Subject 38

INSTITUTE OF LEGAL EXECUTIVES

LEVEL 6 - EQUITY & TRUSTS

EXAMINER’S REPORT – AUTUMN 2009

Introduction

The primary aim of this report is to do the following:

• comments on overall performance by candidates in the Autumn 2009 Equity and Trusts examination; • advises on how performance might be improved; • indicates what should be contained in successful answers to the questions in the examination paper; • provides comment on performance in individual questions. • this is the final Equity and Trusts examination paper under the Level 6 Professional Higher Diploma in Law. If candidates have failed then they should consider sitting Equity and Trusts on the new Level 6 Professional Higher Diploma in Law and Practice. Information is available on the ILEX website at [email protected]

Comment on Overall Performance

This is a Level 6 paper and was, consequently, appropriately demanding. Successful candidates are therefore to be congratulated.

The most common weaknesses were: 1. Poor legal problem solving skills; 2. Lack of adequate skills for tackling essay questions; 3. Poor structure and inadequate understanding of how to use the law to answer questions; 4. Lack of knowledge of the law of Equity and Trusts.

Poor Legal Problem Solving Skills

Common weaknesses included:

ƒ failure to identify all the key issues raised by the problem questions; ƒ failure to identify the particular principles of law relevant to the problems; ƒ failure to state the law accurately and cite cases appropriately; ƒ failure to apply the law to the facts of problem questions in an appropriate manner or (in the case of a few candidates) to apply it to the facts at all.

Lack Of Adequate Skills For Tackling Essay Questions

Many candidates fail to appreciate that it is just as important when tackling essay questions, as it is with problem questions, to target the answer to the actual issues raised by the question. There was a common tendency to write a narrative on the whole law relating to a topic, instead of selecting relevant points and using those to address the actual question set. Answers often lacked

Page 1 of 14 sufficient depth and detail appropriate to an examination at this level, with some candidates producing very short answers to essay questions.

Poor structure and inadequate understanding of how to use the law to answer questions

This was a particular issue with answers to problem questions. Some candidates started their answers with several pages of law, set out in the abstract with no reference to the facts of the problem and often no attempt to pick out the principles that were actually relevant. This was followed by a cursory discussion of the facts of the problem, often making only scant reference back to the previous explanation of the law. Some answers followed their explanation of the law with a mere recital of the facts and then gave a brief conclusion, without demonstrating how it was reached. A proper conclusion can only be arrived at after a careful application of relevant principles of law to the facts of the problem. Some answers failed to reach any conclusion or give the advice asked for.

A few candidates answered some questions by merely setting out the provisions contained in a relevant statute, without any real attempt at discussing them or relating them to the question. Candidates cannot achieve a pass mark by merely reciting statutory sections, which could have been copied from statute books. See further comments under questions 7 and 8.

A number of candidates also failed to use case law appropriately. What is required is a statement of the relevant principle/s from a case, not a recitation of the facts. Candidates will not gain credit for merely reciting the facts of a case, although a brief comparison with the facts in a problem question may sometimes be useful when applying the law; similarly, in essay questions, a candidate may legitimately use the facts of a case to illustrate a particular point that is being made. However, it is the legal principle which is the key part of any case. Some candidates merely listed case names and said that these cases were relevant, without any explanation of the cases or their relevance.

Lack of Knowledge of The Law of Equity and Trusts

An inadequate knowledge of basic principles and/or case law was shown by a number of candidates, meaning that they were unable to reach the standard required to pass the examination. A few candidates failed to mention any authority in their answers, which therefore read as if they were based on common sense rather than legal principles.

A number of candidates appeared not to have revised sufficient topics to enable them to answer four questions fully. A small number of answers contained nothing of relevance to the particular question. This may have been due to misreading the question or the result of candidates finding they had not revised sufficient topics and deciding to write on what they had revised instead of what the question demanded. Either way, such answers are unlikely to score any marks.

General Advice to Candidates

Candidates are strongly advised to develop the skills of analysis required for the practical solution of problems. They need to practice spotting issues and should develop the skill of stating the rules of law succinctly. They should also practice

Page 2 of 14 applying the law to the facts of a problem in order to arrive at a reasoned answer.

