestedinterest, the trustees are precluded from paying any part of the trustcapital or income directly to him. They may, however, apply trustcapital towards his advancement by virtue of s 32 of the TA 1925.

• where the beneficiary has a vested interest which is revocable orliable to be defeated by the exercise of a power of appointment:This means, for instance, that where £10,000 is bequeathed totrustees for the benefit of the testator’s children as his wife shallappoint and in default of appointment to B, the trustees may exercisethe power of advancement in B’s favour before any appointment ismade, even though B would be divested of his interest by any suchappointment;

• where the beneficiary has an interest which is contingent on theattainment of a specified age or the occurrence of a particular event,even in cases where the interest is subject to a gift over to someoneelse in the event of the beneficiary’s death without fulfilling thecontingency. Thus, for instance:(a) if £10,000 is given to trustees to hold on trust for B, a bachelor,

provided he marries, they may exercise the power ofadvancement in B’s favour, even though his interest iscontingent in nature;

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(b) if £10,000 is given to trustees to hold on trust for B if he attainsthe age of 21, with a stipulation that if B dies before then, themoney is to pass to C, the trustees may exercise the power ofadvancement in B’s favour, despite the gift over to C.

Conditions for the exercise of the statutory power

In exercising the statutory power of advancement the trustees mustensure: • that the money paid or applied in favour of a beneficiary shall not

in total exceed half of the vested or presumptive share or interest ofthat beneficiary in the trust property. Accordingly:(a) where trustees hold £10,000 on trust for B if he attains the age

of 21, they are entitled to advance £5,000 to him;(b) where trustees hold £10,000 on trust for B1, B2, B3 and B4 in

equal shares and all the beneficiaries are infants, the trusteesare entitled to advance £1,250 to each of them;

(c) where the trustees are directed in T’s will to hold £12,000 ontrust to be divided among all T’s sons who are called to theBar by the age of 30, and T is survived by four sons under 30,the trustees may advance £1,500 to each of them;

(d) where the trustees are directed in T’s will to hold £12,000 ontrust for the benefit of the first of T’s sons to qualify as a doctorand T is survived by three sons, the position is moreproblematic. Strictly speaking, the presumptive share of eachson is £12,000, since any son that qualifies is entitled to theentire amount. It would, however, appear that the trusteeswill not advance £6,000 to any of the sons, but will, for thepurpose of the exercise of the power, treat the presumptiveshare of each son as £4,000 and therefore advance no morethan £2,000.

• where after an advancement has been made in his favour, abeneficiary becomes absolutely entitled to a share in the trust capital,this advancement shall be taken into account as part of his share.Thus, for example, if T gives £15,000 to trustees to hold on trust forT’s children, B1, B2 and B3, each of them is entitled on attainingmajority to £5,000 out of the capital. Assuming that when B1 was17, the trustees had advanced £1,000 to enable him secure anapprenticeship and acquire the tools of his trade, his entitlement tocapital will be reduced by the sum advanced to £4,000;

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• the power will not be exercisable to the prejudice of any personentitled to a prior life or other interest, unless such person is of fullage and consents in writing to the advancement (as happened inIRC v Pilkington). For example, where property is held on trust forA for life, remainder to B and C in equal shares, A is entitled to theincome from the property in his lifetime and would therefore beprejudiced if any part of it is advanced to B or C. It is in order tosafeguard A against this that his consent is required.

It must be noted that if A’s interest arises under a protective trust, theeffect of giving his consent would ordinarily be to determine his lifeinterest and bring into being a discretionary trust. This result has,however, been avoided by the provision in s 33(1) to the effect thatconsent to the exercise of the power of advancement does not constitutea determining event.

The trustee’s responsibility for ensuring properutilisation of sums advanced

It is provided in s 32 of the TA 1925 that the trustees may ‘pay orapply any capital money’, which suggests that they may either transferthe money directly to the beneficiary or apply it on his behalf.

Where the trustees hand over the money to the beneficiary, theyare not entitled to stand back and leave it open to the beneficiary tospend the money as he chooses, but must seek to ensure that he appliesit for the specified purpose. Failure to do so may amount to a breachof trust and may render the trustees liable to account for any moneywhich has been misapplied. In this connection, the Court of Appealmade it clear in Re Pauling’s ST (1964) that trustees cannot prescribe aparticular purpose and then raise and pay money over to thebeneficiary, leaving him entirely legally and morally free either to applyit for that purpose or dissipate it on other things, without anyresponsibility on their part to inquire after its application.

Settled land not covered by the statutory power ofadvancement

For the purpose of s 32 of the TA 1925, the trustees are empowered tomake advances of any capital consisting of money or securities orproperty held on trust for sale (including land held on trust for sale asseen from Re Stimpson’s Trust (1931)). The power does not, however,

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apply where the capital consists of land held under the SLA 1925 orthe proceeds of sale of land or other capital money for the purposes ofthe SLA.

Exercise of the power of advancement by the courts

Just as the courts have affirmed in Re Collins (1886) that they have aninherent jurisdiction to order provision to be made out of the trustincome for the maintenance of an infant beneficiary, so also have theyheld in Barlow v Grant (1684) and Re Mary England (1830) that theyhave an inherent jurisdiction to order payments by way ofadvancement or maintenance out of the capital.

Furthermore, under s 53 of the TA 1925, the courts may also arrangefor the conveyance of property to which an infant is beneficiallyentitled, with a view to the application of the capital or income whichis yielded for the maintenance, education or benefit of the infant.

The power of delegation

Traditionally, trustees were regarded as being under an obligation toperform their functions personally and the trustee was accordinglyrequired by equity not to delegate any matter relating to theadministration of trust. As Langdale MR asserted in Turner v Corney(1841): ‘Trustees who take on themselves the management of trustproperty for the benefit of others have no right to shift their duty toother persons.’ The operative principle in this connection was delegatusnon potest delegare.

It has, however, been recognised from the outset that trusteescould justifiably derogate from this principle in certaincircumstances. On the one hand, it has always been open to thesettlor to confer the power of delegation in the trust instrument. Onthe other hand, even where this has not been done, the courts havefor centuries empowered the trustees to delegate various aspects oftheir responsibilities to agents.

The situation concerning delegation of trustee functions is nowsubject to statute. The Trustee Delegation Act 1999, which amendedthe law relating to the delegation of trustee functions by power ofattorney, and the exercise of those functions by the donee of a powerof attorney, was followed by TA 2000, which, in Pt IV, has radicallyaltered the law relating to the power of trustees to delegate to theiragents, nominees and custodians.

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Power to employ agents

The trustees of a trust may authorise any person to exercise any or allof their delegable functions as their agent: s 11(1). In the case of a trustother than a charitable trust, a trustee’s delegable functions consist ofany function other than: • any function relating to whether or in what way trust assets should

be distributed;• any power to decide whether fees or other payments due to be made

out of trust funds should be made out of income or capital;• any power to appoint a person as trustee;• any power conferred permitting trustees to delegate any of their

functions or to appoint nominees or custodians: s 11(2). The trustees’ functions in the case of a charitable trust are set out in s11(3) and comprise: • any function consisting of carrying out a decision that the trustees

have taken;• any function concerning investment of assets subject to the trust;• any function concerning raising of funds for the trust other than by

means of profits for a trade which is an integral part of carrying outthe trust’s charitable purpose;

• any other function prescribed by order of the Secretary of State. Persons who may be appointed under s 11 may include trustees: s12(1). A beneficiary may not be authorised to act as agent: s 12(3). Thetrustees may not authorise a person to exercise any of theirmanagement functions as their agent except by written agreement: s15(1). The trustees are obliged to prepare a statement giving guidanceto agents as to how asset management is to be exercised: s 15(2).

Power to appoint nominees

Trustees may appoint a person to act as their nominee in relation tosuch of the trust assets as they may determine (other than settled land)and they may take steps to ensure the vesting of those assets in a personso appointed: s 16(1). The appointment must be in or evidenced inwriting: s 16(2).

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Power to appoint custodians

The trustees may appoint a person to act as custodian in relation tospecified assets: s 17(1). A person is a custodian in relation to assets ifhe undertakes the safe custody of the assets or of any documents orrecords concerning the assets: s 17(2). The appointment must be in orevidenced in writing: s 17(3).

Where the trustees retain or invest in securities payable tobearer, they must appoint a person to act as a custodian of thosesecurities: s 18(1).

Persons who may be appointed as nominees or custodians

A person may not be appointed as a nominee or custodian unless hecarries on a business which consists of or includes acting as anominee or custodian, or is a body corporate controlled by thetrustees, or is a body corporate recognised under s 9 of theAdministration of Justice Act 1985: s 19(1). Trustees of a charitabletrust, which is not an exempt charity, must act in accordance withappropriate guidance given by the charity commissioners concerningappointment of nominees or custodians: s 19(4). The trustees mayappoint as a nominee or guardian one of their number, if that one isa trust corporation, or two (or more) of their number, if they are to actas joint nominees or joint custodians: s 19(5).

Review of agents, nominees, custodians

While an agent, nominee or custodian continues to act for the trust,the trustees: • must keep under review arrangements under which they act and

how those arrangements are being put into effect;• should circumstances be appropriate, consider whether it is

necessary to exercise any powers of intervention;• must intervene if they consider there is a need to do so: s 22(1).

Liability for agents, etc

A trustee is not liable for any act or default of the agent, nominee orcustodian unless he has failed to comply with the duty of careapplicable under Sched 1 when entering into the arrangements underwhich the person acts as agent, nominee or custodian, or when carryingout his duties under s 22 (review of agents, etc): s 23(1). It should benoted that a failure by trustees to act within the limits of the powersconferred by Pt IV, in authorising a person to exercise a function of

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theirs as agent, or in appointing a person to act as custodian or nominee,will not invalidate the authorisation or appointment: s 24.

Variation of trusts

Introduction

Trustees are required to carry out the trust according to the expressterms set out in the trust instrument as supplemented by the variousimplied terms imposed by statute. Where the beneficiaries are all offull age and absolutely entitled to the trust property and are all of oneaccord, this presents no difficulties, since they can simply bring thetrust to an end under the rule in Saunders v Vautier (1841) andreconstitute it under whatever terms they consider appropriate. Inother instances, however, any departure from or variation of the termsof the trust will be allowed only where it is sanctioned by the courteither acting in the exercise of its inherent jurisdiction or on the basisof some statute.

