LEVEL 6 - UNIT 5 – AND TRUSTS SUGGESTED ANSWERS - JANUARY 2013

Note to Candidates and Tutors:

The purpose of the suggested answers is to provide students and tutors with guidance as to the key points students should have included in their answers to the January 2013 examinations. The suggested answers set out a response that a good (merit/distinction) candidate would have provided. The suggested answers do not for all questions set out all the points which students may have included in their responses to the questions. Students will have received credit, where applicable, for other points not addressed by the suggested answers.

Students and tutors should review the suggested answers in conjunction with the question papers and the Chief Examiners’ reports which provide feedback on student performance in the examination.

SECTION A Question 1

This essay will examine the general characteristics of equitable remedies before examining each remedy in turn to analyse whether they are in fact strict and of limited flexibility as the question suggests.

The best way to examine the general characteristics of equitable remedies is to draw comparisons with the common law. Equitable remedies are, of course discretionary, whereas the common law remedy of damages is available as of right. This does not mean that the court has absolute discretion, there are clear principles which govern the grant of equitable remedies. Equitable remedies are granted where the common law remedies would be inadequate or where the common law remedies are not available because the right is exclusively equitable. One of the key characteristics of equitable remedies is of course that they act in personam. This is significant because it means that failure to comply with an order giving effect to an is contempt of court punishable by imprisonment or, where the order can be enforced without a personal restraint on the defendant, then an order against his property can be made.

(a) is a remedy provided by courts of equity in instances where the common law remedy of damages for a failure to fulfil an obligation (usually, a contractual obligation) is deemed inappropriate. The remedy is discretionary and “Equity will only grant specific performance if, under all the circumstances, it is just and equitable to do so” (Stickney v Keeble (1915)). Courts will generally allow individuals to breach contracts (although those individuals may be sued for the breach) but equity also provides the remedy of specific performance in cases where to allow a party to breach a contract would be unconscionable as in Beswick v Beswick (1968). The remedy of specific performance is used especially in cases involving land, as due to its unique nature, replacement land or equivalent Page 1 of 13 property cannot be purchased on the open market. Damages for breach in these cases are thus rarely sufficient, for example, in Wolverhampton Corp v Emmons (1901). Further, where a remedy of damages will be insufficient to achieve justice, a court may order specific performance instead. In Sky Petroleum v VIP Petroleum (1974) for example, a court ordered specific performance of a contract to avoid the insolvency of the claimant, as damages would not have provided relief from financial peril. There are limits to the application of the remedy which limit its flexibility. For example, specific performance will not be awarded where the claimant has not acted fairly or honestly (Walters v Morgan (1861)) or if it will cause severe hardship to the plaintiff (Patel v Ali (1984)).

(b) are one of the most popular equitable remedies and provide a very good tool for examining whether equitable remedies are strict and of limited flexibility. Injunctions are court orders which require a party either to do or not do a particular act. Injunctions can be sought by anyone who claims that a legal or equitable right of theirs has been infringed. Common examples of when injunctions are used include: to restrain breach of contract; to restrain breach of trust; and to restrain from breach of confidence. It would of course be wrong to think there was only one type of ; there are of course various different types of injunctions which all have slightly different characteristics. This analysis will focus on interlocutory injunctions. Interlocutory injunctions are designed to preserve the status quo until the trial. They have been granted to prevent a dismissal alleged to be in breach of agreed procedures (Irani v Southampton and South West Hampshire Health Authority (1985) and to restrain removal of a child from the jurisdiction of the court (Re N NO 2 1967). Two of the most important instances are freezing and search orders.