With regard to essay questions, candidates are strongly advised to analyse the law and to be critical. They should pay particular attention to the wording of the question and discuss the relevant law, connecting their arguments to the actual issues raised by the question. Candidates should also avoid copying or reciting large sections from their statute books. An explanation of relevant sections should be given and then applied to the facts of a problem or discussed critically in relation to an essay question.

The best way to develop these skills is to practice answering questions from ILEX past papers in this subject. Reference should also be made to examiner’s reports.

Candidates should be familiar with how many questions are on the paper and how many they are required to answer. They should know how much they are able to write in three hours. If they discover that it is not very much, they should try to develop the skill of writing fuller, more detailed answers within the set time.

When sitting the examination, candidates would do well to take a common sense attitude. Where they are required to answer four questions it is not only vital that they attempt four answers. It is also of great importance that they allocate time and effort effectively, so that they produce four full answers.

Candidates should only attempt a question where they are able to tackle all parts. If this is not the case, they should choose a different question.

Candidates should read the questions carefully. Thought should be given to structure when planning any answer, whether to a problem or essay question, before a candidate actually begins writing the answer.

Question 1

Suggested Answer:

Candidates were asked to consider whether Paul's wishes were valid and enforceable. In order to advise Oliver and Naomi on this, it was necessary to consider the rules on fully secret and half secret trusts.

Candidates should have mentioned that these operate as an exception to s9 Wills Act 1837, which applies to gifts and trusts to take effect on death. They should have gone on to identify the gift to Naomi as involving a fully secret trust and that to Oliver as involving a half secret trust.

Candidates should then have explained and applied the requirements for validity of secret trusts to the two provisions. (Unless valid, there would be no question of them carrying out Paul's wishes.) It was essential to explain the difference in the rules applying to fully and half secret trusts. For a fully secret trust, communication to the secret trustee of the existence of the trust – Wallgrave v Tebbs [1855] – and terms - Re Boyes [1884] - must take place before death. Re Keen [1937] held that the terms can be communicated by handing a sealed envelope to the secret trustee to be opened after the testator's death provided the secret trustee knows it contains the terms and accepts on that basis. These requirements were met in the case of Naomi. Page 3 of 14 The secret trustee must also accept and candidates needed to consider whether or not Naomi had accepted. She did not originally give a definite acceptance. stating that she needed to think it over. However, Moss v Cooper [1861] is authority for acceptance by 'silent acquiescence' and she would be deemed to have accepted by taking the envelope and not declining to act.

For a half secret trust, the existence and terms must be communicated before or at the time of signing the will, as held in Re Keen and Re Bateman's WT [1970]. Candidates needed to apply this to the original conversation before the will, which may have been sufficient communication of the existence of the trust, and the delivery of the envelope containing the terms on the day after the will was signed. As the terms were delivered after the will, the half secret trust would not be valid and the money would result to Paul's estate. Good answers would also consider the need for consistency between the communication and the way it is referred to in the will, as discussed in Re Keen.

Candidates also needed to consider the other issues arising. Linda, a secret beneficiary, has witnessed the will. Candidates needed to explain s15 Wills Act, which provides that any benefit to a witness is void, and then apply Re Young [1951], which shows that Linda can benefit as she takes under the secret trust which arises outside the will. Good answers discussed the fact that Naomi, the secret trustee, also witnessed the will, which could cause problems as it appears in the will to be an outright gift to her. However, the intention is for her to be a trustee, so there would be no actual benefit to her and s15 does not prevent a witness acting as trustee.

The final issue for candidates to consider was Naomi's unwillingness to carry out the trust for Jet, the cat. This required a discussion of non-charitable purpose trusts, which are normally void for want of a beneficiary - Morice v Bishop of Durham [1805]. However, there are exceptions to this, recognised as existing in cases like Re Astor [1952] and Re Endacott [1960], one exception being the maintenance of animals as in Pettingall v Pettingall [1842] and Re Dean [1889]. The trust should be limited to the perpetuity period and Paul has expressly limited his trust to a maximum of 21 years. Candidates should also have explained that, even though valid, this is a trust of imperfect obligation, with no beneficiary to enforce it and so Naomi could not be compelled to carry it out. She could not keep the property as she has agreed to be a trustee. McCormick v Grogan [1869] suggests it would be fraud for a secret trustee to try to keep the money beneficially.

