CHIEF EXAMINER COMMENTS WITH SUGGESTED ANSWERS
JUNE 2018
LEVEL 6 - UNIT - 5 EQUITY & TRUSTS
Note to Candidates and Learning Centre Tutors:
The purpose of the suggested answers is to provide candidates and learning centre tutors with guidance as to the key points candidates should have included in their answers to the June 2018 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 candidates may have included in their responses to the questions. Candidates will have received credit, where applicable, for other points not addressed by the suggested answers.
Candidates and learning centre tutors should review the suggested answers in conjunction with the question papers and the Chief Examiners’ comments contained within this report which provide feedback on candidate performance in the examination.
CHIEF EXAMINER COMMENTS
As a general observation, candidates answered two or three questions well, but did not give four good answers. This may be due to lack of preparation for the examination.
Candidates are advised not to rely on the bare minimum of revision.
CANDIDATE PERFORMANCE FOR EACH QUESTION
SECTION A
Question 1
This was a popular question with candidates and there was mixture of marks across the board. Candidates who did badly on this question showed very little or no knowledge of the area of law being examined. However, there were some very good answers from candidates who exhibited depth and
Page 1 of 20 understanding in their answers. Many candidates passed this question with a Pass grade.
SECTION B
The most popular question with candidates was question 2.
This was a charities question and there were some very good marks. Candidates enjoy studying charity law and so this was not surprising. Less able students however did not answer this well, but being very general in their answers or not exhibiting any relevant knowledge of this area of law.
SUGGESTED ANSWERS
LEVEL 6 - UNIT - 5 EQUITY & TRUSTS
SECTION A
Question 1(a)
The general rule is that, if an attempted transfer of property to trustees is imperfect, the trust is not completely constituted. A gift to a donee will be imperfect if the transfer has not been properly correctly completed.
Where consideration has been provided, the transfer may be treated as perfect in the eyes of equity even though in law it is not. Where there has been no consideration, however, no effective trust is created, since equity will not assist a volunteer.
A failed gift cannot then be saved by treating it instead as a self-declaration of trust: if a donor intends to use one method to confer a benefit on a person but fails to do so effectually, equity will not save the gift (Milroy v Lord (1862)).
Over the years, the courts have found a number of ways to avoid the harshness of the rule that equity will not perfect an imperfect gift. A gift is complete in equity as soon as the donor has done everything in his power to complete the transfer, despite the fact that formal requirements at law may still be outstanding.
In Re Rose (1949) a transfer of shares was treated as complete in equity when the donor submitted the completed transfer form and share certificate to the company. The outstanding legal requirement of registration was not something in the donor’s power to do.
A legitimate query may be raised, however, as to how the principle in Re Rose (1949) would apply if the directors of a private company were to refuse to register the transfer, as is their right, even though the donor had done all in his power. It had been thought that the Re Rose principle applied only where donor’s actions had been irrevocable. In Choithram v Pagarani (2000) and Pennington v Waine (2002), however, the crucial question was said to be simply whether it would be unconscionable for the donor to refuse to complete the transfer. These cases suggest the development of a new approach to the constitution of trusts, although this introduction of the inherently uncertain
Page 2 of 20 concept of unconscionability has attracted criticism.
1(b)
When a donor makes an imperfect gift during his lifetime, and the donee is subsequently appointed as the donor's executor or becomes the donor's administrator on intestacy, the gift is perfected because the donee obtains legal title to the donor's property, including the subject matter of the intended gift, in the donee's capacity as executor or administrator.
There are four conditions for the rule in Strong v Bird (1874):
The donor must have intended to make an inter vivos gift. Such donative intention must have persisted until the donor's death. The donee is appointed the donor's executor (or administrator, Re James (1935)) The subject matter of the intended gift must have been capable of enduring the death of the donor.
In Re James (1935), Farwell J said, "The defendant by her appointment as one of the administrators has got the legal estate vested in her and she needs no assistance from equity to complete her title. Under these circumstances she cannot be compelled at the suit of persons claiming through the donor to surrender her property. It follows that in my judgment the plaintiff here must recognise the title of the defendant to the property and no steps should be taken to recover it from her."
In criticism, the result may be contrary to the testator’s intentions/wishes.
(c)
A formally incomplete transfer may nevertheless be effective if it qualifies as a ‘donatio mortis causa’ (‘DMC’). The requirements are that (i) the gift is made in contemplation of death (Wilkes v Allington (1931)), (ii) the gift is conditional on death (Gardiner v Parker (1818)), and (iii) there is delivery of the property or of something representing ownership, (Cain v Moon (1896). This last requirement involves parting with dominion or control (Re Lillingston (1952) and Sen v Headley (1991).) So, in Birch v Treasury Solicitor (1951), a savings account was held to have been validly transferred under the DMC principle, by the handing over of the savings account book.
Generally, all forms of personal property can form the subject-matter of a DMC. The principle was extended to incomplete transfers also of (unregistered) real property by the Court of Appeal in Sen v Headley (1991). To date there has been no case on registered land but it is presumed the rule would apply.
DMCs are not without their critics given the fact that where there is a validly executed Will, the court is being asked to overturn the stated intentions of the testator. King v Chiltern Dog Rescue and Redwings Horse Sanctuary (2015) saw an appeal from the earlier decision that the deceased, when nearing the end of her life, had made a valid donatio mortis causa by delivering the title deeds of her house to her nephew, saying that he would need them after her death. She had made various failed attempts at wills giving him the house. The trial judge had found that those attempts indicated contemplation of death even though she was not suffering from any terminal illness. The Court Page 3 of 20 of Appeal reversed this decision and went out of its way to emphasise the need to strictly limit the concept, which can easily lead to fraudulent claims.
On 14 July 2017, the Law Commission published its much-awaited consultation on the law of wills (Law Commission paper 231: ‘Making a Will’). One of the subjects under consultation is the future of the DMC. The consultation paper describes the DMC as an anomaly and asks contributors for their views on the abolition of the doctrine.