Interlocutory (interim) injunctions demonstrate the tensions between certainty and limited flexibility and strictness. Interlocutory injunctions can be prohibitory, mandatory or quia timet which would imply a fair degree of flexibility for the courts but they could also arguably be called strict because once granted they normally remain in force until the trial. This starts to show the strain between the need for flexibility in certain scenarios and the need for a degree of certainty in every situation. One of the strongest arguments that could be made for arguing equitable remedies are strict and of limited flexibility can be seen in mandatory interlocutory injunctions, although these are not often granted. These are used when speed and secrecy are of the essence but can be granted without notice although this is rare. Perhaps this last comment is the most important. It would be simple to merely state that interlocutory injunctions are strict and of limited flexibility but that would be to tarnish all for the characteristics of just one element, a policy the law and society would generally refrain from doing. This tension can again be seen in freezing orders which are a form of interlocutory injunction designed to prevent the defendant from disposing of assets which would otherwise be available to meet the claimant’s claim or removing them from the courts’ jurisdiction. Since they first came into force in 1975 they have become very widely used especially given the ease with which assets can be moved in today’s society. These again arguably are strict and of limited flexibility because they are normally granted without notice to the other side because of the need for speed. However, to purely argue this makes them strict and of limited flexibility is short sighted. In modern society there is a need for speed and efficiency in certain procedures. It could be said that equity has adapted to the rigours of the contemporary legal environment.

Page 2 of 13 Defences to perpetual or interlocutory injunctions include delay; acquiescence; claimant’s conduct; and hardship to the defendant. Delay by itself is not always fatal as demonstrated in HP Bulmer LTD v J Bollinger SA 1977 where an injunction was granted to restrain the use by the respondents of a particular description which the appellants had used for years as it was felt the wrong was a continuing one. This shows the ability of the court to apply defences to ensure that equity is still seen to be done. One could therefore argue this would be evidence towards the idea that equitable remedies are still very discretionary and flexible. This argument can be furthered by looking at acquiescence where the claimant will not obtain an injunction if they acted in such as way that the wrongdoer believed that the claimant did not intend to enforce his legal rights. This would appear to again demonstrate the flexibility of the courts in finding this defence and in turn trying to ensure that the correct result is achieved.

This essay would suggest that equitable remedies have been wrongly described in the question. Equitable remedies still maintain a strong discretionary element but in today’s society there is an inherent need for a degree of certainty and speed. Injunctions have tried to balance the need for discretion and flexibility with the need for certainty and speed. This essay would argue that when compared to common law remedies equitable remedies are in fact still flexible and of limited strictness.

Question 2

Whether a trust should be given charitable status has been a contentious issue for many years. One of the key areas of contention is when trusts which are perceived to have political purposes and are seeking charitable status. This essay will look at why charitable status has been denied to trusts which appear to have political purposes before offering a discussion on whether this approach is appropriate in today’s society or rather short sighted.

Before examining what the legal meaning of charitable is and what are charitable purposes it is of course necessary to quickly discuss why trusts would want to gain charitable status. There are considerable fiscal advantages, comprising of exemptions from various taxes provided that the income of the charity is applied for charitable purposes such as income tax, corporation tax and capital gains tax. Charities are also entitled to 80% relief from council tax and under the gift aid scheme a charity can reclaim income tax paid at the basic rate when the gift is made by a UK taxpayer. Another advantage of charitable status is that that objects need not be certain.

Charitable has a technical legal meaning distinct from its popular meaning. It has judicially been claimed that “the legal meaning and the popular meaning of the word charitable are so far apart that it is necessary almost to dismiss the popular meaning from the mind” (Lord Wrenbury Verge v Somerville 1924). It must of course be remembered that the same definition of charitable applies to and indeed tax and administrative law.

Many charitable trusts are and were created by individual donors and testators and have broadly defined purposes, giving the trustees and those concerned in the administration of the trust considerable leeway in deciding how the trust property can be most usefully applied to meet current needs.

Until recently charitable purposes were classified under the Pemsel Headings: relief of poverty; advancement of education; advancement of religion and other purposes beneficial to the community. These headings implied a logic and clarity Page 3 of 13 in regard to what was classified as a charitable purpose; however this was not the case as these headings left considerable room for eccentricity. Much has been made of the new statutory definition of charitable purposes in the Charities Act 2006 ss1-3 however, as authors such as Moffat have articulated, it is little more than an explicit statement of the categories developed through case law with the benefit of clarification and a modest extension of those purposes recognised as charitable. It is of course worth noting at this point that the Charity Commission is gently pushing at the boundaries of what is defined as charity and is now the body in charge of deciding whether a trust is deemed to have charitable purposes.