Good answers considered the dicta in Re Maddock [1902] suggesting that a fully secret trust would be defeated if the trustee disclaimed the gift and contrasted the dicta in Blackwell v Blackwell [1929] (a case relating to a half secret trust) suggesting that a secret trustee should not be able to defeat the trust after agreeing to carry it out. However, a trustee cannot actually be compelled to carry out a trust of imperfect obligation.

Key Issues to Consider:

This question was generally quite well answered, although there were also some weak answers. The most common weaknesses were generic and are discussed above in ‘Comment on Overall Performance’.

In particular, many candidates accurately set out the requirements for communication and acceptance but failed to refer to relevant cases or to apply the rules in any detail. Many did not apply the communication rules correctly to

Page 4 of 14 the half secret trust, failing to realise that this would fail, despite the earlier conversation, as the terms in the envelope were not delivered until after the will was executed.

Most candidates recognised that Linda could benefit despite witnessing Paul's will but some failed to mention s15 or cite Re Young as authority, although a pleasing number mentioned the outside the will theory. Many candidates did not discuss Naomi witnessing the will.

A number of candidates failed to consider the issues relating to the money for Jet. Some did not refer to purpose trusts at all and others failed to discuss the issues in sufficient detail. Many failed to appreciate that the trust was expressly limited to the perpetuity period. There were also many candidates who did not realise that, as a trust of imperfect obligation, there was no-one who could actually force Naomi to carry out the trust.

Question 2

Suggested Answer:

In order to advise on the entitlement to the various items of Gwen's property, a consideration was required of formalities and constitution.

Candidates should have begun by explaining that Gwen was attempting to set up a trust of the cottage for Amy, with herself, Gwen, as trustee. Candidates needed to realise that there was no need for any transfer of legal title as this would remain with Gwen. It did, however, require a valid declaration of trust and so candidates needed to explain and apply the provisions of s53(1)(b) Law of Property Act (LPA) 1925, as this was a trust of land. The oral declaration made to Amy's father would be unenforceable unless it was evidenced in signed writing. Candidates should have discussed whether the writing on the photo contained sufficient details of the trust to meet the certainty requirements (it identifies the property and beneficiary and may show sufficient intention as there is no need to use the word 'trust') and whether there was a valid signature. If so, the trust would have been validly created in Gwen's lifetime and the cottage would not pass to charity under the will.

In relation to the remainder interest in the West and East shares, candidates needed to discuss s53(1)(c) LPA 1925, as Gwen had only an equitable interest under her uncle's trust. s53(1)(c) requires a disposition of a subsisting equitable interest to be in signed writing. Grey v IRC [1960] held that instructing trustees to hold on trust for another person is attempting a disposition and so the instructions should be in signed writing. Jessie's instructions to hold the West shares for Charles were oral and the disposition would be void, so the benefit of these shares would pass to charity under the will. However, her instructions to give the East shares absolutely to Kath fall outside s53(1)(c), according to Vandervell v IRC [1967]. That case held that, where a beneficiary under a bare trust instructs the trustees to transfer to another absolutely, s53(1)(c) does not apply, as the equitable title passes with legal title. Good answeres went on to consider whether the trustees had actually passed legal title to Kath.

Gwen was attempting to make an outright gift of the North shares to Ruth. This required sending a completed stock transfer form with the share certificate to the company for registration of Ruth as owner. As title passes on registration, which did not happen before Gwen's death, the gift was incomplete and the general rule from Milroy v Lord [1862] is that equity will not perfect the gift or assist Page 5 of 14 Ruth, who gave no consideration. Candidates should then have gone on to see whether any exception could save the gift. This required an explanation of the principle from Re Rose [1952] and a consideration of whether Gwen had down all in her power. Re Rose is distinguishable, as the documents have not been sent to the company or handed to the donee Ruth. Contrast also Mascall v Mascall [1985]. As in Re Fry [1946], there was more for Gwen to do. Good answers would go on to consider that [2002] would also be unlikely to assist as there is nothing on the facts to suggest that it would have been unconscionable for Gwen to change her mind. The gift is likely to fail and the North shares would pass to charity under the will.