Variation in the exercise of the courts’ inherent jurisdiction

As a facet of their inherent jurisdiction to oversee the properadministration of trust property, the courts are competent to vary theterms of a trust. Historically, however, this jurisdiction was exercisedvery sparingly. Consequently, before Parliament intervened to confera wide ranging statutory jurisdiction on them, the courts were willingto sanction such variations only in a limited number of well definedsituations, outlined by Lord Morton in Chapman v Chapman (1954): Inparticular: • The courts were prepared to act where the trust instrument provided

for accumulations out of income in favour of an infant during hisminority, while making inadequate provision for his maintenanceduring the accumulation period (see Re Collins (1886)).

• Where an unexpected development or event occurred, which wasunprovided for by the settlor and which threatened to underminethe basis of the trust, the courts were prepared to authorise certainacts/transactions not provided under the trust, with a view tosalvaging the situation. As observed in this connection by RomerLJ in Re New (1910):

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In a case of this kind, which may reasonably be supposed to be onenot foreseen or anticipated by the author of the trust, where the trusteesare embarrassed by the emergency that has arisen and the duty uponthem is to do what is best for the trust estate…the court in a propercase would have jurisdiction to sanction…such acts on behalf of thetrustee. In line with this, the court in Re Jackson (1882) signified its willingnessto allow the mortgage of trust property to raise funds to carry outvital repairs on the property.

The courts have, however, emphasised in such cases as Re Tollemache(1903) that, for a variation to be authorised under this heading, it wasnot sufficient that the proposed transaction would be advantageousto the beneficiaries; it also had to be established that it was necessitatedby an emergency. • The court could also approve a variation in the exercise of its

inherent jurisdiction where there was a dispute as to the terms ofthe trust or the rights and interests created thereunder, and thedispute was settled by a compromise re-defining the terms of thetrust or the interests of the parties.

Variations under this heading became especially common where thetrustees acting in consonance with the adult beneficiaries wished tovary the beneficial interests provided for under a trust but could notinvoke Saunders v Vautier, because they were also infant beneficiariesor beneficiaries yet unborn. An application would usually be made tothe judge in chambers to approve the variation on behalf of such infantsand unborn beneficiaries and approval was sometimes given even ininstances where there was no genuine dispute to be compromised. InChapman itself, an application was made by the trustees on this footingfor the variation of the trust by the deletion of a particular clause. TheHouse of Lords found that the terms and effect of this clause were notin dispute and the variation was sought simply because of its tax-saving implications. In view of this, the court declined to approve theproposed variation, insisting that its jurisdiction under this fourthheading was not general, but confined to variations which, in the realsense of the word, were designed to compromise real disputes. It waslargely in response to this decision that Parliament enacted theVariation of Trusts Act (VTA) 1958 which is examined in greater detailbelow.

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Variations authorised by statute

Section 96(1) of the Mental Health Act 1983

This gives the Court of Protection the power to make a settlement ofproperty of a mental patient and further provides that the Court mayvary any such settlement in whatever manner it sees fit, if any materialfact was not disclosed when it was made or if circumstances havechanged substantially since it was made.

Sections 23 and 24 of the Matrimonial Causes Act 1973

By virtue of these provisions the courts enjoy wide powers to makeorders affecting the property of parties to matrimonial proceedings.The court may among other things effect the variation of ante-nuptialand post-nuptial settlements as well as any subsisting settlementorders. Furthermore, it may order capital provision to be made byway of cash payments or property transfers or by the making of asettlement for the benefit of the other spouse and children.

Section 53 of the Trustee Act 1925

Where an infant is beneficially entitled to property, s 53 of the TAenables the court to order such property to be conveyed or transferredwith a view to applying the capital or income produced for themaintenance, education or benefit of the infant, notwithstanding thatthis is not provided for by the terms of the trust. For instance, in ReMeux (1959), where property was settled on A for life, remainder to B,an infant, the court granted an application under s 53 for theappointment of a person to convey B’s interest to A absolutely, inconsideration for a sum to be paid by A to trustees for B’s maintenance.Also, in Re Gower’s Settlement (1934), the court authorised the mortgageof an infant remainderman’s interest with a view to providing for hismaintenance.

Section 57 of the Trustee Act 1925

This enables the courts to enlarge the administrative powers of trusteesbeyond the scope provided for by the terms of the trust. It providesthat, where in the management or administration of trust property, itis expedient to sell, lease, mortgage or otherwise dispose of such

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property or to undertake any purchase, investment, acquisition,transfer or other transaction, but the trustees have no power to do sounder the trust instrument or by law, the court may confer the necessarypower on the trustees.

As noted above, the courts could in their inherent jurisdiction varythe terms of the trust to allow such transactions only in the event of anemergency By contrast, it is now open to the courts, relying on s 57, toauthorise such transactions on the grounds of expediency rather thanemergency

The section has been invoked to confer additional powers ontrustees in respect of a broad range of matters. For example: • widening the trustees’ investment powers (Mason v Fairbrother

(1983), Anker-Petersen v Anker-Petersen (1991));• authorising the sale of land where parties who under the terms of

the trust had to consent to its sale, had refused (Re Beale (1932));• authorising the sale of settled chattels where the trust instrument

prohibited such sale (Re Hope (1929));• authorising the sale of the residuary estate where the trust

instrument directed that it should not be sold until it fell intopossession (Re Cockerell’s ST (1956));

• permitting the purchase of a residence for the rent-free occupationof a beneficiary (Re Power (1947)).

It is not, however, in every instance where it is proposed to vary theterms of a trust that recourse can be had to s 57. The type of variationpermitted by the section must be one which relates to theadministrative or managerial functions of the trustees, and not onewhich is intended to redefine or refashion the beneficial interestscreated by the trust (see Re Downshire’s Settled Estates (1953)).

Section 64 of the Settled Land Act 1925

This section prescribes that any transaction affecting or concerningsettled land which is not authorised by the settlement or by law maybe undertaken by the tenant for life on the order of the court, if it isone which could have been effected by an absolute owner and will inthe court’s opinion be for the benefit of the settled land or any personinterested under the settlement.

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In the light of s 28(1) of the LPA 1925, the jurisdiction of the courtsunder s 64 of the SLA 1925 covered not only settled land, but also landheld on trust for sale (see Re Simmons (1956)). Note, however, that s28(1) of the LPA has now been replaced by TLATA 1996.

As emphasised in Re Downshire (1953), it is open to the courts in theexercise of their jurisdiction under s 64 to sanction, not only variationswhich enlarge administrative or managerial powers of the courts, butalso those which entail the alteration of beneficial interests. In theinstant case, the proposed variation, which was upheld under s 64,was intended to alter the beneficial interests in a manner which wouldreduce tax liability.

The section has also been invoked in a variety of other cases, suchas Re Scarisbrick’s Resettlement Estates (1944) and Re Mount EdgcumbeST (1950). In the former, it was used to authorise the tenant for life toraise money by the sale of capital investments to enable him to continueto reside in Scarisbrick Hall in circumstances where this was essentialto its preservation. Similarly, in the latter case, it was used to authorisethe application of £10,000 out of capital monies in replacing furnitureand heirlooms in a mansion house which formed part of the settledestate, where the mansion house had been destroyed during the SecondWorld War and had just been rebuilt. In Hambro v Duke of Marlborough(1994), the trustees of a ducal estate had grounds to believe that theheir to the dukedom was not sufficiently responsible or businessliketo manage the estate soundly on the death of his father, the Duke. Thetrustees therefore proposed a scheme which the court approved unders 64 of the TA 1925, under which the estate would be held on aprotective trust for the heir after the Duke’s death.

The Variation of Trusts Act 1958

The VTA 1958 was designed to strengthen the jurisdiction of the courtsto sanction proposed variations on behalf of beneficiaries or potentialbeneficiaries. According to s 1(1) of the Act, the courts are nowempowered to approve arrangements varying or revoking all or anyof the terms of the trust and enlarging the trustees’ powers to manageor administer any property subject to the trust. Because the provisionis framed in such wide terms, it allows the judges to authorisedepartures from the trust instrument in instances where they wouldpreviously have felt unable to do so either on the basis of their inherentjurisdiction or on the strength of s 57 of the TA 1925. This promptedLord Evershed MR to remark in Re Steed’s WT (1960) that the VTA

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1958 has given the court a Very wide and indeed revolutionarydiscretion’.

At that same time, the courts have distinguished betweenarrangements varying the terms of the trust which will be approvedunder the VTA 1958, and other arrangements which operate to resettlethe property completely, which they have no jurisdiction to approveunder the Act. In this connection, the material consideration, accordingto Megarry J in Re Ball’s Settlement (1968) is whether the proposedarrangement alters the substratum of the trust.

The four categories

The VTA 1958 empowers the court to approve any proposed variationon behalf of four categories of persons namely:

(i) Any person who is unborn; for example, where property isheld on trust for A for life, remainder to A’s eldest son, and Aas yet has no children.

Note, however, that where there is little or no possibility of a futurebeneficiary coming into existence (for example, to trustees on trust forF, for life, remainder to her children, and F attains the age of 65 withoutchildren) the court, without needing to approve a variation under theVTA 1958 may authorise the trustees to deal with the property on thefooting that no children will subsequently be born to F (Re Pettifor’sWT (1966)).

(ii) Any person who is an infant or who is incapable of assentingto the variation because of some other incapacity such asunsoundness of mind; for example, where a trust is declaredfor the benefit of to C for life remainder to D (D being C’s fiveyear old daughter); see Re Whittall (1973) and Re CL (1969).

(iii) Any person who has a discretionary interest under aprotective trust, provided the interest of the principalbeneficiary has not been determined; for example, whereproperty is left to A for life on protective trusts, remainder toA’s eldest child and A has a wife, as long as the protectivetrust subsists, the courts may approve the variation on thewife’s behalf, even if she is an adult and even if the variationwill not benefit her in any way.

(iv) Any person (whether ascertained or not) who may becomeentitled to an interest as being at a future date or on the

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occurrence of a future event, a person of a specified descriptionor a member of a designated class.

For example, where property is held on trust for A, remainder to hiswife, the court may approve the variation on behalf of any future wifehe may marry even if at the time the trust was created he was engagedto B (see Re Clitheroe (1959)). Equally where property is held on trustfor C for life, remainder to his next of kin, and C is still alive, the courtmay approve such a variation on behalf of such next of kin (see ReSuffert (1961) and Re Moncrieff (1962)).