In McGovern v AG (1982) a political purpose was defined to include: to further the interest of a particular political party; to procure changes in the laws of either the UK or a foreign country; to procure a reversal of government policy or of particular decisions of governmental authorities whether in the UK or a foreign country.

Re Hopkinson (1949) is the key example of furthering the interest of a particular political party. If, however, the trust is for the advancement of education, or some other charitable purpose, then there will be a valid charitable gift even though there may be some connection with political purposes. The key example of procuring changes in either the law, or reversals of government policy or government decisions is National Anti-Vivisection Society v IRC (1948) where the main object of the society was found to be the total abolition of vivisection with, in consequence, the repeal of the relevant legislation.

In McGovern v AG (1982) and in Bowman v Secular Society (1917) the reasons why political purposes were held not to be charitable were discussed. In Bowman their Lordships felt that the courts cannot judge if a change in law is for the public benefit because it will normally have evidence before it in order to make this decision. Even if the court did have such evidence to hold that a change in the law was desirable they cannot usurp the function of the legislature. Furthermore in the case of trusts campaigning to secure the alteration of foreign laws not only would there be evidential issues but the enforcement of the trust might prejudice the relations of the UK with that of the foreign country. In National Anti Vivisection Society v IRC (1948) a fourth reason was articulated namely that the Attorney-General, as the guardian of charity, could not be expected to ensure the performance of a trust whose object was to change the law in a way contrary to the wishes of the government.

The only issue needing addressing now is what happens when the non charitable purposes are only ancillary or incidental to the charitable purposes. In this situation the inclusion of non charitable purposes will not prevent the trust from being charitable as long as any profits made from the ancillary purpose are used for charitable purposes.

Question 3

In order for a valid trust to be created it has to comply with certain formalities. This essay will focus on the three certainties, in particular certainty of objects. This essay will discuss whether the statement “for any trust to be valid the objects must be ascertainable” is in fact correct or whether the issue is less clear cut than the question would suggest.

A declaration of a trust must be certain which means that the settlor must declare the terms of the trust with sufficient certainty or precision for the trustees to know what they must do, or the intended trust fails. Certainty of Page 4 of 13 intention determines whether the settlor wanted to create a trust and certainty of subject matter and object test the effectiveness of the settlor’s expression and the workability of his intentions.

A general but rather simplistic way to describe certainty of objects would be to say that the general principle that the objects of a private trust must be certain applies. This is too simplistic because the degree of certainty required depends on the type of trust. For example the object of a trust might be to benefit a legal person or to advance public or private purposes.

The justification for certainty of objects is that unless the trustee knows who the beneficiaries are they cannot distribute the trust property. A further justification is that the court needs to be able to control the trust which was highlighted in Morice v Bishop of Durham (1805) where it was said “there can be no trust over the exercise of which this court will not assume control; for an uncontrollable power of disposition would be ownership, and not trust.”

Unlike with certainty of intention or subject matter certainty of objects varies with the type of potential provision being considered. The two key areas for consideration are: the Fixed Trust and the Discretionary Trust.

A fixed trust is of course trust property where the trust instrument sets out the shares of each beneficiary in the property that comprises the trust, so that each beneficiary’s interest from the start is fixed and unchanging. In order for a trustee to distribute the trust they must to be able under IRC Broadway Cottages Trust (1955) to draw up a comprehensive list of everyone beneficially entitled. The fixed trust does however also demonstrate that this straightforward test may not always apply. In McPhail and Doulton (1971) there was the suggestion that the any given postulant test should be applied to all trusts, it was said that a trust should be upheld if there was sufficient practical certainty for it to be carried out. This idea has divided commentators but adds weight to the idea that the statement in the question may today be too superficial and sweeping a statement.