In relation to the jewellery, candidates needed to explain and apply the rules for a valid donatio mortis causa (DMC). The requirements from Cain v Moon [1896] needed to be explained and applied. Gwen must have made the gift in contemplation of death eg Wilkes v Allington [1931] - she said she was 'fading'; it must have been conditional on death eg Gardiner v Parker [1818] (not intended to be fully effective until death and would be revoked if she recovered) - she refers to what might happen to her jewellery on her death - and Gwen must have delivered the property to the donee. This last requirement involves parting with dominion or control, and candidates should have referred to case law on this and applied it to the facts. Cases which could have been cited include, eg, Re Lillingston [1952], Sen v Headley [1991]. Candidates should have considered whether the existence of another key meant that Gwen retained control, in which case it would not be a valid DMC - Re Craven's Estate [1932]. However, as good answers pointed out, the case of Woodard v Woodard [1992] suggests that intention is important and it seems the only reason for not handing over the other key was that Gwen couldn't remember where it was.

Key Issues to Consider

The question was not particularly well answered, although there were a number of reasonable answers and a few very good ones. A number of candidates dealt well with formalities but poorly with constitution or vice versa. As these topics are frequently examined together, it is essential to be able to deal with both aspects.

A number of candidates tried to apply the wrong sections of LPA 1925 to the cottage. Some discussed s53(1)(c) which was not relevant - there was no subsisting equitable interest as there was no existing trust in relation to the cottage. This was an initial declaration of trust by an absolute owner. Others confused the requirements for a declaration of trust contained in s53(1)(b), which were relevant to the question, with those for a transfer of legal title contained in s52(1), which were not relevant as Gwen intended to retain legal title and act as trustee for Amy. Some candidates who identified s53(1)(b) failed to apply it to the photo.

A number of candidates clearly did not understand when s53(1)(c) was relevant - some wrongly discussed it for the cottage and/or the North shares, where there was no subsisting equitable interest as there was no existing trust. It should have been discussed in relation to her remainder interest in the West and East shares under her Uncle's trust and not elsewhere. Of those who correctly identified s53(1)(c) as relevant to the West and East shares, many failed to apply it correctly. Some failed to distinguish between the instructions to hold on trust and those to give shares absolutely and wrongly applied s53(1)(c) to both. Many failed to identify the relevance of Grey to the West shares and Vandervell to the East shares. Page 6 of 14

In relation to the North shares, most candidates recognised that the transfer of legal title failed but few went on to state the general principle from Milroy v Lord that equity will not assist, before considering whether any exception would apply. A good number of candidates referred to Re Rose but many failed to see that Gwen had not done all in her power as she had not sent the documents to the company or given them to Ruth. A reasonable number considered Pennington, although not everyone explained the principle or thought about whether it was likely to apply.

Most candidates recognised the relevance of DMC to the jewellery and some dealt with this very well, making good use of case law and applying the rules with some thought. However, other candidates failed to set out the three requirements accurately and application was sometimes thin. Far too many candidates failed to illustrate the requirements by reference to any relevant case law.

A worrying number of candidates clearly did not understand that the rule in Strong v Bird [1874] is based on obtaining title as executor, as they wrongly tried to apply it to various transactions in the question. Gwen appointed her solicitor as executor and so there was no transaction in the question to which the rule could possibly apply.

Question 3

Suggested Answer:

Candidates were asked to advise Ron and Wendy in relation to money taken by Zack from a trust and estate for which he was trustee and executor respectively. This required a discussion of the rules on tracing and making proprietary claims.

Candidates should have begun by explaining that Zack was in breach but that personal claims against him were unlikely to be met in full as he may be declared bankrupt, so proprietary claims are preferable. As the beneficiaries do not have legal title, they would be unable to use the common law rules. To trace and claim in equity, candidates should have explained that a fiduciary relationship is needed - clearly present between a trustee or executor and the beneficiaries.

When Zack mixed money from Ron's trust with his own in a building society savings account, Ron could claim a charge over the account to secure his claim - Re Hallett's Estate [1880]. The withdrawal would be treated as coming from Zack's money first under Re Hallett ('presumption of honesty') so that the necklace was bought with Zack's £5,000 and £5,000 of trust money. Although Polly knew nothing of the breach, she gave no value, so a proprietary claim to the necklace is possible - Re Diplock [1948], Foskett v McKeown [2000]. The increase in value could be claimed in proportion - Foskett v McKeown, confirming dicta in Re Tilley [1967]. Zack then spent the remaining money in the account on a holiday, so this is dissipated and cannot be traced. Candidates should have considered Re Oatway [1903] so that Zack's money should be regarded as spent on the dissipation and trust money on the asset. This would allow Ron to claim that the necklace was bought with his £10,000, so that he could claim the necklace, along with the full increase in value.