Question 2
Tracing is a process that allows for the recovery of property (such as land or money) by the owner if it is taken involuntarily, and the owner has not consented to the transfer of title. This can be through theft, breach of trust, or mistake. Owners can recover their property and perhaps also any profits made from it, or in situations where the property cannot be recovered (as it has been mixed in with other property, or cannot be found), substitute property.
The process has two steps, following and tracing.
In Foskett v McKeown (2000), Lord Millett defined them by saying that "(Following and tracing) are both exercises in locating assets which may or may be taken to represent an asset belonging to the ([claimants) and to which they assert ownership. The process of following and tracing are, however, distinct.”
Following is the process of following the same asset as it moves from hand to hand. Tracing is the process of identifying a new asset as the substitute for the old".
There are a number of limitations to tracing at common law in the modern commercial world. Firstly, the Claimant must have legal title. A Beneficiary under a trust cannot trace property and then claim it at law. Secondly, the Property must be identifiable. Common Law tracing views property as physical asset and so it can only be used to trace the value of an asset in substitute provided it has not lost its identity. As a result it is more difficult where property has changed form (substituted/exchanged or mixed with money).
Common Law tracing will be available in simple cases where property has been substituted, e.g. Taylor v Plumer (1815) (investments and bullion) or paid into separate bank account (Banque Belge pour L’Etranger v Hambrouck (1921)) and FC Jones & Sons v Jones (1996) where money had not been mixed. In this case Millett in the CA said they could reclaim not only the money, but also the profit made on it – emboldening common law tracing.
However, where mixing of assets has occurred Common Law tracing becomes problematic. Some cases with tangible property have permitted tracing into the mixture and there have been instances of courts awarding claimants a proportion of the mixture as tenants in common (Indian Oil Co Ltd v Greenstone Shipping SA (Panama) (1988))
However where money is concerned, Lipkin Gorman v Karpnale Ltd (1991) suggests that money can be traced into a bank account where it has been mixed with other money but that money cannot be traced through a mixed
Page 4 of 20 bank account (Agip (Africa) ltd v Jackson (1990)). In Agip money couldn’t be traced through the New York clearing bank system because it had become mixed with other money in the system.
Unlike a century ago, the modern way to move money (via inter-bank transfer systems) mean that assets will invariably become mixed. Modern tracing claims are as a result more likely to involve equitable tracing. In addition of course, tracing at common law usually only leads to a personal claim unlike equitable tracing where an equitable remedy becomes available.
Part of the ratio of the Court of Appeal decision in Agip Africa v. Jackson (1990) is that equity will, but the common law will not, allow tracing through mixed bank accounts. Equitable tracing is based not on legal ownership but on the claimant's possession of an equitable interest.
There are several advantages to equitable tracing; firstly, it can trace property now mixed with other property. In Boscawen v Bajwa (1996), Millett justified this by saying that "equity's power to charge a mixed fund with the repayment of trust moneys enables the claimant to follow the money, not because it is his, but because it is derived from a fund which is treated as if it were subject to a charge in his favour". A limitation is that where the property has been put into a bank account that no longer contains enough money to repay it, it cannot be traced.
However, for equitable tracing to be valid, several things must be demonstrated. First, the equitable title must exist although it can be imposed by the courts, such as in the case of a Constructive trust.
Secondly, there must be some kind of fiduciary relationship between the claimant and the person who breaches the fiduciary relationship. If the property was transferred through breach of trust, it will not be necessary to establish such a relationship, because it already exists. In addition, property transferred through breach of trust may be traced to any third party (other than a purchaser in good faith), even if they did not previously have a fiduciary relationship with the claimant.
Historically, the courts have been willing to be "generous in finding that the necessary fiduciary relationship existed", even going so far as to recognise relationships that did not exist at the time of the transfer.
Equitable tracing's greatest strength is its ability to trace into mixtures of money. Different rules apply in different situations. Where the money has been mixed with the money of a trustee, where a trust fund has been mixed with another trust fund (or money belonging to an innocent volunteer), and where money has been transferred by mistake rather than malicious intent. Where the money has been mixed with the money of a trustee, the court's decision depends on the motive of the trustee. Because a trustee is expected to invest trust property and behave honestly, the courts may choose to find that the trustee transferred the money to further the goal of the trust. Since the trustee is assumed to behave honestly, any profits made may be assumed (by this "convenient fiction") to be made by the trust money, and any losses from the trustee's personal funds.
The alternate approach taken is the "beneficiary election" approach.
Page 5 of 20 This is that where trust funds are wrongly mixed with the trustee's personal funds, used for an investment, and the money is thus not recoverable, the beneficiaries are allowed to "elect" whether the investment is to be held as a security for the amounts owed to them, or whether to take the unauthorised investment as part of the trust fund.
This is considered the exception, rather than the rule. In Foskett v McKeown (2000), Millett said that "The primary rule in regard to a mixed fund, therefore, is that gains and losses are borne by the contributors rateably.
Where funds are mixed with those of another trust, or mixed with the funds of an "innocent volunteer", certain general principles apply.
As laid out in Re Diplock (1948), the principle applied is that the claimant's entitlement ranks pari passu to that of the volunteer; each has an equal claim to their funds.
Whether the fund decreases or increases in value, each party can claim a percentage equal to their contribution.
The problem here comes if the mixed funds are used in unequal chunks to acquire other property. The long-standing rule is that established in Clayton's Case (1816); that the money deposited first is deemed to be spent on the first property purchased provided the bank account holders are innocent parties.
The problem with this is that if the first property becomes less valuable than the second property purchased, the first claimant loses some of their money while the second claimant is able to claim their money in its entirety.
The alternate approach is the previously mentioned pari passu idea; whatever the total property is worth, the claimants get a share proportionate to their input, without assuming that the first claimant's money is tied to the first property purchased and the second claimant's money to the second property.
