Creation of Express Trusts

Capacity - ‘Legal competency or qualification’ - Two common exclusions = poor mental health, infancy - S1(6) LPA 1925: a minor cannot hold a legal estate in land (so cannot create a trust of land).

THE THREE CERTAINTIES - Knight v Knight: Lord Langdale: for an express trust to be created the settlor must express 3 things with certainty. o Certainty of intention o Certainty of subject matter o Certainty of objects

Certainty of Intention - Did settlor intend to subject the property to a trust obligation? - Two ways in which a trust can be created: o The settlor declares himself trustee of property that he already owns; o Settlor transfers property to another person directing that they hold it on trust for the beneficiary.

- Has the settlor done enough to make clear his intention? - Re Kayford Ltd – Megarry LJ: ‘a trust can be created without using the words “trust” or “confidence” or the like; the question is whether in substance a sufficient intention to create a trust has been manifested’. - Company opened separate account, ‘Customer’s Trust deposit Account’ to pay in money received for goods not yet delivered, withdrawing the money only if goods were later delivered – so they could refund customers if goods not supplied (if company went into liquidation). - Held: trust had been created.

- Paul v Constance: C separate from his wife + lived with P. A number of times C told P that the money was as much hers as his. o C died intestate + as he had not divorced his wife, wife was entitled to all of his estate. P brought an action arguing that C had declared an express trust over the money which would not form part of his estate. o Held: Use of those words on several occasions was sufficient to amount to a declaration of trust.

BUT, isolated loose conversation will not suffice. - Jones v Lock: J returned from business trip. The nurse of J’s baby told him off for not bringing his son a gift. So, J produced a cheque + said ‘I give this to baby; it is for himself, and I am going to put it away for him, and will give him a great deal more along with it’. J died a few days later. o Held: he had not made an effective declaration of trust. o Lord Cranworth LC: ‘It would be very dangerous if loose conversation of this sort, in important transactions of this kind, should have the effect of declarations of trust’. - Gold v Hill: Mr Gilbert had separated from his wife + living with another woman + her children. He had not changed his will which left his estate to his wife. He was going on a business trip + took out life insurance nominating Mr Gold as beneficiary: ‘If anything happens to me you will sort things out – look after Carol and the kids. Don’t let that bitch (wife) get anything’. o Was this sufficiently certain? o Held: most likely interpretation = he intended that Gold hold the moneys as trustee for Carol for her to apply them for the use + benefit of herself + children.

- Re Gulbenkian’s Settlements (Lord Upjohn): - “It is…the duty of the court by exercise of judicial knowledge and experience…, innate common sense and desire to make sense of the settlor’s or party’s expressed intentions however obscure and ambiguous the language…”

Intention to impose mandatory obligation, rather than merely a moral obligation: - Re Snowden: S couldn’t decide how to leave the residue of her property between her nephews + nieces as she didn’t want it to be unfair. She left it to her brother saying that ‘he would know what to do’ + that he was perfectly aware of how she wished to distribute the money. When brother died, question = whether the gift of the residue was subject to a trust. o Held: no intention that brother should hold the property for benefit of nephews + nieces. o Megarry LJ: ‘There was no need to bind him by any legally enforceable trust; and I cannot see any real indication that she had any thought of doing this’.

- McPhail v Doulton: Deed establishing a fund stated: ‘trustees shall apply the net income of the fund in making at their absolute discretion grants’ to the employees + ex-employees of a company, their relatives and dependents.’ o Held: mandatory nature of language (‘shall’) showed intention to create a trust + not a mere power. Recipients of the property were under an obligation to make grants but they had discretion to decide to whom they should be made. - R v Clowes: Investment company brochure: ‘All moneys received are held in a designated clients account + clients are the beneficial owners of all securities purchased on their behalf’. o Held: trust had arisen.

Precatory words (expressing a wish/request) -Older cases: precatory words would automatically give rise to a trust. E.g. testator expressing his ‘desire’, ‘hope’, ‘wish’ or ‘confidence’ that it be used in a particular way. -This approach was rejected in 19th century. - Re Adams and Kensington Vestry: testator left property to wife ‘in full confidence that she would do what was right as to the disposal thereof between his children’. o Held: Precatory words alone were insufficient evidence of intention to create a trust. o Cotton LJ: ‘I think some of the older authorities went a deal too far…’

-Modern approach = precatory words do not automatically create a trust. Must look at context.

- Re Steele’s Will Trusts: testatrix’s will: ‘I give my diamond necklace to my son to go and be held as an heirloom by him and by his eldest son on his decease and to go and descend to the eldest son…and so on…as far as the rules of law and equity will permit’. o The solicitor appeared to have copied this phrase from an older case. o Held: intention was evidenced not by precatory words but by the fact that there was an established precedent.

-Sham intention (if no genuine intention to create a trust): - Midland Bank plc v Wyatt: W’s were joint legal owners of family home. They executed a declaration of trust in favour of Mrs W + their daughters, which was placed in a safe. Mr W then obtained credit to finance his business, secured by the interest in the house. Banks were unaware of the trust + its existence was only disclosed after the business had become insolvent. o Held: Declaration of trust was a sham (or a pretence) – so void and unenforceable.

Consequence of a lack of certainty of intention? -If the words were used in conjunction with a transfer of property by will/inter vivos, then the recipient generally acquires the property free of trust. -If words were supposedly a declaration of trust by settlor, the settlor remains the outright owner.

Certainty of Subject Matter -A trust can only exist in relation to specific property - Hemmens v Wilson Browne: Client instructed solicitor to draft a document giving C (client’s mistress), an immediately enforceable right to call at a certain date for a sum of £110,000 to enable her to buy a house for herself + daughter. After document was drafted + executed, solicitor told C that its effect was ‘akin to a trust’ but advised her to consult her own solicitors. Client refused to pay up. Had document created a trust over client’s general assets? o Held: no valid trust as there was no identifiable fund to which any trust could attach.

- Palmer v Simmons: Testatrix attempted to create a trust of ‘the bulk of my residuary estate’. o Held: term ‘bulk’ = too uncertain. No valid trust. - Anthony v Donges: Husband made gift to wife by will of ‘such minimal part of my estate of whatsoever kind…she may be entitled to under English law for maintenance purposes’. o Held: Impossible to determine what she was entitled to. Gift = void for uncertainty of subject matter. - T Choithram International SA v Pagarini: P was seriously ill when he executed a trust deed establishing a philanthropic foundation appointing himself one of the trustees. Orally, he stated that he gave ‘all his wealth’ to the foundation. He added ‘all my balances with the company and my shares as well’. o Held: Clear that the deposit balances + company shares in the 4 defendant companies were sufficiently clearly identified (so didn’t matter whether ‘all my wealth’ was too uncertain). -The term ‘residue’ does not present a problem as it has a clear legal meaning – what is left of the estate after other bequests or testamentary gifts have been made.

BULK V RESIDUE - Residue = remainder – this is certain - Bulk = uncertain

- Re Golay’s Will Trusts: testator provided that a legatee was to receive a ‘reasonable income’ from the property. - Held: Testator intended by ‘reasonable income’ the yardstick which court would apply in quantifying the amount. So, direction is not defeated by uncertainty.

- Boyce v Boyce: Testator had 2 houses. His executors were to convey whichever house his daughter Maria should choose to Maria, and the other house to the other daughter Charlotte. Maria died during the testator’s lifetime. - Held: M’s death made it impossible to ascertain subject matter of trust for C. Trust failed.

-Tangible property in bulk - Re London Wine Co: Wine merchants with large stocks of wine in various warehouses. Customers would purchase wine as an investment. Contract of sale stipulated that the wine would become the customer’s property but would be stored by the company. - Customer’s purchase were entered into stock book + allocated a reference number. Company provided a certificate to customers stating the customers’ sole beneficial ownership of the wine they had purchased. - But, each customer’s order was not segregated from general stocks of wine until actual delivery. When company went into liquidation the customers sought to prove a trust had been created. o Held: No valid trust. Lack of certainty of subject matter as wine had not been appropriated from general stock. No particular customer was able to point to specific bottles of wine that were his/hers.

- Re Goldcorp Exchange Ltd: Company acted for clients by acquiring bullion for them + also acted as depositary for bullion the clients had bought. Terms of the contract required Goldcorp to buy + physically hold in its vaults all of the bullion specified in the order. Each customer received a certificate of invoice verifying ownership. - G was in financial difficulty + in breach of its contracts with its clients; it failed to buy all of the bullion in the orders. When G went insolvent, it did not hold enough bullion to satisfy all of its clients’ orders even though they had already paid for it. o Held: 3 different classes of C: § ‘Non-allocated’ claimants: were given a non-allocated certificate – had not been segregated from the bulk of bullion – certainty of subject matter was not met. § ‘W’ claimants – their bullion had been segregated + stored separately from the bulk of unsegregated bullion held by G. These C’s satisfied the requirement of certainty of subject matter. § Individual (C) who had purchased a large amount (1000) of a particular gold coin. G did not ordinary stock these + so had to make large order. These were then mixed with other coins. C claimed that these coins were earmarked + appropriated for him at the point of the order. HELD: insufficient evidence that these coins had been purchased expressly for C. No clarity of subject matter. -Intangible property in bulk - Hunter v Moss: M owned 950 shares in company + orally declared trust of 5% of the issued share capital for H (around 50 shares). There had been no appropriation/segregation. o Held: Valid trust. Since the shares were essentially identical + indistinguishable, any 50 shares in the company were capable of forming the subject matter of the trust. o Dillon LJ gave leading judgment: where tangible property is concerned, segregation is required but where intangible property is concerned it is not required. - BUT, clashes with Re Goldcorp – Hunter was decided by the Privy Council beforehand, but the CoA judgment had not yet been made when Goldcorp was being heard by the Privy Council.

- Re Harvard Securities: Company bought securities + sold them on to clients. Terms of the contract with clients suggested that the dealer held the securities on bare trust for the client. The securities were not numbered/segregated so it was impossible to ascertain which securities belonged to which clients. Company became insolvent. o Held: Neuberger considered himself bound to apply Hunter because it concerned intangible property. Clients did have a beneficial interest?

-Future property = property a person does not already own but hope/expect to own in future. -A person cannot create a presently existing trust of future property. -I.e.: an interest a person expects to inherit under the will of a relative; future income.

- Re Ellenborough: Sister of E created a settlement giving trustees any property to which she might became entitled on E’s death. When E died, she became entitled to some property but refused to transfer it to the trustees. o Held: No trust had been created.

-But, a vested/contingent right to property is not ‘future property’ (i.e. creating a trust over a remainder interest).

Consequence of lack of certainty of subject matter: - If settlor declares himself trustee but certainty of subject matter is not met, settlor will remain outright owner of the property. - If settlor has already effectively transferred property to a 3rd party, the lack of certainty of subject matter means the recipient will take the property free from the trust.

Certainty of Objects -Trustees must be able to ascertain who the beneficiaries of the trust are.

2 Types of certainty: Conceptual certainty: -Trustee must be able to say of any hypothetical postulant who may come to them claiming to be within the class of beneficiaries, whether they are/aren’t within the class. o ‘Is or is not’ test.

- Re Barlow’s Will Trusts: question whether the class definition ‘friends’ was conceptually certain. o Held: ‘friends’ has a great range of meanings – difficult to draw up a complete list of friends – fails the test of conceptual certainty as it would not be possible to say that any particular individual was or was not a member of the class.

- Re Baden: terms ‘relatives’ and ‘dependants’. o Held: majority CoA thought ‘relative’ could be interpreted as ‘descendants of a common ancestor’ and was conceptually certain. All agreed that ‘dependents’ was sufficiently certain in its context. o LJ Stamp dissented: ‘relative’ = next of kin or blood relations only.

Evidential certainty: -Concerned with problems of proof rather than definition. Good example: - Re Sayer: Concerned a trust in favour of the employees + ex-employees of a confectionary company. There was no conceptual uncertainty as these terms had clear objective meanings. But, the company ran 70 shops in different towns. A large number of its employees were shop assistants who frequently changed their employment. So, the company found it impossible to keep an accurate list of ex-employees. o Held: trust failed for evidential uncertainty.

Fixed Trusts -E.g. ‘To my children in equal shares’ -Trustee must be able to draw up a complete list of each + every beneficiary. -‘Fixed list’/’Class ascertainability’ test. -This will be impossible to do unless the class is both conceptually and evidentially certain.

- Re Gulbenkian’s Settlement: ‘suppose the donor directs that a fund be divided equally between ‘my old friends’, then unless there is some admissible evidence that the donor has given some special ‘dictionary’ meaning…it is plainly bad as being too uncertain’. - OT Computers v First National Tricity Finance: ‘It is not sufficient to be able to say whether or not any identified person is or is not a member of the class entitled to be considered…’

-Problem of beneficiaries of whom the trustees have no knowledge. -Trustee Act 1925, s27(2): Trustees not liable to any person of whose claim they had no notice at the time of distribution.

Powers of Appointment = Power to select who are the beneficial recipients of property/benefits accruing to property. -Power may be given to trustees. -The recipient of a mere power is under no obligation other than to ensure the power is not exercised excessively/ appointments made outside the class of objects. -He/she does not have to exercise power at all + are not required to consider every potential object.

-As a result, no need to draw up a complete list of each + every object. -Established in Re Gulbenkian’s Settlement (the ‘is or is not’ test has subsequently been found to be the test for discretionary trusts).

Discretionary Trusts - IRC v Broadway Cottages Trust: Applied ‘complete list’ test to a discretionary trust. Necessary to do so as if the trustees failed to execute the trust, the court would be left to do so – in which case it would order an equal distribution in which every beneficiary shared.

- McPhail v Doulton: - HL rejected ‘fixed list’ test for discretionary trusts, favouring the ‘is or is not’ test (lower threshold than ‘fixed list’). - Wilberforce rejected the idea in IRC that the court could only order equal distribution if the trustees failed to execute the trust – it would be the last thing the settlor intended. - So, the whole basis for applying the fixed list test for discretionary trusts was gone.

Went to the High Court to determine whether this test was satisfied by the trust in question, and went up to the CoA: - Re Baden (No 2): Majority decided that evidential certainty is not required in the case of discretionary trusts (but conceptual certainty is). - Held: the class was conceptually certain.

Problems of conceptual uncertainty Does trust deed makes provision for resolving the uncertainty by, e.g., reference to a 3rd party?

- Re Tuck’s Settlement Trusts: Concerned a gift which was conditional upon the recipient being of the Jewish faith + married to an “approved wife” (definition + criteria to be met). - Settlement provided that in case of dispute the decision of the Chief Rabbi was to be conclusive. - Held: Conceptual uncertainty was cured by the clause making the Chief Rabbi’s decision conclusive.

- Re Barlow’s Will Trusts: Testatrix directed her executors that any relatives/friends who wished to purchase any of her remaining paintings should be allowed to do so at a reduced price. - ‘Friends’ = conceptually uncertain? - But, gift was construed as a number of separate options exercisable by any person who answered the description ‘friend’. - Impossible to say which test for friendship was intended + there might be persons who could prove that on any test they answered the description ‘friend’. - Held: No legal reason why such persons should not exercise the option. So, conceptual certainty can be cured by construing the direction as a series of individual gifts. The ‘Complete List’ Test + Unascertainable Beneficiaries -Ascertainability = whether a particular beneficiary can/cannot be found. -In the case of a beneficiary who cannot be found, the trustees can apply to the court for directions or pay that share into court (+ court holds it for the beneficiary). -If it is not known whether the beneficiary is still alive, the trustees can apply to the court for a Benjamin order.

- Re Benjamin: Mr B left his residuary estate to his 12 children. One of them, Philip, had disappeared a year before Mr B’s death. - Held: P must be presumed to be dead + in the absence of proof that he had survived, the Court gave the trustees liberty to distribute his share on the footing that he had predeceased his father. This authorised the trustees to distribute the estate between the 11 remaining children.

A Benjamin Order protects the trustees from an action for breach of trust if it subsequently turns out that the unascertained beneficiary is still alive. The beneficiary will be able to trace his share of the fund into the hands of those who received it.

The effects of lack of certainty - If settlor has attempted to declare himself trustee, he remains absolute owner of the property. - If the settlor has transferred property to a 3rd party to hold on trust, the equitable title will revert to the settlor (or his estate if he is dead) by means of a resulting trust.