The £1,000 taken from the estate to clear Zack's overdraft is dissipated. Money cannot be traced into an overdrawn account - Bishopsgate v Homan [1995], Re

Page 7 of 14 Tilley. As the bank had no knowledge of the source of the money and had given value, no claim would lie against the bank.

When Zack mixed money from the estate with trust money, the claimants would normally share in proportion but, as this is mixed in a current account, the rule in Clayton's Case [1816] applies - Re Diplock. On this basis, the £4,000 from the trust would have been the first money spent on the car and the balance of £5,000 would be estate money. The car has halved in value and the decrease would be shared pari passu, ie in proportion to the money spent on it, according to Re Diplock and dicta in Foskett. On that basis, the trust would be entitled to £2,000 and the estate to £2,500, and the £3,000 left in the account would belong to the estate. However, cases such as Barlow Clowes International Ltd (in Liquidation) v Vaughan [1992], Russell-Cooke Trust Company v Prentis [2003] declined to apply Clayton's Case as it did not achieve justice. If the court took the same view here, it might treat the payments as coming in proportion from the trust (£3,000) and estate (£6,000) ,with the money left in the account also being shared in proportion.

The remaining £3,000 was given to Save Our Cats (SOC). As an innocent volunteer, SOC would be subject to a proprietary claim - Re Diplock, Foskett v McKeown. However, the money has been spent on improvements and so may be dissipated if there is no increase in the value of the property - Re Diplock. Even if the value increased, a proprietary claim might be inequitable, as discussed in Diplock, as it could force the innocent volunteer to sell its own property.

The proprietary claim may well fail but, as a beneficiary of an estate, Wendy could bring a personal claim against SOC as in Re Diplock. (If the money for the car were taken proportionately, so that the balance donated to SOC included trust money, a personal Diplock claim would not be available to Ron as the beneficiary of a trust.)

In relation to the £1,000 from the quiz show, candidates should have discussed James Roscoe v Winder [1915] indicating that this is not treated as a repayment and beneficiaries' claims are limited to the lowest intermediate balance on the account.

Key Issues to Consider:

This question was not particularly well answered by many of those who tackled it. The most common weaknesses were generic and are discussed above in ‘Comment on Overall Performance’. In particular, too many candidates described the tracing rules in the abstract and failed to apply them in any detail to the question. Many candidates failed to make sufficient reference to relevant cases, with a number not mentioning any cases at all.

Most answers began with an explanation of why proprietary claims would be preferable on the facts and the requirements for using the equitable rules. Some candidates failed to understand that proprietary claims are possible against innocent recipients, provided they are not bona fide purchasers for value without notice.

Of those candidates who applied the law, many recognised the relevance of Re Hallett to the payment from the mix of trustee and trust money, but surprisingly few went on to consider Re Oatway in the light of the subsequent dissipation. The beneficiaries' right to claim their share of the increase in value on the

Page 8 of 14 necklace was usually referred to but many candidates did not refer to authority on this.

Some candidates wrongly applied the rule in Clayton's Case as between the trust and trustee; candidates generally recognised its relevance in relation to the mix of money from the trust and estate, although not all explained that it would apply because this was a current account. Better answers went on to mention that the application of the rule in such situations has been criticised. A number of candidates failed to understand that the loss in value of the car would be shared in proportion to the amount contributed from each source to its purchase.

A surprising number of candidates failed to appreciate that, in respect of the payment in of £1,000 from the quiz show, the beneficiaries would have no proprietary claim or priority over other creditors in the bankruptcy, as this money is not traceable to trust or estate money and Zack showed no intention to repay them.

Question 4

Suggested Answer:

(a) Candidates were asked to advise Bob in relation to a claim by Rose that she is entitled to a share in the beneficial ownership in a bungalow in his sole name. This required a discussion of beneficial interests in a family home, where there is no written declaration of trust and entitlement is determined by reference to the principles of resulting or constructive trusts. These are exempt from the formality requirements as a result of s53(2) Law of Property Act 1925.