In Barlow Clowes International v Vaughan (1910), the Court of Appeal applied a similar set of principles, holding that the size of the contribution and the amount of time the money was part of the mixed fund were the factors to be considered.
Where payments have been made by mistake claimants may or may not be able to recoup their losses.
The leading case is Westdeutsche Landesbank Girozentrale v Islington LBC (1996), where Lord Browne-Wilkinson declared that a constructive trust would be created when the recipient of the funds became aware of the mistaken transfer.
As such, ignorance of the mistake would not create a fiduciary relationship, therefore not a trust, and the property would be untraceable.
Foskett v McKeowan (2000) – equitable tracing can also force the fiduciary to account for subsequent increases in value of the proprietary interest.
Page 6 of 20 Question 3
The Wills Act is an anti-fraud device in the way to make sure the will of the testator is genuine by complying with different formality requirements. Under S9 of Wills Act 1837, last wishes should be made in writing, signed by the testator whose signature is witnessed by two people. However, there is exception to S9, namely the secret trust.
Generally, secret trust arises in the situation where a settlor communicates to the intended trustee that the settlor would pass property to him for his holding on trust for the intended beneficiary after death of settlor even if there is no formal mention of the trust in the will. The court would uphold the trust even if it does not satisfy the formality requirement in S9 unless the intended trustee disagrees to be a trustee in the very first place.
There are two types of secret trust, half secret trust and fully secret trust. In fully secret trust, both the existence of the trust and the terms of the trust are absent in the will while in half secret trust, trusteeship appears in the will but there is no mention of any terms and beneficiary. There are indeed several justifications for this abnormal operation of secret trust over the centuries, significantly the fraud theory and dehors the will theory.
The fraud theory is based on the maxim: equity will not permit a statute to be used as an instrument of fraud. The operation of fraud theory aims to prevent any denial of trust based on unsatisfactory statutory formalities. In this way prevents the intended trustee from keeping the property of the settlor for his own good while depriving that of the beneficiaries. This theory gained main support from the case Rouchefoucauld v Boustead (1897).
Although the theory seems to be a fair justification for the operation of secret trust, it is not without flaw.
Firstly, it would be difficult to attest the evidence brought about by the claimant. Secondly, the theory fails in half secret trust on the fact that trusteeship is identified in the will and there could be no benefit to the trustee even though the trust fails by the operation of resulting trust as suggested by Blackwell v Blackwell (1929).
There are judicial supports for the theory as in Blackwell v Blackwell (1929) by Viscount Sumner “I do not see how the statute-law relating to the form of a valid will is concerned at all", application of the theory in Cullen v Attorney- General for Ireland (1979) and the speech by Megarry in Re Snowden (1979). Moreover cases following Blackwell seem to accept the theory as a concrete justification for operation of secret trust, more particularly in Re Young (1951) where a beneficial interest in a secret trust was upheld even though the beneficiary was a witness to the will contrary to the Wills Act 1837 where a witness could not be a beneficiary.
Dehors the will theory is probably commonly recognised as the modern theory of secret trust. However, the theory is indeed problematic.
If secret trust is outside the will, then should it follow the law of trust instead of law of probate?
First, secret trust and the will are closely inter-related. If the will fails, it would not be possible to vest the property in the secret trustee and the secret trust Page 7 of 20 will also fail due to want of subject matter. The interdependency between the two could be seen in the following situations:
(i) Revocability of secret trusts
Wills are revocable at any time before death of testator while trusts are irrevocable once it is created unless the testator reserves the right to do so. If it is said that secret trusts are dehors the will, they should be irrevocable as that of normal trusts. However, common laws established that they are not.
Secret trusts could be revoked in two different ways. Settlor could revoke the will so that there could be no vesting of property upon potential secret trustee. Moreover, settlor could revoke the secret trust without changing anything in the will as in the case of Guest v Webb in which Starke J. expressed the view that as a matter of conscience under equity, a secret trust should not be set up contrary to wishes of the testatrix.
Justification for revocability of secret trust mainly falls on the reason that secret trust is not constituted until death of settlor where the vesting of property into hands of secret trustee happens via the will.
(ii) Witness as secret trustee and secret beneficiary
It is accepted that as secret trustee does not receive any beneficial interest from the will, the secret trustee can be a witness to the will as in Re Ray’s Will Trust and Re Young (1951). However, Hayton argues that a fully secret trust under this situation should fail as a beneficial interest is given to the fully secret trustee under the will.
It is also suggested in Re Young (1951) that as secret beneficiary may not be aware of the existence of a secret trust at the time when witnessing the will, the secret beneficiary could be a witness to the will. However, if the secret beneficiary knows about the existence of the secret trust, there would be a possible conflict of interest and that would be hard to justify the decision in Re Young (1951) than that of Re Fleetwood (1880), which it was held that the legacy to beneficiary fails because the beneficiary was a witness to the will.
(iii) Death of Beneficiary
Under a will, when the beneficiary predeceases the testator, the gift lapses. However, in secret trust, if a secret beneficiary dies before the settlor, the gift could still be upheld. The situation is well-reflected by Re Gardner No.2 (1932) in which Romer J said that communication of the obligation to hold the property on trust was like a declaration which binds the secret trustee to hold the property upon trust as specified and thus the trust was constituted at that time before death of the testatrix upholding the gift to the secret beneficiary. Although Romer J has a strong argument to support that gift in secret trust was not to be treated as given under the will for secret trust could be created in the case of intestacy, Re Gardner No.2 (1932) was not without flaw.
The secret trust in Re Gardner No.2 could not be created at the time of communication and acquiescence of the trust as the subject matter at that time was future property which could not be valid under a trust and thus the time of constitution should fall on the death of testatrix.
Page 8 of 20 Hodge suggests further requirement to the constitution of a secret trust in that not only the trust is constituted on death of settlor and vesting of trust property to trustee but also needs to be further manifestation of intention of trustee to constitute the trust and acts as trustee.