With regard to category (iv), there is, however, a proviso whichstipulates that the court will not be competent to consent on behalf ofany person who would fit the description or would be a member ofthe designated class if the date had arrived or the event had occurredon the day the application was made to the court. Thus, in the firstexample, if A proceeds to marry B and an application is thereafter madeto the court to vary the trust, the court cannot approve on B’s behalfifshe is of full age, and in the second example, if at the date of theapplication D would qualify as C’s next of kin if C were dead, it is clearfrom Re Suffert (1961) and Re Moncrieff (1962) that the courts willnotbecompetent to approve the variation on D’s behalf.

Benefit

Where a proposed variation is presented to the court for approval onbehalf of persons in categories (i), (ii) and (iv), it must be establishedthat the variation is for the benefit of such persons. No suchrequirement exists in connection with variations on behalf of personsin category (iii).

Usually it is sufficient to show that there will be some financialbenefit in favour of such persons, such as savings in various forms oftax which thus releases a larger sum for distribution among suchpersons when their interests ultimately vest in possession (see ReDruce’s ST (1962); Re Sainsbury’s Settlement (1967); Gibbon v Mitchell(1990) and Re Clitheroe (1959)).

It was, however, emphasised by Megarry J in Re Holt’s Settlement(1969) that benefit in the present context ‘is plainly not confined tofinancial benefit, but may to extend moral or social benefit’. This ismost clearly illustrated by Re Weston’s Settlements (1969), where asettlor, having settled property on his sons and their issue, now soughtthe court’s approval for an arrangement under which the trusts wouldbe transferred from settlements based in England to offshore

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settlements in Jersey and the appointment of new trustees resident inJersey. This would have achieved a tax saving of £163,000, but wouldhave necessitated the settlor’s sons who were still children movingfrom England to live in Jersey. It was held that, notwithstanding thesubstantial financial gain involved, the arrangement ought not to beapproved, since, according to Lord Denning, ‘I do not believe that it isfor the benefit of children to be uprooted from England and transportedto another country simply to avoid tax’. (Contrast, however, with ReScales Marriage Settlement (1961).)

Also relevant is Re CL, where the court approved a variation onbehalf of a wealthy elderly widow who was a mental patient, wherebyshe gave up her life interest in trust funds in favour of her two adopteddaughters for no consideration. Although the variation would operateto deprive the widow of income otherwise due to her, this income wasgreatly in excess of her spending requirements and was liable tosubstantial taxes. While she did not benefit materially from thevariation, she benefited morally, since it would in all probability havemet with her approval if she had been of sound mind.

Also, in Re T’s Settlement (1964), the terms of the trust specified thatan infant beneficiary would become absolutely entitled to the trustfund on reaching majority, but a variation was approved under whichher interest would become vested at a later date on the ground thatshe was immature and irresponsible and it would therefore be in herbest interests not to have immediate access to the trust fund.

Account to be taken of settlor’s intention

The courts must not only ensure that the proposed variation is in theinterests of the person on whose behalf approval is sought, but mustenquire whether it runs counter to the settlor’s intention. As explainedby Evershed MR in Re Steed’s WT, it should ‘look at the scheme as awhole and when it does so consider, as surely it must, what really wasthe intention of the benefactor’. Here T devised property for the plaintiffon protective trusts for her life, and on her death to any person towhom she might appoint. She wished to eliminate the protective trustto take an absolute interest in the property. The only potentialbeneficiaries were any husband she might marry in future and theirissue, although as things stood, she was unlikely to get married andwas past childbearing age, and an application was made for thearrangement to be approved on their behalf. The court declined to doso. The court found that the reason why the plaintiff wanted absolute

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ownership was so that she could pass the property on to her brotherand his family who were constantly sponging on her, and held thatthis would be inconsistent with the testator’s intention in providingfor her by means of a protective trust, which was to ensure that shedid not fall prey to the temptation to pass it on to her brother. Note,however, the recent decision in Goulding v James (1997) to the effectthat where the proposed variation is undeniably beneficial to thebeneficiaries on whose behalf it is sought, the court will not withholdits approval to the variation solely on the ground that it does not accordwith the settlor’s intention.

Position where adult beneficiary does not consent to variation

The court has no responsibility under the VTA 1958 to secure theconsent of any adults except those who fall within categories (iii) and(iv). If it comes to the court’s attention that an adult beneficiary outsidethese categories has not been consulted, it may adjourn proceedingsuntil his consent is obtained. If an adult beneficiary has been consultedand refuses to consent, the court would decline to approve thevariation. And if the variation has mistakenly been approved withouthis consent, it appears from IRC v Holmden (1968) that the non-consenting beneficiary will not be bound by the variation and mayseek an injunction preventing the trustees from departing from theoriginal terms of the trust.

Consenting beneficiaries not required to execute any document

Under s 53(l)(c) of the LPA 1925, the disposition of a subsisting equitableinterest must be in writing, signed by its owner. In those instanceswhere recourse is had to the VTA 1958 with a view to redefiningbeneficial interests under a trust, it might have been assumed that,pursuant to this provision, all adult beneficiaries who consented wouldbe required to execute a document. This argument was canvassed inRe Holt’s Settlement (1969), but did not find favour with Megarry J,who concluded that no such document was required in order for thevariation to be effective.

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7 Breach of Trust


• what constitutes a breach of trust• the injunction as a remedy for breach of trust• the personal remedy against the trustee and the rules for

determining the extent of the trustee’s personal liability• the defences available in an action for personal liability• tracing as a remedy against trustees and third party recipients

of trust property

General

As Lord Browne-Wilkinson declared in Target Holdings v Redferns (1995):‘The basic right of a beneficiary is to have the trust duly administeredin accordance with the provisions of the trust, if any, and the generallaw.’ This right entitles the beneficiary to pursue a claim for breach oftrust against a trustee who fails to administer the trust estate properly.The breach may entail the non-performance of any of the trustee’sduties or the abuse of any of his powers. It may be in the nature of apositive act (for example, misappropriation of trust funds) or mayconsist of some default or omission to act (for example, failure torecover debts due to the trust estate).

Where a trustee profits from committing a breach of trust he will beliable to the beneficiaries for any profit he makes and also for any losscaused to the trust estate as a consequence of the breach. This is thecase not only where he fraudulently deviated from his duties orexceeded his powers but also where he genuinely believed he wasacting in the best interest of the trust estate. In Re Brogden (1888), forinstance, a marriage settlement contained a covenant to pay £10,000

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to the trustees at the end of a five years. When the debt fell due thetrustees of the settlement chose not to sue the covenantor’s estate forthis sum. Their reason was that his estate formed the basis of a familypartnership, and legal action would undermine the business. In spiteof this, the court found the trustee liable for failing to take all possiblesteps on behalf of the trust estate to recover the sum. It has, however,been accepted in Lee v Brown (1798) and Brown v Smith (1878) thatwhere a trustee commits a mere technical breach which occasions noharm to the trust estate, he will not be liable if his act is one whichwould have been authorised by the court.

Remedies for breach of trust

Where a breach of trust has been committed or appears to be imminent,the beneficiaries may pursue the following remedies: • an injunction to restrain the breach;• a personal remedy exercisable against the trustee; and• a proprietary remedy exercisable against the trustee or some other

party who has received the property from him.

Injunction

Where a beneficiary suspects that a trustee intends to commit abreach of trust, he may seek an injunction to prevent the anticipatedbreach. See Dance v Goldingham (1873), Wheelwright v Walker (1883)and Waller v Waller (1967): injunctions to prevent the sale of trustproperty for less than could reasonably be obtained; Riggal v Foster(1853): injunction to restrain trustees from mortgaging trust propertyunnecessarily; and Fox v Fox (1870): injunction to prevent thedistribution of the trust estate contrary to the terms of the trustinstrument.

The personal remedy against the trustee

Where a breach of trust has already been committed which producesa profit for the trustee or results in a loss to the trust, the beneficiariesare entitled to pursue a personal action against the errant trustee torecover the profit or make good the loss.

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The statutory basis upon which the trustee’s personal liability isfounded is s 30(1) of the TA 1925. The main thrust of s 30(1) is that,while a trustee is personally liable for breaches committed by him, hewill not as a rule be vicariously liable for breaches of his fellow trusteesor losses suffered by the trust due to the dishonesty or neglect of otherpersons to whom trust business has been delegated. It is only wherethere has been some wilful default on the part of the trustee that hewill be liable for the breaches of co-trustees and the shortcomings ofdelegates.

The issue of what constitutes wilful default under s 30(1) wasexplored in Re Vickery (1931), where it was equated with consciousnessor recklessness on the trustee’s part. This has been echoed by MilletLJ, who declared, in Armitage v Nurse (1997), that a trustee will beguilty of wilful default ‘if he consciously takes a risk that loss willresult or is recklessly indifferent as to whether it will or not’. Evenbefore s 30(1) was enacted, the imposition of liability on a trustee onthe basis of wilful default was already well established in early cases,such as Townley v Sherborne (1634).

In this case, a trustee, over a period of time, jointly signed receiptsfor rents collected on trust property but allowed the money collectedto remain in the hands of his co-trustees. When some of the moneywas misapplied by the co-trustees, he was held to be liable, not simplybecause he happened to be a trustee, but because of his wilful defaultin failing to ensure that the rent collected was properly controlled byall the trustees.

Liability for wilful default may also arise where a trustee knowsthat his co-trustees have committed, are committing, or are planningto commit a breach of trust but does nothing (see Boardman v Mosman(1779), Booth v Booth (1838) and Wilkins v Hogg (1861)).

Liability of incoming trustee for breaches by his predecessors

A new trustee will not be liable for breaches committed by othertrustees before he assumed office. However, it was decided in ReStrahan (1856) that if it comes to his knowledge, after assuming officethat any such breach has been committed, the incoming trustee isobliged to take whatever measures are necessary against the erranttrustee, including legal action.

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Liability of retired trustees

Where a trustee retires, this does not extinguish his liability for breacheshe committed while in office. Conversely, a trustee is not normallyliable for breaches committed by other trustees after he leaves office.It is, however, clear from Head v Gould (1898) that a retired trustee willbe liable for a breach by his successors if he retired so as to pave theway for the breach to be committed.

The position where trustees are jointly liable

Where a breach is committed by the trustees acting together or iscommitted by one trustee but facilitated by the wilful default of theother, their liability is joint and several. All the trustees or any one ormore of them may be sued to recover the loss (see AG v Wilson (1864),Fletcher v Green (1864) and Re Harrison (1891)).