As Bob owned the bungalow free of any mortgage, Rose had not contributed to the purchase price in any way and candidates should have explained that a resulting trust in Rose's favour is unlikely. Curley v Parkes [2004] suggests that resulting trusts require initial contributions and dicta in [2007] suggest that resulting trusts are not appropriate in relation to shared homes.

Candidates should, therefore, have gone on to consider the principles of constructive trusts and made reference to Lloyds Bank v Rosset [1990] and Lord Bridge's view on how an interest could arise under two different categories of . Candidates should have explained and applied the requirements for express common intention constructive trusts - express discussions about sharing ownership followed by detrimental reliance - cases such as [1975], Grant v Edwards [1986]. No such discussion appears to have taken place, so Rose would need to try and establish an inferred common intention constructive trust, for which Lord Bridge insisted that direct contributions to the purchase or mortgage are needed, which Rose cannot demonstrate. As far as her indirect contributions were concerned, any of a number of cases could be referred to as suggesting that doing chores and raising children would not suffice to infer an intention to share - possible examples are Rosset itself, Pettitt v Pettitt [1970], Gissing v Gissing [1971], Burns v Burns [1984]. Contributing to bills has also been regarded as insufficient in the absence of express discussions on ownership and she cannot rely on the dicta in Burns about freeing Bob to pay the mortgage, as there is no mortgage.

Candidates should also have discussed the dicta from Stack suggesting that Lord Bridge may have set the bar too high by insisting that only contributions to the initial price or mortgage would do to infer intention. The dicta indicate that substantial improvements which increase the value of the property might suffice, Page 9 of 14 so Rose may be able to rely on her work on improvements and payment for materials, as the bungalow's value has gone up. Arguably, Stack and subsequent cases suggest that other conduct may be taken into account to infer intention, but it remains difficult to persuade the court that insignificant indirect contributions suffice. There was the possibility for good answers to mention cases since Stack.

If Rose can establish an interest under a constructive trust, possible cases to mention in relation to quantifying her share were Drake v Whipp [1996], Midland Bank v Cooke [1995], [2004], Stack v Dowden. In particular, candidates needed to apply the factors mentioned in Stack, as relevant to the facts. Bob and Rose had a child to house, they pooled their resources and had a joint account. However, in Oxley and Stack, the difference in the amounts contributed to the acquisition of the property was treated as significant - here Bob owned the property outright before they met. Although Rose paid for materials for the improvements, Bob obtained the discount and they both did the work. It is likely that her interest, if any, will be considerably smaller than his.

(b) Candidates were asked to advise Dan in relation to his claim that the proceeds of the warehouse, registered in the joint names of himself and Charlie, should be split equally. This required a consideration of how the size of interests should be quantified where the property is in joint names but there is no declaration as to how the beneficial interests are held, as in Stack v Dowden. The House of Lords stated that resulting trust principles were not appropriate in the context of shared homes, but the dispute here is not about a home. Good answers might have mentioned the post-Stack case of Laskar v Laskar [2008], where resulting trust principles were applied to a house bought as an investment.

Candidates should have discussed the presumption of a resulting trust in proportion to contributions. Cases such as Bull v Bull [1955], Cowcher v Cowcher [1972] [1993], Curley v Parkes could be cited. This would entitle Charlie to the two thirds he is claiming. The presumption could be rebutted if Dan could produce evidence that Charlie intended a gift or loan.

If the court decided not to apply resulting trust principles but to follow the list of factors from Stack to quantify the interests, then the difference in the size of contributions, the fact that the property was bought as an investment and their conduct in sharing the rent in the same proportions as their original contributions, would seem to suggest that Charlie should receive two thirds and Dan one third.

Key Issues to Consider

This question was not generally well answered. However, there were some reasonable answers which explained and applied the principles of resulting and constructive trusts quite well, with good reference to case law, including a number who referred in some detail to Stack v Dowden and some who mentioned some of the subsequent cases.

Candidates usually dealt reasonably well with resulting trusts although some failed to refer to any resulting trust cases. Many weaknesses were generic and are discussed above in ‘Comment on Overall Performance’. For example, some candidates adopted a poor structure, setting out all the law in the abstract and failing to apply it to the different events in the question. Many answers failed to refer to sufficient relevant case law and some did not support any of their Page 10 of 14 arguments with authority, so that their answers appeared to be based on 'common sense' rather than on legal principle.

