Equity and Trusts

Robert Chambers
James Penner
William Swadling
This guide was prepared for the University of London International Programmes by:

uu Robert Chambers, BEd, LLB (Alberta), DPhil (Oxon), Professor of Private Law, The
Dickson Poon School of Law, King’s College London.

Drawing on previous guides by:

uu William Swadling, MA (Oxon), LLM (London), Reader in the Law of Property at the
University of Oxford and Senior Law Fellow at Brasenose College.

uu James Penner, BSc (UWO), LLB (Toronto), DPhil (Oxon), Barrister (Lincoln’s Inn),
Professor at the National University of Singapore.

Core and applied comprehensions were written in 2016 by:

Mary McLaughlin LLM (QUB), MA (QUB), LLB (UU), PGCE (OU), PGCHET (QUB), BA
(Reading), DipTrans IoLET, FHEA, Teaching Fellow, University of London.

This is one of a series of module guides published by the University. We regret that
owing to pressure of work the authors are unable to enter into any correspondence
relating to, or arising from, the guide.

If you have any comments on this module guide, favourable or unfavourable, please
use the form at the back of this guide.

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Equity and Trusts page i

Contents
Module descriptor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . v

1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
1.1 Trusts: a difficult subject? . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
1.2 Sources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
1.3 Learning outcomes, self-assessment questions and activities . . . . . . . . . 5
1.4 Advice on the examination . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

2 Trusts – the basics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
2.1 What is a trust? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
2.2 Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
2.3 Comparison with other legal concepts . . . . . . . . . . . . . . . . . . . . 12
Reflect and review . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

3 Types of trusts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
3.1 Express trusts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
3.2 Discretionary and fixed trusts . . . . . . . . . . . . . . . . . . . . . . . . 19
3.3 Bare trusts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
3.4 Trusts arising by operation of law . . . . . . . . . . . . . . . . . . . . . . 21
3.5 Testamentary and inter vivos trusts . . . . . . . . . . . . . . . . . . . . . . 23
3.6 Purpose trusts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Reflect and review . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26

4 The express trust relationship . . . . . . . . . . . . . . . . . . . . . . 27

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
4.1 Introduction to rights and duties . . . . . . . . . . . . . . . . . . . . . . 29
4.2 Powers and duties of trustees and others . . . . . . . . . . . . . . . . . . 32
4.3 Typical administrative powers and duties . . . . . . . . . . . . . . . . . . 34
4.4 Investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
4.5 Power of delegation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
4.6 Interests of beneficiaries and objects of powers . . . . . . . . . . . . . . . 37
Reflect and review . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43

5 Declarations of trust . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
5.1 Intention to create a trust . . . . . . . . . . . . . . . . . . . . . . . . . . 47
5.2 Identifying the trust assets . . . . . . . . . . . . . . . . . . . . . . . . . . 49
5.3 Identifying the beneficiaries . . . . . . . . . . . . . . . . . . . . . . . . . 51
Reflect and review . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58

6 Formalities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
6.1 Declarations of trusts of land . . . . . . . . . . . . . . . . . . . . . . . . . 61
6.2 Testamentary trusts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64
6.3 Transfer of equitable interests . . . . . . . . . . . . . . . . . . . . . . . . 64
Reflect and review . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68
page ii University of London  International Programmes

7 Constitution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70
7.1 Constituting a trust . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71
7.2 Defective constitution . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72
Reflect and review . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76

8 Promises to create trusts . . . . . . . . . . . . . . . . . . . . . . . . . 77

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78
8.1 Promises in deeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79
8.2 Promises for consideration . . . . . . . . . . . . . . . . . . . . . . . . . . 82
8.3 Promises and detrimental reliance . . . . . . . . . . . . . . . . . . . . . . 83
Reflect and review . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85

9 Charitable purpose trusts . . . . . . . . . . . . . . . . . . . . . . . . 87

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88
9.1 Charitable status . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89
9.2 The meaning of ‘charity’ . . . . . . . . . . . . . . . . . . . . . . . . . . . 90
9.3 The public benefit requirement . . . . . . . . . . . . . . . . . . . . . . . 95
9.4 Contaminating non-charitable elements . . . . . . . . . . . . . . . . . . . 96
9.5 Cy‑près . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97
Reflect and review . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 103

10 Private purpose trusts . . . . . . . . . . . . . . . . . . . . . . . . . 105

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 106
10.1 Objections to private purpose trusts . . . . . . . . . . . . . . . . . . . . 107
10.2 The ‘beneficiary principle’ . . . . . . . . . . . . . . . . . . . . . . . . . 108
10.3 Trusts for persons limited by a purpose . . . . . . . . . . . . . . . . . . . 110
10.4 Anomalous valid private purpose trusts . . . . . . . . . . . . . . . . . . 111
10.5 Departures from the beneficiary principle . . . . . . . . . . . . . . . . . 112
Reflect and review . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 114

11 Unincorporated associations . . . . . . . . . . . . . . . . . . . . . . 115

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 116
11.1 Transfers to unincorporated associations . . . . . . . . . . . . . . . . . 117
11.2 The distribution of rights upon dissolution . . . . . . . . . . . . . . . . . 119
Reflect and review . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 123

12 Resulting trusts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 125

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 126
12.1 When do resulting trusts arise? . . . . . . . . . . . . . . . . . . . . . . . 127
12.2 Why do resulting trusts arise? . . . . . . . . . . . . . . . . . . . . . . . 131
Reflect and review . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 136

13 Constructive trusts . . . . . . . . . . . . . . . . . . . . . . . . . . . 137

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 138
13.1 Genuine constructive trusts . . . . . . . . . . . . . . . . . . . . . . . . 139
13.2 False constructive trusts . . . . . . . . . . . . . . . . . . . . . . . . . . 139
13.3 Types of constructive trust . . . . . . . . . . . . . . . . . . . . . . . . . 140
13.4 Making sense of constructive trusts . . . . . . . . . . . . . . . . . . . . 141
13.5 Wrongs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 141
13.6 Unjust enrichment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 142
13.7 Other events . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 144
Reflect and review . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 147
Equity and Trusts page iii

14 Secret trusts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 149

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 150
14.1 What are secret trusts? . . . . . . . . . . . . . . . . . . . . . . . . . . . 151
14.2 Justifications for the admission of evidence of secret trusts . . . . . . . . . 151
14.3 Some specific issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . 154
14.4 What type of trust is ultimately enforced? . . . . . . . . . . . . . . . . . 156
Reflect and review . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 159

15 Appointment, retirement and removal of trustees . . . . . . . . . . . 161

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 162
15.1 The appointment, retirement and removal of trustees in outline . . . . . . 163
15.2 Powers in the trust instrument . . . . . . . . . . . . . . . . . . . . . . . 164
15.3 Powers under ss.36 and 39 of the Trustee Act 1925 . . . . . . . . . . . . . 164
15.4 Powers under s.19 of the Trusts of Land and
Appointment of Trustees Act 1996 . . . . . . . . . . . . . . . . . . . . . 165
15.5 The statutory and inherent jurisdiction of the court . . . . . . . . . . . . 165
15.6 The vesting of the trust rights upon a change of trustee(s) . . . . . . . . . 166
Reflect and review . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 169

16 Variation of trusts . . . . . . . . . . . . . . . . . . . . . . . . . . . 171

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 172
16.1 The principle in Saunders v Vautier . . . . . . . . . . . . . . . . . . . . . 173
16.2 The grant of administrative powers: Trustee Act 1925, s.57 . . . . . . . . . 174
16.3 The variation of beneficial interests: Variation of Trusts Act 1958 . . . . . . 174
Reflect and review . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 177