Contribution

Where the beneficiaries opt to pursue their action against one trustee,he is entitled to claim a contribution from any co-trustee who is alsoliable for the breach. For many years the rule was that the contributionsof all the trustees had to be equal, irrespective of the extent to whichthey were at fault for the breach. This has now been altered materiallyby s 2(1) of the Civil Liability (Contribution) Act 1978 under which thecourt now has a discretion, in the event of a breach, to determine whatit will be fair and just for each trustee to contribute having regard tothe extent of the trustee’s responsibility for the breach.

Indemnity

A trustee may be relieved from his liability to contribute towards thecost of repairing a breach of trust where he is entitled to be indemnifiedby a co-trustee.

The issue of indemnity has frequently arisen where a breach hasbeen committed by two trustees, one a solicitor and the other anordinary trustee. Chillingworth v Chambers (1896) and Re Lindsay (1904)indicate that where the solicitor exerted such a controlling influenceover his co-trustee that the latter relied entirely on the former’sprofessional judgment in matters connected with the trust, the solicitorwill be obliged to indemnify the co-trustee for any breach. On the otherhand, it was decided in Head v Gould (1898) that the solicitor will not

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be bound to indemnify his co-trustee if the latter actively participatedin the alleged breach and did not participate merely in consequence ofthe advice and control of the solicitor.

Apart from cases involving solicitors, a trustee may claim anindemnity against a co-trustee who acted fraudulently in procuringthe breach. Thus, in Re Smith (1896), two trustees acting togetherinvested trust funds in a loss-making venture. One trustee was bribedto make the investment, but the other genuinely believed that theinvestment was sound. The court directed that the bribed trusteeshould bear the entire liability for the breach. By contrast, the courtsare reluctant to allow a trustee to claim an indemnity where the co-trustee against whom it is sought is adjudged not to have actedfraudulently. This is seen from Bahin v Hughes (1886), which decidedthat a trustee was not entitled to an indemnity, where he had abdicatedall his responsibilities under the trust to his co-trustee who actinghonestly but erroneously committed a breach.

The measure of liability

Once it is shown that a trustee is guilty of a breach, it becomesnecessary to establish the extent of his personal liability. Broadlyspeaking, the measure by which his liability will be determined is theprofit he has made or the loss suffered by the trust estate as aconsequence of the breach. The Court of Appeal went even furtherthan this in Target Holdings Ltd v Redferns (1994), where it held that theobligation to make good a loss where a breach has been committedexists, even where the same loss would still have been incurredwithout the breach. On further appeal to the House of Lords, LordBrowne-Wilkinson took the opportunity to expound on the principlesgoverning the trustee’s liability in equity to make good a breach oftrust. He indicated that these were much the same as the commonlaw principles pertaining to the award of damages. He emphasisedthat under both systems, liability is fault-based: in other words, thedefendant is only liable for the consequences of the legal wrong andto make good the damage flowing from such wrong. He concludedthat ‘the result reached by the Court of Appeal does not accord withthese principles’.

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Setting off losses against profits

Where a breach has been committed, resulting in a loss to the trustestate, but the guilty trustees also entered into some other transactionwhich produced a profit for the trust, the general rule is that the profitcannot be set off against the loss (see Dimes v Scott (1828) and Wills vGresham (1854)).

However, a set-off will be allowed where the court finds that theprofit and loss resulted either from the same transaction or from thesame policy decision to pursue a particular course of investment (seeBartlett v Barclays Bank Trust Co (No 1) (1980) and Brown v Kerr ServicesLtd (1995)).

The position regarding payment of interest

A trustee whose breach of trust causes a loss to the trust estate isgenerally required to make good the loss with interest. As observed inWallensteiner v Moir (No 2) (1975): It is well established in equity that a trustee who misapplies trust fundswill be liable not only to replace the misapplied fund but also to do sowith interest from the date of misapplication. The court has the jurisdiction to award either simple interest (that is,interest on the principal sum to which the breach relates) or compoundinterest (that is, interest on the principal sum and any accumulatedinterest). As seen from President of India v La Pintada Cua Navigacion SA(1984), and Westdeutsche Landesbank Girozentrale v Islington LBC (1996),compound interest is awarded only where justice so demands, namely,‘where money has been obtained and retained by fraud or where ithas been withheld or misapplied by a trustee or any one else in afiduciary position’.

In the 19th century, a rate of 4% was widely considered by the courtsto be acceptable, increased to 5% if the breach was fraudulent. Morerecently, the courts have sought to keep abreast of current commercialinterest rates by charging interest at 1% above the prevailing bank rate(see Wallensteiner v Moir, Belmont Finance Corporation v Williams FurnitureLtd (No 2) (1980) and Guardian Ocean Cargoes Ltd v Banco do Brasil (No 3)(1992)). As an alternative, it has been suggested in Bartlett v BarclaysBank (1980), that the proper rate of interest to be awarded was thatallowed from time to time on the court’s short term investment account.

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The position where a breach results in tax savings

Where a breach of trust involves misappropriation or misapplicationof trust funds or property by trustees, this may lead to a downwardadjustment of the tax payable by the beneficiaries on the trust estate.The courts have made it clear in Re Bell’s Indenture (1980), and theBartlett case, that in such an event, the trustees will not be allowed toclaim that the money which has been saved on tax should be deductedfrom the amount which they are liable to pay for the loss occasionedby their breach.

Defences to an action for personal liability

Several defences are available to trustees who commit a breach.

Participation or concurrence in the breach

A beneficiary who participates or concurs in a breach of trust is notentitled to sue for the breach. For example, the leading case of RePauling’s ST (1964) recognised that trustees who improperly advancetrust funds to a beneficiary at the beneficiary’s request may have agood defence if sued by the beneficiary for breach of trust.

For this defence to succeed, it must be shown, not only that thebeneficiary was aware of the breach, but also that he concurred of hisown free will, without any undue influence or pressure and with afull understanding of what he was concurring in. Once this isestablished, it is not necessary to show that the concurring beneficiaryreceived some personal benefit from the breach (see Re Paulings STand Holder v Holder (1968)). Moreover, it is not necessary for a partyagainst whom such concurrence is raised to know that what he wasconcurring in constituted a breach of trust (see Hillsdown Holdings vPensions Ombudsman (1997)).

The fact that a beneficiary has concurred in a breach will not avail atrustee as a defence if he is sued by another beneficiary who hadnothing to do with the breach (see Brice v Stokes (1805); Wilkinson vParry (1828) and Fletcher v Collis (1905)).

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Release and acquiescence

Where a breach has been committed and thereafter a beneficiaryreleases the trustees from liability or acquiesces in the breach, this willhave the same effect as if he had at the outset concurred in the breach.As Lord Eldon declared in Walker v Symonds (1818): ‘I agree that eitherconcurrence in the act or acquiescence without original concurrencewill release the trustees [from liability].’

As in the case of concurrence in the breach, it must be shown thatthe beneficiary’s release or acquiescence was based on a full knowledgeand understanding of the circumstances connected with the breachand was not the result of undue influence or pressure (see Warrant vBlanchford (1863) and Re Garnett (1885)).

Impounding the beneficiary’s interest

Where a trustee commits a breach at the instigation or with theconcurrence of a beneficiary, the court may order the beneficiary’sinterest to be impounded either under its inherent jurisdiction or unders 62 of the TA 1925. Where such an order is made, the affectedbeneficiary will not be able to recover from the trustees any lossincurred by him as a result of the breach. Moreover, the liability tomake good the loss suffered by other beneficiaries will fall on theaffected beneficiary rather than the trustees and will as far as possiblebe met out of his beneficial interest.

The inherent jurisdiction

Under this heading, the courts have distinguished between cases inwhich the beneficiary instigated or requested the breach and cases inwhich he simply consented to it. If the beneficiary instigated the breach,an order impounding his beneficial interest may be made, even if hedid not benefit from the breach (see Trafford v Boehm (1746); Fuller vKnight (1838) and Chillingworth v Chambers (1896)). By contrast, if thebeneficiary did not instigate, but consented to, the breach, an orderwill be made only if he personally benefited from the breach (see Boothv Booth (1838) and Chillingworth v Chambers (1896)).

Section 62 of the TA 1925

On the strength of this statutory provision, the court may order theinterest of any beneficiary in trust property to be impounded wherehe has instigated, requested or consented to a breach of trust

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irrespective of whether he derived any benefit from the breach.However, s 62 cannot be invoked in cases of consent to the breachunless the consent was given in writing.

Finally, an impounding order will be refused where a beneficiaryhas instigated or consented to an act which is not in itself a breach butthe act is then performed by the trustees in a manner which amountsto a breach. For example, if a beneficiary suggests to the trustees thatthey should invest trust funds in mortgages and the trustees in doingso do not take care to ensure that property offered as security is ofsufficient value to cover the trust money advanced under the mortgage,there will be no basis for impounding the beneficiary’s interest (see ReSomerset (1894)).

Relief from liability under s 61 of the TA 1925

Under this section, the court may in its discretion relieve a trusteewholly or partly from personal liability for breach of trust, providedthat: • the trustee acted honestly and reasonably; and• it would be fair for him to be excused. The onus rests on the trustee to establish that his actions were honestand reasonable. It is clear from Re Turner (1897), Re Stuart (1897) andRe De Clifford (1900), that in discharging this burden, the trustee mustshow that he has acted as prudently as he would have done in dealingwith his own affairs.

As Byrne J pointed out in Re Turner, the courts have not attemptedto lay down general rules or principles to be strictly adhered to indetermining whether a trustee should be relieved from liability forbreach of trust, but have preferred to deal with each case according toits own circumstances. The effect of this approach is illustrated by thefollowing cases.

On the one hand, in Perrins v Bellamy (1899), trustees of a settlementwho erroneously believed they had a power of sale and sold certainleaseholds on their solicitor’s advice, were relieved from liability tothe tenant for life whose income was reduced by the sale. Also, in ReDe Clifford, trustees who entrusted trust money to the solicitor to thetrust to be used for paying debts and for other trust purposes wererelieved from liability when the solicitor became bankrupt withouthaving paid all the debts.