Administrative unworkability - McPhail v Doulton: where the meaning of words is clear but the definition of the beneficiaries is so wide that the trust is administratively unworkable. I.e. ‘all the residents of Greater London’. - R v District Auditor ex p West Yorkshire Metropolitan CC: Attempt to create a discretionary trust in favour of the ‘inhabitants of the County of West Yorkshire’. o 2.5 million potential beneficiaries – incapable of forming anything like a class, so administratively unworkable + held void.

Public Policy Limitations - Re Manisty’s Settlement: Templeman J: A power to benefit ‘residents of Greater London’ is capricious as the terms of the power negative any sensible intention on the part of the settlor. - For a sensible intention…He would not have required the trustees to consider only an accidental conglomeration of persons who have no discernible link with the settlor or with any institution.

Capriciousness is not applicable to general or hybrid powers. - Re Hay’s Settlement Trust: A power in favour of ‘the residents of Greater London’ would not be capricious if the donor were the former chairman of the Greater London Council. o There would be a ‘discernible link with the settlor’.

Also applies to discretionary trusts: - ex parte West Yorkshire Metropolitan CC: Discretionary trust in favour of the residents of West Yorkshire was held not to be capricious (presumably local authority had every reason for wishing to benefit these residents). Violations of public policy - Conditions against alienation are void: Re Brown - Conditions restricting marriage (the freedom to marry) are void: Low v Peers - BUT, conditions restraining marriage to a particular individual or class of persons are valid: Duggan v Kelly - Conditions encouraging divorce or separation are void: Re Johnsons’ Will Trusts - Conditions which discriminate on grounds of race, religion and sex have no application to private trusts (Race Relations Act 1976; Sex Discrimination Act 1975) - With regard to religion, it depends on context: o Blathwayt v Baron Cawley: ‘to say that any condition…is void seems…too wide a rule’.

SECRET AND HALF SECRET TRUSTS - The Wills Act 1837, s9 (amended by the Administration of Justice Act 1837, s17): a will must be in writing, signed by the testator in the presence of 2 or more witnesses. - If a testator wishes to alter the will he must make a new will in the same form. A will which simply amends an existing will without replacing it = a codicil.

OPTIONS: - Expressly declare trust: “I leave £50,000 on trust to Tim for the benefit of Betty” - Incorporation by reference: “I leave £50,000 to Tim on trust for the purposes which I have mentioned to him in a letter dated 25 February, 2012”. o Tim has the dated letter in his possession, which reveals that the money is to be held on trust for Betty. - Half secret trust: “I leave £50,000 to Tim on trust for the purposes which I have mentioned to him”. - Fully secret trust: “I leave £50,000 to Tim”.

Justification for these trusts (despite non-compliance with the Wills Act) è “Fraud” theory: equity will not allow a statute to be used as a cloak for fraud o McCormick v Grogan è “Outside (dehors) the will” theory: i.e. an express trust during the testator’s lifetime + constituted by the testator’s will o Blackwell v Blackwell

HALF SECRET TRUSTS - Basis = they operate outside the will, changing nothing that is written in it (Megarry VC in Re Snowden)

Taking property under the trust rather than under the will: o Re Young: s15 WA: The chauffeur witnessed the will + he was also a beneficiary under the half secret trust. o S15 WA: Where a person witnesses a will as one of the 2 witnesses necessary, that person cannot benefit under the will. o Re Gardner: Wife left property to her husband for life, with a half secret trust in relation to the remainder. One of the beneficiaries under the half secret trust predeceased her. If the property had been left as a gift in the will, it would have failed.

Equitable maxim: the court will not allow a trust to fail for want of a trustee. o Trustees hold their office + the trust property as joint tenants à when one trustee dies, the property passes to the other trustee(s) by survivorship (recognised by s18(1) Trustees Act 1925). o Where a sole trustee dies, the trust property devolves on his personal representatives who can choose new trustees under s36 (recognised by s18(2)).

Communication must take place before or at the same time as the will is executed - Blackwell v Blackwell: The testator wished to provide for a lady + her illegitimate son. He left £12,000 to five persons upon trust “for the purposes indicated by me to them”. - Lord Summer: "[a] testator cannot reserve a power of making future unwitnessed dispositions by merely naming a trustee + leaving the purposes of the trust to be supplied afterwards".

- Re Keen: “as may be notified” - Re Bateman’s WT: “as shall be stated”

COMMUNICATION can be done orally or in writing - Can be done in a sealed letter provided the recipient knows that it contains the terms of the trust (Re Keen).

- Does a half secret trust of LAND need to be in writing to comply with LPA 1925 s53(1)(b)? o Express trusts: no need to be in writing o Constructive trusts: s53((2) LPA 1925, no need.

- The contents of the communication must not conflict with the terms of the will o If the will refers to past communication, the court will not accept evidence of communication after the will has been made (or vice-versa). Re Keen. o If the will refers to a recipient as a trustee, it may not be possible to bring in evidence that he was intended to take a benefit as well. o Re Rees’ WT: Testator left his residue “unto my trustees absolutely…knowing my wishes…” Trustees tried to argue that testator intended them to have the surplus after certain purposes were carried out.

SECRET TRUSTS Requirements?

- Ottoway v Norman: Essential elements which must be proved: o The INTENTION of the testator to subject the primary donee (trustee) to an obligation in favour of the secondary donee (beneficiary) o COMMUNICATION of that intention to the primary donee o The ACCEPTANCE of that obligation by the primary donee either expressly or by ACQUIESCENCE - There must also be transfer of the property by will to the primary donee.

The standard of proof required (in the absence of fraud) = balance of probabilities.

COMMUNICATION – same rules as for half secret trusts Fully secret trust of land – same rules as for half secret trusts

- Ottaway v Norman: Testator left his house to his housekeeper on the understanding that, when she died, she would leave the house to the testator’s son. - She subsequently fell out with the son + changed her will so that the house would pass to a neighbour.

Communication before death: - Wallgrave v Tebbs: T left property to named friends. He never told his friends about his wishes. Evidence emerged that he had wanted his property to be used for certain charitable purposes.

Contents of the communication - T must intend to impose a legal rather than moral obligation: Re Snowden - The communication must state the terms of the trust + not simply that the recipient should act as trustee: - Re Boyes: Solicitor agreed to act as trustee. But, a letter stating the terms of the trust, including the name of the beneficiary, was not discovered until after the testatrix’s death.

- The intended trustee must know what property is impressed with a trust. - The testator must inform the trustees of any later additions. - Re Colin Cooper: Testator established half secret trust in relation to £5,000. By a codicil, he added a further £10,000 on the same terms but failed to inform the trustees of this.

Acceptance – may be informal; acquiescence will suffice - Moss v Cooper: “acceptance either by words of consent or by silence”

Death of a trustee - Right of survivorship for ordinary trusts (same as half-secret trusts). - BUT, it has been suggested obiter that, if the trustee of a fully secret trust dies before the testator, the trust fails (Re Maddock).

Disclaimer? - Someone who is appointed trustee can refuse the trusteeship provided he has not already indicated his acceptance. - If necessary, the court may appoint trustees under s41 TA 1925.

The Beneficiary Principle + Purpose Trusts

Purpose Trusts – created for a purpose 3 reasons why a purpose trust may fail: 1. There must be someone who can enforce it so that the court can control it (the beneficiary principle) 2. It must comply with the rules against perpetuities (it must not be intended to go on for ever and ever) 3. It must be sufficiently certain

THE BENEFICIARY PRINCIPLE Morice v Bishop of Durham: “Every trust must have a definite object”. -Bequest to the Bishop upon trust for “such objects of benevolence and liberality as the Bishop of Durham in his own discretion shall most approve of” -NEED an identifiable beneficiary!

àFor a trust to be valid, it must be for the benefit of people (not just for carrying out a purpose). àRationale: without a legal person who has an interest in seeing that the trust is carried out properly, it’ll be impossible to ensure proper administration of the trust.

Leahy v AG for New South Wales: “A gift can be made to persons (including a corporation) but it cannot be made to a purpose or to an object – unless it is charitable. For a purpose or object cannot sue, but, if it be charitable, the A-G can sue to enforce it”. -Property = a house with 20 rooms, left for an order or nuns which had many members, spread throughout the world.

Re Astor’s Settlement Trusts -Trust failed as it violated the beneficiary principle. -Trust = income was to be applied for the ‘maintenance…of good understanding…between nations’, ‘the preservation of the independence and integrity of newspapers,’…etc. -Found to be non-charitable purposes

Exceptions to the beneficiary principle v Charitable purpose trusts = trusts for ‘public purposes’ (as opposed to trusts for ‘private purposes’) v Trusts of imperfect obligation (‘anomalous exceptions’ – ‘concessions to human weakness or sentiment’ – there is no principled basis for upholding these trusts)

THE 4 TRUSTS OF IMPERFECT OBLIGATION 1. The Erection/Maintenance of Tombs, Graves or Monuments

Trimmer v Danby: Testator bequeathed £1,000 for the erection of a monument to his memory in St Paul’s Cathedral. Upheld as valid. Musset v Bingle: Testator bequeathed £300 to erect a monument to his first wife’s husband + £200 to provide for its upkeep. Held: £300 was upheld as a valid trust. However, the £200 for the upkeep could not be upheld as a valid trust as it violated the perpetuity period.

Pirbright v Salwey: Testator bequeathed £800 for the upkeep of a burial enclosure of his child in a churchyard ‘for as long as the law permitted’. Held: Trust was valid for a period of 21yrs from the testator’s death.

2. The Care of Specific Animals - Trusts for the maintenance + care of specific animals/specific groups of animals - (Trusts for the care of animals generally are capable of being charitable)

Pettingal v Pettingal: A trust for the upkeep of the testator’s favourite black mare was upheld.

Mitford v Reynolds: Testator bequeathed the remainder of his property to charity ‘after deducting the annual amount that will be requisite to defray the keep of my horses’.

Re Dean: A testator gave his horses to his trustees + charged his freehold estates with an annual payment of £750 for a period of 50yrs for their upkeep, should they live that long. - Trust was upheld, relying on Mitford + the monuments cases. - Problematic = North J drew an analogy with a charitable trust for animals – misleading. - Case generally considered to be incorrectly decided as trust was held to be valid for 50yrs + so offends the rule against perpetuities.

Perpetuity rule = non-charitable trust must not last beyond the period of ‘lives in being’ plus 21 years. Correct approach to this rule was laid down in:

Re Kelly: Testator left £100 ‘to his executors + trustees for the purpose of expending £4 on the support of each of my dogs per year’ Held: There was a valid trust for 21yrs succeeding the death of the testator, providing any of the dogs lives so long (not a trust for the life of the dogs). -Meredith J dismissed idea that ‘measuring life’ could be that of an animal (possible basis for the outcome of Dean) -But, cases since have taken judicial notice of an animal’s life expectancy, e.g. Re Haines

3. The Saying of the Masses for the Dead - Until early 20th century, trusts for the saying of the masses for private individuals = void on the basis that they were for ‘superstitious uses’. This changed in:

Bourne v Keane: Such trusts were capable of being valid. -But, HL did not consider whether they were capable of being charitable (‘advancement of religion’?)

Re Hetherington: These could amount to a valid trust for a charitable purpose, provided the masses were celebrated in public. Browne-Wilkinson suggested: a trust for the saying of masses in private COULD be valid (as anomalous exception purpose trusts?)

4. Promotion and Furtherance of Fox Hunting

Re Thompson: Testator left money to his friend L to be applied by him however he think fit in his absolute discretion towards the promotion + furtherance of fox hunting. This was upheld. Clauson J made a Pettingal Order. [Despite ban – Hunting Act 2004, Sch1 exempts hunting from the statutory prohibition in defined circumstances (but these area closed class that will not be extended)]

Re Endacott: Lords stressed that scope of the anomalous exceptions cases ought not be extended. Harman LJ: “These cases stand by themselves + ought not to be increased in number, nor followed, except where the one is exactly like another”.

Invalid purpose trust examples: Re Astor’s ST Re Shaw: George Bernard Shaw left money on trust for 21yrs into research into a 40 letter alphabet to replace our present alphabet + for the translation of a play into the new alphabet. Re Endacott: T left £2,000 to the North Tawton Devon Parish Council for the purpose of providing some “useful memorial to myself”.

- As they are trusts of ‘imperfect obligation’, the trustees cannot be made to apply the fund for the stipulated purpose. - The court can prevent T’s from misapplying the trust property by making a Pettingal Order, which requires T’s to give an undertaking to carry out the purpose + interest parties (persons who would take property if the trust failed/would be entitled to any surplus after the purpose had been carried out) are given leave to apply to the court if T’s apply the property outside of the stipulated purpose. - These types of trusts remain subject to the rules against capriciousness + perpetuity.

PURPOSE trusts framed as trusts for PEOPLE - Exception may apply if trust fund is to be applied for a purpose, but that purpose benefits ascertainable individuals.

A QUESTION OF CONSTRUCTION: Re Osoba: T left his residue: “for the training of my daughter up to University grade”. When this education was complete, the other claimed the remaining money. Held: T’s intention had been to make an absolute gift to his daughter + the reference to education was merely expression of motive. Daughter was entitled to the whole of the property.

Re Bowes: Trust to plant trees on a settled estate. The money belonged to the estate owners absolutely.

DIRECT/INDIRECT BENEFIT TO INDIVIDUALS? Re Denley: Land conveyed to T’s for 21yrs after death of X, to be ‘maintained + used for the purpose of a recreation or sports ground primarily for the benefit of the employees of the company’. Was the purpose of the trust framed as trust for people? Held: Employees ascertained + sufficiently tangible benefit. Goftt J: Beneficiary principle…is confined to purpose/object trusts which are abstract or impersonal”.

Re Lipinski: To be valid, such trusts must also not offend the rule against inalienability.

PERPETUITIES à Two Rules: 1) Remoteness of Vesting – future trust interests must be certain to vest within a defined period of time -Perpetuities and Accumulations Act 2009: 125 years max duration – only applies to charities – common law rules for purpose trusts -Act eradicates previous uncertainty surrounding the 1964 Act.

2) Rule against inalienability -Inalienable = cannot be bought, sold or transferred from one individual to another, e.g. person rights to life and liberty, various types of property – rivers, highways (Re Grants WT)

CAPRICIOUSNESS Brown v Burdett: Trust for blocking up windows + keeping the house empty for 20yrs, before being transferred to next of kin. Held: There was no purpose for this – was capricious – invalid.

CERTAINTY - Morice v Bishop of Durham (“benevolence”, “liberality”) - Re Astor’s ST (“integrity of the press”) - Re Endacott (“useful” – memorial)

Unincorporated Associations – persons & companies can be done of a gift - Cannot hold property as they have no legal identity – just a group of people - Any gift for them must be interpreted as a gift to the members of the association - Subject to perpetuity rule - 3 constructions in Neville Estates v Madden: o Could be a gift to all members (present or future?) o Could be a trust (usually fail as private purpose trusts but not necessarily – framed as trusts for people?) o Governed by a contract – ownership of property is on a contractual basis?

- Horley Town Football Club: Land given on trust for the primary purpose of securing a permanent ground for the club. Club rules allowed members to call general meeting, pass resolution to dissolve club & divide assets. - Held = Beneficiaries = club members, + no issues relating to inalienability - Re Recher: Brightman J: “It would astonish a layman to be told that there was difficulty giving a legacy to an unincorporated non-charitable society…” Charitable Purpose Trusts - 160,000 charities registered with the Charity Commission. - They are VALID purpose trusts. - Two privileges:

Privileges as to validity - Not defeated by beneficiary principle – A-G. - Court is more relaxed with ‘certainty of objects’ – a gift ‘for charity’ will be valid. - If exact charitable purpose intended by donor is uncertain, courts + Charity Commissioners draw up a scheme to apply the funds. - Exempt from the rule against perpetual duration. - Policy of the law = to encourage gifts to charities – courts adopt a benevolent approach when determining questions of charitable status.

Tax privileges - Charities are exempt from income tax on investments + corporation tax. - Gifts to charities are exempt from inheritance tax. - Gift Aid allows charities to reclaim the basic rate of tax on gifts made to them. - Charities are exempt from capital gains tax, stamp duty + National Insurance Surcharge.

STATUTORY FRAMEWORK Ø Charities Act 2011: consolidates various statutory provisions in the area of charities, repealing The Recreational Charities Act 1958 + The Charities Act 1993.

Regulation - The Attorney-General enforces charitable trusts on behalf of the public in the name of the Crown. - Charities are regulated by the Charity Commission (CC) ensuring that the public can have confidence in giving to charitable causes.