17 Breach of trust . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 179

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 180
17.1 Liability of trustees for breach of trust . . . . . . . . . . . . . . . . . . . 181
17.2 Liability of trustees inter se . . . . . . . . . . . . . . . . . . . . . . . . . 185
17.3 Liability of third parties . . . . . . . . . . . . . . . . . . . . . . . . . . 188
17.4 Dishonest assistance . . . . . . . . . . . . . . . . . . . . . . . . . . . . 188
17.5 Knowing receipt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 189
Reflect and review . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 197

18 Breach of fiduciary duty . . . . . . . . . . . . . . . . . . . . . . . . 199

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 200
18.1 Fiduciary relationships . . . . . . . . . . . . . . . . . . . . . . . . . . . 201
18.2 Breach of trust v breach of fiduciary duty . . . . . . . . . . . . . . . . . . 201
18.3 The ‘no conflict’ rule . . . . . . . . . . . . . . . . . . . . . . . . . . . . 202
18.4 The ‘no profit’ rule . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 202
18.5 The ‘self dealing’ rule . . . . . . . . . . . . . . . . . . . . . . . . . . . . 203
18.6 The ‘fair dealing’ rule . . . . . . . . . . . . . . . . . . . . . . . . . . . . 204
18.7 Equitable compensation . . . . . . . . . . . . . . . . . . . . . . . . . . 204
18.8 Trustee exemption clauses . . . . . . . . . . . . . . . . . . . . . . . . . 206
Reflect and review . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 209

19 Claims based on tracing . . . . . . . . . . . . . . . . . . . . . . . . 211

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 212
19.1 Tracing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 213
19.2 Claiming . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 217
Reflect and review . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 222
page iv University of London  International Programmes

Feedback to activities . . . . . . . . . . . . . . . . . . . . . . . . . 223

Chapter 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 225
Chapter 2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 226
Chapter 3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 226
Chapter 4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 227
Chapter 5 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 230
Chapter 6 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 233
Chapter 7 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 233
Chapter 8 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 234
Chapter 9 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 235
Chapter 10 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 240
Chapter 11 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 241
Chapter 12 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 241
Chapter 13 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 242
Chapter 14 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 242
Chapter 15 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 243
Chapter 16 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 244
Chapter 17 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 244
Chapter 18 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 248
Chapter 19 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 249
Equity and Trusts page v

Module descriptor
GENERAL INFORMATION

Module Title
Equity and Trusts

Module Code
LA2002

Module Level
5

Students taking Equity and Trusts at Level 6 (LA3002) should refer to the Module
Descriptor available on the Laws VLE.

Contact email
The Undergraduate Laws Programme courses are run in collaboration with the
University of London International Programmes. Enquiries may be made via the
Student Advice Centre at: [Link]

Credit
30

Courses on which this module is offered

LLB, EMFSS

Module Pre-requisite
None

Notional Study Time

300 hours

MODULE PURPOSE AND OVERVIEW

Equity and Trusts is one of the seven foundation modules required for a qualifying
law degree (QLD) in England and Wales. Standard Entry and Graduate Entry students
on a QLD pathway must pass an examination in the module in order to meet the
requirements of their course.

This module deals with the rules and principles governing the creation and operation
of trusts – a particular method of holding property that developed historically
primarily to preserve family wealth, particularly by minimising liability to taxation. The
syllabus focuses on three broad areas:

1. the requirements for establishing a valid trust (including express private trusts;
charitable trusts; implied and resulting trusts; constructive trusts);

2. the powers and obligations of trustees under a valid trust (including appointment,
retirement and removal of trustees);

3. the remedies available when trustees act improperly.

MODULE AIM
This module aims to provide students with a solid understanding of the fundamental
principles of the modern law of trusts and an appreciation of the controversies and
difficulties that can be encountered in this area of law.
page vi University of London  International Programmes

LEARNING OUTCOMES: KNOWLEDGE

Students completing this module are expected to have knowledge and understanding
of the main concepts and principles of Equity and Trusts. In particular they should be
able to:

1. Contextualise the modern law of trusts within its historical origins and the role of
equity in its enforcement;

2. Classify types of trusts and identify their main distinctive features and purposes;

3. Identify and apply relevant statutory frameworks to the law of trusts;

4. Explain how breaches of trusts arise and identify appropriate available remedies;

5. Explore key issues in judicial decision making, including ethical and societal
considerations, and demonstrate knowledge of the wider academic debates.

LEARNING OUTCOMES: SKILLS

Students completing this module should be able to demonstrate the ability to:

6. Apply knowledge to practical problems and theoretical enquiries demonstrating

the ability to think critically about the issues arising;

7. Summarise key arguments advanced in judicial opinions and academic writings;

8. Distinguish lines of argument and judge relative strengths and weaknesses;

9. Use appropriate legal terminologies specific to the law of Equity and Trusts.

BENCHMARK FOR LEARNING OUTCOMES

Quality Assurance Agency (QAA) benchmark statement for Law (2015).

MODULE SYLLABUS
(a) Definition and distinction from other legal concepts. Classification of trusts. Equitable
rights and remedies.

(b) Express private trusts. Statutory requirements for creation. Secret trusts.
Incompletely constituted trusts. Certainties of a trust. Protective trusts.
Discretionary trusts. Purpose trusts.

(c) Trustees’ powers and duties. Investment of trust funds. Maintenance and
advancement. Accumulation of income. Delegation of trustees’ powers and
discretions.

(d) Charitable trusts. Definition. Distinctions from private trusts. Classification of

charitable trusts. Doctrine of Cy-près.

(e) Resulting trusts. Voluntary conveyances. Purchase in the name of another. Failed
trusts. Presumptions of resulting trust and advancement. Why resulting trusts
arise?

(f) Constructive trusts. General nature. Constructive trusts of wrongful enrichment

and unjust enrichment. Constructive trusts arising for other reasons, including
the contractual vendor as a constructive trustee. Comparison with proprietary
estoppel.

(g) The appointment, retirement and removal of trustees.

(h) Variation of trusts.

(i) Remedies for breach of trust. Trustees’ liability to account. Equitable compensation.
Exemption clauses. Trustees’ right of indemnity or contribution. Dishonest
assistance. Knowing receipt.

(j) Claims based on tracing. Tracing rules. Trusts, liens, and subrogation.
Equity and Trusts page vii

LEARNING AND TEACHING

Module guide
Module guides are the students’ primary learning resource. The module guide covers
the entire syllabus and provides the student with the grounding to complete the
module successfully. It sets out the learning outcomes that must be achieved as
well as providing advice on how to study the module. It also includes the essential
reading and a series of self-test activities together with sample examination questions,
designed to enable students to test their understanding. The module guide is
supplemented each year with the pre-exam update, made available on the VLE.

The Laws Virtual Learning Environment

The Laws VLE provides one centralised location where the following resources are
provided:

uu a module page with news and updates, provided by legal academics associated
with the Laws Programme;

uu a complete version of the module guides;

uu online audio presentations;

uu pre-exam updates;

uu past examination papers and reports;

uu discussion forums where students can debate and interact with other students;

uu Computer Marked Assessments – multiple choice questions with feedback

are available for some modules allowing students to test their knowledge and
understanding of the key topics.

The Online Library

The Online Library provides access to:

uu the professional legal databases LexisLibrary and Westlaw;

uu cases and up-to-date statutes;

uu key academic law journals;

uu law reports;

uu links to important websites.

Core reading
Students should refer to the following core text. Specific reading references are
provided for this text in each chapter of the module guide:

¢¢ Penner, J.E. The law of trusts. (Oxford: Oxford University Press, 2016) tenth edition
[ISBN 9780198747598].

Any recent edition of this book can be used.