The discretionary trust is a trust of property where the settlor has designated a class of people from whom the beneficiaries may be chosen, but the actual selection of the beneficiaries is made by the trustees. This type of trust can be either exhaustive in so far that all the income must be distributed or non exhaustive where the trustees have the discretion whether to pay a part or indeed any of the income. In IRC v Broadway Cottages the Court of Appeal applied the fixed list test to discretionary trusts. In McPhail, Broadway was overruled with the test for discretionary trusts for certainty of object being held to be “can it be said with certainty that any given individual is or is not a member of the class?” This is known as the given postulant or individual ascertainability test which was developed in Re Gulbenkian’s Settlement Trusts (1970). This test is somewhat contained by Lord Wilberforce’s obiter remarks concerning administrative unworkability. Administrative unworkability is the idea that if the description of the class of beneficiaries is so hopelessly wide as not to form a class, the trust will be impossible to administer for example R v The District Auditor ex parte West Yorkshire MCC (1986).

Conceptual and evidential uncertainty as discussed in Re Baden’s Deed Trusts (1973) (NO 2) also add further clarity to the certainty of object debate. This concept makes it clear that if a person cannot be proved to be in a class he is held not to be in that class, it does not matter whether others cannot be proved to fall within the class or not.

Page 5 of 13 As can be seen from the discussion above of certainty of object the issue is not as clear cut as the question statement would suggest. The degree of certainty required depends to a large extent on the area under consideration.

Question 4

The fusion of law and equity has become a highly contentious issue and an issue of debate since the Judicature Acts which fused the administration of law and equity. The debate now focuses on whether it is appropriate in any way to discuss equity and the common law as distinct systems. Academics are divided on whether common law and equity are indeed fused today with many academics still holding on to the analogy of common law and equity as two streams running side by side in the same river but not mixing water.

It is worth at this point remembering that the trust was of course developed as a response to equity’s special concern to ensure that legal rights were not used in bad conscience. However, it has today become a sophisticated institution governed by established rules with many academics arguing that equity has today been sidelined, despite the idea that if common law and equity conflict, equity prevails. This essay will examine the historical role of equity before addressing the role of common law and equity today and how trusts demonstrate the alleged fusion of their roles today especially in trusts relating to the family home.

The early common law, although beneficial, became too complex and unable to responds to the needs of society. Equity was born when cases referred to the Chancellor were decided by the Chancellor according to general principles of justice. After equity had become established as a body of principles, doctrines and rules and began to rival to the common law it became more constrained by the common law. The Judicature Acts 1873 and1875 reformed equity and now equity and the common law are administered side by side in the courts of England and Wales which is why the Judicature Acts have in the past been the focus of the fusion debate.

In order to fully assess the extent of the fusion of common law and equity we must of course first analyse the functional distinction between common law and equity. The function of the common law is to establish rules to govern the generality of cases, the effect of those rules is to recognize that certain people will acquire certain legal rights and powers in certain circumstances. Legal rules allow the holders of legal rights and powers to exercise them in the confidence that they are entitled to do so.

The function of equity is to restrain or restrict the exercise of legal rights and powers in cases when it would be unconscionable for them to be exercised (Earl of Oxford’s case (1615)). This links in with the idea equity follows the law; equity was never designed to undermine the common law merely to supplement and regulate it. The distinction between common law and equity is often characterised by the distinct functions both are believed to have. It is only in the last 40 years that academics and to an extent judges have really begun to question whether these distinct functions still exist today.

Equitable maxims such as: “equity follows the law” and “equity will not suffer a wrong to be without a remedy” are useful tools. These maxims help to not only explain the role of equity but also demonstrate the development of equity and the school of thought that equity and the common law are distinct but mutually dependent on each other. The idea that “equity follows the law” is the prime example. This maxim demonstrates that equity does not depart from a statute or Page 6 of 13 the common law except in exceptional circumstances. Equitable interests in land therefore correspond to legal estate and interests. Rights and duties under an equitable lease are the same as those under a legal lease. Where possible equity ensures that its practices follow the common law but where there is conflict equity will prevail.

There are numerous examples of the fusion of common law and equity for example the use of equitable remedies in legal actions such as A-G v Blake (2000). One of the most striking examples of the fusion between common law and equity is in cases relating to the family home and in particular Constructive trusts.

