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Law of Contract July 2010

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Law of Contract July 2010 LEVEL 6 - UNIT 5 - EQUITY AND TRUSTS SUGGESTED ANSWERS - JANUARY 2014 Note to Candidates and Tutors: The purpose of the suggested answers is to provide students and tutors with guidance as to the key points students should have included in their answers to the January 2014 examinations. The suggested answers set out a response that a good (merit/distinction) candidate would have provided. The suggested answers do not for all questions set out all the points which students may have included in their responses to the questions. Students will have received credit, where applicable, for other points not addressed by the suggested answers. Students and tutors should review the suggested answers in conjunction with the question papers and the Chief Examiners’ reports which provide feedback on student performance in the examination. SECTION A Question 1 (a) “Every effort” test The transfer of the legal title to company shares is not complete until the transferee is registered by the company. Similarly a gift of the legal estate in land is not effective until the donee is registered at the Land Registry. In these cases the final stage in the transfer formalities is in the hands of a third party and is outside the donor’s control. Such gifts are effective in equity before the legal title is transferred if the donor has done everything required of him or her to transfer legal title (Milroy v Lord (1862); Re Rose (1952)). In Re Rose it was held that this stage is reached for gifts of shares when the transferor has parted with the stock transfer form and share certificate beyond recall and it lies in the transferee’s power to be registered as the new shareholder. Once that point is reached, it is too late for the donor to withdraw. The insistence on some formalities provides time for donors to change their minds. They are not bound until they have parted with the relevant documents. However, the every effort test ensures that a donor’s intention to make a gift is not defeated by, for example, the donor’s death before registration or the company’s refusal to register the donee. (b) The rule in Strong v Bird (1874) The rule applies when a donor makes an attempted lifetime gift but does not effectively transfer the property. The gift is perfected if the donor dies and the donee acquires title to the property by becoming the donor’s personal representative. It is necessary for the donor to have intended an immediate lifetime gift and for the intention to have continued up until his death. Page 1 of 15 Strong v Bird is an example of the courts’ readiness to carry out the donor’s intention by not allowing it to be thwarted by the absence of a formality. It also allows the donor to change his or her mind at any time until his or her death. (c) Unconscionability Pennington v Waine (2002) concerned the transfer of shares. The donor had handed the stock transfer form to her agent but the donee had not been registered at the company when the donor died. The donor and the agent had told the donee about the gift and the agent had told the donee there was nothing which he needed to do. Believing that he had been given the shares, the donee became a director of the company. It was held that the gift was complete in equity because it would have been unconscionable for the donor to have changed her mind. Arden LJ did not define unconscionability in this context but said it was significant that the donee had been told about the gift and had become a director. Arden LJ suggested that the courts should not be too eager to declare attempted gifts to be void on a technicality because this runs counter to the donor’s intention. She said that “Equity should not strive officiously to defeat an intended gift” citing the case of T Choithram International SA v Pagarani (2001) as authority. In Choithram, a settlor orally declared that he was giving all his wealth to a charitable trust of which he was one of the trustees. He died before transferring the property (which comprised valuable shareholdings) to the trustees. Thus, the trust was incompletely constituted. The Privy Council held the trust was valid contrary to the maxim “equity will not assist a volunteer”. The settlor had done enough to declare himself a trustee and the Privy Council decided, it would have been unconscionable for him to have changed his mind at that stage. In Pennington giving effect to the gift carried out the donor’s intention because she died without changing her mind. She thought that her agent was dealing with the registration of the donee. However, the point at which it becomes unconscionable for a donor to change his or her mind is unclear due to the uncertainty inherent in the term ‘unconscionability’. If it would be unconscionable for the donor to recant once he has told the donee about the gift, then the paternalistic policy of allowing donors to change their minds is seriously compromised. In Curtis v Pulbrook (2011) the judge suggested that Pennington was a case of proprietary estoppel which is a recognised exception to the rule that equity will not perfect an imperfect gift. If this is the case, the donor can change his or her mind unless the donee has acted to his or her detriment in reliance on the gift being made. Indeed proprietary estoppel is a well-established exception to the maxim that ‘equity will not perfect an imperfect gift’. More recently, the courts have favoured the broad approach of asking whether it would be unconscionable for a party to deny an assurance on which the other party has relied and acted on to his detriment (e.g. Gillett v Holt (2001)) Question 2 Dispositions which are to have effect on a person’s death should be contained in a valid will. In order to be valid, a will must be in writing and signed by the Page 2 of 15 testator in the presence of two witnesses who then sign the will in the presence of the testator (s9 of the Wills Act 1837). Secret trusts do not fully comply with s9. In a fully secret trust, the will contains a gift to X. The fact that X is to hold on trust for Y is not set out in the will but is communicated to X (orally or in writing) outside the will before the testator dies (Wallgrave v Tebbs (1855); Re Boyes (1884)). In a half secret trust the will contains a gift to X to hold on trust, but the identity of the beneficiary is kept off the face of the will and is communicated to X before or at the time the will is executed (Re Keen (1937); Re Bateman (1970)). Secret trusts are enforced only if X agrees to act as a trustee. In both fully and half secret trusts, the transfer of the property to the trustee which constitutes the trust is contained in the will executed in accordance with s9 but the declaration of trust is outside the will. Thus, secret trusts are enforced despite non-compliance with the Wills Act. There are two possible explanations. The first explanation is that ‘equity will not allow statute to be used as an instrument of fraud’ (McCormick v Grogan (1869)). If a fully secret trust were not enforced, the trustee (X) would take beneficially because, on the face of the will, he or she is a legatee taking absolutely. This would be a fraud when X has agreed to act as a trustee and, in reliance on X’s agreement, the testator has made a will leaving the legacy to X or has left the legacy unrevoked. However, this does not explain why the secret beneficiary is allowed to benefit. Fraud would be prevented by refusing to allow X to take beneficially by imposing a resulting trust for the testator’s estate. The prevention of fraud theory breaks down completely in relation to half-secret trusts. The fact that X is to be a trustee is apparent on the face of the will. There is no possibility of X taking beneficially and therefore, no possibility of fraud by X. The fraud theory is viable if the fraud consists of not allowing the beneficiary to benefit but it is difficult to see why this should be so when the promise to hold on trust was not made to the beneficiary and the beneficiary has not relied on the promise to his or her detriment. The modern explanation why secret trusts are enforced is the ‘dehors the will’ theory (Blackwell v Blackwell (1929)). This explanation runs as follows: The testator communicates to the secret trustee the terms of the intended trust, and the secret trustee accepts the obligation. This is an inter vivos declaration of trust. At this stage the legal title remains with the testator, and the trust is incompletely constituted. The testator dies, and the legal title is then transferred to the secret trustee/legatee under the testator’s will. The trust is now completely constituted. This solves the apparent contradiction with s9 Wills Act 1837, which requires any trust declared on death to be in signed writing, and witnessed by two witnesses. The secret trust is not declared on death: it is an inter vivos declaration of trust. The dehors the will theory explains the decision in Re Gardner (No 2) (1923). The secret beneficiary died before the testator.
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