ASSESSMENT
Learning is supported through formative activities in the module guide, which
include self-assessment activities with feedback. There are additional online activities
in the form of multiple choice questions. The activities allow students to make an
assessment of their knowledge and understanding and also help them to develop
skills listed in outcomes 6–9. The formative activities prepare students to achieve the
module learning outcomes tested in the summative assessment.
page viii University of London  International Programmes

Summative assessment is through a three hour and fifteen minute unseen

examination. Students are required to answer three questions out of six. Summative
assessment questions test learning outcomes 1–9.

Permitted materials
Students are permitted to bring into the examination room the following specified
document:

¢¢ Core statutes on property law 2017-18 (Palgrave Macmillan).

1 Introduction

Contents
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

1.1 Trusts: a difficult subject? . . . . . . . . . . . . . . . . . . . . . . . . . 3

1.2 Sources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

1.3 Learning outcomes, self-assessment questions and activities . . . . . . . 5

1.4 Advice on the examination . . . . . . . . . . . . . . . . . . . . . . . . 5

page 2 University of London  International Programmes

Introduction
The purpose of this module guide is to help you study the law of equity and trusts.
Working through this guide, you will gain an understanding of the subject sufficient
to do well in the final examination. This is not, however, a matter of rote learning.
Each chapter will introduce and take you through a programme of study, but it will
not simply ‘give you the answers’ to be memorised for later regurgitation in the
examination. Only by taking seriously the various instructions as to reading and
answering questions will you attain the necessary grasp of the subject.

Learning outcomes
By the end of this chapter, and having completed the Essential readings and
activities, you should be able to:
uu appreciate why the law of trusts is considered to be a difficult subject
uu identify the necessary sources of reading for studying this subject.
Equity and Trusts  1  Introduction page 3

1.1 Trusts: a difficult subject?

The law of trusts is generally acknowledged to be one of the more difficult subjects
in the LLB syllabus. This is mainly because of the nature of the trust which contains
elements both of the law of obligations and of the law of property. In some ways,
trusts are like contracts, and in other ways they mimic property relationships under
the law. However, trusts are unique and it can be difficult to obtain an intuitive feel
for the ways in which the law of trusts responds to particular problems. While you will
certainly gain a feel for the law of trusts as you work through this guide, at times you
may feel frustrated, and that you do not ‘get’ what the law is. Be patient and persistent.
In particular, while you should work through only one chapter at a time, if you review
previous chapters that you have already completed on a regular basis you will start to
see how everything really does ‘fit together’. Consider each chapter in this guide as a
piece of a puzzle. As you complete each chapter, you will add one more piece, and the
whole picture will begin to take shape.

As with all LLB module guides, this one is not intended to be a substitute for reading
cases, articles and textbooks. The Essential reading and exercises set in each chapter
must be taken seriously. Only by doing so will you obtain any genuine understanding
of the law. Typically, the final examination will include as many problem questions as
essay questions, and the only way you will be able to apply the law of trusts to new fact
situations is to grapple with the reading and exercises and appreciate their demands.

Trust law cases

The main objective is to understand the principles laid down in the leading cases (as
the law of trusts is primarily an area of judge-made law) and appreciate how statutes
have modified, or codified, the law in the cases. As a general rule, the leading cases
and important statutory provisions are those which are the focus of discussion in the
relevant chapters in the textbooks.

A word about trust cases. Trust issues arise in all sorts of situations. The facts of trust
cases often involve other areas of the law with which you may be unfamiliar, such as
succession, taxation or commercial law. Not understanding these other legal issues
can make it difficult to understand some cases. There is no easy solution to this
problem, but what you must try to do is grasp the relevant trust law issue. You will
better be able to do this if you approach the cases as follows:

uu Start with the relevant section of the module guide to give you an idea of the
points to be looking for. Take one section at a time. Do not try to digest several in
one go.

uu Read the textbook passages about the case. This will generally describe the facts
in such a way as to give a brief explanation of the surrounding law necessary for
picking out the trust issues.

uu Read the further reading or study pack readings recommended.

As to cases generally:

uu When studying leading cases, take notes or re-read the cases so that you retain a
grasp of what the case was about, how the judge approached the law, and what the
decision was. Make a special effort to remember the correct names of the parties,
the court which decided the case (particularly if it is a decision of the Supreme
Court, House of Lords, Court of Appeal or Privy Council) and any other important
features, such as the presence of dissenting judgments, the overruling of previous
authority and apparent inconsistency with other cases.

uu Read the textbook and module guide passages again and ask yourself whether
those interpretations of the cases agree with your impression of them. If they
do not, read the cases again because you may have missed something or
misunderstood it in some way. Also consider looking at another textbook. Different
authors take different perspectives on the cases, and you might find another view
more in keeping with your own.
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uu In many areas of trust law, the law is unsettled and there are cases going in
different directions on the same issue. If this is so, be prepared to take a measured
stance as to which is the better view of the law, and be prepared to defend your
view of the cases, or the views of one author over another, in the examination. You
will not lose marks for preferring one view of the cases or one learned author’s
view over another’s, but it is important to show that you realise when the law is
unsettled or that one particular author’s opinion is regarded as controversial.

Note that the vast majority of cases cited in this guide can be accessed through the
Online Library.

1.2 Sources
The set textbook for this module is:

¢¢ Penner, J.E. The law of trusts. (Oxford: Oxford University Press, 2016) 10th edition
[ISBN 9780198747598] (referred to in this guide as ‘Penner’).

Detailed reading references in this module guide refer to the edition of the set
textbook listed above. A new edition of this textbook may be published by the time
you study this module but you can use any recent edition. Use the detailed chapter
and section headings and the index to identify relevant readings. Also check the virtual
learning environment (VLE) regularly for updated guidance on readings.

This book is essential reading for this module. It is an accessible and inexpensive
shorter textbook which will introduce the topic of the chapter but at the same time
discuss it in sufficient detail for you to gain a good sense at the outset of what the
topic is about and the various difficult issues you will have to confront in order to
master it. In view of this, the statement of learning outcomes which immediately
follows will be comprehensible, and you will be able to begin to organise your
thoughts about what seems to you straightforward in the topic, and what will need
concentrated effort to understand. In certain chapters, the Essential reading will also
instruct you to revise one or more of the previous chapters of this module guide. This
does not mean, of course, that you should work through that chapter a second time,
but it does mean you should spend at least half an hour going over that chapter and
your notes and answers to questions to re-familiarise yourself with that topic. It is
essential that you do this, so that you see the connections between chapters, and see
how the different ‘pieces of the puzzle’ come together.

At the end of each chapter of this guide there is another section called ‘Essential
reading’. It will typically list cases and relevant statutory provisions.

Complete the Essential reading before attempting the sample examination questions at
the end of each chapter, which have been written on the basis that you have done so.

The Essential reading is not the only reading available on the various topics covered
and occasionally chapters may indicate some Further reading. These texts will broaden
your knowledge of the chapter topic. At the end of each chapter of Penner, further
reading is indicated, and you may use this as a guide for further reading where none is
indicated in this guide. Do not attempt the further reading until you have tackled the
Essential reading and have a solid understanding of the subject. Many of these texts
are available through the Online Library, or in the study pack which accompanies this
guide.

There are two other recommended books:

¢¢ Glister, J. and J. Lee Hanbury and Martin: modern equity. (London: Sweet &
Maxwell, 2015) 20th edition [ISBN 9780414032408].

¢¢ McFarlance, B. and C. Mitchell Hayton and Mitchell: Text, cases and materials on
the law of trusts and equitable remedies. (London: Sweet & Maxwell, 2015) 14th
edition [ISBN 9780414027473].
Equity and Trusts  1  Introduction page 5

The first book, commonly known as ‘Hanbury & Martin’, is useful if you are looking for
more detail on a particular subject. You may find the second book, commonly called
‘Hayton & Mitchell’, helpful for two reasons. First, it contains extracts of many of the
cases you will be reading as you progress through the module guide. Secondly, the
commentary on those cases may help you understand them better. These books are
not replacements for the textbook, but can provide useful additional resources to be
read alongside the textbook.