Historical development Ø Gilmour v Coats: Incremental, haphazard development of charity. Ø Charitable Uses Act 1601: ‘relief of aged impotent and poor people… sick and maimed soldiers…marriages of poor maidens…relief or redemption of prisoners’. Ø Commissioners of Income Tax v Pemsel [1891]: The ‘Four Heads of Pemsel’: o Trusts for the relief of poverty; o Trusts for the advancement of education; o Trusts for the advancement of religion; and o Trusts for other purposes beneficial to the community, not falling under any of the preceding heads.

(Pre-2006, public benefit was presumed for the first 3 heads, but had to be positively demonstrated for the 4th).

The Charities Act 2006 v Continued validity of charitable purposes under pre-2006 case law. v Extends categories of charitable purposes from 4 to 13. v Removes presumption of public benefit. v Requires CC to issue guidance about the public benefit requirement.

The Charities Act 2011 v Does not add to/alter the exiting law – built upon CA 2006. v 3 vital ingredients of a charitable trust: o For charitable purpose; o For the public benefit; o Wholly and exclusively charitable.

PUBLIC BENEFIT REQUIREMENT - No longer presumed under any head (s4(2)) - No statutory definition – must rely on previous case law + CC guidance. - N.B. successful challenge to guidance: Independent School Council v CC… - All charities must demonstrate that they meet PB requirement based on: o Principle 1: There must be an identifiable benefit/s o Principle 2: Benefit must be to the public/ a section of the public

PRINCIPLE 1: Identifiable benefit - Benefit must be clear: o Re Shaw – 40 letter alphabet o Re Hummeltenberg – a spiritual organisation for the teaching of spiritual mediums who could speak with the dead

- Benefit must relate to the charity’s aims: o Charity Commission, Charities and Public Benefit (2008) Section E3: § A charity wishing to preserve a historical building may provide an ice rink in its courtyard to attract people to appreciate the building. § BUT, benefit to people’s health from skating is not included in the public benefit analysis –not a sufficient connection with the preservation of the building. o IRC v Oldham Training and Enterprise Council: OTEC was set up to promote commerce for the benefit of the public in Oldham – not charitable. Council lacked a public entity.

- Benefits must be balanced against any detriment/harm: o National Anti-Vivisection Society v IRC: Purpose = to change the law regarding vivisection. Court cannot judge whether a change in the law will be for the public benefit. Potential detriment may outweigh benefit. o Held: Could not be a charity. o But, court stressed: political activity which is ancillary to the main (charitable) objects will not prevent an organisation from being charitable.

PRINCIPLE 2: Benefit must be to the public, or section of the public (s2(1)(b) and s4 CA 2011

- S4(2): Benefit will not be presumed in relation to any purpose. - S4(3): Public benefit has the same meaning as the term had under the previous law.

- Benefit to the public: o Gilmour v Coats – Gift given to small order of nuns. Cloistered community + no contact with outside world. Held: Not charitable. o COMPARE: Re Hetherington (Deceased): Saying of masses for the soul of T – found to be charitable – masses being said in public.

- Beneficiaries must be appropriate to the aim.

- Opportunity to benefit must not be unreasonably restricted by: Geographical restrictions: o Restricting to a particular geographical area is OK, but should not be too small (e.g. a street, or a few named houses). o IRC v Baddeley: Trust promoting religious, social & physical training for residents of West Ham, who were/were likely to become Methodists. Held: By further limiting to Methodists, it was creating a ‘class within a class’ – thus not a sufficient section of public to satisfy public benefit.

Or Ability to pay fees? o Independent Schools Council v CC for E+W: Private School – people in poverty must not be excluded from the opportunity to benefit? - Held: To be charitable, school must demonstrate a wider public benefit, beyond that to their own pupils that it more than a ‘token benefit’ – i.e. scholarships, bursaries, provision for local state school students to access facilities.

Any private benefits must be ‘incidental’: o Re Coxen: The provision for an annual dinner for the charity trustees did not undermine the body’s charitable status.

o Benefits are incidental where they: o Directly contribute towards achieving the charity’s aims; and/or o Are a necessary result or by-product of carrying out those aims

o Scottish Burial Reform and Cremation Society Ltd v Glasgow Corporation: There is no objection in principle to the charging of fees for services provided by charities.

Restrictions based on personal characteristics? - The beneficiaries must NOT be defined by a personal connection (such as a family relationship or common employer) o Oppenheim v Tobacco Securities Trust Co Ltd: Trust was established by a large shareholder for the education of children of employees and former employees of that company. o Held: Trust was not charitable as this group was not a section of the public but a private class. o The possible beneficiaries were not numerically negligible. o The quality which distinguishes them from other members of the community, so that they form by themselves a section of it, must be a quality which does not depend on their relationship to a particular individual (personal nexus test).

Problems with political objectives – not charitable Political purposes aim to: - Further interests of a particular political party - Procure changes in the laws of UK/foreign country - Procure reversal of govt. policy/decisions in UK/abroad

McGovern v AG: Amnesty International sought to seek charitable status for part of its organisation – failed due to inclusion of political objectives: - Attempting to secure the release of prisoners of conscience; - Procuring the abolition of torture or inhuman or degrading treatment or punishment. Held: An organisation will not be charitable if its objects are to achieve a change in the law or necessitate a change in the law – Amnesty’s main purposes were political. - This does not prohibit all campaigning activities by Charities.

BUT: Human Dignity Trust v Charity Commissioner (2014) - Applying to be recognised as a charity. - Focuses on human rights issues on criminalisation of homosexuality. - Many argued – political, so not a charity. - BUT ON APPEAL: Held that HDT was concerned with the promotion of HR’s by establishing whether particular laws were valid – outside McGovern category. - HDT was engaged in upholding the law, not changing it. - HDT’s purposes were for public benefit – seeking to interpret, clarify + protect superior constitutional rights.

CHARITIES ACT 2011 Ø S1(1)(a): In order to be a charitable trust the trust must be ‘established for charitable purposes only’. Ø The trust must be exclusively charitable. Ø However, where the non-charitable purposes are subsidiary/ancillary to the main charitable purpose, the trust will still be charitable (Funnell v Stewart).

S3(1): “Charitable purpose”: A purpose which – (a) falls within s3(1) (b) is for the public benefit.

S3(1) Lists the purposes which are charitable: a) The prevention or relief of poverty; b) The advancement of education; c) The advancement of religion; d) The advancement of health or the saving of lives; e) The advancement of citizenship or community development; f) The advancement of the arts, culture, heritage or science; g) The advancement of amateur sport; h) The advancement of human rights, conflict resolution or reconciliation or the promotion of religious or racial harmony or equality and diversity; i) The advancement of environmental protection or improvement; j) The relief of those in need by reason of youth, age, ill-health, disability, financial hardship or other disadvantage; k) The advancement of animal welfare; l) The promotion of efficiency of the armed forces of the Crown, or of the efficiency of the police, fire and rescue services or ambulance services; m) Any other purposes. o [Lord McNaghten’s ‘catch all’ category – purposes recognised as charitable by existing charity laws and developments by analogy]

A) The Prevention or Relief of Poverty - Poverty is not defined in the CA – need to look at case law. - Poverty need not mean ‘destitution’.

-Re Coulthurst: Poverty may include temporary hardship. - “For the benefit of the widows and orphaned children of deceased officers and ex- officers of the bank”. -Re Segelman: Poverty – about 20 relatives – upheld.

-Re Sanders’ Will Trust: Money to provide dwellings for ‘the working classes and their families’. HELD: Not charitable – ‘working classes’ did not necessarily indicate poverty. è BUT: Re Niyazi’s Will Trust: Trust for the construction of a hostel for ‘working men’ – Held: charitable for the relief of poverty.

-Re Gwyon: T’s money directed to provision of clothing for boys of 10-15yrs in a particular area. Excluded: boys supported by any charitable institution, + boys whose parents were in receipt of parochial relief. Held: To be charitable, the gift must be in terms that exclude those who are not poor – this failed here.

-The personal nexus test has no application to trusts for the relief of poverty: -Dingle v Turner: D had set up a trust to pay pensions to the ‘poor employees’ of his company.

CC guidance 2008: ‘people in poverty’ = people who lack something of a necessity, which the majority of the population would regard as necessary for a modest, but adequate, standard of living. - All poor people suffer from ‘Financial hardship’. Those in financial hardship who are not poor – relieving this hardship may be charitable. - People may qualify for assistance from a poverty charity whether or not they are eligible for state benefits.

B) The Advancement of Education - Wide view of ‘education’ – beyond teaching in schools + colleges.

IRC v McMullen: Trust to encourage playing sports in school + universities = valid. Case law prior to CA 2006 interpreted this head as covering research, sport + culture. - 3(1)(f) + 3(1)(g) – these no longer need to be dealt with under this head.

àTEACHING – this would cover: Ø AG v Margaret and Regius Professors in Cambridge: the founding of professional chairs. Ø AG v Lady Downing: the endowment of schools and colleges. o Although trusts endowing fee paying schools will only be charitable if the school is non-profit making (Customs + Excise Commissioner v Bell Concord Educational Trust). Ø Case of Christ’s College Cambridge: the payment of salaries of teachers + administrative staff. Ø AG v Ross: purposes ancillary to teaching institutions (Student Union at a Polytechnic was held to be charitable because it furthered the educational function of teaching even though it was ancillary to it).

àVOCATIONAL/INDUSTRIAL TRAINING + PROFESSIONAL BODIES: Ø Re Koettgen’s Will Trusts: “For the promotion and furtherance of commercial education” = Valid. Ø Construction Industry Training Board v AG: Functions was to make provision for the training of persons employed/to be employed in the construction industry. Held: board was charitable. Ø IRC v White: Trust for educational purposes where testator made gift to the following societies…but left names blank. Held: T’s can apply to CC for scheme prescribing use of money.

àRESEARCH Ø Re Shaw: Not charitable – merely the increase of knowledge not enough – must be combined with teaching or education. [Narrow view] Ø BUT: Re Hopkin’s Will Trust: Must be identifiable benefit. Lots of money left to Bacon society – researching that Bacon wrote Shakespeare not Shakespeare himself! Held: Charitable.

N.B. No longer necessary to argue that scientific/medical research is in this category – comes under s3(1)(d) or 3(1)(f).

C) The Advancement of Religion - Traditionally, ‘belief in a divine being’ = necessary. - Lord Parker: belief in a single God was required! – Bowman v Secular Society. - This ruled out Hinduism, Buddhism, and belief systems such as freemasonry (Free Mason v Holborn BC). - Re South Place Ethical Society: study + dissemination of ethical principles – not permitted.

BUT, CA 2006 + CA 2011: Multi-deity faiths + non-deity faiths now qualify as religions. S3(2)(a) gives a definition of “religion”.

CHARITY COMMISSION GUIDANCE 2008: “Advancement of religion for public benefit” - Belief in a god/supreme being = a religion - Druidism (promoting harmony + worship of nature) = a religion - Agnostics (impossible to know) = not religion - Scientology = not a religion

Church of Scientology case: “The core practices of Scientology, being auditing and training, do not constitute worship as they do not display the essential characteristic of reverence or veneration for a supreme being”.

D) ADVANCEMENT OF HEALTH OR THE SAVING OF LIVES - previously fell under ‘other purposes’ category. - s3(2)(b): “includes the prevention or relief of sickness, disease or human suffering”.

Trusts for the provision of healthcare (e.g. a hospital) are clearly charitable provided the hospital is not commercially run to generate profits for individuals: § Re Resch’s Will Trusts: If a charity charges generally for the services which it provides, this is not an objection to charitable status. § Would not be charitable if it excluded the poor – by limiting admission to the rich.

§ Funnel v Stewart: The promotion of alternative/complementary therapies may be charitable.

Saving of lives? - Re Wokingham Fire Brigade Trusts: Provision of a voluntary fire brigade was held to be charitable. - Re David: Royal National Lifeboat Institution was held to be charitable.

CC GUIDANCE (Commentary on the Descriptions of Charitable Purposes – 2009) è Medical research charities. è Charities that provide facilities for medical practitioners, e.g. homes for nurses. è Charities that ensure the proper standards of medical practice. è Charities that promote activities that have a proven beneficial effect on health. è Charities that provide rescue services – lifeboats, mountain rescue, etc. è Charities set up to assist victims of natural disasters/war. è Provision of life saving or self-defence classes E) ADVANCEMENT OF CITIZENSHIP/COMMUNITY DEVELOPMENT - Covers broad range directed towards support for social + community infrastructure which is focused on the community rather than the individual.

S3(2)(c): it includes: o Rural or urban regeneration; and o The promotion of civic responsibility, volunteering…etc.

CC guidance: - Good citizenship schemes, Scout and Guide groups, etc. - Promotion of the voluntary sector - Promotion of community capacity building - Charities concerned with social investment

F) ADVANCEMENT OF THE ARTS, CULTURE, HERITAGE OR SCIENCE - Pre-2006, would have come under ‘advancement of education’:

Royal Choir Society v IRC: Purpose was to form + maintain a choir in order to promote the practice + performance of choral works. Held: charitable (for advancement of education as pre 2006).

Re Delius: A trust to promote music of the composer Delius = charitable.

CC Commentary: - Art galleries, art festivals + art councils. - Charities promoting drama, ballet, music, literature, painting, cinema – e.g. theatres, cinemas, orchestras, etc. - Local or national history/archaeological societies - Preserving monuments - Preserving historical traditions – carnivals, country dancing - Scientific research projects

G) ADVANCEMENT OF AMATEUR SPORT - Traditionally, not recognised as charitable: - Re Nottage: Held: establishing a prize for ocean yacht racing was not charitable. - There had to be some other benefit? Other than health benefit + sport itself…

CC accepted charitable status of Amateur Sports Clubs in 2002. - S3(2)(d): ‘sport or games which promote health by involving physical or mental skill or exertion’. - IRC v McMullen

¡ Re Dupree’s Deed Trusts: Trust validated for annual chess tournament for young men under 21yrs. But warned of the slippery slope – each case must be dealt with in turn. ¡ English Bridge Union Ltd v Revenue and Customs Commissioners: recognised as charitable. H) ADVANCEMENT OF HR’S, CONFLICT RESOLUTION, etc. - Problem = often involves advocating a change in the law? - McGovern v AG - But see: Human Dignity Trust

Promotion of equality between men+ women has already been held charitable: Halpin v Steear

I) ADVANCEMENT OF ENVIRONMENTAL PROTECTION OR IMPROVEMENT - National Trust was held to be charitable: Re Verrall

J) RELIEF OF THOSE IN NEED…. - Joseph Rowntree Memorial Trust Housing Association Ltd v AG: Housing Association building homes for sale on long leases to the elderly = charitable. - Commentary gives examples of purposes falling within this description.

K) ADVANCEMENT OF ANIMAL WELFARE - Re Wedgwood: Money left on secret trust for welfare of animals (in particular to further the movement for the humane slaughtering of animals. Held to be charitable.

-Tatham v Drummond: RSPCA held to be charitable.

L) PROMOTION OF EFFICIENCY OF ARMED FORCES… - Commentary gives guidance

M) ANY OTHER ANALOGOUS PURPOSE… - allows the law to evolve in changing social + economic circumstances.

EXCLUSIVELY CHARITABLE? S1(1)(a)

Chichester Diocesan Fund and Board of Finance Incorporated v Simpson: Executors directed to “apply the residue for such charitable institution/s or other charitable or benevolent objects in England…as may see fit”. Held: “charitable” and “benevolent” do not mean the same thing. Too vague – fatal as it permitted the trustees to select benevolent purposes which might not be charitable. Gift failed as it was not exclusively charitable.

Benign construction? Lord Hailsham in IRC v McMullen: “where it can be claimed that there is an ambiguity, a benignant construction should be give if possible”.

Non-charitable purpose read as merely incidental: - Re Coxen

Severance - This only applies exceptionally, where the interests are clearly apportioned. - Salusbury v Denton: money was left for the founding of a charity school + for the testator’s relatives. - No indication was given on division of the fund, so court ordered equal division. - But, often such a division is impractical + clearly not the donor’s intention.

CY-PRES DOCTRINE Part 6, Charities Act 2011: where the purposes of charitable trust become impractical or impossible, the trust property may be applied to other charitable purposes. - NOTE: only applies to a purpose that is already charitable.

Cases of initial failure: where charitable purpose fails before the trust commences - Need to show general charitable intent of settlor. - Biscoe v Jackson: Money left on trust to establish soup kitchen + cottage hospital in Shoreditch but suffered initial failure. o Trust fund applied cy-pres for similar purpose benefiting poor in Shoreditch.