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These may be contrasted with other cases such as Re Turner and ReBarker (1898). In Turner, there were two trustees, a solicitor and anordinary trustee. The solicitor arranged for the investment of trustfunds in certain mines in which he had an interest and the investmentturned out to be useless. The court refused to relieve the ordinarytrustee from liability for the breach, since he had abdicated hisresponsibilities to the solicitor-trustee and failed to take any steps toensure that the investment was sound. In Barker, a trustee of a familytrust, acting on the advice of a commission agent who was a familyfriend, failed to sell unauthorised investments for 14 years. She washeld to be liable for breach of trust, since the court considered itunreasonable for her to have retained the investment for so long.

Exclusion of liability by the trust instrument

Where the trust instrument expressly provides that a trustee will notbe liable for acts or omissions which would otherwise constitutebreaches of trust, this will afford a good defence to the trustee if thebeneficiaries sue him in respect of such acts or omissions. This is seenfrom Armitage v Nurse (1997) where the principal beneficiary under atrust sued the trustees for breach alleging, inter alia, that they had notproperly supervised the management of the trust property, hadimproperly applied trust capital, had failed to obtain proper paymentof interest in relation to a loan made to her mother, and had generallyfailed to give paramount consideration to her interests in their dealingswith trust property. Clause 15 of the trust instrument provided thatno trustee should be liable for any loss or damage to the capital orincome of trust property unless such loss or damage was caused byhis actual fraud. The Court of Appeal construed this to mean that atrustee was not liable for loss or damage unless caused by hisdishonesty, no matter how indolent, imprudent, lacking in diligence,negligent or wilful he might have been. There was no indication thatthe trustees in this case had acted dishonestly, and it was thereforeheld that clause 15 absolved them from liability for the allegedbreaches.

Actions which are statute-barred

Where a beneficiary discovers a breach of trust but delays unduly insuing, the trustee may be able to claim the protection of s 21(3) of theLimitation Act (LA) 1980, which provides that ‘an action by a

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beneficiary to recover trust property or in respect of any breach oftrust …shall not be brought after the expiration of six years from thedate on which the right of action accrued’.

The operation of this six year limitation period is, however, subjectto a number of important exceptions and qualifications. In the firstplace, the proviso to s 21(3) specifies that, where a beneficiary isentitled to a future interest in the trust property, his right of actionwill not be treated as having accrued until his interest falls intopossession. This means, for instance, that if property is held on trustfor A for life remainder to B, and a breach of trust is committed in A’slifetime, B’s action will not be statute-barred until six years after A’sdeath.

Secondly, where a beneficiary is able to show that he was unable topursue his claim within the six year period because he was under adisability (such as infancy or mental incapacity), s 28 of the LA 1980enables the court to extend the limitation period to take account ofthis. Equally, where the beneficiary was unaware of his right of actionat the time it accrued, due to some mistake or because it wasfraudulently concealed from him by the trustee or his agent, s 32provides that the period of limitation shall not begin to run until hehas discovered the mistake or concealment, or could with reasonablediligence have discovered it.

Finally, s 21(1) makes it clear that the limitation period in s 21(3)shall not avail the trustee as a defence, where the action by thebeneficiary is either an action: • in respect of any fraud or fraudulent breach of trust to which the

trustee was a party or privy; or• to recover from the trustee trust property or the proceeds of trust

property in the possession of the trustee or previously received bythe trustee and converted to his use.

The proprietary remedy of tracing

Where it is alleged that loss has been occasioned to the trust estateowing to a trustee’s breach of trust, a personal action would be of noavail if the trustee does not have sufficient funds from which the losscan be repaired. Where this happens, the principal course of actionopen to the beneficiaries is to pursue the proprietary remedy of tracingwhich entails following the trust funds or assets which have been lost.

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The remedy is available primarily against the trustee who hasmisappropriated trust funds which he has applied towardsacquiring property in his own name, or who has intermingled trustfunds or assets with his own personal resources. It may also beemployed against any other party who has received such funds orassets in breach of trust (for example, an overpaid beneficiary or aninnocent volunteer to whom the funds or assets have beentransferred).

Tracing as a right in rem

Because the remedy of tracing is proprietary in character, it isenforceable in rem and not merely in personam. The chief advantage ofthis is that the rights of the beneficiaries will not be extinguished bythe insolvency of the trustees or any other person against whom theright exists. On the contrary, their rights will in such an event beaccorded priority over those of general/unsecured creditors of thetrustee or other insolvent person.

Tracing under the common law

In most instances, parties seeking to pursue the remedy of tracingwill base their claims on equity and we shall elaborate on the rulesgoverning tracing in equity below. The main remedy which thecommon law affords an owner of property which has beenmisappropriated or converted by another person to his use is theaward of damages. In certain circumstances, however, the commonlaw will order the recovery of the property itself or any otherproperty into which it has subsequently been converted. In Taylor vPlumer (1815), for instance, defendant entrusted money to W to buyexchequer bonds for him, but W used the money to purchase bullionand American investments for himself, and then absconded. W wasapprehended and defendant seized the bullion and investments. W’sassignees in bankruptcy sought to claim the seized assets fromdefendant. Lord Ellenborough, however, held that defendant’smoney was traceable into the investments and bullion and the claimtherefore failed. According to him, ‘it made no difference in reason orlaw into what other form the original may have been [changed]…forthe product of or substitute for the original thing still follows thenature of the thing’.

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It is evident from Banque Belge v Hambrouck (1921) that tracing isavailable at law, not only where the asset or its exchange productremains in the hands of the original wrongdoer but also where he hastransferred it to a third party. In this case, H fraudulently obtainedseveral cheques from the bank where he was a cashier and paid theminto his account. He later transferred the money into the account of S,his mistress. S spent some of the money, leaving a balance of £313,and the bank was held to be entitled to trace into her account to recoverthis balance. It also emerges from the recent case of Trustees of theProperty of FC Jones v Jones (1996) that where money is improperly paidto a recipient who then invests it at a substantial profit, the commonlaw right to trace will extend not only to the initial sum received butalso to the profit.

It was, however, made clear from the outset by Lord Ellenboroughin Taylor v Plumer (1815), that the common law right to trace would belost where the asset being claimed was no longer ascertainable becauseit had, for instance, been turned into money and become mixed in ageneral mass of the same description. This has been affirmed in ReDiplock (1948) and more recently in Agip (Africa) Ltd v Jackson (1990),where Millet J declared that: Money can be followed at common law in and out of a bank accountprovided it does not cease to be identifiable by being mixed with othermoney derived from the same account. No such mixing was found to have occurred in Taylor, Hambrouck andJones, where the tracing claims succeeded. These cases differ materiallyfrom Agip v Jackson, where an accountant working for an oil companyin Libya contrived to deprive his company of £518,000 which wasinitially paid into the London bank account of a dummy company,and thereafter transferred into the account of the defendants, who werea firm of accountants based in the Isle of Man. The money had beentransferred electronically into the account of the dummy companythrough the New York clearing system and had consequently becomemixed with other funds within the system, before being transferredinto the defendants’ account. This led the Court of Appeal to hold thatthe common law remedy of tracing would not avail the oil companyagainst the defendants

The aversion of the common law towards tracing into mixed fundsis in marked contrast to equity’s willingness to pursue its tracingremedy where mixing has occurred. In the words of Atkin LJ in

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Hambrouck, ‘the common law halted at the banker’s door…[whereas]equity had the courage to lift the latch, walk in and examine thebooks’. Atkin LJ made it quite clear that he saw no reason why thecommon law should not follow equity’s example in this regard andthis sentiment has recently been echoed by Andrews and Beatson,who suggested in (1997) 113 LQR 21, p 26, that ‘if the opportunityarises for reconsideration of the law regarding the mixing of money,the common law should be brought into line with the more liberalattitude to mixing displayed by equity’.

Tracing in equity

There is little scope for recourse to tracing under the common law inthe context of breach of trust. If the claim is against the trustee, thebeneficiaries are hindered by the fact that, in the eyes of the commonlaw, beneficiaries have no recognised interest in trust property asagainst the trustee. Even if the action is against a third party to whomtrust assets have been wrongfully transferred, an action for tracingwould only be entertained under the common law if the trustee joinedin the suit. The beneficiaries must thus pursue their tracing claim inequity.

For a claim to trace to succeed in equity, three basic conditions mustbe fulfilled, namely: • the claim must be founded on an initial fiduciary relationship;• there must be some property in a traceable form;• the order to trace must not yield inequitable results.

The initial fiduciary relationship

An initial fiduciary relationship must exist before a tracing order willbe made in equity. As Jessel MR declared in Re Hallett (1880), ‘themoment you establish the fiduciary relation, the modern rules ofequity as regards following trust property apply’.

Such a fiduciary relationship is easy to discover where property isheld on trust and the beneficiary has cause to seek a tracing orderagainst the trustee. Such an order may also be granted where a trusteeimproperly transfers trust property to a third party, since what ismaterial is the initial fiduciary relationship with the trustee whichextends to the transferee (see Re Diplock (1948)). The transferee will

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not, however, be subject to a tracing order if he is a bona fide purchaserfor value without notice (see Re J Leslie Engineers Co Ltd (1976)).

The equitable remedy of tracing is also available in the context ofother fiduciary relationships. As Jessel MR pointed out in thisconnection in Re Hallett, there is no distinction between the liability ofthe trustee and that of an agent, a collector of rents or anybody else ina fiduciary position.

Indeed, there has been such a marked judicial tendency to discoverthe existence of fiduciary relationships in the context of equitabletracing that Hayton and Marshall maintain that the courts havestretched the concept of fiduciary relationship to the limit in theiranxiety to uphold the right to trace wherever they perceive it to bejust. This is borne out by cases such as: • Re Diplock (1948), where a fiduciary relationship was held to exist

between an executor of a will and the residuary beneficiary.• Chase Manhattan Bank v Israel-British Bank (1981), where a fiduciary

relationship was found to exist between two banks, one of whichhad twice paid a large sum of money to the other under a mistakeof fact.

• Boscawen v Bajwa (1995) where a bank advanced money to aprospective purchaser of property, which was used to pay off thevendor’s outstanding mortgage, but the sale was never completed.A fiduciary relationship was held to have arisen in the bank’s favour,so that when the property was eventually sold, it could trace intothe proceeds of sale.

• In Sinclair v Brougham (1914), it was also held that the relationshipbetween a building society and its depositors would found a tracingclaim in equity. However, this has now been overruled by theWestdeutsche case (1996), which held that, in so far as the depositswere ultra vires and hence void, a depositor had a personal actionat law to recover the money deposited, but not an equitableproprietary claim which would be enforceable against third parties,or give him priority in an insolvency.