1.3 Learning outcomes, self-assessment questions and activities

A number of ‘learning outcomes’ are listed at the beginning of each chapter. The list is
meant to be helpful. But be mindful of the fact that understanding any branch of law is
about ‘knowing how’, not just ‘knowing that’: it is not just about acquiring knowledge;
you must learn to apply that knowledge, both to practical problems and to theoretical
enquiries. In other words, you will be expected to be able to think about what you
know and to write critically about it. That is why many of the learning outcomes are
stated in the form of ‘knowing how’ to do something, or being ‘able to explain’ how
the law in a particular area works.

To help you acquire this ‘knowledge’, you will come across activities, self-assessment
questions and sample examination questions throughout this guide. It is important
that you tackle these conscientiously. Doing so will help you to remember and
understand the content of the module, and will also give you practice in writing
legal English and formulating arguments that will help you when it comes to the
examination.

Self-assessment questions require no feedback. They are designed for you to confirm
to yourself that you have identified and understood the issues which have been
discussed in the text. In addition to these questions, there are activities which usually
have some form of feedback. You can undertake all of these activities working alone,
but it is always useful to tackle questions with a group of fellow students if possible, so
as to promote discussion and debate.

Sample examination questions are included at the end of each chapter (except this
one); it is advisable to attempt to answer the questions under mock examination
conditions (i.e. without consulting your notes or the text). Taking this approach will
help you develop your ability to think critically and construct a persuasive answer in a
limited time. It will also encourage you to review those areas where your knowledge
is insufficient so you cannot clearly and coherently answer examination questions.
On the other hand, you may find it more helpful to work through the questions with
your notes and books in front of you. The crucial thing, however, is that you get some
practice in writing examination answers before going into the examination itself.

The structure of each chapter

All the chapters follow a similar format, although some chapters may deviate from this
structure when certain more specialised areas of the law are considered. In general,
the chapter will contain, in this order: contents; introduction; Essential reading;
learning outcomes; the main text broken into the various sub-topics, in which are
interspersed self-assessment questions, learning activities with feedback, summaries
of material covered, and reviews of the learning outcomes; Further reading; and
sample examination questions with feedback.

1.4 Advice on the examination

Important: the information and advice given here are based on the examination
structure for the session 2017–18. We strongly advise you to always check both the
current Regulations for relevant information about the examination, and the VLE. You
should also carefully check the rubric/instructions on the paper you actually sit and
follow those instructions.
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At the end of the module there will be an examination which takes the form of a three
hour 15 minute unseen paper. You will be required to choose three questions from
a total of six. The choice is unrestricted in that there are no compulsory questions.
The paper will be made up of a mixture of essay questions and problem questions.
You should note that in a six-question examination, not every topic can or will be
examined, and you should therefore not pin your hopes on finding a question on a
particular topic.

Activity 1.1

Core comprehension – the common law and equity

Using your online library resources, research the following journal article:
uu Hayton, D. ‘The development of equity and the “good person” philosophy in
common law systems’ (2012) Conveyancer and Property Lawyer Editorial.
You can complete this learning activity by reading pp.263–65.

Common law
a. Identify the broadest meaning of the ‘common law’.

b. Identify a narrower meaning of the ‘common law’.

c. Identify the narrowest meaning of the ‘common law’.

d. Which function does equity perform in relation to the common law?

e. In which court did the common law develop?

Equity and trusts

f. Which role in dispute resolution did the King’s Chancellor play?

g. From the example of land law disputes, explain (i) why equity intervened and
(ii) how equity intervened in the example of the trust.

Activity 1.2

Core comprehension – is equity sufficient?

Using your online library resources, research the following journal article:
uu Duggan, A.J. ‘Is equity efficient?’ (1997) 113(Oct) LQR 601–36.
You can complete this learning activity by reading the section entitled
‘I Introduction’, pp.601–03.
a. How is ‘common law’ defined for the purposes of this discussion?

b. How does Maitland define equity?

c. Identify the distinctive historical origins of the rules of the common law and
equity.

d. Identify jurisdictions in which the distinction between common law and equity
is upheld.

e. Using the example of Australia, identify three substantive areas of law in which
equity doctrines have informed reform.

f. Which five arguments underpin the emergence of the ‘the new equity rhetoric’?

g. According to Duggan, how can equity respond to changing values in society in a

way that the common law cannot?

h. Identify how equity functions in a way which upholds ethical behaviours.

2 Trusts – the basics

Contents
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

2.1 What is a trust? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

2.2 Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

2.3 Comparison with other legal concepts . . . . . . . . . . . . . . . . . . 12

Reflect and review . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

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Introduction
This module guide is chiefly concerned with equity and trusts, but other material will
be encountered from time to time. Its essential aim is to enable you to answer the
most common questions that could be asked about equity and trusts. In this chapter,
we address a number of fundamental issues about equity and trusts. The following
chapters then move on to examine the types of trust which can exist and the nature
of the trust relationship (Chapters 3 and 4). After that, we look at the requirements of
a valid trust, considering issues of certainty, formalities, constitution, and promises
to create trusts (Chapters 5–8). We then look at charitable and private purpose trusts,
unincorporated associations, resulting trusts, constructive trusts, and secret trusts
(Chapters 9–14). This is followed by the administration of the trust, the appointment,
retirement and removal of trustees, and variation of trusts (Chapters 15 and 16). We
then turn to examine the equitable wrongs of breach of trust and breach of fiduciary
duty (Chapters 17 and 18). Finally, we look at claims based on tracing (Chapter 19).

In this chapter, we look at three things. First, what is a trust and why do people create
them? Second, what is equity? And third, how do trusts differ from other related
concepts? Understanding these topics is essential to understanding this whole
subject.

Essential reading
¢¢ Penner, Chapter 1: ‘The historical origins of the trust’.

Learning outcomes
By the end of this chapter, and having completed the Essential readings and
activities, you should be able to:
uu explain in outline what is a trust, and why people create them
uu explain the difference between law and equity and the role of equity in the
enforcement of trusts
uu explain how trusts differ from similar concepts.
Equity and Trusts  2  Trusts – the basics page 9

2.1 What is a trust?

At its simplest, a trust is a device in which rights, either personal (e.g. a right to be
repaid by a borrower) or proprietary (e.g. a fee simple or leasehold estate in land) are
held by one person for the benefit of another. The person creating the trust is called
the settlor, the person holding the rights is the trustee, and the person for whom those
rights are held is the beneficiary. The beneficiary is also called the object of the trust.
The rights being held in trust are often called the subject matter of the trust. They are
also called the trust property or trust assets. The term ‘trust property’ can be confusing
because personal rights (i.e. non-proprietary assets) can be held in trust.

2.1.1 Why create a trust?

We need to know why people create trusts. The question is perhaps answered by
asking why someone might not want to give rights to another person outright (i.e.
without the interposition of a trustee between that person and the right). There are a
number of answers to this question, including the following three.

First, a person could be incapable of managing rights. I might, for instance, want to
give company shares to a child. Although there is no legal impediment to me doing so,
such an action might be very foolish indeed, for the child may well have no idea of the
value of what they have received. It is much better to give the shares to a trustee to
manage on the child’s behalf.

Another reason is the flexibility that trusts can provide. For example, by the use of a
discretionary trust (discussed in Chapter 3), funds can be released to those members
of a class of potential beneficiaries who have the greatest need or the lowest tax
liability. Indeed, tax management is often a reason behind the creation of trusts.

A third reason is that trusts can provide for the enjoyment of rights to be split on
a plane of time. If I want my wife to receive the income from some investment
throughout her life but to give the capital to my children, then the only way I can do
so is by the use of a trust. This list is not intended to be exhaustive and there are other
reasons why trusts are used.