Cases of subsequent failure: fails after trust has been established. - No need to show general charitable intent of settlor. - Re Slevin: Money to an orphanage that had ceased to operate before the money came into its hands.

Altering the original charitable purpose - Historically, cy-pres applied only where impossible/impracticable to carry out the terms of the trust. - Requirement has been gradually relaxed by statute. - Relevant provision: CA 2011, S62.

Thought on charities… OSCAR WILDE – è Under socialism, no need for charity – each member will share in the ‘general prosperity and happiness of society’ è Most poor people are not grateful for charity -

Trusts of the Family Home

• Family home trusts have developed differently to those applied in a commercial context – o Consider not just the property itself (purchasing behaviour) but also the individual’s relationship with each other (relationship dynamics)

Changing social patterns

• Victorian period - family home was patriarchal, cohabitation rare. • Late 20th & 21st century – revolution in society’s rules, now the patriarchal unit has been replaced by notions of equality & partnership. • Historically home general trusts were applicable to both married & unmarried couples (as stated in Pettitt v Pettitt), but naturally married couples had more favour with the legislature & the judiciary. • Matrimonial Proceedings & Property Act 1970 – pulled married couples out of trust law & placed into flexible discretionary principles of family law. • Cohabitation is increasing – o Perception of heterosexual cohabitation has undergone radical transformation. § 1950 - Asquith LJ in Gamman – ‘living in sin’ § 1976 - Bridge LJ in Dyson Holdings Ltd – ‘The social stigma that once attached to them has almost, if not entirely, disappeared’

Contribution dynamics in a family

• Historically family homes held as leasehold. • With expansion of building societies & government incentives (e.g. ‘right to buy’ scheme), owner occupation has increased - with people able to buy their home outright. • Houses owed solely by male bread winner shifted, with changing views about role of women o Particularly with regard to their entry into the labour market o E.g. Equal Pay Act 1970, Sex Discrimination Act 1975 • Women became able to make financial contributions to the acquisition of property – increasing their claim for an interest in the property. • Therefore, contributions & conduct have become fundamental to trusts of the family home disputes – o Direct Financial Contributions – always valued by the law § E.g. contribution to purchase price or making a mortgage repayment o Indirect Financial Contribution – Partially valued. § The facilitation of direct financial contribution – e.g. where one pays for mortgage & other pays for bills/food. o Non-financial contribution & domestic responsibilities – Rarely valued by the law. § E.g. working in the home & child care.

Problems

1) Exposure to risk & widespread failure to appreciate legal position

• Cohabitants are often ignorant of the law. o Don’t take the legal steps to protect themselves that a commercial company would. • In 2001, 67% cohabitants believed mere act of cohabitation generated ownership rights. • Burns v Burns – o Valerie Burns lived with D, unmarried, for 19 years. o House in name of D & Valerie made no financial contributions – instead performed domestic duties o No right to a beneficial entitlement to family home. • Many non-married claimants believe themselves to be ‘common law spouses’ – o That by virtue of cohabitating & looking to all intents and purposes like a spouse, that they had acquired proprietary rights.

2) Failure to articulate intentions

• Law fails to note realities of situation – that people in intimate relationship rarely conduct themselves like business partners. • Implies the law needs to take into account – o Relationship factors o All contribution types – not merely financial o Parties’ naivety about home ownership o The fact parties assume legal protection. • Stack v Dowden – HoL intimated the need for change – o Lord Hope – ‘a more practical, down-to-earth, fact-based approach is called for.’ o Not all agreed – Lord Neuberger, dissenting, remained ‘unconvinced’ that a different approach would be justified. Acquisition Hurdle & Quantification Hurdle

Sole ownership cases –

• D sole owner, claimant with no legal title) • Claimant must show that D holds equitable title for them through a trust or via proprietary estoppel. • Claimant must do two things – o Acquisition stage – must acquire an equitable interest by satisfying the requirements of a particular trust o Quantification stage – Must quantify that equitable interest so as to determine how much of that interest they will acquire (half, quarter etc)

Joint ownership cases –

• Claimant is joint legal title owner. • No issue of acquiring an interest – he already has SOME. o Just needs to know how much – Quantification Stage only applies.

1) Express Trusts (the express declaration of trust)

• Method for locating precisely where the equitable ownership lies. • Where property is conveyed to parties jointly at law, they need to choose HOW they want to hold the beneficial ownership. • Three options – o Beneficial Joint Tenancy – property held as joint tenants, with right of survivorship. o Tenancy in Common in Equal Shares – Hold equally as equitable tenants, no survivorship. o Tenancy in Common in Unequal shares – Hold unequally as equitable tenants (e.g. 60/40) with no survivorship. • Where property is conveyed to one party, they may choose to hold property on trust for their partner in equity, using one of above options & making express declaration of trust in that parties’ favour. • Formalities for the express trust – o S.53(1)(b) Law of Property Act 1925 – Must be proved by writing signed by person who is able to declare such a trust. a) Advantages of Express trusts

• Explicit & conclusive – isolates where the beneficial interest lies. o Slade LJ in Goodman v Gallant ‘the document speaks for itself’ o Exception – where fraud or mistake is shown – Wilson v Wilson • Provides legal certainty – as the parties themselves came to that arrangement. o Courts need not look any further. • Cannot be altered unless through subsequent agreement or through proprietary estoppel (Clark v Meadus) • Cannot be altered by implied trusts – Pankhania b) Disadvantages

• Written evidence needed – issue of how intimate relationship conduct affairs. • Conveyancing problem – raised by Hale in Stack v Dowden – o The current TR1 conveyancing form is still legally operative, despite the box regarding holding the beneficial interest not being filled in. • Parties are often misinformed.

• RECAP – when executed, they ae highly effective. o But they MUST satisfy the written evidence formality. o Implied trusts are generally more prevalent in practice.

2) [The Presumed Intention] Resulting Trust

• Following Jones v Kernott, it now has a limited role to play in ownership disputes. • If resulting trust is found, it serves to ‘result’ the beneficial ownership back to the person in the proportions that they contributed to the purchase price. • A presumed intention resulting trust arises where property is – o Purchased in the name of another or, o Transferred to another o & No evidence that the transferee was intended to take beneficially – no evidence of gift applying. • Hodgson v Marks – o Old lady took in lodger, grew fond of him. o Transferred legal title of her house to him, to ensure he would be provided for after her death. o Lodger was a rogue & tried to sell house over her head. o Held - Court refused to find express trust – lodger had not expressly & in writing declared he would hold some beneficial title on trust for the lady. o But Court found resulting trust – there was conveyance to lodger, without consideration & no evidence to show lady intended it as a gift. § Thus beneficial ownership ‘resulted’ back to old lady. a) Contributions to trigger resulting trust

• Direct Financial Contribution to purchase price o Pettitt v Pettitt – Mr Pettitt performed renovations increasing value, held as ‘purely ephemeral’ & jobs any husband would be expected to do – § NO direct contribution to purchase price § There needs to be expenditure aimed at the obtaining of propriety rights at time of acquisition o Tinsley v Milligan – house partly purchased with money obtained through jointly owned car – there was direct financial contribution.

• Contributions to Mortgage repayments o Case law somewhat inconsistent & ambiguous o Laskar v Laskar - Where two parties take out joint mortgage & both assume liability in case of one of them defaulting on repayments – there is a direct financial contribution. o Curley v Parkes – Payer was not party to the mortgage & held that any repayment could not amount to a direct financial contribution § i.e. NO assumption of liability from that party as not around at time mortgage was concluded. • Contribution to cost of repairs or renovation – o Limited authority that suggests if renovation was ‘substantial’ it could establish a resulting trust – Drake v Whipp (at first instance only) • Contribution to general household expenses/domestic arrangements – o Will not generate resulting trust. o Burns v Burns – § Mrs Burns, believing herself to be a ‘common law wife’, looked after 2 children & bought various household chattels (e.g. washing machines) § Not entitled to any interest – no direct contribution to purchase price

b) Evaluation

• Criticised – it embodies the ‘property law’ approach aimed at legal certainty & ignorant to non-financial contributions & family dynamics. • Resulting trusts are rigid & formulaic o In terms of quantification – it is simply a matter of you get back what you put in. • As everything focuses at the time of acquisition, mortgage facilitated purchases are inherently problematic.

• THEREFORE judiciary have MARGINALISED the resulting trust – • Stack v Dowden – Baroness Hale ‘the law has indeed moved on in response to changing social and economic conditions’ o Lord Hope – ‘a more practical, down-to-earth, fact-based approach is called for.’ o Lord Neuberger dissenting – applauded the simplicity of the resulting trust. • Courts now favour constructive trust.

Family Home Constructive Trusts

• Introduced early 70s, regarded as a more appropriate device – o Shift from the strict monetary focus of the resulting trust o Represented a more flexible vehicle which ‘in theory’ could arise without a direct financial contribution to the purchase price. • If it would be unconscionable or inequitable for one party to deny another an equitable title, then equity ‘constructs’ a trust in favour of the claimant. • The family home context creates a specific type of constructive trust

The ‘New Model Constructive trust’

• Denning sought to combat social injustice that came through rigid application of property law rules – • In Hussey v Palmer – he introduced the ‘constructive trust of a new model’ o ‘A trust imposed by law whenever justice & good conscience require it’ • But problematic – o Vague & too flexible § Claimants could not be advised by lawyers with certainty. o Challenged the accepted system of proprietary interests & rights o Denning selective in the quotations from the judgments he used to give it pedigree. • Though never overruled, it fell into obscurity due to lack of use & judicial support.

Common Intention Trusts in SOLE Legal title disputes

• SOLE legal title disputes require satisfaction of Acquisition & Quantification stage. o (Joint legal title = just Quantification)

Acquisition stage

• The acquisition requirements – o Common Intention § The parties must share a common intention to share beneficial ownership of the land. § Expressly stated or inferred. o Detrimental Reliance § Claimant significantly altered his position or acted to his detriment on basis of this common intention.

1) Express Common intention

• ‘Any agreement, arrangement or understanding reached’ – Lord Bridge, Lloyd’s Bank v Rosset • Difficult to find – intimate couples tend not to articulate intentions through legal formality • Also difficult to find because of ‘excuse cases’ – o Eves v Eves – § Cohabitants, Janet believed herself to be ‘common law wife’ § Stuart told Janet house was in sole name because she was under 21 so could not own property (False – 18+) – a ploy to avoid joint legal title. § Janet contributed to household dynamics. § Stuart found new partner & bean to seal off rooms. § Express common intention arose here – court able to find common intention that Janet was to have a share in the property – since Janet had been led to believe she would acquire an interest. o In these cases courts motivated towards achieving social justice & have become more diligent in looking for evidence of an ‘agreement, arrangement or understanding’ • However, benchmark now set rather high post-Stack – • James v Thomas – o Mr Thomas legal owner of cottage & operated business o Ms James provided unpaid work & helped business. o She argued there was an ‘agreement, arrangement, understanding’ to share beneficially as Mr Thomas had made assurances improvements ‘would benefit them both’ o HELD no actual agreement so NO express common intention. § ‘Benefitting us both’ was too vague

2) Inferred Common Intention

• By looking at conduct, courts can infer that parties intended the claimant to have a beneficial interest. • Lloyds Bank v Rossett – o Implies direct financial contribution or mortgage repayments will readily allow the court to infer common intention. o Argued this sets too high a hurdle – mirroring the resulting trust by such financial focus. • Le Foe v Le Foe – High Court advocated broader view. o Intimated arrangement whereby one takes on household expenditure to facilitate the other’s mortgage repayments was indirect financial contribution – enabling inferred common intention. • James v Thomas re-endorsed high hurdle. o Ms James argued an inferred common intention existed based on her labour & contributions to the business. o Court rejected this – her work was aimed at the success of the business, not the acquisition of an interest in the property. • Restrictive approach taken in Morris v Morris, endorsing Rossett, stating inferred intention constructive trusts only arise in ‘exceptional circumstances’

3) The Stack Effect on Sole Title cases

• Stack v Dowden applies directly to JOINT legal title cases, but argued it reformulates the law with regards to sole ownership cases also. • Martin Dixon – advocated post-Stack there are not three ways of acquiring common intention constructive trust – o By examining the whole range of the parties conduct in relation to the property’ o Very liberal approach, owing to extensive criticism in Stack of the financial focus used in Rosset. o Lord Hope – ‘a more practical, down-to-earth, fact-based approach is called for’ o However - contrary to modern cases James v Thomas & Morris v Morris which were in line with strict Rosset- therefore unlikely courts will think this way.

4) Detrimental Reliance

• Once common intention has been established, there must be detrimental reliance. • Detrimental reliance – the claimant must reply on the agreement or significantly later their position based on it. • In express common intention cases – o The detrimental reliance generally quite broad – Grant v Grant – § Conduct one would not reasonably have been expected to embark on unless they were to have an interest in the house. § Expenditure could suffice – as long as it was provided in belief of an interest in the property. • In inferred common intention cases – o Detriment considered along with the inference itself in relation to the contribution. o Not many problems – focus is on the presence of an agreement or the triggering contribution. • Simon Gardner – detrimental reliance plays no real role anymore.

The Quantification Stage

• Constructive trusts dramatically differs from the resulting trust in quantification. • In this second stage, the court takes a much more flexible & liberal approach. • Midland Bank v Cooke – o Duty of judge to undertake a survey of the whole course of dealing between the parties relevant to their ownership & occupation of the property. o Mrs Cooke’s 6.74% contribution to the purchase price was converted into a half share in the property. § If she had used a resulting trust, she would have only got 6.74%. • Approach further developed in Oxley v Hiscock – o Court of Appeal sought to develop principles for quantifying shares – § If parties had formulated agreement as to size of shares, the court must give effect to it. § If no agreement has been formulated, the court must ask itself what is a FAIR share having regard to the whole course of dealings between the parties. • Shows a liberal, family-centric approach that recognises non-financial contributions. o Problem – individuals must firstly satisfy strict acquisition stage to then enjoy flexibility of the quantification stage.

• Stack v Dowden – discusses Oxley v Hiscock – o Baroness Hale – stated that the court’s main focus should still be searching for the result which reflects what the parties must, in light of their conduct, be taken to have INTENDED. § Therefore Oxley v Hiscock does not enable the court to abandon that search in favour of the result which the court itself considers fair. • This recourse to common intention as opposed to fairness has been further endorsed in the joint name case of Jones v Kernott. o Implies that where there is no evidence of actual agreement to share, fairness is permitted as a RESIDUAL option.

JOINT Legal Title Issues under the Common Intention Constructive trust

• No issue of acquiring beneficial interest – some is vested in each party. o Simply an issue of how much a) Stack v Dowden • Provides a comprehensive mechanism for deciding how much beneficial interest each acquires. o Dehra Dowden & Barry Stack met in 1975. o Dehra ourchased first home in 1983 in sole name, providing the financial contributions. o Both improved house & had 4 children. o 1993 they sold house & bought another in joint names. o Dehra advanced most of the capital using sale proceeds from previous property. o Joint name mortgage taken out & both contributed – Barry £27,000, Dehra £38,500 o Bills in Dehra’s name, both improved property. o Bank accounts rigidly separate. o Parties separated in 2002 & sold property in 2005. • HoL awarded a 65/35 share in favour of Dehra. • Baroness Hale gave main judgment – o Days of the mathematical resulting truest are numbered – law has moved on. o STARTING POINT is a heavy presumptive burden of equal sharing – parties presumed to own property in 50/50 shares. § Heavy burden to dislodge, facts needed to be unusual or exceptional. o In showing they share unequally, ‘Holistic’ approach similar to Oxley v Hiscock used § Taking into account broad range of factors in isolating where the true beneficial ownership would lie. o Factors relevant to diving the parties’ true intentions – § Advice or discussions at time of transfer casting light upon their intentions § Reasons why home was acquired in joint names § Purpose for which home was acquired § Nature of the parties’ relationship § Whether they had children § How the purchase was financed, initially & subsequently § How parties arranged their finances – separately or together § How they discharged outgoings of property & other household expenses § Parties’ characters o Builds upon foundations laid by Oxley v Hiscock – § Though refines it slightly, stating the court must not proceed on the basis of fairness – instead should undertake a survey of the whole course of dealings that casts light on what shares were INTENDED. o Lord Neuberger dissented – § Division should follow resulting trust route unless a common intention can be found that displaces this presumption of resulting trust. § This would avoid the subjectivity inherent in the majority’s approach.

b) Jones v Kernott

• Ms Jones & Mr Kernott had two children, purchased home in joint names. • £30,000 house, £6000 deposit paid for from proceeds of Ms Jones’ previous home. • Few years later jointly took out loan for £2000 extension, Mr Kernott did some work himself. • 1993 Mr Kernott then moved out, bought own house 1996. • Ms Jones lived in property with children. • Property increased in value, 2006 Mr Kernott indicated he wished to claim a beneficial share in it. • Count Court Judge - held that although house first purchased as family home, in joint names meaning there was a presumption that they would joint share the beneficial ownership, their common intention had changed in the 14 ½ years that followed. o Following Stack, once initial presumption of joint beneficial ownership displaced, it falls upon court to infer intention. o Decided Mr Kernott entitled 10% share. • High Court dismissed Mr Kernott’s appeal. • CoA allowed appeal & considered case – but upheld County Court Judge’s decision. o CoA stated following principles – § Starting point – if bought in joint names, they own the property as joint tenants. § Presumption can be displaced by evidence that their intention was different – at time of purchase or later. § Common intention inferred from conduct & dealings. § Where it is not possible to infer actual intention, court entitled to impute intention that each is entitled to the share which the court considers fair. § Financial contributions relevant, but there are many other factors in deciding what was intended or fair.