The new model developed largely due to Lord Denning. In (1972) Lord Denning described the constructive trust as one ‘imposed by law wherever justice and good conscience require it’. Cases such as Eves v Eves [1975], where the woman was given an in the property representing her contribution in terms of heavy work, demonstrated the influence of equity. There was an attempt to re-establish earlier principles in this field (Lloyds Bank v Rosset (1991)) relating to the existence of a common intention that an equitable interest should arise, and the existence of a direct financial contribution. The House of Lords in (2007) re- introduced some of the earlier flexibility into the constructive trust showing that equity is alive and well.

Today the common law and equity remain distinct but mutually dependent aspects of the law. It is indeed true to say that today neither equity or law are contained and hampered by their origin and the fact they are both administered by one court demonstrated and explains to a point how and why each has borrowed from the other in furthering the development of law as a whole.

SECTION B Question 1

This question concerns the rights and remedies available to beneficiaries in the event of a breach of trust by one or more trustees. Brody, the trustee, appears to have committed several breaches of trust. Heidi and Spencer, the beneficiaries under the trust, have a number of potential options available to them. This answer will address the potential breaches of trust and proceed to outline the remedies available to the beneficiaries.

As a trustee, Brody is under a duty to administer the trust in accordance with its terms and the principles of equity with a view to protecting the interests of the beneficiaries in the trust property - equity's general duty of care.

Similarly, Brody is under what may be called “the statutory duty of care”, (see: the Trustee Act 2000 – “a duty to exercise such care and skill as is reasonable in the circumstances”) when commuting one form of investment of trust property into another. These duties might be loosely called – “a duty to act in the best interests of the trust”. Brody is further under a relationship in relation to the beneficiaries as was enunciated in Reading v AG (1951) AC 507.

The sale of the ‘Sunset’ painting by Brody to Taylor would be interpreted by the court as a failure to act in the best interests of the trust. Brody has breached both the common law and statutory duty of care by failing to ensure the trust received the full market value of the painting.

Page 7 of 13 Further, the gift of the “Frankie” painting to Brody’s aunt would also be treated as a breach of trust; the trust has not received any payment for the painting and it has been demonstrated clearly that its market value was £40,000. As noted in Bristol & West Building Society v Mothew (1996) 4 All ER 698 per Millet LJ: “The principal is entitled to the single-minded loyalty of his fiduciary.”

With respect to the final sale of the “Partridge” painting, it is unclear whether the proceeds from the sale were claimed by Brody or were given to the trust. If Brody kept the proceeds for himself, he is again in breach of trust. He will be in breach of both his fiduciary duty to the trust and the duty not to make a personal profit from his position of trustee. This is termed ‘the no-conflict rule’ and has been described thus:

“It is an inflexible rule of equity that a person in a fiduciary position…is not, unless otherwise expressly provided, entitled to make a profit; he is not allowed to put himself in a position where his interest and duty conflict” - Bray v Ford (1896) AC 44 per Lord Herschell.

This is the case even where any profit is made in good faith, or where the trust itself benefits from the action of the trustee, under (1972). Equity will impose a constructive trust over any profits made by a trustee in breach.

It has therefore been established that Brody has committed numerous breaches of trust in relation to his dealings with the trust property. The beneficiaries must therefore be advised of any remedies available to them. The problem for the beneficiaries is that Brody has been declared bankrupt and therefore even if the court ordered a judgment against him, it is unlikely that he will be able to comply with any financial order.

Heidi and Spencer must attempt to ‘trace’ the property into the hands of the other parties involved in the dispute. These parties are known as ‘strangers to the trust’. Where the property has changed in some way or has been sold on, ‘the plaintiffs must subject [the strangers to the trust] to a personal liability to account as constructive trustees’ – per Millett J in Agip v Africa (1990) Ch 265 at 290. Under Foskett v McKeown (2002), where any funds are mixed, the beneficiary can claim a share of the fund in the proportion which the original trust funds bore to the mixed fund at the moment they were mixed. This allows the beneficiary to claim any profits made through the use of the trust fund.