Reflection point
As you read trusts cases, make a note of the reasons for which the trusts were
formed, if this is known. Consider what this tells you about the requirements for,
and possible problems with, trusts law.

2.1.2 Trusts arising by operation of law

It is also the case that not all trusts are created by settlors. Sometimes, the law imposes
trusts. These are generally known as either ‘constructive’ trusts or ‘resulting’ trusts. The
reasons why such trusts are created are controversial and various, but it helps to have
one or two clear examples at the outset. In Chase Manhattan v Israel-British Bank [1981]
Ch 105, the claimant bank mistakenly paid US$2 million to the defendant bank. Although
the defendant was personally liable at common law to repay the money, that was of little
use to the claimant because of the defendant’s subsequent insolvency. Rights held by
a trustee on trust for others do not form part of the estate available for distribution to
creditors in the event of the trustee’s insolvency, and so the claimants argued for a trust.
Goulding J held that when money is paid by mistake, the recipient holds it on trust for the
payer, and so it came out of the insolvent estate. Another example of a constructive trust
is that which arose in FHR European Ventures LLP v Cedar Capital Partners LLC [2014] UKSC
45, [2015] AC 250. The claimants hired an agent to negotiate their purchase of a hotel
unaware that their agent was also receiving a secret commission from the vendor. Since
this was a breach of the agent’s fiduciary duty to loyally serve the claimants’ interests, the
agent held that commission on constructive trust for the claimant.

Both cases are controversial and will be examined in detail later on. For now, they are
simply given as examples to demonstrate that not all trusts are created intentionally
by people who want to create them.
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2.1.3 The juridical effect of a trust

There is some confusion with regard to the legal effect of creating a trust of a right. It
is, for example, often said to involve the creation of a dual ownership, with equitable
title passing to the beneficiary of the trust, and legal title to the trustee. However, the
rights which the settlor had prior to the creation of the trust are transferred in their
entirety to the trustee. At the same time, new rights are created for the beneficiary of
the trust, which enable the beneficiary to hold the trustee to account for the trustee’s
exercise of those rights.

Before the trust was created, the settlor was the legal owner of those assets and there
were no equitable rights involved. As Patten LJ said in Swift 1st Ltd v Chief Land Registrar
[2015] EWCA Civ 330, [2015] Ch 602 at 622:

Absent a trust, the legal estate carries with it all rights to the property and equity has no
role to play in separating legal from beneficial ownership.

The clearest discussion of this issue is to be found in the Australian case of DKLR Holding
Co (No 2) Ltd v Commissioner of Stamp Duties [1982] HCA 14, 149 CLR 431. A company,
29 Macquarie (No 14) Pty Ltd, was the registered proprietor of a fee simple estate. It
arranged with another company, DKLR Holding Co (No 2) Ltd, for the latter to hold the
title in trust for the former once a change in registration was effected. The question
was how much stamp duty was payable on the transfer to DKLR as proprietor. DKLR
argued that only nominal duty was payable, since all that it received was the bare legal
estate, with 29 Macquarie retaining the equitable interest. The argument was rejected
in both the New South Wales Court of Appeal and the High Court of Australia. Speaking
in the former, [1980] 1 NSWLR 510 at 519, Hope JA said:

[A]n absolute owner in fee simple does not hold two estates, a legal estate and an
equitable estate. He holds only the legal estate, with all the right and incidents that attach
to that estate... [A]lthough the equitable estate is an interest in property, its essential
character still bears the stamp which its origin placed upon it. Where the trustee is the
owner of the legal fee simple, the right of the beneficiary, although annexed to the land,
is a right to compel the legal owner to hold and use the rights which the law gives him in
accordance with the obligations which equity has imposed upon him. The trustee, in such
a case, has at law all the rights of the absolute owner in fee simple, but he is not free to use
those rights for his own benefit in the way he could if no trust existed.

29 Macquarie did not therefore ‘retain’ an equitable interest; their equitable interest
only arose on the transfer and the tax was therefore payable.

Similar views were expressed when the case reached the High Court, (1982) 149 CLR 431
at 474, where Brennan J said:

An equitable interest is not carved out of a legal estate but impressed upon it. It may
be convenient to say that DKLR took only the bare legal estate, but that is merely to say
elliptically that 29 Macquarie transferred to DKLR the property in respect of which DKLR
had declared that it would be a trustee. The charter of 29 Macquarie’s interest was DKLR’s
declaration, not the memorandum of transfer; and DKLR’s declaration was moved by the
transfer to it of the property to be held on the trust declared.

An equally good metaphor is to see the interest of the beneficiary as being ‘engrafted’
on to the right held by the trustee. This is the language of McLelland J in Re Transphere
Pty Ltd (1986) 5 NSWLR 309. Having referred to the judgment of Hope JA in DKLR, he said:

Where a legal owner holds property on trust for another, he has at law all the rights
of an absolute owner but the beneficiary has the right to compel him to hold and use
those rights which the law gives him in accordance with the obligations which equity
has imposed on him by virtue of the existence of the trust. Although this right of the
beneficiary constitutes an equitable estate in the property, it is engrafted onto, not carved
out of, the legal estate.

We will see later that this undoubted truth is often forgotten by courts and
commentators.
Equity and Trusts  2  Trusts – the basics page 11

2.2 Equity
You need to know about the system of law called equity. From your study of the
English legal system, you may already be familiar with the fact that English law
comprises two systems of case law: common law and equity. An understanding of
this division is essential to an understanding of trusts, for the trust device is only
recognised by equity, not the common law. The rules of equity are those rules which,
prior to the passing of the Judicature Acts 1873–75, were administered by the Court
of Chancery. Until that time, there were separate courts of common law and equity,
each applying their own rules. Sometimes those rules were the same, but often they
were different. Today there are no separate courts of law and equity and every High
Court judge is empowered to administer the law of both jurisdictions. For the sake
of convenience, however, many actions which would have formerly been heard in a
court of equity are now assigned to the Chancery Division of the High Court of Justice.
For more information about the Chancery Division, see: [Link]/courts/
rcj-rolls-building/chancery-division

Although the law of trusts is part of the law of equity, equity’s jurisdiction is not limited
to trusts. You will, for example, have had some contact with equity in your study of the
law of contracts. One example is the doctrine of promissory estoppel, through which
equity can enforce a gratuitous promise that has been relied upon to the detriment
of the promisee. Another example is in the range of responses available for breach of
contract. The common law provides only damages, while specific performance and
injunctions are available in equity. Although the rules that govern the law of trusts
are drawn exclusively from equity, at times some knowledge of particular areas of the
common law will be needed, most particularly the rules of common law relating to the
transfer of personal and property rights. Those legal rules will, however, be explained
as we go along.

2.2.1 Conflicts between law and equity

Given that the rules of law and equity are sometimes different, situations are bound
to arise where there is a conflict between the answer given to a dispute at common
law and that given in equity. A conflicts rule was therefore needed for such situations,
and it was held as long ago as 1616 in the Earl of Oxford’s case that where the rules of
common law and equity were in conflict, the rules of equity prevail. That is still the
law today: Senior Courts Act 1981, s.49. This does not mean that the rules of common
law are redundant. As a matter of history, the common law predated equity by many
years, and the reason why rules of equity arose was to deal with situations in which the
common law was unable to give relief. The rules of equity do not, therefore, comprise
a complete system of law. Rather, they presuppose the existence of the common
law, acting as a gloss or supplement to it in certain well-defined circumstances. The
common law is a complete system and could survive (although not very well) without
equity. But, as Maitland in Equity – A Course of Lectures (1909) famously explained:

At every point equity presupposed the existence of common law...Equity without

common law would have been a castle in the air, an impossibility.