The ‘Stack Effect’ on subsequent cases

1) Sole Name cases

• James v Thomas & Morris v Morris – have shown a reluctance to apply the new flexible principles of Stack. • Reasons for this – o No explicit overruling of Lloyds Bank v Rosset & the desire to therefore adhere to judicial precedent. o Uneasiness between the Acquisition & Quantification conditions? § Very liberal if one has an initial interest (joint), but cautious if you acquire an interest (sole) o Is Stack too dynamic and subjective? Suggested by Lord Neuberger. o Does Stack represent a family law judgment in disguise? § John Dewar’s argument of the ‘Familialisation of property law’ – whereby he argues that judges & the legislature have modified general principles of land law & trusts to accommodate the specific needs of family members

2) Joint name cases

• Post-Stack cases have generally endorsed Stack, without providing any radical interpretations. • Fowler v Barron – Arden LJ applied Stack strictly & held that a long term cohabiting relationship resulted in an equal division of the family home.

3) Other

• Stack applies to non-sexual living arrangements o Adekunle v Ritchie – principles of Stack applied to shared home between mother & son. • Stack does NOT apply to commercial property/ Property as an investment o Laskar v Laskar – Lord Neuberger was able to restrict the application of Stack to domestic/cohabitating cases. TRUSTEE POWERS + DUTIES

Duties are imposed on trustees by 1. The terms of the trust; and/or trust deed 2. By law

3 types: (1) Duties arising under the common law (2) Duties arising under the Trustee Act 2000 (3) Fiduciary duties

A breach of (1) and (2) = Breach of trust A breach of (3) = Breach of fiduciary duty

Who can be a trustee? - Any legal person, whether an individual or a corporation, with legal capacity, can be a trustee - Restrictions: o Express trust – s20 LPA 1925 – children – “the appointment of an infant to be a trustee…shall be void” o Resulting/constructive trust – s20 does NOT apply – a minor can become a trustee for this type of trust § BUT: s1(6) LPA 1925 – infant cannot hold a legal estate in land § An infant can ONLY be a resulting/constructive trustee of personal property

A trust will not fail for a lack of trustee Exception = trust dependent on SPECIFIC trustees - This principle may come into operation if, for example: o The sole trustee dies; o The person appointed as trustee does not want to take up the office of trusteeship + disclaims the trust; o The person appointed is incapable of acting as a trustee, e.g. because they are an infant; or o The person appointed as trustee has died before the testator (in the case of a trust created by a will)

- Equity fills the gaps in different ways: o Inter vivos transfer of property to trustees upon trust § If sole trustee dies, property vests in trustee’s personal representative § If trustee disclaims the trust, the property re-vests in the settlor o Testamentary transfers of property on trust § Settlor dies, property goes to intended trustee § If trustee predeceases S/disclaims the trust, property will be held by S’s representatives

Requirements on the number of trustee - Trust of PERSONAL PROPERTY (movable) – no limit on number of trustees - Trust of REAL PROPERTY (immovable; i.e. land) – max. number of trustees = 4 (TA s34(2)) o Min. number of trustees = 1

Appointment of new trustees - A trust instrument may allow for this - Where a trust is silent, statute allows a new trustee to be appointed in certain circumstances – s36(1) TA + s36(2) TA

- But, there is NO general power of appointment of new trustees - They can only be appointed under the Trustee Act… o When the trustee dies o When the trustee is out of the UK for more than 12 months o Where the trustee desires to be discharged from some/all responsibilities o Where the trustee refuses to act o Where the trustee is unfit/incapable § Mental illness: Re East § Age + infirmity: Re Lemann’s Trust § Bankruptcy: Re Wheeler + De Rochow o Where the trustee is an infant o Where the trustee is removed under an express power in the instrument

- Where no one is NOMINATED by the trust instrument, the power to appoint resides with the surviving/continuing trustees - A trustee who is REMOVED does NOT count as a surviving/continuing trustee: Re Stoneham Settlement Trusts

Replacement of trustees (1) If the trust instrument specifies an express power, that person appoints (2) If no person specified, s36(1) + (2) give power to replace trustees to: o A person nominated in the trust for this purpose, but if there isn’t one/they are unwilling to act… o The remaining trustees, including refusing + retiring (but not removed trustees), or if all have died… o The personal representatives of the last remaining trustee

Appointment of additional trustees (1) If the trust instrument specifies an express power, that person appoints (2) If no person has been specified, s36(6) TA: power to appoint additional trustees to: o A person nominated in the trust instrument for this purpose, or if there is none/they are unwilling to act: o The trustees for the time being

N.B. 1) This provision only applies where there are NO more than 3 trustees 2) It is not obligatory to appoint more unless required by trust instrument/statute 3) Number of trustees cannot be increased beyond 4 4) The person appointing may not appoint his/herself

The power of beneficiaries to appoint new trustees - Ss19-21 TOLATA 1996 - S19: beneficiaries can give written direction to retire/appoint trustees - Circumstances are NOT limited to those in s36(1) + (2) TA - Summary: When… a. There is nothing in the trust instrument expressly nominating a person to appoint new trustees; and b. The beneficiaries are of full age, capacity + are (unanimously) absolutely entitled to the trust property (they fall within the rule in Saunders v Vautier); and c. The right is not expressly excluded - TA still applies – not possible to have more than 4 trustees (s19(5) TOLATA)

The power of the court to appoint new trustees (1) Where there is NO express power under the trust instrument, and o S36 TA cannot be used… o S41 TA – court has the discretion to appoint new trustees + additional trustees o It may also remove trustees against their will (Henderson v Henderson) o When acting under s41, the court must consider whether the appointment is ‘expedient’ (a good thing) o Re Weston’s Settlement: the parents of the infant beneficiaries wished to have the trust moved to Jersey for tax reasons. They wished to replace the English trustees with trustees in Jersey + an application was made under s41 § Held: Denning – concerned about children’s education + it was not fair to uproot them just to avoid tax § Also wasn’t their permanent home – had only lived in Jersey for 3 months § Propositions: (i) Court’s function is to protect those who cannot protect themselves § (ii) It can give its consent to a scheme to avoid tax (this may be legitimate) § (iii) The court should not merely consider the financial benefit to the infants, but also to their educational + social benefit o S41(4): provides examples of when this may be exercised § Substitute for a trustee who is incapable/bankrupt/etc…

(2) The court’s inherent jurisdiction à to remove trustees - Example of its use = Clarke v Heathfield: o Mineworkers strike, trustees of the Union trust fund refused to return to the UK union funds that had been sent abroad to frustrate a sequestration order. Members of the NUM applied to have the trustees removed. o Held: Court removes T’s as the funds were not available for the purposes for which the members had contributed them + T’s had refused to obey orders of the Court - Reasons for removal by the court are vague o Interests of beneficiaries are under threat o Trust property not safe o Trust not properly executed o Trustees’ disagreement amongst each other if it threatens the trust o Unlawful actions of trustees (Clarke v H) o But NOT merely an ‘occasional error’ by a trustee – Rafferty v Philip

Remuneration of trustees - GENERAL RULE = trustee is NOT entitled to remuneration o Lord Talbot LC, Robinson v Pett - Exceptions to this rule: 1. A trustee is entitled to expenses – s31(1)(a) TA 2. S32 TA: fees of agents may be charged against the trust fund 3. Fees permitted by express terms in trust instrument § A trustee acting in a professional capacity is still entitled to remuneration under an express term EVEN IF those services are capable of being provided by a lay trustee – s28(2) TA 4. S29 TA – only applies where no express clause or where fees not otherwise permitted by statute § S29(1) + (2): allow professional trustee trust corporations ‘reasonable’ remuneration § All other trustees must agree to this in writing – s29(2)(b) 5. The court’s inherent jurisdiction to grant remuneration § Previously only exercised in exceptional circumstances § Now: Re Duke of Norfolk’s ST: confirmed court has jurisdiction • In exercising the jurisdiction, the court should take care to safeguard the beneficiaries’ interests as against a trustee’s claim since the nature of the office of T was gratuitous • Court should regard T’s experience + skill, the amounts which he seeks to charge (compared with similar T’s) + all other circumstances of the case § Guinness v Saunders: Lord Goff: Jurisdiction should ONLY be exercised where it would not have the effect of encouraging trustees to put themselves in a position where their interests conflicted with their duties

COMMON LAW DUTIES (equitable duties) v Duty of personal service v Duty to act unanimously v Duty to maintain equality between the beneficiaries v Duty to exercise discretion o A) Failure to exercise discretion o B) Improper exercise of discretion v Duty to provide accounts + information

Duty of personal service - Delegatus not potest delegare: trustees may NOT delegate their decision making powers to others - Explained by Lindley LJ in Speight v Gaurit - But: Trustee Act 2000 allows for delegation – where the trust instrument/statute authorizes - A trustee CANNOT escape liability by leaving the matter to another trustee – the law does not recognize a ‘sleeping trustee’ – Bakin v Hughes

Duty to act unanimously - It is not possible for trustees to take action on the basis of a majority decision - Luke v South Kensington Hotel: ‘the only power to bind is the act of all of them’ - Does not apply in the case of pension fund trusts/charitable trusts - Trustees may act other than unanimously where this is authorised by the trust instrument

Duty to maintain equality between the beneficiaries - Problems with direct competition between trustees’ investment decisions - i.e. competition between life tenant (who is entitled to the income of the trust during his/ her life) AND a remainderman (who is entitled to the capital of the trust after the death of the life tenant) - This conflict is inevitable – but trustees must maintain a fair balance… not necessarily ‘equality’? - Nestle v National Westminster Bank plc: o “If the life tenant is living in poverty + the remainderman already has ample wealth… common sense suggests that T could take that into account” o Hoffman J: T’s entitled to take into account the relative closeness of the different beneficiaries’ relationships with S - Where T’s have a discretionary power to choose between beneficiaries, this duty does not apply - So, T’s may prefer one class of beneficiaries over another so long as they do not take into account ‘irrelevant, irrational, or improper factors’ – Edge v Pensions Ombudsman

Duty to exercise discretion properly - Distinguish: o Duty: every trustee has DUTY to invest – have to do it o Discretion: have the ability to decide – but this is limited o Power: “may distribute in absolute discretion” = power to act + power to decide - Courts will intervene if the discretion has been IMPROPERLY EXERCISED or if the trustees have IMPROPERLY FAILED to exercise it

Failure to exercise discretion - Turner v Turner: 3 trustees appointed by S, because he knew he had easy control over them o Trustees did not exercise their discretion as they were not aware that they HAD a discretion o Held: discretion must be exercised by trustees, not the settlor

Improper exercise of discretion - If the trustees do disclose the reasons for their decision (they aren’t obligated to do so) these may then be reviewed by the court for IMPROPRIETY - Re Beloved Wilkes’ Charity: “discretion [be] exercised with an entire absence of indirect motive, with honesty of intention and with a fair consideration of the subject”

1) The trustees act outside the authority conferred - Pitt v Holt; Futter v Futter: the purported exercise of a discretionary power on the part of the trustees will be void if what is done is not within the scope of the power

2) The discretion is exercised fraudulently or in bad faith - Clouette v Storey: the trustees distributing trust property to the beneficiaries, having arranged that the beneficiaries will retransfer the property to the trustees

3) The trustees exercise or refuse to exercise the discretion for improper motives - Klug v Klug: Ts had a power to advance part of the capital of the trust fund for the benefit of 1 of the beneficiaries. 1 trustee wished to do so, but the other, B’s mother – refused. o Neville J: Mother was not considering her welfare – she was annoyed as daughter had married without her consent

4) The trustees have exercised the discretion capriciously - Acted for reasons ‘which…could be said to be irrational, perverse, or irrelevant to any sensible expectation of the settlor’ – Templeman J, Re Manisty’s Settlement

5) Unreasonableness - ‘Wednesbury unreasonableness’ - Dundee General Hospital Board of Management v Walker: had trustees ‘acted in a manner that no reasonable trustee acting with the bounds of the duty laid on him by T could possibly act?’ - Edge v Pensions Ombudsman: Judge can intervene if: o T’s took into account irrelevant, improper or irrational factors o T’s decisions can be said to be one that no reasonable body of trustees properly directing themselves could have reached

6) The trustees fail to take into account all relevant considerations /T’s take into account irrelevant considerations - Re Hastings-Bass: decision to exercise a power of advancement – primary aim to create life interest had been achieved, but remainder interest contravened perpetuity rules – invalid? o Held: Decision operated within scope of the power – as it was exercised for the benefit of the advancee

“Rule in Re-Hastings-Bass” (Buckley LJ) - Court should NOT interfere with T’s action notwithstanding that it does not have the full effect which he intended, unless… it is clear he would not have acted as he did: o A) had he taken into account irrelevant considerations o B) had he failed to take into account considerations he should have

- Justification: to promote certainty + avoid continuous court challenges of T’s decisions - It became heavily relied on by T’s, who wanted their own decisions set aside, arguing they would have decided differently if they had appreciated the consequences

- Resolved in: Pitt v Holt; Futter v Futter: o Both cases: T’s had relied on inaccurate advice in making decisions that had adverse tax implications o Lightman J: the inadequate deliberation on the part of the trustee must be sufficiently serious so as to amount to a breach of fiduciary duty o It is not enough to show that the trustee’s deliberations have fallen short of the highest possible standards o Apart from exceptional circumstances, only breach of fiduciary duty justifies judicial intervention

- Described further: Abacus Trust Company: o If D has identified relevant considerations + used all proper care + diligence in obtaining relevant info + advice, T can be in no breach of duty + the decision cannot be impugned if info turns out to be partial/incorrect

Duty to provide accounts + information General rule = trustees are not required to give reasons for their decisions - Re Londonderry’s Settlement – confirms this: o Salmon LJ: reasons are immaterial if T’s exercise the power bona fide with no improper motive o It would not be for the good of the beneficiaries o It might make T’s life intolerable – embitter family feelings + their relationships o Would prove more difficult to persuade people to act as trustees – embarrassments, arguments that could follow - Where T’s do choose to give reasons, B’s could use this as a basis for challenge - Rules MAY be limited where B has a legitimate expectation that the discretion will be exercised in their favour o Suggested in Scott v National Trust

Trust documents - Duty to account = for any unauthorised profit + make available to the B’s full + accurate trust accounts - Historically – this extended to trust documents – as B’s had proprietary interest in assets - BUT this had the effect of revealing T’s reasons for their decisions – Re Londonderry’s Settlement - Modern position = Schmidt v Rosewood Trust: B’s DO NOT have absolute entitlement to trust docs - But, the courts can decide whether to order disclosure of docs on a case-by-case basis (inherent jurisdiction) TRUSTEE’S DUTIES UNDER STATUTE The Power of Investment S3(1) TA 2000: A trustee may make any kind of investment that he could make if he were absolutely entitled to the assets of the trust = general power of investment (may be restricted/excluded by express terms in the trust instrument)

Ss4-5: Regulation of these powers - Aim = to facilitate investment in accordance with modern portfolio investment theory - Trustees must ensure their investment decisions are not in breach of their fiduciary duties

S4(1): T must have regard to the standard investment criteria AND (2): review any investments they have made from time to time (3): sets out standard investment criteria - T’s must have regard to the purpose + nature of a particular trust when adopting an investment strategy - Looking at degree of risk, whether there are both life tenants + remaindermen?