Moreover, if Re Gardner No.2 (1932) was decided rightly, it would mean that the secret trust is constituted upon communication and acquiescence as in Blackwell v Blackwell (1929). However, this would contradict the revocability of secret trust as discussed earlier which could occur before death of settlor.
Secondly, the normal rules of trust do not accept declaration of immediate trust of future property while secret trust accepts the trust to be binding on property even if they are acquired afterwards. If it is to argue that secret trust could get around the problem by constitution upon death of settlor, it would mean that Re Gardner No.2 (1932) should be decided wrongly for there was no trust when the beneficiary died.
Thirdly, if secret trusts are express trusts, the trust over land would require to be evidenced in writing in accordance to S53(1)(b) of the Law of Property Act 1925 , while in Ottaway v Norman (1971), it was suggested that in the case of fully secret trust, no writing was required although writing was still required under half secret trusts of land as in obiter statement in Re Baillie (1886).
Fourthly, the argument for secret trusts to be under law of trusts instead of law of probate fails to justify the reason for the need of declaration of trust to occur before the date of the will if under the assumption that the date of constitution of trust is the date of the death of settlor and the will only acts as a trigger to the constitution purpose.
It is also suggested that there are two basic characteristics for testamentary disposition: ambulatory and revocability, which mean the valid will walks along until the testator dies and it can be revoked or changed respectively before death of testator. Clearly, the two characteristics of testamentary disposition are well satisfied by characteristics of secret trust from the discussion above.
Patricia Critchley argues the theory interprets meaning of will in a wrong sense and the theory confused “outside the will" with “outside the Wills Act" for secret trust is a kind of testamentary disposition not to “arises outside the will". Critchley distinguished meaning of will between board and narrow sense. She pointed out that the theory is founded only on the narrow interpretation of will to be a formal document executed by a testator contrary to what the statute means. Critchley’s interpretation of “will" in the broad sense seems to be more reasonable on the fact that “will" should be intention of the way the testator wishes to deal with his own property rather than of a piece of writing on which dehors the will seems to focus on the latter. Moreover, the narrow interpretation of “will" could not justify the admission of inherent evidence by court and could not explain the importance of acceptance of trust by trustee. Critchley also pointed out that S9 is indeed just an evidential provision setting out requirements for evidence to be admitted in order to prove the intention of testator.
Secret trusts do not operate completely outside the will but the two are instead inter-dependent on each other. The key element would be on constitution of a secret trust on death of settlor and vesting of property into hands of trustee either by terms of will or following rules under intestacy. Although the statement in Re Young suggests that the gift was taken under Page 9 of 20 the secret trust but not the will, it does not say that secret trust and will are independent to each other. Moreover, dehors the will theory interprets meaning of the will wrongly. Therefore dehors the will indeed fails to justify the informality of secret trust.
Question 4
Resulting trusts arise in the absence of an express declaration where a person holds legal title in circumstances where they cannot be taken to have full equitable ownership. According to Re Vandervell's Trusts (no 2) (1974) Ch 269 There are two categories of resulting trusts; Automatic resulting trust and Presumed resulting trust.
"Both types of resulting trust are traditionally regarded as examples of trusts giving effect to the common intention of the parties. A resulting trust is not imposed by law against the intentions of the trustee (as is a constructive trust) but gives effect to his presumed intention". per Lord Brown Wilkinson Westdeutsche Landesbank Girocentrale v Islington LBC (1996) 2 WLR 802.
An automatic resulting trust will arise where the settlor transfers property to the intended trustee but the trust has failed for some reason. The trustee holds the legal title of the property on trust. The beneficial or equitable ownership is retained by the settlor.
Presumed resulting trusts arise either from voluntary transfer of the legal estate or by contribution to the purchase price. In these situations it is presumed that the person did not intend to make a gift of the property or money unless there is a clear intention that they did so intend. In such circumstances a resulting trust arises and the transferor or the person making the contribution retains or takes a share in the beneficial interest. However, in some relationships there is a counter presumption that a gift was intended. This is known as the presumption of advancement.
Uncertainty of objects is a failure to specify intentions clearly, Vandervell and how the intention was defeated.
Outside of land law, where a person transfers property to a third party who does not provide any consideration, there is a presumption of resulting trust, unless the relationship is one which gives rise to the presumption of advancement. However, S.60(3) Law of Property Act 1925 cast doubt as to whether this would apply to the transfer of land.
S.60(3) did not prevent a resulting trust being imposed in Hodgson v Marks (1971). In this case, Mrs Hodgson transferred her house to her lodger Mr Evans on the basis that she would remain the beneficial owner of the whole. They both continued to live in the house under the same arrangement with regard to rent and payment of bills. He held the legal title as bare trustee for her. He then in breach of trust sold the house to Mr and Mrs Marks. When the Marks came to view the property they saw Mrs Hodgson coming up the path but did not make any enquiry as to who she was or if she had any interest in the house, assuming she was Mr Evans’ wife. At trial, the judge found for the Marks and held that actual occupation required actual and apparent occupation and only protected those whose occupation was by an act recognisable to any person seeking to acquire an interest in land. Mrs Hodgson appealed.
Page 10 of 20 The appeal was allowed. Mrs Hodgson was in actual occupation and it was irrelevant that the Marks had assumed her to be Mr Evans’ wife. There was no requirement that occupation need be apparent.
It is well established that a contribution to the purchase price will give rise to a presumption of resulting trust meaning the person that makes the contribution will take a share in the equitable ownership of the property in proportion to their contribution. In Gissing v Gissing (1971), Mr & Mrs Gissing divorced after 31 years of marriage. The legal title of the matrimonial home vested in Mr Gissing alone. Mrs Gissing claimed to be entitled to half of the beneficial interest. The purchase price of £2,695 was provided by a mortgage of £2,150, a loan of £500 taken out by the husband and the remainder came from his own money. Mrs Gissing provided £220 towards furniture and laying a lawn. Mr Gissing paid the mortgage instalments and loan instalments. He also gave Mrs Gissing an allowance to pay for the running costs of the house. They had separate bank accounts. She used her money to purchase clothes for herself and their child and some household expenses.