Tracing may be conducted at common law or equity. Common law is extremely difficult to show. Equitable tracing operates when the following factors are satisfied: fiduciary relationship; equitable proprietary interest; tracing would not be inequitable – (1948) and the property must be in a traceable form. The circumstances where a stranger may be liable are the following: Trustee of one’s wrong; in breach of trust and knowing receipt of trust property.

In relation to the “Sunset” painting, the beneficiaries ought to claim the proceeds of sale from Taylor, the art collector under the ‘knowing receipt’ concept, as he is not a for value without notice. Personal liability to account on the basis of knowing receipt of trust property applies to strangers to the trust who receive trust property or its traceable proceeds in the knowledge that the property has been misapplied or transferred in breach of trust.

‘Knowledge’ in this capacity means: actual knowledge; wilfully shutting one’s eyes to the obvious – termed ‘Nelsonian knowledge’; wilfully and recklessly Page 8 of 13 failing to make such enquiries as an honest and reasonable man would; knowledge of circumstances which would indicate the facts to an honest and reasonable man; knowledge which would put an honest and reasonable man on enquiry.

Taylor failed to make the necessary enquiries in relation to the ownership of the painting and had implied or constructive notice of the breach. If Taylor has retained the £250,000, equity will allow the beneficiaries to trace the funds from the sale into his account, even if the funds have been mixed.

A similar argument may be made in relation to the sale of the “Partridge” painting. The auctioneer, Frankie, was clearly placed on notice with regard to the breach of trust by Brody and failed to make the requisite enquiries under BCCI v Akindele (2001). The problem for the beneficiaries in this situation is that the property has been transferred to China with no reasonable prospect of its return. Further, aside from any commission fees, Frankie did not benefit financially from the sale. Thus, they will be unable to trace any proceeds from the sale through him. It is therefore unlikely that the beneficiaries will have any useful remedy in relation to this breach.

Finally, with regard to the gift of the “Louis” painting, again, the beneficiaries may be left with no practical remedy. Although the property was transferred to Brody’s aunt in breach of trust, the aunt had no knowledge of the breach, either express or implied. As a stranger to the trust she may only be held to account where it would be equitable to do so. Considering her lack of knowledge of any breach, it is clear that she would not be held to account for the breach. Furthermore, the £40,000 has been spent; it has therefore been dissipated. There is no ‘property’ into which the £40,000 in question may be traced. The beneficiaries therefore will be left only with a remedy against Brody, a ‘man of straw’.

Question 2(a)

This question concerns appointment of new trustees. Under S36(1) or S41 Trustee Act 1925 a new trustee could be appointed and Alexia removed as being incapable. S36(1) is the section normally used to appoint new trustees. This section allows appointment for some of the following reasons; where an existing trustee is dead; remains outside the UK for a continuous period exceeding 12 months; is unfit to act because of mental disorder Re East 1873 or refuses to act. The rule in Saunders v Vautier may be invoked to replace Alexia as trustee or alternatively to dissolve the trust if the beneficiaries are of full age and capacity.

If the trustees wished to remove Alexia they could also use s41 of the Trustee Act. S41 of the Trustee Act allows the court to exercise its powers to remove a trustee. The trustees should therefore try and use S36(1) first as this would be the most “expedient route”, whereas S41 would be impractical or difficult to do so. However it is worth noting at this point that Alexia does not need to be replaced as there are still 3 other trustees. This means there are still enough trustees left to meet the statutory requirement for trusts of land in the LPA 1925.

Question 2(b)

Trustees have a duty on appointment to call in any trust property outstanding. Their duty is primarily to the trust; it does not matter whether the Spearings are their friends as stated in Re Brogden (1888). However, the trustees do have the power to allow time for debts to be paid. The Trustees should consider making a Page 9 of 13 Beddoe application where the court will determine whether or not proposed litigation is the proper course of action. This protects the trustees and there is the power under s15 Trustee Act 1925 to settle claims.