S5: Requires T to take advice in relation to the investments S5(3) – exception: if T believes that in all the circumstances advice is unnecessary/inappropriate - Perhaps when: T himself has sufficient experience - OR: the sums involved are so small that cost of obtaining advice is disproportionate to the benefit

Exercising powers of investment + the duty of care under TA - S1(1): T must exercise such care + skill as is reasonable in the circs, having regard to: o A) any special knowledge/experience he has o B) if he acts as trustee in the course of a profession, any special knowledge that it is reasonable to expect… - Standard = variable - Higher standard expected of professionals - Sch 1: this statutory DoC applies to…including: o Exercising the general power of investment o Exercising a power of investment however conferred (e.g. express) - Sch 1, para 7: Allows DoC to be excluded

Common law duty of care 1) Standard of care + risk - Pre-TA case law: trustees to exercise their investment powers to the level of the ‘prudent man of business’ - Speight v Gaunt - S1 TA: no mention of ‘prudence’ – but ‘reasonable’ is used – lower? - Notes accompanying TA: refer to prudence (BUT, notes are not binding) - Learoyd v Whiteley – businessman of ordinary prudence. But, T must confine himself to the class of investments which are permitted by the trust + to avoid all investments of that class which are attended with hazard - Bartlett v Barclays Bank Trust: Brightman J added: “that does not mean that T is bound to avoid all risk + in effect act as an insurer of the trust fund” o Prudent businessmen in their dealings incur risk o Distinguish between prudent degree of risk and hazard

2) The best interests of the Bs - Difficulties – does this mean FINANCIAL or NON-FINANCIAL interest? i.e. ethical considerations… - Cowan v Scargill: National Coal Board’s pension trust o Half of the trustees to a pension trust opposed to an investment plan – as it involved overseas investments in industries that were in competition with coal. Brought legal action. Held: These trustees had acted unreasonably. § They MUST put the interests of the beneficiaries FIRST (when the purpose of the trust is to provide financial benefits for the beneficiaries – their best interests are normally their best financial interests)

- The TA makes NO explicit reference to ethical consideration - But, these could be captured within ‘suitability to the trust’ – s4(3)(a) - Explanatory notes [para 23] – ‘suitability’ will ‘include any relevant ethical considerations as to the kind of investments which it is appropriate for the trust to make’

3) The duty to maintain a fair balance between beneficiaries - Nestle v National Westminster Bank

The power to delegate A. Collective delegation – where the T’s delegate some of their functions to an AGENT o In addition to any express power of collective delegation, TA 2000 provides for a general power of collective delegation o S11(1) – general power to delegate o S11(2) – functions that CANNOT be delegated o S11(3) – trustees of a charity – special rules o S15 – special rules for duty to invest – requirements for: § Delegation to be in writing § T’s produce a policy statement giving guidance § Agent must comply with current policy statement § Policy statement – should ensure functions are in best interest of the trust § Policy statement should be in writing o Special rules apply to trustees of land – TOLATA ss9-9A

o Liability of trustees on delegation § Sch 1 para 3: trustee is under statutory duty of care, when: § A) selecting the agent § B) determining the terms § C) preparing the policy statement o Trustees are also required to supervise the agents – ss21-22 TA – which are are also under statutory duty of care – Sch 1 [3](1)(e) TA o N.B. if trustees have satisfied duty of care, they are not liable merely because the agent does something that causes a loss to the trust: o S23(1) TA: ‘A trustee is not liable for any act of default of the agent…’

B. Individual delegation – individual trustee can delegate by appointing a substitute to exercise some/all of his powers o As well as any express power, s25(1) TA: power of individual delegation o Restrictions: § (a): delegation may not exceed 12 months – s25(2)(b) § (b): must be by deed – as a power of attorney – s25(1) § (c): notice must be given to the other trustees – s25(4) o S25(7) TA: the original trustee will be liable for the acts/defaults of the substitute as if they were his own

Fiduciary Duties of a Trustee

- FIDUCIARY (trustee) owes a duty to the ‘PRINCIPAL’ (beneficiary). - Finn: fiduciary = persons who are acting for, or on behalf of, or in the interests of, or with the confidence of, another. o Believes the term ‘fiduciary’ is ill-defined + very misleading.

The categories of fiduciary relationships are not closed. A large range of relationships have been characterised as fiduciary, e.g.: v Solicitor + client – Re Hallet’s Estate v Mortgagee and mortgagor – Farrars v Farrars Ltd v Government employee and the Crown – A-G for Hong Kong v Reid

Courts can create fiduciary relationships in order for TRACING to take place (Agip (Africa) v Jackson)

Chase Manhattan Bank NV v Israeli-British Bank (London) - Plaintiff bank mistakenly paid $1 million to D bank as it had forgotten that it had already made an identical payment. - Held: Found fiduciary relationship – arose as result of mere receipt of payment. - BUT, courts are generally hostile to finding a fiduciary relationship in commercial situations: Re Goldcorp.

Core fiduciary duty = duty of loyalty (Bristol and West Building Society v Mothew). - Facets of this duty: act in good faith, must not make a profit out of his trust, must not place himself in a position where his duty and his interests may conflict, must not act for his own benefit without the informed consent of his principal.

‘No Profit’ and ‘No Conflict’ rules Relationship: - Boardman v Phipps: no profit rule is part of the wider rule of no conflict - Bray v Ford: they are alternative statements of the same principle - Matthew Conaglen: o Justification for the profit principle is drawn from the justification for the conflict principle. o In virtually all cases in which a profit is made out of a fiduciary position, the fiduciary will have acted in a way that involves a conflict.

No Conflict Rule - Stated in Bray v Ford – T should not let his interest + duty conflict - Also covers situations where T’s duty to one principal conflicts with his duty to another (the ‘double employment rule’) – North & South Trust Co v Berkeley - Lord Herschell described the no conflict rule as ‘inflexible’ – rule of strict liability - The no conflict rule can be breached even where: o The fiduciary has acted in utmost good faith o The principal has suffered no loss o The principal actually benefited from the actions of the fiduciary o The principal would have allowed the transaction if he’d been asked o There was no ‘actual’ conflict (simply the possibility of it) o There was no ‘breach of morality, without any wrong being inflicted, and without any consciousness of wrong-doing

- For firms taking on 2 clients with potentially conflicting interests o Jefri Bolkiah v KPMG: With no consent, a solicitor will be restrained from acting for the new client if necessary to avoid risk of disclosure/misuse of confidential information belonging to the former client. o Rakusen v Ellis Munday & Clarke: There is no absolute rule that the professional may not act: a 2 man firm where the partners operated independently did just that with CoA’s approval.

The Self-Dealing Rule Tito v Waddell: if T sells the trust property to himself, the sale is voidable by any beneficiary, however fair the transaction. - This rule is ABSOLUTE (unless the trust deed authorises T to purchase the trust property). Ex p James: It is not permitted in any case, however honest the circumstances. The general interests of justice require it to be destroyed in every instance.

-Applies even where T bought the trust property at a public auction – Campbell v Walker -Or where T has obtained an independent valuation of the property prior to the sale – Wright v Morgan

BUT, exceptional approach by the courts in: Holder v Holder: T died leaving an estate including 2 farms. -Victor (a son) had been appointed an executor (fiduciary position). He performed some minor administrative functions + then renounced his executorship so that he could buy 1 of the farms at auction. -Technically, renunciation of executorship was ineffective. -His brother brought an action seeking to have the sale set aside – self-dealing. -HELD: Rule did not apply to V. Since his administration of the estate was minimal, the knowledge he had gained was as tenant (not as executor).

N.B. the transaction is VOIDABLE, not void. The beneficiary must elect whether to: 1. Adopt the sale (and the trust will bind the proceeds of sale); OR 2. Rescind the sale (the property sold remains subject to the trust)

-If the property has since been sold, the beneficiary will be able to claim the profits of sale: Ex p James

The Fair-Dealing Rule - Applies when T purchases the BENEFICIAL INTEREST from a beneficiary - Less strict – there is scope for genuine negotiation between the 2 parties - Tito v Waddell: It can be set aside by the beneficiary unless T can show that he has taken no advantage of his position + has made full disclosure to the beneficiary + that the transaction is fair + honest. - Williams v Scott: Sir Ford North: T must show that the beneficiary had taken competent + independent advice + that the agreement was reached on full disclosure of all material facts.

The No Profit Rule - Bray v Ford: A person in a fiduciary position is not (unless otherwise expressly provided), entitled to make a profit. - Same strictness as no conflict rule. - Only applies to UNAUTHORISED profits. - Keech v Sandford: T held the profits of Romford market on trust for an infant. When lease expired, landlord refused to renew lease to the trust, renewing it to T personally. Held: Lease was taken on trust for the infant + T had to account for any profits he had made.

- Regal (Hastings) v Gulliver: RH had insufficient funds to exploit a particular business opportunity. The directors (fiduciary relationship with company) thus took up this opportunity. - Directors ended up making a profit, but had failed to obtain informed consent of the shareholders to the breach. - When company was sold, buyers brought an action against the directors, that they had made this profit in breach of their fiduciary duties. - HELD: D’s had to account for their profits to the company.

- Boardman v Phipps: B was solicitor to a family trust. One of the assets was a holding of shares in a company. - B and Tom (a beneficiary) were dissatisfied with how the company was being run. - By obtaining a majority shareholding in the company they could turn it around (which would have the effect of safeguarding the value of the trust shares or possibility generating a profit). - B wrote to the beneficiaries explaining his plans + they did not object. - The takeover went ahead + created a substantial profit for the trust, B + Tom. - But, one of the beneficiaries then brought an action against B for unauthorised profits made in his fiduciary capacity. - Held: Due to the fact that the information + opportunity had come to B through his fiduciary role, he should be liable to account for the profits. o Any possibility of a conflict of interest will render the fiduciary liable. - Lord Upjohn + Viscount Dilhorne dissented. o Conflict of interest was too remote to render B liable? - The court recognised the harshness of the decision by rewarding B a sum for his hard work in service of the trust.

COMPARE: Bribery cases - Should the principal be granted a proprietary interest in the profits under a constructive trust? This allows C to trace the profit into substitutes + thus recover any increase in the value of the property purchased with the profits

Lister v Stubbs: S = purchasing agent employed by L. - S accepted bribes by a supplier that were paid to him in order to secure business with L. He invested in bribes in land + other investments. - When discovered, S tried to dispose of the investments + L sought an injunction to stop S doing so before the trial, claiming he had a proprietary interest. - CoA: S = merely under a personal obligation to account for the bribes to his principal.

Attorney General for Hong Kong v Reid: - R = a public prosecutor accepting large bribes in order to obstruct the prosecution of certain criminals. - He invested these bribes in properties abroad + the Crown sought to assert a proprietary interest in these properties. - Held: overturned Lister. A fiduciary must not be allowed to benefit from his own breach of duty – he should account for the bribe as soon as he receives it. - Thus, a bribe + the property from time to time presenting the bribe are held on constructive trust for the person injured.

Overruled in: Sinclair Investments v Versailles Trade Finance: CoA: a proprietary interest in wrongful gains is not available to C unless he can show that he already had a beneficial interest in the gains.

BUT: FHR European Ventures LLP v Cedar Capital Partners LLC: FHR employed C as an agent to negotiate the sale of a hotel to them for €211.5m. - FHR did not know that C had entered into a brokerage agreement with the vendors that meant C was paid €10m by the vendors on the successful conclusion of the sale. - Held: C held the commission on constructive trust for FHR.

FHR clarifies current position in law. BUT… Is a bribe or secrete commission paid by a 3rd party + sometimes constituting the proceeds of crime comparable to a profit stemming from trust property? - Is the fiduciary required to take it on behalf of his principle?

AVOIDING A BREACH OF THE NO CONFLICT AND/OR NO PROFIT RULES Fiduciary can avoid liability if: - He/she obtains the fully informed consent of the principal (before OR after the breach – subsequent consent = ‘ratifying the breach’). - There is a specific authorisation in the trust instrument (or, in cases of remuneration, the TA 2000). - Any conflict is inherent in the way the trust is set up (e.g. if T is also a beneficiary under the trust there is an inevitable conflict in relation to how the property should be distributed.

N.B. The principal is not permitted to claim profits if he unduly delays a claim in order to wait for a rise in their value. He will be taken as having acquiesced in the fiduciary’s retention of the unauthorised gains.

Breach of Trust

BREACH OF TRUST = different to breach of fiduciary duties - Occurs when T fails to carry out duties imposed on them by Law or TRUST INSTRUMENT - Can be caused by act or omission

PERSONAL LIABILITY = to hold T personally liable regardless of whether he/she is still in possession of the property that relates to the loss/unauthorised gain - D HAS to make good from THEIR OWN funds - If they don’t have enough money, then there’s no effective remedy o May lead to their bankruptcy o This is why beneficiary will try to pursue a proprietary remedy (better for tracing) - Trustees are only liable for breaches of trust if: o They make an unauthorised GAIN for themselves o They make a LOSS for the trust

3 REMEDIES 1. Accounting for gains o Where T gets an unauthorised profit from their position – personally liable to account for the profit to trust – discussed under no profit rule

2. Substitute compensation – reconstitution of the trust – restoring it to its state before the breach o To assess amount, look at amount in trust at the time that the assets were misapplied

3. Compensation for losses – hold transaction up to relevant standards + compensate for the difference, or ‘surcharging’

Substitutive compensation ‘false accounting’ Compensation for losses ‘surcharging’ Why? Misapplication of the trust asset Not misapplication, but causes a loss to e.g. making an investment not permitted by trust fund trust instrument -Breach of any other trustee duty -e.g. exercising less than required still or care in making investment decisions How much? Court will regard this act as having been Must compensate for the difference carried out by T’s personal assets – T must between the bad investment + the account for trust fund as if no transaction had investment if it had been carried out in been carried out full compliance with T’s duties Relevant point Time that breach occurred. If trust then Time the case comes to trial for assessing receives back some of its assets that were amount of misapplied, minus this off from the final compensation compensation Causation + Doesn’t usually apply to misapplication of Must establish a link between loss + a remoteness fund breach of duty -BUT NOW: Target Holdings – causation does -‘But for’ test apply sometimes -Once this established, must see if T is liable for ALL losses which flow from breach, OR if principle of remoteness applies, restrict losses to those that were reasonably foreseeable – Bristol & West Building Society

Bristol & West Building Society: Millet LJ: - Remedy equity makes available for breach of equitable duty of skill + care = equitable compensation - In case of a successful surcharge, close analogy between equitable compensation + common law damages – awarded to C by way of compensation for loss - C must prove a breach of duty + causation - Common law principles for compensation – causation, remoteness, measure of damages should be applied here - Judge notes distinction between breach of fiduciary duty + breach of equitable duty of skill + care

Target Holdings v Redferns - TH (mortgagee) loaned money to Crowngate (mortgagor) as mortgage - R = their solicitors. R gave instructions not to release the funds it was holding on bare trust for TH before all necessary documents executed - Turns out C were fraudulently trying to make a profit (property was worth much less than the mortgage) - R breached the terms of the agreement by releasing the funds to a 3rd party - TH were not able to recover all of the funds they had advanced as security for the property + sued R to recover loss - CoA: this was substitutive compensation. Must pay back ALL the money - HL: causation rules o Cannot be said that ‘but for’ the breach, TH would not have sustained these losses o ONLY losses that resulted as a breach of R’s contract terms could be recovered o Because R’s payment away of the trust property had nothing to do with the ultimate losses of TH, they were not liable to repay that money - Normally, clock stopped at the time the breach occurred. But NOT here - Here – clock is stopped at the DATE of judgment - Compensation = the figure necessary to put the trust estate back in the position it would have been, had there been no breach - Rules on remoteness don’t apply – just need to establish causation - Foreseeability is irrelevant when assessing compensation here – as in Canson Enterprises – Canadian case

After Target Holdings: Misapplication of trust funds/breach of fiduciary duty: Breach of any other trustee duty: Causation ü Causation ü Hindsight ü Hindsight ü Remoteness û Remoteness ü