The court held that Mr Gissing held the house absolutely. Mrs Gissing had no beneficial interest in the property. There was no evidence of a common intention that she was to share in the beneficial interest of the house. Her contributions were not sufficient to infer a common intention.
If there is existing evidence that a gift was intended, this will rebut the presumption of resulting trust and the transferee will be absolutely entitled to the property and the transferor will not be entitled to any share in the beneficial ownership (Fowkes v Pascoe).
The same principle applies where the money advanced for the purchase price was intended to be a loan (Re Sharpe (A bankrupt) (1980)).
Lord Browne-Wilkinson’s judgement in Westdeutsche Landesbank v Islington LBC illustrates the importance of intention in reaching a judgment, so it is not just an academic debate.
The cases in relation to surplus funds can be discussed in relation to the charity/purpose cases such as Re the Trust of the Abbott Fund (1900). Consider whether those who give to charity really intend to regain their property should the charity not need it.
Upon the failure of a charitable trust, the gift may be held on resulting trust for the donor, as in Chichester Diocesan Fund v Simpson (1944), or submitted to variation under the cy-près doctrine. As in Simpson v Simpson (1992), if property is given to somebody who is incapable of acting, it will also be held on resulting trust for the donor.
A resulting trust will also be found where the purposes of a trust have been completed, but there is excess property left over; for example, a trust by a settlor to provide for his children's university education. Judges and academics disagree over what should happen to the property; possibilities are that it should be held for the donors, that it should be held for the beneficiaries (as the donors intended to make an irrevocable gift) or that it should be given to the Crown as bona vacantia. A fourth suggestion is that the trustees take the surplus, as in Re Foord (1992). The general rule was set out in Re Trusts of the Abbot Fund (1900), where it was decided that excess funds will be held on resulting trust for the settlor. There are exceptions to this rule; the general Page 11 of 20 rule is put aside if the court can find intention to benefit specific individuals, as in Re Osoba (1978).
Linked to this category is the problem of unincorporated associations. Unincorporated associations cannot hold rights (chattels or land) on their own account. When they dissolve, the question is then what to do with property that has been transferred to the association. The traditional view, as laid out in Re West Sussex Constabulary's Widows, Children and Benevolent (1930) Fund Trusts, is that the members of the association hold these rights on purpose trust. Where the money was raised from identified individuals, the property should be held on resulting trust for donors upon the failure of the purpose trust. Where it is impossible or impractical, the property should be passed to the Crown as bona vacantia. The more modern view developed from Walton J's judgment in Re Bucks Constabulary Benevolent Fund (1979). This is that dissolving a society and distributing property to its members is a matter of contract, not trusts law. As such, the contract between the association's members should be the deciding factor in how the property is to be distributed, and there is no need to involve resulting trusts. If the contractual provisions identify how to distribute property, they will be followed; if not, the property will be distributed according to an implied term, usually in equal shares
Consider if there should be different rules for donations for purposes with human beneficiaries and those with no human beneficiary.
The discussion above can lead to a discussion of Quistclose trusts and how the intention of the settlor is enforced here, so the imposition of a resulting trust in this situation specifically does reflect the intention of the settlor. Lord Wilberforce, in Barclays Bank Ltd v Quistclose Investments Ltd (1970), stated that the contract gives the moneylender an equitable interest in the loan. Under Wilberforce's two-stage trust, the interest in the money first goes from the lender to the borrower (the primary trust) and then, when the trust's purpose fails, reverses (the secondary trust). In Twinsectra v Yardley (2002) Lord Millett also explained that a Quistclose trust is a resulting trust, but held that the lender retains the interest throughout the transaction, with no need for this interest to reverse if the purpose of the loan fails. The problem with Wilberforce's analysis, , is that because the resulting trust only comes into existence after the misuse of the loan, it may come too late; if the money is not available when the claim is brought, there is no remedy. The borrower may already have spent the money, or already be insolvent and the subject of claims by creditors.
Another flaw with both Wilberforce's and Millett's explanations is that if the interest is retained by the lender from the outset of the contract, it is not a resulting trust at all; the complete transfer of money should end the lender's equitable interest. It could be argued that the creation of a Quistclose trust is not based on the recovery of the original interest, but the creation of a new one. Doubts have also been raised about the Twinsectra case in general, in that the facts of the case did not create a stereotypical Quistclose trust; this causes problems with applying Millett's analysis.
Page 12 of 20 SECTION B
Question 1(a)
To be a valid charitable trust it must satisfy requirements:
Gift must be for a purpose which falls within S 3(1) of the Charities Act The trust must promote the public benefit accepted by courts (as what is considered charitable is a question of law not settlors intentions) The purposes of the trust must be wholly and exclusively charitable.
TFF would appear to fall under S3(1)(c ) Charities Act - advancement of religion. A belief in god is not required (R (Hodkin & Anor) v Registrar-General of Births, Deaths and Marriages (2013)) as long as there is an advancement of spiritual beliefs through pastoral or proselytising work. One of the most important is that they must have a level of engagement with the world around them (Gilmore v Coates (1949) and promoted “moral or ethical improvement”. The Charity Commission recently rejected an application to grant charitable status to the Temple of the Jedi Order as it failed on these very grounds. TFF would seem to fall into a similar category. TFF may have a belief system but this is not enough. The Charity Commission has said that it is looking for “cogency, cohesion or seriousness” to be a true belief system.
Another problem for TFF is the fact that it charges a lot of money for its sessions. Charities must not exclude the poor.
1(b)
The School – S3(1)(b) CA – advancement of education. But must still consider the public benefits test and the need to be exclusively charitable.