Property in a traceable form

Unless there is property into which the beneficiaries can trace, theremedy will not be available. Assuming, for instance, T, a trustee of£10,000 uses this sum to purchase shares on his own account, thebeneficiaries can trace into the shares in lieu of the £10,000; but if T

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dissipates this money on a holiday and is declared bankrupt soonthereafter, a tracing order would be fruitless and equity will not actin vain.

The rules which the courts have laid down in determining whetherthere is property in a traceable form, and the extent to which the rightto trace can be exercised in respect of such property, will be dealt withunder the following headings.

The position with regard to unmixed funds

Where the trustee (T) has kept the trust funds distinct from his ownassets without at any stage mixing both funds this presents noproblems as long as T remains solvent. However, if T becomesbankrupt, it is often necessary to deal with competing claims made bythe beneficiaries on the one hand and other creditors on the other.Such claims may arise in the following circumstances.

Where the trust fund remains intact

Assuming, for instance, that T holds £10,000 on trust for B in a separatetrust account which he has not touched, and £8,000 of his own moneyin a personal account and that he then becomes bankrupt, B will beentitled to the £10,000 in the trust account to the exclusion of T’s othercreditors, who must content themselves with the £8,000 in T’s personalaccount.

Where trust money has been withdrawn and squandered

If T has withdrawn the £10,000 from the trust account and spent it ona round the world cruise, while leaving the £8,000 in his personalaccount untouched, B cannot rely on the remedy of tracing as a basisfor claiming the £8,000 in priority to T’s other creditors. B will rankpari passu with these other creditors and be entitled to a share out ofthe £8,000 in proportion to them.

Where trust money has been applied in the purchase of specificproperty

If T withdraws the £10,000 and uses it to purchase an asset such as acar, a house or shares, B will be able to rely on the right to trace todefeat any claims to the asset by T’s creditors. As Jessel MR signifiedin Re Hallett’s Estate (1880), in such circumstances, B ‘has a right to

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elect either to take the property purchased or to hold it as security forthe amount of trust money laid out in the purchase’.

It follows that where the property has increased in value sincepurchase, B will be entitled to the benefit of this increase. Where itsvalue has decreased, say to £4,000, B will still have a personal claimagainst T for the remaining £6,000, but stands in the same position asT’s other creditors in respect of this sum.

The position where the trustee mixes trust funds with hisown

Where T transfers money from the trust account into his personalaccount which already contains his own money (or sells trust propertyand puts the proceeds into his personal account), equity will as a ruleallow B to trace into the mixed funds.

Where the dispute is between B and T

As between B and T, the position is well summed up in Jessel MR’srhetorical observation in Re Hallett: Supposing the trust money was 1,000 sovereigns and the trustee putthem in a bag and by mistake or accident, or otherwise, dropped asovereign of his own into the bag…[c]ould anybody suppose that ajudge in equity would find any difficulty in saying that the cestui quetrust has a right to take 1,000 out of the bag. It would make no differenceif instead of one sovereign it were another 1,000 sovereigns. Moreover, the onus is on the trustee to satisfy the court as to whichpart of the mixed fund belongs to him, for as Ungoed-Thomas J statedin Re Tilley’s WT (1967): If a trustee amalgamated trust property with his own, the beneficiarywill be entitled to every portion of the property which the trustee cannotprove to be his own.

Where the dispute is between B and T’s creditors

Where a trustee becomes bankrupt after wrongfully mixing trust fundswith his own funds, the tracing remedy is usually employed bybeneficiaries as a means of obtaining priority over other creditors.Where the funds are lawfully mixed, however, this remedy will not beavailable to the beneficiaries. Thus, in Space Investments Ltd v Canadian

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Imperial Bank of Commerce Trust Co (Bahamas) Ltd (1986), a bank-trusteewas authorised under an express power to deposit trust funds withitself. When it was subsequently wound up, it fell to be determinedwhether the beneficiaries could trace into the bank’s general assets torecover the funds which had been so deposited, The Privy Councilheld that if the bank had misappropriated the funds for its own benefit,the tracing remedy would have been available, but since the mixingwas done lawfully, the bank only had a personal liability to repaywith the result that the beneficiaries had no priority over unsecuredcreditors.

Where trustees have acted wrongfully in mixing trust funds withtheir own funds, the entitlement of beneficiaries to trace into the mixedfund can be dealt with under the following headings.

Where no withdrawals have been made after mixing

If the trustee (T) mixes £10,000 belonging to the trust with £8,000 inhis personal account and becomes insolvent without drawing fromthis account, leaving debts of £18,000, the beneficiary (B) will have afirst charge on the money in the account. This entitles B to recover the£10,000 belonging to the trust before other creditors who are thereforeleft with £8,000 (see Re Hallett).

Where T has withdrawn money from the mixed fund and squandered it

If T, having mixed £10,000 of trust funds with his own £8000,withdraws £12,000 from the fund which he dissipates before becomingbankrupt, the position as established by Re Hallett is that T will bedeemed to have drawn out his own money first before touching anypart of the trust money. This operates to B’s advantage at the expenseof other creditors, since it means that B will be able to claim the £6,000left in the account as representing trust funds, to the exclusion of thecreditors.

Where T has withdrawn money from the mixed fund, squandered it andthen paid in a further sum of his own into the fund

Assuming in the previous instance, T mixed the funds in January 1994,had squandered the £12,000 by April 1994, and proceeded in May 1994to pay into the account an additional £3,000 of his own money, andthen become bankrupt, the issue arises as to whether B can trace intothe additional £3,000 in priority to T’s other creditors.

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In Roscoe v Winder (1915), it was held that B can only trace into thelowest intermediate balance (that is, the £6,000 remaining in theaccount before the injection of the additional £3,000). With regard tothe additional £3,000 B stands in no better position than T’s othercreditors.

A notable effect of the rule in Roscoe v Winder is that B’s right totrace will be lost, once the balance in T’s account falls to nil. LordTempleman appeared to take a different view in the Space Investmentscase where he declared that if it becomes impossible for beneficiariesto trace their money into any particular asset, equity ought to allowthe beneficiary to trace the money into all the trustee’s assets byimposing an equitable charge under which the claims of thebeneficiaries should be payable out of these assets in priority to theclaims of other creditors.

Subsequent cases, such as Re Goldcorp (1994) and BishopsgateInvestment Management Ltd v Homan (1995), however, indicate, notonly that Lord Templeman’s observations were made per obiter, butalso that they were, in fact, concerned with equitable tracing into amixed fund rather than a non-existent fund. Where the fund is non-existent, because the trustee’s account was overdrawn when the trustfund was paid into it or subsequently became overdrawn, both thePrivy Council in Goldcorp and the Court of Appeal in the Bishopsgatecase have held on the basis of the rule in Roscoe v Winder that thebeneficiary’s right to trace ceases to exist. See, also, Re Lewis ofLeicester (1995).

Where mixed funds have been applied in the purchase of specificproperty

In determining B’s entitlement to trace, where T has mixed trust fundswith his own money in a single account and then drawn money fromthis account to purchase property, regard must be had to the followinghypothetical possibilities.

T mixes £8,000 of his own money and £10,000 of trust money andwithdraws the £18,000 to purchase property

In such circumstances, it appears from Re Hallett and Sinclair vBrougham that B will be deemed to have a first charge over theproperty purchased to the extent of the £10,000 due to the trustestate.

ESSENTIAL TRUSTS

184

Where the property purchased has since increased in value, theposition is not entirely clear. On the one hand, going by the dicta in ReHallett/Sinclair v Brougham and the views of such commentators asMaudsley (1959) 75 LQR 234, p 246, the charge in B’s favour simplyentitles him to recover the trust money, with interest and not to claimany part of the increased value. This has, however, been called intoquestion by other commentators such as Pettitt, and Hanbury andMartin, who consider it illogical and startling that T should be allowedto profit from the trust by claiming the entire increase in value.

An alternative approach which was favoured in the Australian caseof Scott v Scott (1962), and approved per obiter in the English case of ReTilley’s WT (1967), recognises that B will be entitled to claim a part ofthe increased value relative to the proportions in which trust fundsand T’s own money were laid out in purchasing the property. Thereare clear indications from the judgments of Scott VC and Morritt LJ inthe recent case of Foster v McKeown (1997) that English law has nowaccepted this ‘proportionate’ entitlement approach.

Where the value of the property purchased has diminished, B willhave a charge on the property in priority to other creditors and if itscurrent value is less than the £10,000 due to the trust estate, he willhave a personal claim against T in relation to the balance, but willrank pari passu with other creditors with regard to this claim.

T mixes £8,000 of his own money and £10,000 of trust money andwithdraws £15,000 to purchase property, leaving a balance of £3,000 inthe account

As seen above, Re Hallett establishes that where a mixed fund isinvolved, T will be presumed to have expended his own money first,with the result that it is open to B to claim the balance of £3,000.

With regard to the remaining £7,000 due to the trust estate, B canclaim a first charge over the property, which will be more than sufficientto meet his claim if it maintains its value.

Where the property appreciates in value, whether or not B will beentitled to a share of the increased value will depend on which of thecontending positions outlined above will ultimately prevail.

Where on the other hand, the property depreciates in value, say to£5,000, B, in addition to his entitlement to the £3,000 left in the mixedaccount, will be entitled to assert his right to trace into this property inpriority to T’s other creditors (see Re Hallett).

185

BREACH OF TRUST

T mixes £8,000 of his own money with £10,000 of trust money, uses £7,000 ofthe mixed fund to purchase property, and then withdraws and squanders thebalance

In a situation of this nature, the adoption of the presumption in ReHallett would work to B’s disadvantage. This is because if T ispresumed to have spent his own part of the fund first, it would meanthat of the £11,000 squandered by him, £10,000 will be traceable astrust money, with the result that B would be unable to trace into theproperty purchased by T. It has, however, been decided in Re Oatway(1903) that in such situations the presumption that the trustee spenthis own money first will be displaced, thus enabling the beneficiary totrace into any part of the mixed fund that remains identifiable. Thismeans that in our example, B’s entitlement to trace will now beexercisable by reference to the property purchased with the £7,000taken from the mixed fund.

The position where the trustee mixes funds from twotrusts

Assuming T, who is a trustee of Trust A and Trust B mixes funds fromthe two trusts in a current bank account and thereafter withdrawssome money from this account, which he fritters away, it is necessaryto determine how the balance will be appropriated.