TH applied in AIB Group v Mark Redler Solicitors: - Re-mortgaging case - Couple borrowed £3.3 million as a new loan on their house - This money was supposed to pay off an old loan FIRST and then advance the rest of the money to the mortgagor in return for a first charge over the property - In error, solicitors didn’t pay off the entire 1st mortgage - So AIB advanced more of the money directly to the mortgagor, only obtaining a 2nd charge over the property - Mortgage defaulted + property sold for substantially LESS than value of the security - 1st mortgage HAD to be paid off before AIB could recover - Held: Court distinguished from TH as the solicitors never rectified the breach by obtaining for the beneficiaries the benefit they were instructed to obtain - But, still applied the TH causation – C’s wouldn’t have avoided the loss ‘but for’ the breach, save for the amount that should have been paid towards the 1st mortgage

Main principle - If trust property misapplied, T should restore the trust fund to the position it would have been in ‘but for’ the breach - Compensation to be measure AT DATE OF TRIAL - Remoteness – foreseeability of loss = IRRELEVANT - Principles of equity do not differ with the trust’s nature - But, principles of traditional trusts did not necessarily apply to bare trusts in a commercial contract. this defined the trust’s parameters - ‘But for’ test applies for equitable causation

SET OFF Bartlett v Barclays Bank Trust - Generally, where T is liable for distinct breaches of trust, one of which resulted in a loss + the other in a gain, he is not entitled to set the gain against the loss, unless they arise in the same transaction

Extent of liability for breach of trust v T’s are ONLY liable for their OWN breach of trust o Townley v Sherborn o UNLESS trustee: § Leaves it to co-trustees without making inquiries; § Turns a blind eye to a breach of trust; § Allows the trust funds to remain in the sole control of a co-trustee; § Does nothing to redress a breach of trust contemplated or committed by a co-trustee § All this relates to ‘trustees must act unanimously’ and ‘the law doesn’t recognise a sleeping trustee’

v Indemnities (security/protection against a loss/other financial burden) o A trustee can escape liability by obtaining an indemnity from a co-trustee when his co-trustee: § Re Smith: Acted fraudulently § Bakin v Hughes: obtained personal benefit from breach of trust § Re Partington: has special knowledge/qualifications + that co-trustee exercises a controlling influence: here, the solicitor trustee indemnified co- trustee as he misled her + didn’t give full information on investments he was asking her to advance money on o Head v Gould: co-trustee will only be entitled to an indemnity if its proved that they merely participated in consequence of the advice + control of the solicitor

v Joint and several liability o A claimant may pursue an obligation against any one party as if they were jointly liable + it becomes the responsibility of D’s to sort out their respective proportions of liability + payment o Where a number of trustees are liable for breach of trust – they are jointly + severally liable – Bishopsgate Investment Management v Maxwell: § 2 people committed breach of trust by signing to misappropriate fund o J&S liability enables B’s to recover entire loss from any T alone OR from all of them o Civil Liability Contributions Act 1978 – Court can determine the amount each trustee is liable for depending on what is just + reasonable

Relief/defences to liability for breach of trust (1) Exemption clauses (2) Consent/concurrence of beneficiaries (3) Subsequent condonation by the beneficiaries (4) The court’s discretion to grant relief o Honestly o Reasonably o Ought fairly to be excused (5) Limitation of actions (6) Laches

1) EXEMPTION CLAUSES - Not liable for breach of trust if its covered by the trust instrument – trust instrument remains supreme - SOME limits to this: some obligations are so fundamental to the office of trusteeship that it shouldn’t be possible to exclude them - Armitage v Narse: exemption clause tried to exclude from all liability except from fraud. B tried to argue that this should be void – either for repugnancy OR contrary to public policy o Millet LJ: there are some irreducible core obligations owed by T’s to B’s that are fundamental to the concept of the trust o If B’s don’t have any enforceable rights against T then there is no trust o Minimum necessary duty of T’s sufficient for it to be a trust = T’s duty to perform trusts honestly, in good faith for the benefit of the beneficiary o So the clause exempted T from liability in all circumstances – AS LONG AS he had NOT acted dishonestly o BUT: Millet believes exemption clauses have gone too far: § Professional T’s would never dream of excluding liability for ordinary professional negligence § Seems unfair that they should be able to rely on a such a clause!

Law Commission, 2006 – ‘Trustee Exemption Clauses’ è Legislation limiting exemption clauses would have too many disadvantages è So the law remains that exemption clauses can exclude liability for negligence + gross negligence è If T claims he has acted in good faith + thus is exempt – belief that they were acting in the interests of B’s must NOT be unreasonable

- Walker v Stones o Solicitor-trustee knowingly acted in breach of trust in the genuine (but misguided) belief that this would be best for B. Was this OK? o CoA: Slade J: T’s CANNOT be exempt from liability, even if in genuine belief that this was for B’s benefit

2) A CONSENTING OR CONCURRING BENEFICIARY - S62(1) TA 1925: can get an indemnity from liability because of consenting/concurring B - Re Pauling’s Settlement Trust: if can establish valid request + consent, then is a good defence - N.B. if some (but not all) B’s don’t consent, will still be liable to them - For it to be EFFECTIVE defence, B’s must: o Not be infants o Not be under a mental incapacity o Consent must be FREE + INFORMED - Holder v Holder (exceptional case) o T’s at the time didn’t know they were committing a breach, so B’s didn’t need to include knowledge that they are consenting to a breach

3) SUBSEQUENT CONDONATION BY B - Same as above (same conditions apply), but takes place AFTER the breach 4) THE COURT’S DISCRETION TO GRANT RELIEF - S61 TA: court can relieve from liability if: o ‘Honest’ (this is not enough on its own – it’s a ‘starting point’ – Perrins v Belaney) o ‘Reasonable’ o ‘Ought fairly to be excused for the breach of trust’ o Court may relieve him ‘wholly or partly’

- ‘Reasonable’? o Where T fails to meet required standard of care expected of them, then it’s hard to argue that they acted ‘reasonably’ o Ward Smith v Jebb: T paid money to a person he erroneously believed was a beneficiary § Held: he did not act ‘reasonably’ in committing breach § Buckley LJ: ‘a prudent man… should have checked fully that he understood the relevant statute + sought legal advice’ o On the other hand: Re Evans: § D was administratrix of her mother’s estate. Brother was a B but had been missing for 30yrs – presumed dead. She took legal advice, which said to take out ‘missing beneficiary insurance policy’ § She administered estate, then brother contracts her + tries to sue for breach of trust § Held: She had acted reasonably • Legal advice doesn’t automatically grant relief/defence • Court should consider conduct + circumstances in light of advice • Here, estate was small + followed legal advice = reasonable • Reasonable to take out B insurance as a practical solution - ‘Ought fairly to have been excused’ o Perrins v Bellamy: if acted fairly + reasonably, in the absence of special circumstances, provisions in section should be applied in his favour o Marsden v Reagan: ‘at the end of the day, it is for the judge to decide’

5) LIMITATION ACT 1980 - S21(3): action by B to recover trust property because of breach of trust shouldn’t be brought after date of 6 YEARS AFTER BREACH - S21(1)(a) – limitation doesn’t apply to: o Fraudulent breach of trust o Recover from trustee property/proceeds of property in possession of the T, or previously received by T + converted to his use - S32(1): where defendant T has concealed any relevant fact to do with breach from the B, then the expiration period only starts running when C discovers the concealment - Williams v Central Bank of Nigeria: s21(1)(a) doesn’t apply to 3rd party constructive trustees (e.g. dishonest assistants + knowing recipients)

6) DOCTRINE OF LACHES - May protect D where C delays in bringing the action - ONLY applies where s21(1)(a) doesn’t apply – the exceptions - Ask: would it be inequitable for C to get remedy in the circumstances? - Court assesses each case on its merits - Factors to take into account set out in Nelson v Rye: o Mere delay alone will never suffice o Period of delay o Extent that D’s position prejudiced by delay o Prejudice caused by actions of C - Court should BALANCE whether should grant remedy or withhold

Tracing & Proprietary claims for breach

è PERSONAL = D has to make good from his own funds. No effective remedy if D doesn’t have enough money è PROPRIETARY = in the form of a trust usually, gives C right to seize specific property so it doesn’t matter if T is bankrupt o A claim of ownership against specific property in the hands of another person (so it doesn’t matter if T is bankrupt) è To show that it derives from original property, must use process of following or tracing

Foskett v McKeown: - Following = process of following SAME asset as it moves from hand to hand - TRACING = identifies the VALUE inherent in asset as it undergoes a number of substitutions o Identifying a new asset as a substitute for the old

- If it’s exchanged for another asset, can choose to: o Follow original asset into hands of new owner o Trace its value into the new asset in hands of same owner - Tracing/following a processes, not remedies – merely a means for gathering evidence to establish entitlement to a remedy

- Boscawen v Bajwa: If C succeeds in tracing his property + overcomes any defences, he is entitled to a remedy

Tracing at common law + tracing in equity Common law tracing = more restrictive than at equity, because: - Equitable tracing can trace into + out of a MIXED FUND (with CLT you can only trace into) - But, equitable is limited to fiduciary relationships

Foskett v Mckeown – LJ criticises distinction (obiter) - One set of tracing rules is enough – there is no logical justification for 2 – the US only has 1 - Process capricious results in cases of mixed substitutions by insisting on a fiduciary relationship

TRACING AT COMMON LAW - Prerequisite = legal title (beneficiaries cannot use this) - Can trace into a mixed fund BUT NOT OUT OF IT - CLAIMS + REMEDIES (largely personal) a. Action for money had + received § Restitutionary remedy – reverses the process § C sues D for MONEY to which C is entitled § Amount received reflects measure of liability b. Action for wrongful interference (conversion) § C sues D for CHATTELS that D deprived C of § Compensatory remedy – awards damages § Also: statutory remedy of delivery up of goods: Torts (Interference with Goods Act 1977 – s3(3)(a)) c. Action in debt = action claiming a sum of money

- Clean substitution o Does not involve any mixing (i.e. A asks B to look after £1,000, B buys a car with the money)

- Examples: o Banque Belge pour l’Entranger v Hambrouck : § Cashier fraudulently paid cheques from his employers (the bank) into a new, empty bank account in his name § Then he transferred some of it into his mistress’ (empty) bank account § Held: As no mixing – this was the ONLY money in their bank accounts – CAN TRACE MONEY o FC Jones & Sons v Jones § Partner in bankrupt potato firm wrote cheque to wife § She opened an account, invested money in potato futures, made a profit + deposits money in an account § Held: wife never had title to money, it remained with C all the time § C could follow the right to be paid, so had a right to the invested funds along with any profits – could claim ENTIRE balance in wife’s account

Tracing into + through a mixed fund - E.g. where money is mixed with money already in bank account + then all money is spent on a car - Can follow money into hands of subsequent transferee as long as it isn’t mixed with other funds (otherwise it won’t be identifiable) - Agip (Africa) v Jackson: o Employee (J) changed name on a payment order of $500,000 to Baker Oil Services o Money was transferred from Banque du Sud (Tunisia) to Baker Oil’s account with Lloyd’s bank in London o All but $43,000 was then paid to unknown parties. Agip Ltd sued J for return of the money o Held: Tracing only possible at EQUITY, not common law o Agip’s money had been mixed in the clearing system + could not be traced

Limits + defences - Change in position: - Lipkin Gorman v Kapnale: an award of restitution is subject to a defence of change of position (can pay less if position is changed) o Lawyer takes money out of his firm’s account + gambles it at Playboy Club o Club wins some of the stolen money, rest paid out in ‘winnings’ to lawyer o He flees to Israel o Held: Casino was only liable for remaining sum (excl. the winnings he took away) o Partial defence = as winnings had been paid, casino changed their position

TRACING IN EQUITY - Can trace INTO + OUT OF mixed funds - Limitation: must establish the requirements for – fiduciary relationship AND – equitable proprietary interest - Can definitely establish these 2 where person is a beneficiary and trust property has been misappropriated

Requirements: - Fiduciary relationship o Traditionally: only a pre-existing one could be found o Re Diplock: charity wrongly receives payment under will § Executors clearly had fiduciary relationship to the estate § Can use equitable tracing into charity’s hands o Does not have to be an express trust, as long as fiduciary relationship found: o Agip (Africa): employer-employee fiduciary relationship ‘per se’ - MORE RECENTLY: a subsequent FR is sufficient: o Chase Manhattan Bank v Israeli-British Bank: accidentally paid $1 million into other bank, forgotten that it had already made an identical payment § No pre-existing FR, but Goulding J found one – person who pays money to another under a factual mistake retains an equitable property in it + the conscience of that other is subjected to a fiduciary duty to respect his proprietary right § SO: FR comes into play the moment recipient realised payment was mistake - Stealing? – legal title remains with V (thief holds property on constructive trust for V?) o Suggested in Westdeutsche Landesbank G v Islington – V can trace in equity?

BARS TO TRACING IN EQUITY A. Bona fide purchaser for value without notice B. Dissipation of trust property C. Paying off a debt or unsecured loan o Exception: potentially ‘backwards tracing’ o Exception: secured loan, subrogation D. Inequitability

A) BFPFVWN - Even if C can establish that they are original owner of the trust property + D holds the traceable product of that property, C can’t claim if D is a BFPFVWN - Where D is a volunteer, i.e. was given the car by T who misappropriated the property to buy the car, B will be able to get an equitable remedy - Where D bought the car (from T who had misappropriated the money to buy the car), then they are a BFPFVWN – an unanswerable defence

B) DISSIPATION OF TRUST PROPERTY - NOTHING to trace into! - If property/proceeds are dissipated/used up/destroyed – e.g. spent on a holiday, or a car that was destroyed, or going out for a meal

C) DEBTS OR UNSECURED LOANS - General rule: repayment = dissipation - Where misappropriated funds are used to discharge a debt/unsecured loan, creditor = equity’s darling - UNLESS it has notice of the misappropriation - This is why it is impossible to trace into an overdrawn bank account - Shalson v Russo: funds misappropriated into purchase of yacht + accounts o Accounts were overdrawn + the money advanced simply reduced D’s liability to the bank – the account is NOT an asset – it’s a liability o All the money has done is reduce a liability – ceases to exist

- Possible exception = BACKWARDS TRACING o Where T asks for a loan with the specific intention/purpose of repaying it with the trust property – could be able to engage in ‘backwards tracing’ + trace into this asset: Bishopsgate Investment Management v Homan (although these comments were obiter) - Exception: secured loans à subrogation o Where D uses trust money to pay off a secured loan (e.g. a mortgage) then C can ‘step into the lender’s shoes’ + become ‘subrogated’ to the mortgage (restitutionary remedy) o So, if T misappropriated trust funds + used it to pay back remaining mortgage (£10,000) over house, B would receive a proprietary interest in the form of a CHARGE to the value of £10,000 - Boscawen v Bajwa: o Solicitors were acting both for purchasers of property + their lenders o Lender deposited money with the solicitor, who advanced the money in breach of trust to the vendor before completion + purchase, and then it was used to discharge the vendors existing mortgage over the property o Sale fell through + the vendor + solicitors became insolvent o Held: lenders were entitled to be SUBROGATED to the rights of the vendor’s bank under the mortgage o Didn’t have to prove anything – right of subrogation came from the parties’ conduct o Millet LJ: subrogation is a remedy, arises from conduct of parties, principles + circumstances that make it unconscionable for D to deny the proprietary interest claimed by C

D) INEQUITABILITY - Applied in Re Diplock: o Charity mistakenly received misappropriated funds o Denied a charge over the land that had been improved by the misappropriated fund o Thought to be unjust to require innocent recipients to sell their land in order to enforce the charge (although the paying back of the mortgage now overturned by Boscawen) o Suggestion: this inequitability principle could be resolved by way of a change of position set out in Limpkin

Claiming in Equity - Can go for: a) A proprietary claim to assets identified as representing the original trust property o Effected by the declaration that identified assets are to be held on terms of the original trust o Situations: § Trust property retained § Clean substitution of the trust property § Mixed funds (can get a proportionate share of the asset) b) An equitable lien over assets as representing the original trust property o Lien = a proprietary security interest over a property – i.e. having the right to be satisfied out of the proceeds of sale of that property – ahead of any D/unsecured creditors o Doesn’t offer a proportionate share in the value o Situations: § Clean substitution § Property acquired with mixed funds

- When would you want them? o PC – rise in value of asset § Person in possession of asset is insolvent (this is the only way you’ll get priority over other creditors) § You would rather get a proprietary share as it is proportionate – gives B a share in the increase o Lien – fall in value of asset § If you put 10 in you get 10 out every time