Private schools have historically been able to claim charitable status through the provision of scholarships and bursaries. The Charity Commission has considered the position of schools in 2014 (with regards to the public benefit principles) and issued extensive guidance which has subsequently been the focus of a great deal of discussion in the independent school’s sector. It is now clear that a school must show a range of acts to qualify for charitable status including a bursary and scholarship scheme, out-reach work, links with the wider education community, etc. It is unlikely that one bursary per year will cut the mustard!
(c)
Mini Beasts Wildlife Trust – the question here is about cy pres. For cy pres to apply the gift must be charitable (S62 CA). Trusts where the doctrine is applicable are divided into two groups; those with subsequent failure, where the trust's purpose has failed after it came into operation, and initial failure, where the trust's purposes are immediately invalid. Subsequent failure cases simply require the redirection of the funds to the nearest possible purpose, since there is no question of allowing the settlor's next of kin to inherit the money. Initial failure cases, however, require not just a decision on whether the purpose has failed, but also on whether the funds should be subject to cy- près or returned to the estate in a resulting trust. This is decided based on the Page 13 of 20 charitable intention of the settlor, something determined on the facts of each individual case but some general principles are in place; external evidence is admissible to override any prima facie interpretation that a gift is for non- charitable purposes, as in Re Satterthwaite's Will Trusts (1966), and charitable intention can be found in cases where a non-existent charity is the recipient of the settlor's gift, as in Re Harwood (1936).
Cy pres is allowed if: the original purpose for the gift has been fulfilled or cannot be carried out in accordance with the spirit of the gift or the original purpose has ceased to exist. This does not seem to be a case of amalgation (Re Faraker (1912)) but rather that MBWT has ceased to exist. We know that it was charitable (unlike Re Harwood (1936) where it had to be imputed) when it existed so the question is how the money is used now. The Charity Commission will find the money home for the gift that is similar to BMWT.
Question 2(a)
Petey Ltd shares
Shares in a private company are an authorised investment. Under s3 of the Trustee Act 2000 (‘TA 2000’) the trustees may invest as though they were beneficially entitled to the trust fund. However they owe a duty to consider the suitability of the investments they make and the need for diversification of the entire portfolio (s4 TA 2000’).
The trust has diverse investments but further information is needed on whether the investment in Petey Ltd is suitable. Shares in this private company may have been too risky or may not have served the interests of the beneficiaries. The trustees breached their duties if they did not seek advice from someone they reasonably believed to be qualified to advise them before buying the shares (s.5 TA 2000).
The trustees are also in breach if they failed to review the shareholding (s4(2) TA 2000’). Where the trust holds a majority holding in a private company the trustees must ask for company accounts, attend shareholders’ meetings and keep a close watch on the directors. If necessary the trustees should get themselves appointed as directors (Bartlett v Barclays Bank (1980); Re Lucking (1968)). Retaining shares where the value is falling may indicate a failure to review. Family loyalty is not a valid reason for keeping the shares; the trustees must act in the best financial interests of the beneficiaries (Cowan v Scargill (1985)).
The trustees must exercise such care as is reasonable in all the circumstances (s.1 TA 2000’). A professionally qualified trustee is expected to exhibit the care that would be expected from a member of the same profession so Beatrice’s duty of care may be greater than Antonia’s.
Quoted shares
The issue here is whether the trustees are liable for the defaults of the adviser. Trustees are permitted to delegate the selection and management of trust investments to a suitably qualified financial adviser (s11 TA 2000’). They must appoint the adviser in writing and provide a policy statement setting out any restrictions on investment and the objectives of the trust (s15) TA 2000’. They owe a duty to review the appointment and the policy statement and
Page 14 of 20 intervene if necessary (ss.21 and 22) TA 2000’.
The trustees owe the s.1 standard of care on the appointment of the agent, preparation of the policy statement and review.
Trustees are not vicariously liable for the defaults of the agent but an action can be brought against them if they breach any of the above duties and this causes loss to the trust (s23 TA 2000’).
If the beneficiaries establish a breach of trust they may still have difficulty proving that it caused a loss. Trustees are not expected to achieve a return which keeps pace with inflation or the stock exchange indices. The standard is measured by the yield which would be attained by reasonable prudent trustees performing all their duties (Nestlé v NatWest Bank (1988)). In both cases, the trustees would have a defence if they acted honestly and reasonably and ought fairly to be excused (s61 of the Trustee Act 1925)
2(b)
There are 2 issues here – the purchase of Crossfield Manor by Antonia and the purchase of the property in France.
While it is allowable to purchase a property for a beneficiary to occupy the purchase of the house was not an authorised investment: s8 of the TA 2000 permits trustees to buy freehold or leasehold land in the UK for occupation by a beneficiary. This property is in France.
The purchase of Crossfield Manor by Antonia is a breach of her fiduciary duties. Although Antonia may think she is acting in the best interests of the trust by purchasing trust property she is breach of her fiduciary duty (Keech v Sandford (1726)). As a result the beneficiaries will have a claim against Antonia. The usual remedy would be that Antonia must accounting for the profits made from the purchase of the house. However, a constructive trust over the property would be more appropriate in this instance (FHR European Ventures LLP v Cedar Capital Partners LLC (2014))
(c)
Section 19 of the Trusts of Land and Appointment of Trustees Act 1996 gives beneficiaries the power to serve a written direction on trustees requiring them to retire and appoint replacements. All the beneficiaries must be sui juris and agree. This is the case here. As an alternative, they could apply to the court to replace the trustees under s41 of the Trustee Act 1925 on the grounds that it would be difficult inexpedient or impracticable to replace them without the court’s assistance and that it would be expedient for the court to act. The court may make an order if the trustees are shown to be in breach of trust.
Page 15 of 20 Question 3
1. £100,000 to build a suitable monument in memory of my genius as an artist, and to maintain the monument for as long as possible.