In the first place, assuming the account in question also containedmoney belonging to T, the rule in Re Hallett comes into play as betweenT and the beneficiaries under the two trusts, such that T will be deemedto have spent his own money first. For example, if T has an accountcontaining £5,000 of his own money and in January 1994 transfers£10,000 belonging to Trust A to this account; in February 1994 transfers£10,000 belonging to Trust B to the same account; and in March 1994withdraws and spends £5,000, the effect of the presumption is thatTrust A and Trust B will be entitled to recover the £10,000 due to eachfund out of the remaining £20,000.

The matter becomes more complicated if in the above instance Twithdrew and spent £15,000 rather than £5,000, leaving a balance of£10,000 in the account. The issue here is whether Trust A or Trust Bwill be entitled to this balance. It has been held in Re Hallett, Hancock vSmith (1889), Re Stenning (1895) and Re Diplock, that any disputebetween Trust A and Trust B falls to be determined by reference to therule in Clayton’s Case (1816). According to this rule, the first paymentinto the account (that is, the £10,000 belonging to Trust A) will be

186

deemed to have been withdrawn first, the operative principle beingfirst in, first out. This means in effect that the £10,000 remaining in theaccount will be deemed to belong to Trust B, while the beneficiariesunder Trust A will have to be content with asserting a personal claimagainst A.

The operation of this rule in the present context has been subjectedto considerable criticism, and the Court of Appeal has recentlyemphasised in Barlow Clowes International v Vaughan (1992) that it willbe displaced as a basis for determining such competing claims wherethe courts are able to deduce a contrary intention, express or presumed.

Where, on the other hand, a mixed fund derived from Trust A andTrust B is applied towards the purchase of specific property, differentconsiderations apply In Sinclair v Brougham (1914) the position wasstated thus by Lord Parker: Suppose property is acquired by means of money, part of whichbelongs to one owner and part to another, the purchaser is in a fiduciaryposition to both, each owner has an equal equity and is entitled to acharge on the property for his own money and neither can claimpriority over the other. It follows that their charges must rank paripassu according to their respective amounts. See, also, the judgment of Scott VC in Foskett v McKeown (1997).

The position where trust funds are given to innocentvolunteers

Where T, acting in breach of trust, transfers trust property or funds toV who takes as an innocent volunteer, V, not being a bona fide purchaserfor value without notice, takes subject to the trust. In such an event, Bis required in the first instance to pursue a claim for breach of trustagainst T. Where T is insolvent or otherwise unable to meet B’s claim,it is clear from the decision in Re Diplock that equity will allow B totrace the funds or property into V’s hands even though there is nofiduciary relationship between B and V, provided there is property ina traceable form and the result will not be inequitable.

The position is fairly straightforward where V, having receivedproperty or funds from T, keeps it separate from his own property.Where this happens, the courts will, in all likelihood, hold that B canrecover the property/funds. Equally, where V puts the amount receivedfrom T in an account containing his own money (or sells the property

ESSENTIAL TRUSTS

187

BREACH OF TRUST

received and puts the proceeds in such an account) without makingany subsequent withdrawals, B will also be entitled to recover thetrust funds or proceeds of sale from the account (see Banque Belgique vHambrouck (1921)).

Where such mixing has occurred and thereafter V withdraws sumsof money from time to time for various purposes, then according tosuch authorities as Re Stenning, and Re Diplock, the rule in Clayton’sCase will determine the order in which the mixed fund has beenexpended. Thus, for example, if V who already had £5,000 in hisaccount, received another £5,000 from T on 1 March, and then paid inanother £3,000 of his own money into the account on 1 April, andfinally withdrew £8,000 on 15 April, spending £4,000 on a holiday andthe other £4,000 on repaying a long-standing debt, there will be abalance of £5,000 in the account. Out of this £5,000, B cannot exercisehis right to trace in respect of the £3,000 which represents the amountpaid in by V on 1 March, but he can trace into the remaining £2,000.

Where, on the other hand, part of the mixed fund is withdrawn fora purpose such as the purchase of specific property and it can be shownthat V’s intention was to use the funds received from T for the purchase,the money so used will be traceable by B into the property (Re Diplock).If it is the entire fund in the account that has been withdrawn andapplied in the purchase of property, B will also be entitled to trace intothe property purchased, but his claim will rank pari passu with that ofV according to the proportion of the mixed fund representing theirrespective shares (see Lord Parker in Sinclair v Brougham).

No inequitable results

Even where an initial fiduciary relationship is established and there isidentifiable property into which the beneficiary can trace, the courtshave the discretion not to grant the remedy where inequitable resultswould follow. The courts are especially anxious to ensure that thereare no inequitable results where the party against whom the order issought is an innocent volunteer. This point was emphasised in ReDiplock with particular reference to situations in which the innocentvolunteer has applied trust funds received by him in good faith inmaking improvements or alterations to property belonging to him.The remedy of tracing was felt to be inappropriate in such instancesin so far as it would create a charge on such property which wouldimpose an unfair burden on the innocent volunteer.

188

Closely allied to the proposition that tracing will not be allowedwhere the result will be inequitable, is the doctrine of ‘change ofposition’ which has only recently found its way into the sphere oftracing. This doctrine proceeds on the premise that: …the right of a person to restitution from another because of a benefitreceived [by that other] is terminated or diminished, if after the receiptof the benefit, circumstances have so changed that it would beinequitable to require the other to make full restitution. The possibility that this doctrine could afford a defence in a tracingaction was acknowledged by the House of Lords in Lipkin Gorman vKarpnale Ltd (1991). Its effect in this context will be that where aninnocent recipient of trust funds has spent the money received onimproving his property, or has irretrievably spent money on theassumption that he is entitled to the sum received, he may be relievedfrom making restitution, wholly or in part.

ESSENTIAL TRUSTS

189

AAccessories 74–76Account of profits 6Accounts 142Accumulation 145, 146, 148Administration of

trusts 123–64administrative

unworkability 19, 22–24trustees 123–56

variation of trusts 156–64Advancement

capital 151, 152courts’ exercising

power of 153definition of 149–50

discretionary trusts 152husbands 54

illegality and 57in loco parentis

persons in 54–55minors 54–55, 153mistresses 54presumption of 55–57

protective trusts 152settled land 152–53spouses 53statutory power of 150–53

trustees’ powers 149–53utilisation of, proper 152

Agency 6–7, 73–74,154–56Animals 9, 103Appointment of

trustees 123–31acceptance of 129–31additional 124, 125, 127beneficiaries’

involvement in 129capacity 123–24court, by 127–29disclaimers 131formalities for 127initial trustees 124–25, 130

land 124minors 123number of trustees 124

replacement 125, 126–27subsequent 125

vesting 130Appointment powers 7–8Assignment 27, 28–29, 42Associations

unincorporated 60–62 BBailment 4Beneficial interests

certainty of 17family home 80–81, 86–88

resulting trusts 59trustees by

purchase of 140–41variation of trusts 157, 160

Beneficiariesappointment of

trustees 129beneficiary

Index

190

principle 17–18breach of trust 172–74cestui cjue trusts 1, 2–3, 73class

members of 18–20, 22, 23impounding 172–74

in personam rights 3inquiries as to 141objects

certainty of 17–18proprietary interests 3

trustees 2–3, 129, 141Bona fide purchasers

for valuewithout notice 3, 73

Breach of trust 165–88acquiescence 172

constructive trusts 75–76, 79contribution 168

defences 171–74exclusion of

liability 174fraud 169impounding 172–73incoming trustees

liability of 167indemnities 168–69injunctions 166interest, payment of 170joint liability for 168measure of liability 169–71participation and

concurrence in 171personal remedy 166–69profits 165–66release 172relief from liability 173–74remedies for 166–69retired trustees

liability of 168Set off 170tax savings

resulting in 171time limits 174–75tracing 175–88trustees, by 2, 132, 141wilful default 157, 158

Brides 71–72

CCertainty

basic principles 11beneficial interests 17creation of express

private trusts 11–24declarations of trusts 11discretionary trusts 8

intention 12–14objects 8, 17–24powers 8subject matter 14–17three certainties 11–24

Cestui que trusts 1, 2–3, 73Change of position 188Charitable trusts 89–121

aged and impotentwelfare of the 100

‘and’ cases 112animals 103apportionment 113beneficial to the

community, otherpurposes 99–105, 109–10

charitable purposes 90–91charitable status 89–90, 99citizenship of

moral welfare,encouragementof good 103

cy-près doctrine 90, 114–21delegation 154disasters 101–02drafting 111duration of 90

ESSENTIAL TRUSTS

191

INDEX

education 93–97, 106–08emergency/

rescue services 102enforcement 90

ethical standardsand principles,promotion of 99

exclusivelycharitable purposes 110–14

exclusivelynon-charitablepurposes 112–14

human suffering ordistress, relief of 101–02

national security 102–03‘or’ cases 111–12poverty 92–93, 106public benefit

requirement of 105–10public collections 120public works and

amenitiesprovision of 101

recreation 104–05religion 97–99 108–09severance 113sports 104–05taxation 90, 105trustees 154

remuneration of 136valid

requirements for 90–91validation 113–14

Chattels 41Choses in action 42Collections, funds

raised by public 120Company, shares in 42Conditions precedent

gifts subject to 23Confidential

information 71, 138Conflicts of interest 138, 141

Constitution of trusts 39–8incomplete 39–40outright gifts 41–42self, declaration as

trustee of 40–41transfer

to trustees 41–42vesting of trusts 39–40, 42–48volunteers 40

Constructive trusts 63–88accessory liability 74–76agents 73–74behalf, fiduciaries

entering intotransactions on own 70–71

bona fide purchaserswithout notice 73

breach of trust 75–76, 79confidentiality 71contractual

licences 66, 68definition 63–64enforcement 49equity 63–66, 68–69family home 66, 67, 79–88fiduciaries 69–73knowing

assistance 73, 74, 76–79knowing

receipt 74–75, 76–79land 26, 68mortgages 72new model

approach 65–68remedies 65, 68remuneration

receipt of 69–70secret trusts 38strangers as

constructivetrustees 72–79

traditional 64–65trustees 69–73

192

de son tort 72, 74–79strangers, as 72–74

volunteersinnocent 73

Contract 4–6, 61–62constructive trusts 66, 68equity 28–29licences 66, 68oral 28–29privity of 5