- Where the asset was acquired with funds of another innocent party AND there was a fall in value – proprietary share ONLY (lien may not be claimed) – Foshett - When property purchased from a mixed fund rises in value… can choose a proprietary claim or a lien: o Foskett v McKeown: investors invested money in property development § Funds were misappropriated + invested in a life assurance policy § He commits suicide § Beneficiaries under the property investment scheme try to trace a proportionate share into the life assurance policy proceeds + succeed

TRACING IN EQUITY – DIFFERENT SITUATIONS: Situation 1: Trust property retained OR clearly substituted: - Trust property retained – T misappropriates money into empty bank account à B can just follow money into that account - Trust property cleanly substituted – e.g. T misappropriates £10,000 buys painting + then exchanges it for a vase o In theory, can follow MONEY OR trace into PAINTING OR trace into VASE o Have to choose which asset to trace into. But it depends on the circumstances – any possible defences of parties, e.g. BFPFVWN o B can’t recover twice

Situation 2: Tracing into + through a mixed bank account that contains the T’s + B’s monies - Can trace both INTO + THROUGH in equity - Presumption of honesty – we presume that the T who misappropriated the trust property in a mixed account spends HIS money first – so the trust fund survives - Applies in Re Hallett’s Estate: o Solicitor held bonds for client + wrongfully sold them o Put proceeds of sale into a mixed fund that includes his money o Presumption that the fiduciary intended to dissipate his own money before the B’s money - Exception to the presumption of honesty o Cherry picking rule prevents the presumption to work against the B where remaining funds are dissipated – Re Oatway o BUT: no cherry picking where sufficient funds remain in the account – Turner v Jacob o Where T first buys another asset with the mixed fund, then dissipates the balance of the fund, Re Hallett’s principle does not apply – because B would be left with nothing (where this presumption works against B – it isn’t applied) - Re Oatway: misappropriates money from a trust, and then mixes it with his own money o He buys shares + the rest is dissipated o Held: can’t apply Re Hallett’s – instead, shares considered bought with trust money - BUT: if T misappropriates funds into a mixed fund account, buys an asset that rises in value, and then there is STILL enough money in the account to satisfy B’s claim, B cannot choose whether to trace into the account or the asset

- Turner v Jacob: in such a case, B’s right to trace is limited to tracing into the funds in the bank account

The lowest intermediate balance rule - If trust money deposited into an account + then subsequent withdrawals are made, maximum claim B can make is the LOWEST INTERMEDIATE BALANCE between the time of the deposit + the time of the claim - EXAMPLE: o T misappropriates £5,000 + pays it into his account that has £2,000 already. o He spends £4,000 on a party. Now £3,000 is left. o Then, he wins £5,000 + puts it in his account (now: £8,000) o But, B cannot trace his £5,000 into the £8,000 – rules of tracing won’t allow this – the maximum B can get is £3,000 - Applied in Roscoe v Winder: o Re Hallet’s estate must be applied o Exhausts his money first, then starts to exhaust the trust money o The lowest balance in the account is the one that B can then claim o Even if it is replenished afterwards somehow - Exception to rule? o Presumption can be rebutted if B can show that the subsequent credits to the account were INTENDED to replenish the trust fund o Must be clear evidence of intention (won’t be presumed)

Situation 3: Tracing into a mixed account containing the monies of 2 different trusts, or the 1 trust + an innocent volunteer - Difficulty = have to weigh up the interests of 2 innocent parties - Mixing may have been done by a wrongdoer, or the innocent volunteer – this is completely irrelevant - Re Diplock: mere fact that the innocent volunteer carried out the mixing will NOT prevent C from tracing into that mixed fund - BUT: if innocent volunteer had received monies belonging to another in equity o Which was then mixed with his own monies o Innocent volunteer would be treated no less favourably than a B of a trust whose monies had been mixed with those of a 2nd trust

Starting point: Rule in Clayton’s Case – ‘first in, first out’ rule - Money gets misappropriated from T1 (£10,000) into account - Money gets misappropriated from T2 (£10,000) into account - So now account has £20,000 - £10,000 is dissipated on a cruise. The money that was dissipated is from T1. Beneficiary of T2 can still claim his money

Note: PARI PASSU would change this: - If £10,000 dissipated on a cruise, this is £5,000 of T1’s money + £5,000 of T2’s - So each T can trace £5,000 of remainder

Broadening the rule in Clayton’s Case… - Criticisms: Clayton’s can produce unfair results because 1 innocent party can recover in full, and another equally innocent party won’t recover anything - El Ajou Holdings: rule in Clayton’s Case will NOT be applied if it contradicts intentions of parties - Barlow Clowes: BC = an investment company with many investors in a fund o Company left owing a lot of money to investors, without funds to cover it o Inter investors try to invoke Clayton rule o Held: Rule only needs to apply where: it’s convenient to do so + it’ll bring broad justice to do so o It won’t be applied where this is the intention/presumed intention of B’s + if the cost of applying it is likely to exhaust the funds for B’s o In this case, was against presumed/express intention of B’s – adopted pari passu – all investors get proportionate share - Commerzbank AG v IMB Morgan: o Irrespective of intentions of parties, it won’t be applied if it would produce an unfair result - Charity Commission v Framjee: o Although Clayton = still the default rule, it may be displaced with relative ease in favour of a solution that procedures a fairer result

Accessory liability for breach of trust (dishonest assistance + knowing receipt)

DISHONEST ASSISTANCE: FOUR ELEMENTS 1) The existence of a trust (or fiduciary relationship) 2) A breach of that trust (or fiduciary relationship) 3) Assistance in that breach 4) Dishonesty

- T’s liability = primary liability - A stranger who dishonestly assists to commit breach of trust – may also ne personally liable as a constructive trustee – secondary/accessory liability

Royal Brunei Airlines v Tan: explains: - Liability for DA isn’t dependent on receipt of trust property – it arises even though no trust property has reached the hands of the accessory - C (airline) appointed an agent for the sale of its transportation - D (Tan), the MD of agent company - Terms required the agent company to hold funds on trust - They didn’t keep it in separate account (in breach of agreement) but used it for company’s ordinary business purposes (paying salaries, etc.) - Assumed Tan was authorised to do this - Company becomes insolvent - Held: Tan is liable as DA, personally liable to account as an accessory to a breach of trust committed by the company -This is particularly useful when T who did the breach is insolvent – B is better off pursuing a solvent DA

1) The existence of a trust (or fiduciary relationship) - Royal Brunei: here – there was obviously an express trust - JD Wetherspoon: o Don’t need an express trust – just need to show a fiduciary relationship o Doesn’t have to involve a trust, just means providing DA to someone else who in a fiduciary capacity has breached their duties

2) Breach of a trust (or fiduciary relationship) - Obviously – party in breach of trust will be someone OTHER than the defendant - As D has just assisted in the breach of trust - Royal Brunei: Rejects the principle that the breach must be dishonest o Breach of trust/fiduciary duty must be demonstrated, but… § No need to show T had been dishonest/fraudulent (state of mind is irrelevant) § No need to show that the 3rd party came into the trust property o Objective test – but takes into account D’s personal characteristics

3) Assistance in that breach - Where there has been some active conduct by the defendant, easy to establish ‘assistance’: - Royal Brunei Airlines: Tan’s role as MD, authorising using the trust funds for ordinary running of business – was sufficient to amount to assistance to the company’s breach of trust - Twinsectra v Yardley: D = a solicitor o Allowed trust monies to be used for purposes outside the terms of the loan = DA - Passive acquiescence? Probably can’t amount to assistance o VERY HIGH THRESHOLD for establishing liability for DA - Brinks v Abu Saleh: robbery of a Brinks warehouse – valuables stolen o 1 of the issues = husband of woman laundered proceeds of stolen gold by taking cash from England – Switzerland in car o His wife was with him in the car o Held: no evidence that her act of accompanying her husband amounted to ‘assistance’ or that her husband asked her to accompany him as a ‘cover’ o Her accompaniment was merely ‘in the capacity’ as his wife rather than providing cover for money laundering

- Subsequent covering up of the breach? = capable of being assistance - Twinsectra v Yardley: fault-based liability (not receipt based) o Liability extends to everyone who consciously assists in the continuing diversion of the money o A lot of the time this is to do with covering it up afterwards, not just assisting with original breach

4) Dishonesty - Objective test – but takes into account the D’s characteristics - Twinsectra v Yardley: o Y borrows £1m from T to buy a property o S + L (solicitors) acting for Y o T gives money to S to use solely for the acquisition of Y’s property o S guaranteed the payment (i.e. held money on trust for T) o S gives money to L anyway + L pays money out according to Y’s instructions, involving purposes other than the acquisition of the property o S became bankrupt – argued that money was bound by a trust, S was in breach of trust + L dishonestly assisted o First instance: L wasn’t dishonest – was ‘misguided’ + had ‘shut his eyes’ o CoA: ‘shutting his eyes’ means dishonesty o HL: Hutton explains 3 possible standards of dishonesty: § 1) Subjective standard – person is only dishonest if he transgresses own standards of dishonesty. Rejected. § 2) Objective standard – person is dishonest if he transgresses the ordinary standards of ordinary, reasonable + honest people § 3) Combined test – ordinary standards of reasonable + honest people + he himself realised that by those standards the conduct dishonest o Relevant standard is combined test – So, L wasn’t dishonest because he didn’t satisfy the 2nd subj. limb of the combined test – he didn’t realise that his conduct was dishonest by ordinary standards o Slynn, Hoffman + Steyn all agreed o L Millet gave CONVINCING DISSENT: § Nicholls in Tan expressly rejected combined test § It’s not necessary that he should have appreciated that he was acting dishonestly – enough that he was

- Barlow Clowes = an investment company, many investors in fund o Mr C misappropriates money to offshore funds o Company left owing a lot of money to investors, without funds to cover it o Held: Privy Council thought tests in Tan and Twinsectra = same o Hoffman clarified that it is an objective test – not necessary to prove that D reflected on what those standards were. The only subjective part = what the D knew of the material facts? - Abou Rahman v Abacha: o Barlow Clowes followed as the correct reading of Twin + Tan o BC doesn’t depart from Twin – just gives correct guidance on what it means

- Starglade Properties v Nash: o There is a single standard of honesty objectively determined by the court o Standard is applied to the specific conduct of a specific individual possessing the knowledge + qualities he actually enjoyed o Relevant standard = ordinary standard of honest behaviour o Ultimately court determines standards + applies it to facts of the case

KNOWING RECEIPT: THREE ELEMENTS (Hoffman in El Ajou) 1) Disposal of assets in breach of trust/fiduciary duty 2) Beneficial receipt of traceable assets 3) Knowledge

-Might be impossible to get a proprietary remedy against stranger who receives property in breach of trust – e.g. where they no longer have it -Possible for B’s to obtain a PERSONAL remedy against them -Equity imposes duty on this stranger to account as a constructive trustee -Stranger must restore the trust to the value he has received -May have to also account for profit made -Merely receiving property = insufficient (there is a fault requirement)

1) Disposal of assets in breach of trust/fiduciary duty - Easy to show: where T has transferred the trust assets to a 3rd party in breach of trust

2) Beneficial receipt of traceable assets a) Beneficial receipt o Agip (Africa) § 1) Beneficial means ‘for his own benefit’ § 2) Distinction between ‘beneficial receipt’ + ‘ministerial receipt’ o In context of banks – if T’s deposit money with the bank is the bank considered to receive that property beneficially? § Playing/collecting money for customer bank = just an agent § But if it collecting the money its used to reduce overdraft = that is for its own benefit

b) Assets traceable as representing assets of C o Not necessary that the assets are the original trust property, must just be traceable as representing assets o E.g. trust property used to buy a painting = traceable

3) Knowledge -Timing of knowledge - Stranger can be liable for knowing receipt of trust property where: o Received that assets knowing that they were traceable to a breach of trust duty: AND o Although he didn’t know at the time of the receipt, he later dealt with them in a manner inconsistent with the trust which he had since become aware of - Stranger can also be liable where he receives assets lawfully (i.e. without a breach of trust), but then deals with them in a manner inconsistent with trust – liability here called ‘inconsistent dealing’

-What does ‘knowledge’ mean? - Knowledge is distinct from notice - Re Montagu’s Settlement Trusts: ‘knowledge’ (in the context of knowing receipt) is distinct from ‘notice’ (in the context of determining whether a party is BFPFVWN) - BFPFVWN = concerned with it he takes property subject to or free from trust (determines burdens of property) - Constructive trust – concerned with if a person is to have imposed on him the personal burdens/obligations of trusteeship - So, a stranger who bought assets could have had notice that they were subject to a trust, but may not be personally liable to account as a constructive trustee

5 BADEN CATEGORIES 1. Actual knowledge; 2. Wilfully shutting one’s eyes to the obvious; 3. Wilfully + recklessly failing to make such inquiries as an honest + reasonable man would make; 4. Knowledge of circumstances that would indicate the facts to an honest + reasonable man; 5. Knowledge of circumstances that would put an honest + reasonable man on inquiry

1-3 = actual, 4-5 = constructive

Is constructive knowledge sufficient? - Karak Rubber v Barden: yes it is - Belmontt Finance Corp: confirmed this - Rolled Steel Products: Browne Wilkinson LJ confirmed this – 3rd party with actual/ constructive notice – will be accountable as a constructive trustee for any money/ property received by him - BUT: later cases say constructive knowledge = insufficient - Re Montagu’s ST – 10th duke of Manchester entitled as remainderman to chattels. His father was the life tenant o Settlement had certain terms o Everyone then assumed that 10th duke entitled to all the chattels o He received some chattels in breach of trust o Was he liable as constructive trustee because of knowing receipt? o No – doctrine of tracing + imposition of constructive trust must be kept distinct o In considering whether the CT arose must consider question: was the conscience of the recipient sufficiently affected to justify this o Depends on KNOWLEDGE, not notice o Knowledge is confined to Baden categories 1-3 (categories 4-5 are doubtful) o Person won’t have knowledge if he knew, but then genuinely forgot – test is whether knowledge continues to operate

- Eagle Trust v SBC Securities o Only Baden categories 1-3 are enough to make D liable as constructive trustee o Justification – in commercial context, professional parties shouldn’t have to continually look over their shoulders o So this leaves scope for constructive knowledge to suffice in non-commercial transactions - Cowan v Eagle: is dishonesty the key? Yes - Carl-Zeiss Stiftung: for constructive trusteeship, dishonesty is necessary – Sachs LJ - Agip (Africa) v Jackson: L Millet: for knowing receipt, must distinguish between honest + dishonest cases

Is Baden classification helpful? - Yes for whether constructive knowledge is sufficient/what it actually entails - But, in Agip: Millet gives warning on over-reliance on it – an over-rigid classification o Difficulty of drawing clear distinctions between categories o 4-5 are not necessarily cases of constructive notice only o Real distinction should be between honesty + dishonesty, which is for the jury

Polly Peck International: Scott LJ: - Also gives warnings on Baden classification - Various categories of mental state aren’t rigid - The real question = whether in circumstances where transfers made should have made the bank suspicious

CLARIFICATION – BCCI v Akindele: - Akindele invests 10mil in BCCI holdings - They guarantee that he can sell in 2 years + get 15% interest - He does this + receives 17mil - His only intention was to get an excellent rate of return, never intended to become a shareholder - Unknown to him, BCCI used his investment to pursue fraudulent plan hiding liquidity from public – Akindele had no idea of this - Alleged that the sum held by A was on constructive trust + he knowingly received property in breach of the fiduciary duty to BCCI - 1st instance: MUST fit 1-3 Baden categories + be dishonest. No dishonesty on A’s part - CoA: Nourse LJ: MUST distinguish between ‘knowledge’ + ‘dishonesty’ o 2 separate questions: § 1) What is meant by knowledge? (single test = unconscionability) § 2) Is it necessary for recipient to act dishonestly? • Dishonesty not a key ingredient for liability of knowing receipt - From Montagu onwards, cases suggest that only 1-3 Baden categories constitute actual knowledge, and 4-5 constructive knowledge - From Baden, categories weren’t formulated with knowing receipt in mind – originated in case about knowing assistance - Royal Brunei: leading case for knowing assistance, but doubts its utility in cases of knowing receipt

Now: all that is necessary = recipient’s state of knowledge should be as such to make it unconscionable for him to retain the benefit of the receipt

Since BCCI, courts have sought to combine unconscionability test with Baden categories – Starglade Properties v Nash - Others have simply approved Akindele – Arthur v AG Turks & Caicos Islands

= Law remains UNSETTLED in this area!