Fusion
As we have seen, the separate courts of common law and equity were merged in the
latter half of the nineteenth century. It has been a controversial question ever since
whether that merger was merely one of administration, with the different rules being
left intact and only the power to enforce them now being vested in all the judges,
or whether there was a merger of substance, with the result that we no longer have
separate rules of law and equity but simply rules of law. This is the fusion debate. You
must make up your own mind about who in this controversy is right, although the
authors of this guide would adopt the view expressed by Ashburner, that ‘the two
streams of jurisdiction, although they run in the same channel, run side by side, and
do not mingle their waters’. None of us, however, would advocate the continuation of
unprincipled differences between law and equity.
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The content of equity

Many students make the mistake of thinking that equity is synonymous with fairness
or justice, and that the rules of equity are simply what the student (or a judge) thinks
is fair or just. This could not be further from the truth. Indeed, were that so, the rules
of equity would have no substantive content and would not be a fit subject for study
at university level. It is therefore vital to appreciate at an early stage that equity is a
system of rules in exactly the same way as the common law, and that it has a system
of precedent which is exactly the same as that operated at law. The legal method
employed by the equity judges is no different from that employed when they wear
their common law hats. Although equity started out as providing ad hoc responses
to common law injustices (as indeed did the common law), it soon settled down
to become a coherent system of rules, the content of which did not alter with the
identity of the particular judge. As long ago as 1818, Lord Eldon, one of the greatest
equity lawyers, in one of his last judgments before retirement, responded to such a
criticism by saying:

Nothing would inflict on me greater pain in quitting this place than the recollection that
I had done anything to justify the reproach that the equity of this court varies like the
length of the Chancellor’s foot. (See Gee v Pritchard (1818) 2 Swan 402, 414.)

There has recently been a disturbing trend which says that everything should turn on
whether the defendant was acting ‘unconscionably’ in what they have done: see Bank
of Credit and Commerce International (Overseas) Ltd v Akindele [2000] EWCA Civ 502,
[2001] Ch 437; Pennington v Waine [2002] EWCA Civ 227, [2002] 1 WLR 2075; Pitt v Holt
[2013] UKSC 26, [2013] 2 AC 108. Precisely what is ‘unconscionable’ is never defined, and,
given that it is just as vague as ‘just’ or ‘equitable’, it must therefore take content from
the perception of the individual judge trying the case. ‘Unconscionable’ expresses a
conclusion, not a rule we can apply to resolve disputes, and if such an approach takes
root, then we risk losing the constitutional principle of the rule of law. For that reason
alone, it should be asked whether such a development is to be welcomed.

Equitable maxims
You will from time to time come across a number of equitable maxims. These are very
generally stated rules. The use of maxims in law is an ancient one, and the common
law knew its fair share. Although no one would nowadays spend time discussing
common law maxims, students of trusts are introduced to the equitable maxims.
These should, however, be treated with caution, for they are often so widely stated as
to be of little practical use. Rules should instead be taken from cases, just as with the
common law, which will at least have the merit of ensuring that the particular rules
are not then taken out of context.

Activity 2.1
Read Cowcher v Cowcher [1972] 1 WLR 425.
a. What were the facts and decision of the case?

b. What were the judge’s reasons for rejecting the argument that equity was
synonymous with ‘fairness’?

2.3 Comparison with other legal concepts

One of the best ways to understand something is to compare it with things which are
different but closely related, thereby understanding the differences between them.
If, for example, we want to understand what leopards are, we need to know how
they differ from jaguars, tigers and the other big cats. So too with trusts. If we are to
understand trusts, we need to know how they differ from a number of other similar
legal relationships: agency, bailment, contract and debt.
Equity and Trusts  2  Trusts – the basics page 13

2.3.1 Agency
Trustees are not, by virtue of their office, agents of the beneficiaries. When entering
into contracts as trustees, the trustees incur the liability to perform them. The
beneficiaries do not. If the trustees were agent of the beneficiaries, the beneficiaries
too would become liable. An agent may also be a trustee, although everything will
turn on the terms of the contract of agency. Suppose that you are going abroad for a
year and appoint an estate agent to let and manage your house. Whether the agent
merely owes you the amount of rent received from your tenants or holds it for you on
trust depends on whether the agreement between you provided for the creation of a
trust. An example of a contract using the trust device is Royal Brunei Airlines v Tan [1995]
UKPC 4, [1995] 2 AC 378 (discussed in Chapter 17), where a travel agent was appointed
to sell tickets for the plaintiff airline on condition that all monies received by the agent
were to be held for the airline on trust.

Reflection point
Why might the use of a trust device make a difference in such cases?

2.3.2 Contract
There is no clean division between contract and trust, although some judges have
attempted to draw one (see e.g. Re Cook’s ST [1965] Ch 902, discussed in Chapter 8).
Indeed, there can be no hard and fast line between contract and trust because
contract is a source of rights while trust is a way of holding rights. Indeed, many of
the rights held in trust are born of contract. A simple example will illustrate. Suppose
I open a bank account and pay in £1,000. I have a right born of contract that the bank
repay me £1,000 on demand. If I then declare that I hold that right on trust for my
children, it is impossible to say that this is now a case of trust and not contract. In
truth, it is both.

The other point, of course, is that contract is an essentially consensual institution.

Although some of the terms of a contract may be dictated by the law rather than the
parties themselves, no one is ever forced to be a contracting party. This is not the case
with trusts. Although the vast majority of trusts are settlor-created, some are forced
upon unwilling parties.

2.3.3 Debt
The distinction between trust and debt is more difficult. The relationship between
trustee and beneficiary is not one of debtor and creditor. In other words, the trustee
does not owe the value of the rights they hold to the beneficiaries. Take a simple
example. If I lend you £100, your obligation to repay me £100 will not be removed if
the cash I gave you is stolen from you. But if you hold £100 on trust for me, then the
total loss of the subject-matter of the trust (so long as it was without fault on your
part) will mean that it is not possible for me to bring an action against you, claiming
that you owe me £100 (see Morley v Morley (1678) 2 Cas Ch 2).

In Ontario Hydro-Electric Power Commission v Brown (1959) 21 DLR (2d) 551, the
defendant was the plaintiff’s agent and collected money due to the plaintiff from its
customers. That money was stolen from the defendant’s safe and he argued that he
was not liable to the plaintiff because the money had been lost without his fault. The
Ontario Court of Appeal held that he was liable because he was a debtor and not a
trustee. Morden JA said:

If the defendant’s liability is to be decided, as the trial Judge did, upon the basis that the
property in the bills and coins collected was in the plaintiff and the defendant was a bailee
or trustee of them, then in my respectful opinion the defendant satisfied the burden of
proving that the money was not lost through his want of care… If the property in the
money was in the defendant and if he was therefore a debtor of the plaintiff in respect
of the amount collected, the loss of the money however occasioned is no defence to the
plaintiff’s claim for money had and received.
page 14 University of London  International Programmes
It is trite law that an agency relationship is a fiduciary one which imposed upon an agent
many well defined duties in his dealings with and on behalf of his principal. But this
description does not mean that in every situation where an agent collects money, he
is a bailee or trustee of the bills in specie or a trustee of the money in his possession or
deposited in his bank. In Henry v Hammond [1913] 2 KB 515 at 521, Channell J said:

It is clear that if the terms upon which the person receives money are that he is bound
to keep it separate, either in a bank or elsewhere, and to hand that money so kept as a
separate fund to the person entitled to it, then he is a trustee of that money and must
hand it over to the person who is his cestui que trust. If on the other hand he is not
bound to keep the money separate, but is entitled to mix it with his own money and
deal with it as he pleases and when called upon to hand over an equivalent sum of
money, then in my opinion, he is not a trustee of the money. All the authorities seem
to me to be consistent with that statement of the law.