Contrbution 168Contributions 52–53, 81–87Copyright 42Covenants 45, 46Creation of trusts

certainties 11–24express private

trusts 11–38formalities for 24–38testamentary trusts 30–38

Custodians 155Cy-près doctrine 90, 114–21

alteration ofpurposes 116

collections, fundsraised by public 120

initial failure 117–20intention 114, 117, 119non-existent

charities 118–19, 120–21scope of 114–16subsequent failure 117, 120–21surplus 115trustees 114

DDamages 45De son tort trustees 72, 74–79Definition of trusts 1–3Dehors theory 37–38Disaster appeals 101–02Disclaimers 131

Discretionary trustsadministrative

unworkability 22–23advancement 152appointment powers 8certainty of objects 8, 20–22‘is or is not’ test 21–22powers 8

selection, trusts withpower of 23

Distribution 141–42Donationes mortis causa 46–47Duality of ownership 3 EEducation

artistic activities 95–96charitable trusts 93–97, 106–

08educational material

compilation andpublication of 95

learned bodies/professional bodies 95

museums 95public benefit

requirement 106–08research 93–94sports and pastimes 96students’ union 96–97

Emergency and rescueservices 102

Enforcementcharitable trusts 90constructive trusts 49covenants 45, 46donationes mortis

causa 46–47marriage settlements 44equity, in 46proprietary estoppel 47–48resulting trusts 49, 58secret trusts 32–33, 34, 36–38

ESSENTIAL TRUSTS

193

INDEX

settlementcovenants of 45

specificperformance 45

vesting, without 44–48Equity

assignment 27, 28–29constructive

trusts 63–66, 68–69declaration of

new trusts 28duality of

ownership 3inter vivos trusts 26–30interests in 26–30jurisdiction 2maxims 40oral contracts 28–29proprietary

estoppel 47–48secret trusts 31self as trustee

declaration of 30subsisting interests 27, 28–29third parties

direction tohold for 27

title, transfer of 28tracing 176, 178–79, 187–88vesting of trusts 42–43

writingrequirement of 26–27, 29

Estoppel, proprietary 47–48Exclusion of liability 174Expenses 136Express private trusts

creation of 11–38 FFair dealing rule 142Family home

beneficialinterests 80–81, 86–88

constructivetrusts 66, 67, 79–88

contributions 81–87express

declarations 80–81intention 83–85resulting trusts 79, 81–82

Fiduciaries 69–73, 137, 178–79Fixed trusts 19–20Formalities for the

creation of trusts 24–38declarations of

trusts 41inter vivos trusts 24–30land 24–26secret trusts 31–38testamentary trusts 30–38writing 24

Fraud 36–37, 169Freehold estates 41, 143–44 IIllegality 57Imperfect obligations

trusts of 9Impounding 172–74In loco parentis 54–55In personam claims 3In rem claims 3, 176Indemnities 168–69Information, duty

to provide 142Injunctions 166Insolvency 6–7, 176Insurance 144Intention 9

certainty of 12–14conduct 14cy-près doctrine 114–16family home 83–85language 12precatory words 12–14secret trusts 32, 33, 34

194

variation of trusts 163–64vesting 43

Inter vivos trustsequitable interests

subsisting 26–30formalities for

creation of 24–30pure personalty

trusts of 24Interest, payment of 170Interests

equitable 3legal 3, 41–42proprietary 3

Investmentsadvice on 142–43diversification 143land 143trustees’ duties

and powers 137, 155‘Is or is not’ test 21–22 JJoint tenants 34, 124Jurisdiction 2, 156–57, 159–61,

172 KKnowing assistance 73, 74, 76–

79Knowing receipt 74–75, 76–79 LLand

advancementappointment of

trustees 124constructive trusts 26, 68formalities for the

creation oftrusts of 24–26

freehold estates in 41, 143–44inter vivos trusts 24–26

investments 143leases 41, 143–44purchasers of 25resulting trusts 26, 51, 52settled 152–53, 159transfer of 41two trustee rule 25trustees 25, 143–44writing

requirement for 25–26Leases 41, 143–44Legal estates and

interests 41–42Licences 66, 68 MMaintenance power

accumulation 145, 146, 148authorisation of 149capital 149conditions for the

exercise of 146improper

exercise of 148intermediate

incomeentitlement to 146–48

minors 144–49, 156trustees 144–49variation of trusts 156, 158vesting 145–46

Marriage settlements 44, 158Mental patients 158Minors 23–24

advancement 54–55, 153appointment

of trustees 123–24maintenance 144–49, 156variation of trusts 158, 161

Money paid for aparticular purpose 62–63

Mortgages 72

ESSENTIAL TRUSTS

195

INDEX

NNational security 102–03New trusts

declaration of 28Nominees 154, 155, 156Non-existent charities

gifts to 118–19 OObjects, certainty of 17–24

administrativeunworkability 19, 22–23

ascertainability 19beneficiary

principle 17–18class, members of 18–20, 22,

23conceptual

uncertainty 19, 20, 21conditions

precedent 23–24description

individualsidentified by 18

discretionary trusts 20–22evidential

uncertainty 19, 20, 21fixed trusts 19–20purpose trusts 18secret trusts 35selection, trusts with

power of 23third party

opinions on 22Oral assignment

contracts 28–29Outright gifts 41–2 PPersonal liability

defences toactions for 171–74

Personalty

resulting trusts 51, 52trusts of pure 24

Poverty 92–93, 106Powers

appointment, of 7–8certainty of objects 8discretion 7, 9discretionary trusts 8fiduciary 9imperfect obligation

trusts of 9selection, trusts with

power of 23trust, power in the nature of 8trustees, of 7–8trusts and 7–9

Precatory words 12–14Private trusts

creation of express 11–38formalities for the

creation of 24–38three certainties 11–24

Privity of contract 5Profits, unauthorised 6, 137–38,165, 166, 170Property

bona fide purchasersfor value withoutnotice 3, 73

certainty as to 14–16definition using

relative words 16gifts to third persons

subject to 16reference to 3trustees

purchase by 138–39Proprietary estoppel 47–48Protective trusts 152, 161, 164Public trustee 124Purchase in the name

of another 52Pure personalty trusts 24

196

RReal property

See LandReligion 97–99, 108–09Remedies

breach of trust 166–69constructive trusts 65, 68damages 45injunctions, breach of 166personal 166–69specific performance 45tracing 175–88trustees, against 166–69

Remuneration oftrustees 134–36

Resulting trusts 49–63advancement

presumption of 53–57automatic 50, 58–63beneficial interest

failure to disposeof entire 59

conditions, failure of 59contributions 52–53enforcement 49equitable interests 58family home 79, 81–82illegality 57–58land 26, 51, 52money paid for

particular purpose 62–63personal property 51, 52presumed 50, 51–52purchase in the name

of another 52rebutting

presumption of 55–57surplus 60–62ultra vires, purposes

which are 63unincorporated

associations ceasing

to exist 60–62vesting 59voluntary transfer

of property 51 SSecret trusts

acceptance 33, 35communication 32, 33, 34–35constructive trusts 38Dehors theory 37–38enforcement 32–33, 34, 36–38equity 31express trusts, as 38formalities for the

creation of 31–38fraud 36–37fully 31–32, 34half-secret 31–32, 34–35intention 32, 33, 34joint tenants 34objects

communication of 35tenants in common 34testamentary trusts 31–38two or more

legatees /devisees 33Selection, trusts

with power of 23Self-dealing rule 139–41Set off 170Settled land 152–53, 159Settlement covenants 45Shares 42Specific performance 45Strangers

accessories, as 74–76constructive

trustees, as 72–79Subject matter

certainty of 14–17Surplus 60–62, 115

ESSENTIAL TRUSTS

197

INDEX

TTaxation 90, 105, 171Tenants in common 34, 124Testamentary trusts

formalities forcreation of 30–38

Three certainties 11–24basic principles 11creation of express

private trusts 11–24declarations of trusts 11intention 12–14object 17–24subject matter 14–17

Tracingbreach of trust 175–88change of position 188common law 176–78equity 176, 178–79, 187–88in rem rights of 176inequitable

results, no 187–88insolvency 176mixed funds 177–78, 181–87property in

traceable form 178–87unmixed funds 180–81volunteers

innocent 186–88Trustees

See, also, Appointmentof trustees

account of profits 137–38accounts 142administration

of trusts 123–64advancement

power of 149–53agents 154, 155–56assignment 27beneficial interests

purchase of 140–41

beneficiariesenquiries as to 141relationship

between 2–3breach of trust by 2, 132, 141charitable trusts 136, 154competing in

business with trust 141conflicts of interest 138, 141constructive 69–73custodians 155, 156de son tort 72, 74–79death of 124declaration of self as 29, 40–

41delegation 153–56discretion 133, 142distribute, duty to 141–2duality of ownership 3duties of 132–41duty of care 136–37

expensesreimbursement of 136

fair dealing rule 142fiduciary duties 137

incomingliability of 167

information, dutyto provide 142

insolvency 6–7insurance 144investments 137, 142–43, 155land 25, 143–44leases 143–44maintenance 144–49nominees 154, 156outright gifts 41–42powers of 7–8, 133, 142–56professional 135profits

unauthorised 6, 137–38,165, 166, 170

ESSENTIAL TRUSTS

198

propertypurchase of 138–41

Public Trustee 124removal of 132remuneration 69–70, 134–36retirement of 131–32, 168self-dealing rule 138–41third parties

indirectpurchasethrough 139

transfer to 41–42two trustee rule 25unanimity rule 133–34variation of trusts 156–64

UUltra vires 63Unanimity rule 133–34Uncertainty, conceptual

or evidential 19, 20, 21Unincorporated

associations 60–62 VVariation of trusts

accumulations 156administration

of trusts 158–59beneficial interests 157, 160benefit 162–63consent, lack of 164documents

executing 164future beneficiaries 161intention 163–64

jurisdiction of court 156–57,159–61

maintenance 156, 158marriage 162matrimonial

proceedings 158mental patients 158minors 158, 161protective trusts 161, 164Saunders v Vautier

rule 156settled land 159–60statute

authorised by 158–63trustees 156–64

Vesting of trustsappointment of

trustees 130constitution

of trusts 39–40, 42–48enforcement

as condition of 39–40without 44–48

equity 42–43intention 43maintenance power 145–46other means

occurring by 43–44resulting trusts 59

Void trusts 63 WWills 30–38Writing

requirement for 24, 25–27, 29

essential trusts, 3rd edition (essential series)

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