Question 2(c)

The issues involved in this scenario revolve around the rules against self dealing. Trustees must not purchase trust property because to do so can conflict with their duty as trustee. The honesty of the trustee is not relevant, the rule is based on the trustee’s status as trustee (Boardman v Phipps (1967)). Such a purchase is voidable at the option of the beneficiary. It would not matter that full market value had been paid but in this scenario less than full market value was paid. The facts of this transaction are similar to Holder v Holder (1968), where an executor had tried to renounce his executorship. The renunciation was invalid, because the he had done some minor acts in the administration of the estate. Although he took no further part in the administration he did buy land at an auction which had belonged to the estate and the court refused to set the purchase aside.

Question 2(d)

Wendy can retire under S36(1) if there is no provision in the trust instrument. Wendy could also retire under S39 Trustee Act 1925 by consent of the trustees or an individual or individuals with the power to appoint trustees. Section 41 of the Trustee Act also permits trustees to retire by court order.

Question 3

This answer will address the operation of the trust mechanism in relation to beneficial interests in property.

In advising Parshinder, one must consider whether her actions since 2005 following Ama’s purchase of the house will allow her to gain an interest in the property. She is not named on the title deeds and will therefore have to demonstrate that she is beneficially entitled to an interest in the property arising from trust principles.

Parshinder pays for the outgoings on the property and will therefore attempt to claim that this will suffice to raise a constructive trust of some share of the property in her favour. Under Drake v Whipp (1971) a precise beneficial share in a property does not have to be agreed in order for the creation of a constructive trust.

However, Parshinder must demonstrate that there was a clear agreement or understanding that the expenses she incurred were made in return for a beneficial interest in the property. It is clear from caselaw (see Lloyds Bank v Rosset (1991)) that, in the absence of an express agreement, understanding or arrangement, only direct financial contributions will raise the presumption of a constructive trust in the favour of a claimant who is not named on the title deeds. In this case, Lord Bridge stated: “In this situation direct contributions to the purchase price by the partner who is not the legal owner, whether initially or by payment of mortgage instalments, will readily justify the inference necessary to the creation of a constructive trust. But, as I read the authorities, it is at least extremely doubtful whether anything less will do....”

There is dicta in Gissing v Gissing (1971) which suggests that, in situations where a property is purchased by way of mortgage and the legal owner is unable

Page 10 of 13 to pay both the mortgage and outgoings, then a constructive trust may arise by virtue of the payment of outgoings by the non-legal owner. However here there is no mortgage, and, therefore, the dicta cannot be applied.

Was there any ‘agreement, arrangement or understanding’ that Parshinder was to have an interest in return for paying the outgoings and/or keeping house? We are not told. If there was no agreement, the inference would be that the outgoings were met in return for the accommodation provided. It is unlikely therefore that Parshinder would be entitled to any beneficial interest in the home.

In relation to Tariq, it must be considered whether the substantial improvements to the property will create a constructive trust in his favour and, thereby, a beneficial interest.

As noted in the case of Parshinder, under Lloyd’s Bank v Rosset, the general principle in this area of trusts is that, in the absence of something from which one could infer an agreement that a beneficial interest was to be created, someone who improves property that belongs to another will not get an interest in that property.

Was there an agreement, arrangement or understanding that Tariq was to acquire an interest? If Tariq only renovated the house in order to ‘keep the peace’ and for no other reason, that suggests that there was no such agreement, arrangement or understanding that Tariq was to acquire an interest in the property. And, if this is so, then he will get nothing, especially if the work was seen as payment for rent-free accommodation (under Thomas v Fuller-Brown (1988)).

If there was an agreement, arrangement or understanding that Tariq was to acquire an interest, and he acted to his detriment on the same, then Tariq may acquire an interest under constructive trust principles and the court can assess the value of that interest in accordance with the inferred common intention of the parties (drawn, if necessary, from their conduct).

The question is whether court can infer a common intention merely from the extent of the contribution to improvements. The traditional view suggests that, in the absence of an express common intention between the parties, then improvements to a home by a cohabitee do not generate a constructive trust in their favour (see Pettit v Pettit (1971). However, under more recent caselaw, (Midland Bank plc v Cooke (1995); Oxley v Hiscock (2005)) the courts have looked to the financial contributions as just one element – albeit a highly significant one – in deciding on whether to infer a common intention with regard to the beneficial interests under a trust. However, as Tariq made no financial contribution whatsoever, it may be difficult for him to claim a beneficial interest.