…In the case at bar there is no evidence that it was a term of the defendant’s employment
that he should keep the moneys he collected separate from his own. The letter appointing
him agent does not touch the point…

In the instant case the defendant was in my opinion the debtor of the plaintiff to the
amount of the moneys collected less his commission. He was under no duty to keep this
money separate from his own and the fact that he did so cannot alter what I find to be the
basic relation between the parties.
Note: the ‘cestui que trust’ is the beneficiary of the trust.

It is possible for someone to be both a debtor and a trustee at the same time, with
the borrower holding the money in trust for the lender until certain conditions are
fulfilled: Barclays Bank Ltd v Quistclose Investments Ltd [1968] UKHL 4, [1970] AC 567;
Twinsectra Ltd v Yardley [2002] UKHL 12, [2002] 2 AC 164. Once the condition is fulfilled,
the trust ceases to exist and the debt continues. If the condition cannot be fulfilled,
then the debtor as trustee must return the money to the lender as beneficiary, thus
ending both relationships.

Activity 2.2
Is it possible to maintain strict divisions between trust and agency, trust and
contract, and trust and debt?
Explain your views.

Self-assessment questions
1. What are trusts and why are they created?

2. What is the relationship between the law of equity and the law of trusts?

3. What similarities are there between common law and equity?

4. What are the differences between the two?

5. What was the effect of the Judicature Acts 1873–75?

6. In a trust, who are (a) the ‘settlor’, (b) the ‘beneficiary’ and (c) the ‘trustee’?

Sample examination questions

No sample questions are given here because although the topics covered in this
chapter are vital for an understanding of the law of trusts, they are not specifically
examinable.
Equity and Trusts  2  Trusts – the basics page 15

Reflect and review

Look through the points listed below.

Are you ready to move on to the next chapter?

Ready to move on = I am satisfied that I have sufficient understanding of the principles

outlined in this chapter to enable me to go on to the next chapter.

Need to revise first = There are one or two areas I am unsure about and need to revise
before I go on to the next chapter.

Need to study again = I found many or all of the principles outlined in this chapter very
difficult and need to go over them again before I move on.

Tick a box for each topic.

Ready to Need to Need to
move on revise first study again

I can explain in outline what is a trust, and why

people create trusts. ¢ ¢ ¢

I can explain the difference between law and equity

and the role of equity in the enforcement of trusts. ¢ ¢ ¢

I can explain how trusts differ from similar concepts. ¢ ¢ ¢

If you ticked ‘need to revise first’, which sections of the chapter are you going to
revise?
Must Revision
revise done

2.1 What is a trust? ¢ ¢

2.2 Equity ¢ ¢

2.3 Comparison with other legal concepts ¢ ¢

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Notes
3 Types of trusts

Contents
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18

3.1 Express trusts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19

3.2 Discretionary and fixed trusts . . . . . . . . . . . . . . . . . . . . . . . 19

3.3 Bare trusts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20

3.4 Trusts arising by operation of law . . . . . . . . . . . . . . . . . . . . . 21

3.5 Testamentary and inter vivos trusts . . . . . . . . . . . . . . . . . . . . 23

3.6 Purpose trusts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24

Reflect and review . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26

page 18 University of London  International Programmes

Introduction
There are several different kinds of trust, and learning what these are is to a large
extent learning the meaning of the different terms used to classify trusts. This
terminology is historical, and to some extent unsystematic and even contradictory.
Nevertheless, grasping the different kinds of trust, and the various terms used to
classify them, is vital for two reasons:

1. The first, practical reason is that if you do not get a grip on these terms you will not
be able to understand most of what judges and lawyers say when they talk about
trusts, and indeed you will have an impossible time understanding the rest of this
module guide.

2. Just as importantly, understanding any area of law turns on being able to see
the distinctions it draws and classifications it devises, for this is how it is made
comprehensible and coherent, so that justice is done and like cases decided alike.

Do not worry if everything is not entirely clear when you have finished working on this
chapter. We will return to all of these issues throughout the guide. The main purpose
of this chapter is simply to acquaint you with the language of the subject so that you
can work through the other chapters with some measure of comprehension.

Essential reading
¢¢ Penner, Chapter 2: ‘The nature of the express trust’ Sections ‘Express trusts and
trusts arising by operation of law (TABOLs)’ and ‘The features of the express
trust’, Subsection ‘The position of the settlor’, Chapter 3: ‘Express trusts:
trusts and powers’ Sections ‘Fixed trusts, discretionary trusts, and powers of
appointment’, ‘Interests under fixed trusts’ and ‘Interests under discretionary
trusts and powers of appointment’, Chapter 4: ‘Constructive trusts’ Sections
‘Effectively declared trusts and trusts that arise by operation of law (TABOLs)’,
‘Varieties of constructed trusts’ and ‘”Anticipatory” constructive trusts’ and
Chapter 5: ‘Resulting trusts’ Sections ‘Resulting uses’ and ‘Resulting trusteeship’.

Learning outcomes
By the end of this chapter, and having completed the Essential readings and
activities, you should be able to:
uu explain what the terms ‘express’, ‘fixed’, ‘discretionary’, ‘bare’, ‘simple’, ‘special’,
‘arising by operation of law’, ‘implied’, ‘constructive’, ‘resulting’, ‘testamentary’,
‘inter vivos’, ‘purpose’, ‘private’, ‘public’ and ‘charitable’ mean when used of
trusts
uu indicate where some of these terms may have several, perhaps conflicting,
meanings
uu outline the structure of the various kinds of trust to which these terms refer and
be able to explain the bases upon which they classify trusts.
Equity and Trusts  3  Types of trusts page 19

3.1 Express trusts

The central case of the trust is the express trust. An express trust is one which is
deliberately created by the holder of the rights which will be held in trust. As we
will see in Chapter 3, this person is called the ‘settlor’ because they ‘settle’ the rights
on trust, either declaring that they will henceforth hold some particular rights on
trust for specified persons (the beneficiaries), thus becoming a trustee for them, or
by transferring the rights to other persons to hold on trust for the beneficiaries. The
reason why such trusts are called express is because a declaration of trust is expressed,
(literally ‘pushed out’) in the same way that toothpaste is ‘expressed’ from the tube, by
the settlor. Such an expression of intent is known as a declaration of trust. An express
trust, therefore, is no different from a declared trust. The essential points to grasp
about express trusts are the following:

1. It is not every declaration of trust that will be effective to create a trust. In order for
it to have this effect, certain requirements must be satisfied. These requirements
will occupy us in Chapter 5. You can think of them in much the same way that you
understand the requirements for the successful formation of a contract. To take
just one example, just as there must be an intention to create legal relations in
the law of contract, so there must be an intention to subject the right-holder to a
duty to perform the trust. For that reason, we will see that ‘precatory’ words, words
expressing merely a hope or desire that a right-holder will act in a particular way,
are not normally sufficient to bring a trust into being.

2. The power of a right-holder to create a trust reflects a principle of ‘freedom

of trust’ similar to the principle in succession law of ‘freedom of testamentary
disposition’ and the principle of ‘freedom of contract’ in the law of contracts.
Settlors can, within the limits of the law, divide up the entitlements under the trust
in almost any way they choose, providing different kinds of interests for different
beneficiaries or different charitable purposes.

3.2 Discretionary and fixed trusts

The terminology of fixed trusts and discretionary trusts classifies trusts by a criterion
of dispositive control by the trustee. In a fixed trust, the trustees have no choice as to
how to distribute the trust rights, but no one else has any say, and it is the trustees’
duty to ensure that the correct distribution takes place. In a discretionary trust, the
trustees themselves have the power of choice over the distribution of the trust rights.