Theobold has attempted to create a trust for a private purpose rather than for a legal person. This infringes the beneficiary principle in that there is no legal person to enforce the trust (Morice v Bishop of Durham (1805)).
To be valid the purpose must be charitable or within one of the accepted exceptions to the rule, i.e. those in Re Endacott (1959), Re Denley (1969). It will also require a valid perpetuity period and a willing trustee.
It appears that this example will fall under the exception for the erection and maintenance of graves and monuments (Mussett v Bingle (1876)).
There should be no issue with perpetuity period regarding the building of the monument – it should be complete within 21 years – however maintenance of the monument could continue indefinitely. In Re Hooper a trust did not fail due to perpetuity period when it was stated that it should continue for ‘as long as the law allows’. Here, Theobold has stated ‘for as long as possible’. If this was interpreted as ‘as long as possible under the law’ then the trust would be valid, however if it was interpreted as ‘as long as physically possible’ then it would lack a valid perpetuity period.
If the trust was founding wanting of a valid perpetuity period it would not be possible to sever the two parts (building / maintenance) as specific amounts have not been assigned to each – the entire trust would be invalid (Salisbury v Denton (1857) / Mussett v Bingle (1876)).
If valid then the funds should be used as stated, if not they should pass to the residuary estate.
2. £15,000 to my trustees to select such of my relations as they shall see fit but if any property remains undistributed at the end of the year after my death to divide equally among my relations.
This clause is either power of appointment plus (at end of year) a fixed trust or discretionary trust plus (at end of year) a fixed trust. When considering the power, it must be considered whether the power is a fiduciary power or personal power. In this case it is almost certainly fiduciary.
The second question to then whether it is a discretionary trust? This must be considered by answering whether the trustees have to distribute the property? Here this may not be the case since the settlor provides for what happens if they don’t distribute i.e. equal distribution.
However, the provisions in McPhail v Doulton (1970) should be considered where the settlor makes provision for what happens if the trustees don’t distribute BUT the House of Lords decided that what he meant was that there is a duty to distribute but a power not to if the trustees decide to accumulate. Lord Wilberforce argues that telling the difference between a power to appoint and a duty to appoint (i.e. a discretionary trust) can be difficult. However this may not actually matter in relation to the validity of the clause only in the administering the trust.
Page 16 of 20 Suppose there are 3 trustees, 1 wants to distribute all of the property now – the other two do not. Do the trustees have to distribute immediately?
If there is a duty to distribute immediately (i.e. discretionary trust) but a power not to and wait for a year then they must distribute immediately.
Why?
Because they must distribute unless they can exercise the power and to exercise the power they must be unanimous.
If there is NO duty to distribute immediately (ie fiduciary power of appointment) then they cannot distribute immediately.
Why?
Because they have a duty to wait unless they can exercise the power of appointment and to exercise the power they must be unanimous.
Either way there is a potential need to distribute equally (fixed trust if no appointment within the year) so the need for a list. Even if the trustees make it clear they will appoint all of the property long before the end of the year.
Is ‘relations’ sufficiently certain to meet the ‘list’ requirement – because the whole trust is void if not. Here we must consider how the Court of Appeal defined relations in Re Baden No2 (1973). Sachs and Megaw LJJ defined relations as ‘descended from a common ancestor’ and Stamp LJ defined them as ‘next of kin’.
3. My collection of Constable paintings to my trustees to hold for such of my friends as Donald may select.
The first issue with this clause is that it is not obvious for whom the trustees hold the property before Donald makes appointments. It would appear that if the distributions are not made that the painting would revert back to the settlor on a resulting trust.
Donald has a power of appointment in this clause but he is not a trustee. Therefore this is not a fiduciary power but a personal power. As a result he is not bound by the fiduciary duties which would bind a trustee. He could ignore the request altogether. He could exercise it capriciously.
When he exercises the power he must choose between the “friends” of the settlor but there are issues of certainty of subject here. What does “friends” mean? This is particularly difficult to ascertain in the modern world of facebook and twitter where we may have “friends” we have never met.
If the gift fails result back to the estate and fall in to the residue. This gift could be saved by putting a time limit on Donald’s exercise of the order, with a default provision: ‘In the event that no appointment is made by [date] then to Jo Bloggs absolutely’. Alternatively, Theo should list the friends he wants to benefit.
Page 17 of 20 4. £50,000 to my trustees to hold for such person or persons, being inhabitants of Bedford, as they shall in their absolute discretion select.
In McPhail v Doulton (1970), Bertram Baden established a fund for the benefit of the staff of Matthew Hall & Co Ltd. He died in 1960 and the executors of his trust claimed that the trust was invalid for uncertainty of objects. It was, therefore a power not a trust. The issue contested was contained in clause 9(a) of the trust deed which said that, the trustees shall apply the net income of the fund in making ‘at their absolute discretion’ to or for the benefit of any of the officers and employees or ex-officers or ex-employees of the company or to any relatives or dependents of any such persons [...] the trustees shall be under no obligation to see to the application of the money.
On appeal, the Court of Appeal ruled that: (1) Clause 9 (a) constituted a trust because the word ‘shall’ combined with a power of selection created a trust for the distribution of income; (2) The test for certainty of objects was similar to that applied to powers: if it can be said with certainty that any given person is or not a member of the class, the trust will not fail only because it is impossible to ascertain every member of the class. Through this decision, McPhail constitutes a turning point because it changed the certainty requirements for discretionary trusts.
Lord Wilberforce in McPhail v Doulton (1970) suggested ‘administrative unworkability’ as a reason for invalidity. The meaning of the words used is clear but the definition of beneficiaries is so hopelessly wide as not to form 'anything like a class' so that the trust is administratively unworkable. He suggested ‘residents of Greater London’ was far too wide to be workable.
Here we have ‘inhabitants’ rather than ‘residents’. Do these two words mean the same thing? Inhabitants suggest something even wider than residents and so if anything given to greater administrative unworkability.