If the parties (Tariq and Ama) were married or engaged then under s37 of the Matrimonial Proceedings and Property Act 1970 (provided that the contribution was ‘substantial’) the courts must give Tariq a beneficial interest in property unless there was an agreement to the contrary.

In the absence of marriage or engagement, position is somewhat less clear. Where property was a ‘shell’ then courts may be able to infer common intention fairly easily, but where property was habitable far less easy. On the facts, it is highly unlikely that Tariq has an interest.

Page 11 of 13 Following Ama’s death, it is clear that in her will she leaves the property to the local women’s refuge. The refuge will take whatever interest Ama had in the property, subject to any equities (i.e. beneficial interests) held by Parshinder and Tariq (although as noted, in all likelihood they will have none).

Question 4

(a) The Trustee Act 2000 contains the powers of investment open to trustees. The key sections concerning power of investment are: S3 which provides trustees with a general power of investment. This section allows Edgar and Roland to make any investment that they could make if they were absolutely entitled under the trust. The trust instrument may restrict these investment powers, which has occurred in this scenario as the trust instrument makes it impossible for Edgar and Roland to invest in oil and gas companies. Other statutory investment powers which Edgar and Roland have to keep in mind are; s8 which concerns investment in legal estate in UK Land; S31 which outlines discretionary powers to use income for maintenance and S31 power to advance capital for advancement or benefit and the limits on that power. It should of course be remembered that these powers are default powers in that they apply in the absence of any contrary provisions in the trust instrument.

It can therefore be seen that these powers give Edgar and Roland very wide statutory investment powers which limit the ability of the beneficiaries to hold Edgar and Roland to account. It also means that Edgar and Roland would, in theory, be able to invest in antiques as they have expressed a desire to.

(b) The key statutory provisions governing Edgar and Roland and their duties concerning investment are: Trustee Act 2000 S1 statutory duty of care; S4 standard investment criteria and duty to review; S5 duty to obtain advice; S11 delegable functions; and finally S22 and S23 concerning use of agents.

Trustees investing trust property are expected to use the care that would be used by an “ordinary prudent man of business” investing on behalf of someone whom he has a moral obligation to provide (Learoyd v Whitely (1887). The Trustee Act 2000 states that the trustee is under a duty to exercise such care and skill as is reasonable in the circumstances, having regard to any special experience or knowledge the trustee has or has claimed to have. This standard clearly applies to investment (Schedule 1 TA 2000) and sits alongside the ordinary prudent man of business test. Both Edgar and Roland would be held to a higher standard than the ordinary prudent man of business test because Edgar is a barrister and Roland is a university lecturer in accountancy and finance so are held to the higher standard of care because of their perceived specialist knowledge in law and accountancy and finance.

There are two other key issues for Roland and Edgar:

Investment in Antiques

Edgar and Roland need to keep in mind that the duty of investment includes a duty to treat beneficiaries equally (Lloyds Bank v Duker (1987)). Edgar and Roland will have to consider whether the investment should favour capital growth over investment income given the various positions of Solomon and Teddy. Trustees are under section 3 TA 2000, may make any investment he/she likes as long as they comply with their other duties (eg. Page 12 of 13 Duty of care, duty to consult where appropriate etc) and comply with the standard investment criteria, including suitability and diversity in other words adherence to the modern portfolio theory. Edgar and Roland would have to assess whether the investment in antiques would comply with these duties or not.

Non investment in tobacco companies request

Under Cowan v Scargill (1985) the duty of trustees is to exercise their powers in the best financial interests of the present and future beneficiaries of the trust, holding the scales impartially between the different classes of beneficiary. Cowan v Scargill also makes it clear that if investments of a certain type would be more beneficial to the beneficiaries than other investments then the trustees cannot prioritise one of the beneficiaries’ interests over the financial interests of the other beneficiaries. Edgars wish to avoid investing in tobacco companies cannot be taken into account as he is a trustee and has a duty to put the financial interest of the trust first.

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