Some candidates had obviously revised the topic in detail and learnt a lot of cases but did not understand how to use them to answer the question, as discussed in ‘Comment on Overall Performance’. Many of these merely recited the facts of the cases without any indication of the relevant legal principles or any real attempt to apply them to the facts of the question.

Many candidates failed to make any distinction between express and inferred common intention constructive trusts or to apply the principles from relevant cases to the various events in the question. A number of candidates did not consider quantification in any detail and some recited the list of relevant factors from Stack without any attempt to apply them to the facts.

Question 5

Suggested Answer:

This question required a discussion of the maxims of equity, with illustrations from case law, and a consideration of their role and contribution.

Good answers considered what is meant by the exercise of the equitable jurisdiction and how the maxims represent the early principles of equity. The quotation in the question also referred to the maxims as illustrating various recurrent themes, so good answers considered some of these themes, such as 'conscience'.

Candidates should have referred to a good number of maxims, explained what they mean and illustrated their use with example cases. In doing so, good answers made reference to the various propositions in the quotation.

Key Issues to Consider:

The question was not generally well answered. The most common weaknesses were generic and are discussed above in ‘Comment on Overall Performance’. In particular, answers were often too short. Some referred to only a few maxims and others did not explain the maxims they mentioned or refer to illustrative case law as specifically required by the question. Few candidates addressed the issues raised in the quotation.

However, there were some pleasing answers that discussed a good range of maxims, with suitable explanation and case law examples, and the best answers also made an attempt to relate their discussion to the propositions put forward in the quotation.

Question 6

Suggested Answer:

Candidates were asked to discuss the no profit and no conflict rule on fiduciaries and whether the rule operates too harshly in some circumstances. Candidates needed to explain the different aspects of the rule on fiduciaries and illustrate these with relevant case law in order to decide whether or not the rules are applied too harshly.

Page 11 of 14 In relation to the no profit rule, candidates could have referred to the rules preventing remuneration and the exceptions to these. Incidental profits also needed to be discussed. Possible examples include directors' fees, with cases such as Re Macadam [1945], Re Dover Coalfield Extension Ltd [1908], Re Gee [1948], Re Llewellin [1949] to illustrate. Cases such as Keech v Sandford [1726], Williams v Barton [1927] and in particular [1966] are important for showing the strictness of the no profit rule.

Candidates might also have mentioned that similar rules on profits have been applied to other fiduciaries, such as company directors. Cases such as Regal Hastings v Gulliver [1942], Industrial Development Consultants v Cooley [1972] and Queensland Mines Ltd v Hudson [1978] could be used to illustrate how the rules have been applied in that context.

Other possible points for discussion were the cases relating to bribes, such as Reading v Attorney General [1951], Attorney General for Hong Kong v Reid [1994], and cases where defendants were made to account for profits made from the use of confidential information.

Good answers considered the difference between accounting for unauthorised profits and holding them on constructive trust.

Candidates also needed to consider the no conflict rule which requires fiduciaries to avoid putting themselves in a position which could possibly lead to a conflict of interest. Examples include the self-dealing rule and its strict application in cases such as Wright v Morgan [1926], which could be contrasted with Holder v Holder [1968]. There is also the rule prohibiting trustees from competing with the trust.

A very good answer might have considered the case of Murad v Al-Saraj [2005], where the Court of Appeal suggested that a future case might revisit the rule on unauthorised profits and consider whether it should be applied less inflexibly in appropriate circumstances where it operates particularly harshly.

Key Issues to Consider:

The question was not well answered by some candidates, although there were a few pleasing answers which showed some thought in using relevant material to address the question. The most common weaknesses were generic and are discussed above in ‘Comment on Overall Performance’. In particular, there was a lack of sufficient detail and case law in a number of answers. Several candidates misinterpreted the question and wrote about trustees' duties in general rather than their fiduciary duties. Such answers were unlikely to score well and candidates need to take care to read questions carefully and ensure that they answer the question set.

Question 7

Suggested Answer:

Candidates were asked to discuss the principles of public benefit in relation to charity, as derived from case law and interpreted in the Charity Commission's guidance. This was in the context of a quotation which also mentioned that the Charities Act 2006 does not define public benefit.

Page 12 of 14 Candidates might have begun by mentioning that the Act contains a new list of charitable purposes, preserves the requirement for public benefit and removes any presumption that trusts are for the public benefit.