In R v District Auditor of West Yorkshire MCC (1986), per Taylor J stated that:
‘A trust with as many as 2 ½ million potential beneficiaries is, in my judgment, quite simply unworkable. The class is far too large...’
The likelihood is this clause would fail and fall in to residue. To be saved the testator must consider a far small group of potential beneficiaries.
5. The residue to my trustees to pay to such person or persons they believe may have a moral claim on me, in the event of any doubt they may consult Edward whose decision shall be final.
The question here is whether a discretionary trust where the class is ‘persons with a moral claim on me’ meets the ‘any given postulant test’ (Re Gulbenkian (1968)). It seems unlikely unless there is evidence of what the settlor meant by this. This is a case of conceptual uncertainty.
In Re Tuck (1978), Sir Adolph Tuck created a trust for future baronets who were married to a wife 'of Jewish blood' and who 'continues to worship according to the Jewish faith'. If in doubt, 'the decision of the Chief Rabbi in London of either the Portuguese or Anglo German Community… shall be conclusive'. It was contended that the concepts of being of Jewish faith and of Jewish blood were too uncertain for the trust to be valid. Lord Denning MR Page 18 of 20 held the trust was valid, and the Chief Rabbi could resolve any uncertainty.
Here it must be considered whether it is reasonably clear what the settlor was concerned to achieve? In Tuck, the testator wanted his grandchildren to be Jews as understood by Orthodox authorities. But suppose the objective of the settlor is not so clear. Why should Edward be any better at defining the term than anyone else – if he is acting through guesswork alone does this invalidate the power because the Court is in no position to determine whether he is acting properly and so he is beyond the court’s control?
It is the residuary gift and so if this fails the whole of the residue will pass according to the rules of intestacy, i.e. to specified next of kin. If no relations can be found, it will pass to the Crown as bona vacantia.
Question 4
There are two properties to be considered in this question. One is held jointly by the parties and the other is in Wanda’s sole name.
The London Flat
This is a sole ownership situation. The flat is in Wanda’s sole name so Mark needs to convince the court of the existence of a trust; if he cannot do this Wanda gets the equitable and legal share. He has not contributed to the initial acquisition (Lloyds Bank v Rosset (1991)) so a common intention constructive trust seems to be his only hope (in the absence of an express declaration of trust). He must show that this has arisen as result of the property becoming their family home. Students must identify Lloyds Bank v Rosset (1991) as the leading authority for sole name cases and the principle that direct financial contributions need to have been made. Mark has seemingly not done this; the fact that mortgage payments were always made from Wanda’s account (either via rental payment or directly from her).
In the context of the family home, the courts have evinced a willingness to impose a constructive trust to prevent fraudulent or unconscionable conduct. Prior to Lloyds Bank v Rosset (1991), it was evident that two lines of authority emerged from the cases. The first line of authority, illustrated by cases like Gissing v Gissing (1970) and Pettitt v Pettitt (1970) was based on the ‘solid tug of money’, which followed closely the resulting trust analysis, in that, there had to be a direct referability between financial contributions and the acquisition of the property. In the absence of evidence to the contrary, the prima facie inference is that it is the common intention of the parties that any contributions made towards the total purchase price of the property would entitle the party making the contribution to a proportionate share in the property.
The second line of authority is found in cases like Eves v Eves (1975) and Grant v Edwards (1986). The constructive trust is imposed on the grounds of ‘fairness’ or ‘justice’ which suggests the courts’ willingness to impose a constructive trust in situations where the claimant is able to establish that the defendant has either explicitly promised to share the property or at least acknowledged in some way the intention to share and the claimant has, in reliance on this promise, acted to his or her detriment. This needs to be applied to Mark and Wanda’s situation. In doing the work to the flat did Mark believe he had a share in it? Had Wanda led him to believe this?
Page 19 of 20 It is also worth considering the status of indirect financial contributions as in LeFoe v LeFoe & Woolwich (2001) in which the payment of bills by the non- owning party enabled the legal owner to meet the mortgage payments. However here there is nothing to suggest that Wanda could not have afforded the payments on her own. Better students will bring in Baroness Hale’s comments in Stack V Dowden (2007) about the bar being set a little too high in Rosset, but that without doubt there needs to be something referable to the property, and not the mere fact of coupledom. It is suggested that Mark has made improvements to the flat since the family moved it. Whether this will be enough to establish a constructive trust will depend on the type of work done. Extensions leading to an increase in capital value may be held to be sufficient but certainly housework and childcare will not.
If enough is shown to establish a constructive trust, candidates should then consider Hale’s holistic approach to suggest a possible apportionment if Mark was successful in his claim. From the facts I would suggest that 15% is the most Mark could hope for, and that Wanda has some strong arguments to limit his claim.
The House
There is a clear difference here with the strong presumption of equal shares (Stack v Dowden 2007)). Mark will be entitled to at least 50% (he put up the deposit but she paid the mortgage) unless Wanda can convince the court that either their initial intention was not for equal shares, or their intention has changed. The discovery of the affair is too recent to have had a change in the apportionment of shares.
They purchased as Joint Tenants although it is not clear that Mark appreciated the full extent of what this means (Burns v Burns (1984)). Fowler v Baron (2008) shows how much the courts emphasise the advice and decision at the time of purchase, but this leads to the question of why Mark did not make sure that there was a declaration of trust to acknowledge his deposit contribution. If he had not wanted to “protect” that at the time of purchase then that is strong evidence of 50/50. In Stack Lady Hale comments on the presence of a “joint enterprise” which sees parties go into the purchase together looking forward to a joint future. This would appear to be the case here as they bought the house as a family home following the birth of their child.
The house is now being rented out and the rental income is covering the mortgage. While Mark provided the deposit, it appears that Wanda paid most for the mortgage while the family lived there. Most cases go very much along the financial lines.
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