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Level 6 - Unit 5 – Equity & Trusts Suggested Answers – January 2011

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Level 6 - Unit 5 – Equity & Trusts Suggested Answers – January 2011 LEVEL 6 - UNIT 5 – EQUITY & TRUSTS SUGGESTED ANSWERS – JANUARY 2011 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 2011 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 1(a) A decree of specific performance is a court order instructing a party to a contract to perform their obligations under that contract. Failure to comply is contempt of court. It is a precondition of a decree of specific performance that the remedy at law is inadequate. That remedy is generally damages. This is consistent with the role of equity within our legal system, as it developed to provide remedies for those who could not receive the assistance they required through the common law courts. Whether damages are an adequate remedy will depend on the subject matter of the contract. If a contract is for the sale and purchase of an item that is unique, no amount of damages will be able to make up for the fact that the purchaser will no longer receive the item they contracted for. Examples of unique property include land or leases of land and also antiques or items that are in short supply, even temporarily (Phillips v Lamdin (1949), Sky Petroleum Ltd v VIP Petroleum Ltd (1974)). If, on the other hand the contract is for something that is easy to obtain elsewhere, the claimant is expected to be satisfied with the value of the thing they contracted for, rather than the thing itself. A claim was refused in Cohen v Roche (1927) because the contract was for chairs that were then “ordinary articles of commerce and of no special value”. A contract for the same chairs today would be specifically enforceable, because the chairs in question would now be valuable and irreplaceable antiques. Shares in public companies are readily replaceable and therefore specific performance would not be available; if the shares are in a private company, so they cannot be purchased on the open market, it would be (Duncroft v Albreht (1841)). 1(b) A search order is a special type of injunction that may be obtained as part of the preparation for a trial. The search order was formerly known as an Anton Piller Order and the jurisdiction to grant it is now based on s37 Supreme Court Act 1981. Its purpose is to prevent a defendant from disposing of items which may be prejudicial to them at the trial. The Page 1 of 14 claimant is given the opportunity to go (with their solicitor) to go to the defendant’s premises, inspect and make copies of relevant documents and other materials. Not surprisingly, given its purpose, this type of mandatory injunction will be obtained without notice. Examples of situations where a search order might be obtained include an order allowing inspection of documents relating to earnings (Emanuel v Emanuel [1982] and an order allowing the claimants to inspect, photograph and remove articles that were infringing copyright (EMI Ltd v Pamdit [1975]). The conditions for the grant of a search order are that the claimant must have a very strong prima facie case, they must be able to show actual or potential damage of a serious kind, there must be clear evidence that the defendant has incriminating documents or things, and there must also be a real possibility they will be destroyed (Anton Piller). According to Columbia Picture Industries Inc v Robinson, the court must find a balance between the infringement of the defendant’s rights and the future enforcement of remedies granted to the claimant. It is only available against materials that are likely to be destroyed or concealed, it is not a means of getting hold of other less vulnerable evidence. The documents are not to be retained, they are photocopied and where there is a dispute about their ownership, they should be held by the defendant’s solicitor. If a search order is carried out in an excessive or oppressive manner, the claimant may have to pay aggravated damages (Universal Thermosensors Ltd v Hibben [1992]). The guidelines in Universal Thermosensors include matters such as having a woman present as part of the search team if the search is being carried out somewhere where a woman may be alone, and a requirement that the search is during office hours. The guidelines were set out formally in Practice Direction (ex parte Mareva Injunctions and Anton Piller Orders [1994]. A freezing order is an injunction preventing a defendant from removing money or chattels from the jurisdiction. Freezing injunctions are made under s37 Supreme Court Act 1981 and were formerly known as Mareva injunctions. They are brought where the claimant has an action that is being brought to trial, but there is a danger that assets will be removed, so that any judgment made will be useless (The “Rena K” [1975]). A freezing injunction cannot be issued unless proceedings have already been issued or will be issued immediately or almost immediately. It may also be granted after judgment has been given. The subject matter is usually a named sum of money or some specific assets. The defendant will be permitted to use money for normal expenses – the injunction should not destroy their business (United Mizrahi Bank Ltd v Doherty [1998]). The effect of the injunction is not to give the claimant a right to the property, just to prevent certain dealings with it by the defendant. For a freezing injunction, the claimant must have a good arguable case and the balance of convenience should favour the grant. If the order would persuade the defendant to provide security, that is a good reason to grant one, the claimant must make full and frank disclosure of all material matters, and his grounds for believing the defendant has assets that are at risk of dissipation or removal, leading to the risk of default on judgment. It is not enough to show that the defendant is resident abroad or has a foreign passport (Midas Merchant Bank plc v Bello [2002]). The claimant must give an undertaking to pay damages in case the action is not successful (HM Revenue & Customs v Egleton [2006]). Page 2 of 14 2. The trust is a creation of equity, and it is easier to describe than to define. When a trust exists, the trustee is the legal owner of certain property, but is not entitled to use that property however they wish. The trustee holds the property for the benefit of one or more beneficiaries. Fixed trusts and discretionary trusts are two types of trust. In a fixed trust, the size of the beneficiary’s interest is known from the time the trust comes into being. In a discretionary trust, the settlor describes a class of potential beneficiaries and gives the trustees to discretion to select which beneficiaries to benefit and by how much. When a donor (the owner of property) creates a power, she gives someone else – the donee – the power to deal with or dispose of property that is not their own. A power of appointment is a power to appoint (give) property to some other person or persons. If it is a general power, the property can be appointed to anyone, even the donee. If it is a special power, there is a limited class of objects to whom appointments may be made. There are some similarities between trusts and powers. Both involve giving someone something less than full ownership of property, with limited or restricted ability to alienate or destroy the property. A full owner of £50,000 worth of bank notes would be entitled to burn them, if she wished. A trustee could not, and nor could a donee (since the power is only to dispose of the property to particular objects). The similarities between discretionary trusts and powers of appointment are even stronger. The trustee of a discretionary trust, like the donee of a power, gets to choose who will receive the benefit of the property. However, although they may look similar – and it may even be difficult to tell the difference – there are also some important differences. The first important distinction between a trust and a power is that the trustee must exercise their duties as a trustee, but a person who has been given a power does not have to use it. If the trust is fixed, the trustee is required to transfer property to the beneficiaries as set out in the trust document (or oral instructions if there is no written document). If the trust is discretionary, the trustee is required to consider how to exercise their discretion. If the trust requires property to be distributed, then property must be distributed. A donor of a power is not required to exercise that power, or even to consider exercising the power. As a result, at one time the test of certainty of objects was different for trusts and for powers (Re Gestetner’s Settlement [1953]). Because there was no duty even to consider exercising the power, there was no requirement that the objects be certain; but for a trust, even a discretionary trust, it was necessary to be able to list every possible beneficiary.
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