Reference should also have been made to the requirement in the Act for the Charity Commission to issue guidance, which it did, following consultation, in January 2008. The guidance, however, does not have the force of law.

Candidates needed to explain the key requirements of public benefit with reference to relevant case law and some mention of the guidance. For example, case law required there to be a tangible benefit (referred to in the guidance as an identifiable benefit) and also that the benefit be to the public as a whole or a sufficient section of the public.

Cases that might have been mentioned in relation to the relief of poverty include Re Scarisbrick [1951], Re Cohen [1973], Re Young [1950], Spiller v Maud [1881], Dingle v Turner [1972]. In Dingle, the House of Lords decided that the personal nexus test did not apply to poverty trusts.

This could be contrasted with Oppenheim v Tobacco Securities Trust [1951], where the personal nexus prevented a trust for the advancement of education from meeting the public benefit requirement. Candidates might also have referred to Gilmour v Coats [1949], the leading case on public benefit in relation to trusts for the advancement of religion.

Good answers would have explained some of the key principles set out in the Charity Commission guidance. Firstly, there must be an identifiable benefit, which must be balanced against any harm that might result from the Charity's purposes (see, for example, the pre-Act case of National Anti-Vivisection Society v IRC [1948]). Secondly, the trust must benefit the public or a section of it but any restriction on those to benefit must be reasonable in the light of the purposes of the trust. Thirdly, those in poverty must not be excluded from benefiting and this is likely to be an issue for charities that charge for their services, as any charges must be reasonable and not so high as to exclude those on low incomes. Fourthly, any private benefit must be purely incidental to carrying out the charitable purposes.

Key Issues to Consider

This question was in general not well answered. Many answers lacked sufficient detail. Some discussed charities in general, rather than focusing on public benefit. Many did not make sufficient reference to cases and some failed to mention the Charity Commission guidance at all. A few candidates simply recited sections of the Charities Act 2006, without any attempt to use them to answer the question, as referred to above in 'Comment on Overall Performance'.

Question 8

Suggested Answer:

Candidates were asked to consider the extent of trustees' duties in relation to investment and delegation of investment powers.

To do so, candidates should have discussed the duty of prudence in Learoyd v Whiteley [1887] and the statutory duty of care contained in s1 of Trustee Act (TA) 2000. They should also have discussed the need to review investments and Page 13 of 14 the standard investment criteria in s4, relating to the suitability of investments and need for diversification. In this context, reference should also be made to Nestlé v National Westminster Bank [1988] and the duty to consider and balance the needs of life and remainder beneficiaries. Candidates should also have discussed cases such as Cowan v Scargill [1985] and Harries v Church Commissioners [1993] that specify that trustees must base their investment decisions on financial criteria not on moral or ethical considerations. Mention should also have been made of the requirement to seek advice under s5 of TA 2000.

Good answers would also have referred to case law duties where a trust owns a controlling shareholding in a company. As this enables the trust to steer the company in a particular direction, it was held in Bartlett v Barclays Bank Trust Company Ltd [1980] that the trustees should not merely depend on the ordinary flow of information available to shareholders but should ensure that they have the fullest information on the conduct of the affairs of the company so that they can step in if necessary to protect the trust shareholding. Various ways of keeping themselves fully informed were suggested in that case and in Re Lucking [1968].

In relation to delegation, candidates should have referred to s11 as to what can be delegated to an agent and discussed the statutory duties applicable when delegating, including the need to review and the application of the duty of care when appointing and reviewing agents. Candidates might also have referred to s23 on how far trustees can be held liable for the acts of agents.

Key Issues to Consider

This question was answered reasonably well by a number of candidates but there were also quite a few weak answers.

The most common weaknesses were generic and are discussed above in ‘Comment on Overall Performance’. In particular, some answers were too short and failed to deal adequately with case law duties. Some candidates missed some of the key statutory duties in relation to investment and some failed to refer to the duties in relation to delegation. A number of answers merely recited the statutory provisions without comment.

This is the final Equity & Trusts examination paper under the Level 6 Professional Higher Diploma in Law. If candidates have failed then they should consider sitting Equity & Trusts on the new Level 6 Professional Higher Diploma in Law and Practice. Information is available on the ILEX website at [email protected] under changes to qualifications.

The examination statistics will be available shortly.

© 2009 Institute of Legal Executives

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