A settlor may decide to divide up the interests of the beneficiaries according to a fixed
plan but very often may decide to take a ‘wait and see’ approach, leaving the actual
shares or interests that the beneficiaries will receive to be decided later. For example,
the settlors may want to create a trust for their children, but leave it open as to how
much each child will receive, so as to take account in later years of their differing
circumstances.

1. A fixed trust is one in which the interests of all the different beneficiaries are
determined at the outset and the trustees have no decisions to make as to how
they should distribute the trust rights.

2. A discretionary trust is one in which the trustees have such a dispositive discretion
(i.e. a choice as to how to dispose of the trust rights).

Discretions may be shaped in various ways, but the typical case is one in which there is a
class of persons among whom the trustees may distribute the trust funds in such shares
as they, in their discretion, decide. Thus they can choose to distribute the rights evenly or
in unequal shares by giving some to all or only to one or a few of those in the class.

The fixed or discretionary nature of a trust turns upon whether the trustees have a
discretion in their distribution of the trust rights. Being fixed does not mean that the
actual amount that a beneficiary will receive can be determined from the outset. For
example, in a trust of company shares where the income of the shares (the dividends)
page 20 University of London  International Programmes

go to Paul as long as he lives and then the capital (the shares themselves) go to Peter,
it is impossible to tell how much Paul will get at the outset, for that will depend
on the value of the dividends on the shares over time and how long Paul will live.
Nevertheless, the trust is still fixed because the trustees have no choice but to transfer
that income to Paul.

Furthermore, a beneficiary may receive a contingent or defeasible interest under a

trust. A contingent interest is one that will only arise if a certain event occurs. So, for
example, a trust might provide that your daughter, Samantha, is to receive an income
interest, but only if she completes her law degree successfully. A defeasible interest is
one which may come to an end upon the happening of a certain event. You might give
Samantha an interest in income, which will terminate if she wins £1 million or more in
a lottery. Although under both these kinds of interests, it is not certain at the outset
what, if anything, Samantha will take under the trust, they are still classified as fixed
because the trustees have no dispositive discretion.

A trust can include both discretionary and fixed elements. For example, you may
settle a trust of company shares, with the income of the shares to be distributed as
it arises among your children, Tom, Dick and Mary, in such shares as your trustees, in
their discretion, decide, and with the capital (the shares themselves) to be distributed
in equal shares to Tom, Dick and Mary once the youngest turns 18 years of age. The
distribution of income is discretionary, but the capital interests are fixed.

3.3 Bare trusts

A bare trust is one in which the terms of the trust are minimal. Under a bare trust,
the trustees hold the trust rights ‘to the order’ of the beneficiaries, which means that
the trustees simply hold the rights and do the bidding of the beneficiaries. In this
respect, a bare trust is just the most minimal kind of fixed trust, under which trustees
have no discretion. A distinction is sometimes drawn between simple (bare) trusts
and ‘special’ trusts (with more or less complicated terms, fixed or discretionary). Why
might someone set up a bare trust? In various circumstances, a bare trust can be very
convenient. For example, you might transfer company shares to your broker to hold
on bare trust for yourself. The broker will be able to engage in all the legal procedures
to deal with the trust rights, so you do not have to attend to that, and the broker will
just follow your instructions about the various transactions, which you might find
convenient to give over the telephone, for example. For this reason, trustees under
bare trusts are sometimes called ‘nominees’, to indicate that they hold the rights in
name only directly for another (the beneficiary). Such trusts are sometimes called
‘nomineeships’.

All trusts which arise by operation of law are bare trusts.

Activity 3.1
Make a short spoken presentation explaining the difference between fixed and
discretionary trusts, giving practical examples.
No feedback provided.

Summary
An express trust is one which arises in response to an effective manifestation of
intention on the part of a right-holder that a trust should arise. This manifestation
of intention is known as a declaration of trust. Express trusts are therefore declared
trusts. The simplest form of declared trust is the bare trust or nomineeship, under
which the trustee holds rights to the order of the beneficiary. However, interests under
trusts are commonly structured by the use of contingent interests (which may arise
or lapse on the occurring of events) and by providing the trustee with dispositive
discretions (to allocate trust rights among a class of persons). Trust provisions
which incorporate dispositive discretions are termed ‘discretionary’, and those not
incorporating such discretions are called ‘fixed’. All trusts arising by operation of law
are bare trusts.
Equity and Trusts  3  Types of trusts page 21

Activity 3.2
You have just won £1 million in a lottery and decide to settle half of the money on
your loved ones. Devise a trust, deciding how you wish to divide up the money
among them, incorporating both fixed and discretionary elements, and if you wish,
contingent and defeasible interests.

3.4 Trusts arising by operation of law

3.4.1 How rights arise

Although the manifestations of consent underlying contracts, wills, deeds, and
declarations of trust are a common source of legal rights, rights can arise in other
ways. In private law, rights can also arise from the commission of a wrong (tort), by
unjust enrichment, and by miscellaneous other events. One question for the law of
trusts is when these events trigger trusts and not merely a personal right to a money
payment, injunction, or other remedy.

3.4.2 Statutory trusts

There are a number of situations in which the legislature has thought it convenient to
use the trust device as a cure for certain problems. In such cases, the trust is a creature
of statute. One of these is a central feature of English land law. If I attempt to transfer
my land to Fred and Joe as tenants in common, statute provides that the effect of my
action is to convey the title to Fred and Joe as joint tenants on trust for themselves
as tenants in common: s.34(2) Law of Property Act 1925. In this module we are not
concerned with statutory trusts, for they are used by the legislature on an ad hoc basis
and only make sense when examined in context.

3.4.3 Constructive trusts

The term ‘constructive’ is ambiguous, but in the context of trusts, it means a trust
which is ‘constructed’ by the court rather than by an individual right-holder through
a declaration of trust. We came across examples of constructive trusts in the last
chapter in Chase Manhattan v Israel-British Bank and FHR European Ventures LLP v Cedar
Capital Partners LLC. The vital fact to realise about both these cases is that the trust
arose even though there was no declaration of trust by anyone. Constructive trusts,
therefore, have not been declared, but to say that they arise for reasons other than
a declaration of trust is not particularly helpful. It gives only a negative description,
telling us why the trust does not arise rather than why it does. It is one of the tasks of
judges and commentators working in the area of trusts to come up with a typology of
constructive trusts so that this question can be answered.

The late Professor Birks said that the events that give rise to rights in private law
fall into one of four categories: manifestations of consent, wrongdoing (breaches
of duty), unjust enrichment, and other events. The trusts that arise as a response
to manifestations of consent are express trusts, which leaves constructive trusts to
occupy the last three categories, and there is no doubt that each category has content.
Thus, the trust in FHR European Ventures LLP v Cedar Capital Partners LLC can be seen
as a response to the commission by the agent of the wrong of breach of fiduciary
duty. In Chase Manhattan, the trust arose as a response to the unjust enrichment of
the defendant caused by its receipt of the mistakenly paid US$2 million. As for the
miscellaneous other events, by far the majority of constructive trusts fall within it. So,
for example, a contract to sell an estate in land turns the seller into a trustee of that
estate for the purchaser, even though there is no declaration of trust, no wrongdoing,
and no unjust enrichment. The crucial questions in all cases of constructive trusts are
why the trusts arose and whether they should.

Constructive trusts can be sub-divided into ‘institutional’ and ‘remedial’ trusts.

Unfortunately, those terms do little to explain the idea behind them. It might be seen
as the rule of law versus the rule of man, the man (or woman) in question being the
page 22 University of London  International Programmes

individual judge. Thus, institutional constructive trusts arise because of the application
of legal rules, albeit rules developed incrementally by the courts, whereas remedial
constructive trusts arise because an individual judge thinks it is fair that it should, despite
the fact that the rules developed by the courts say that on the particular facts there
should be no trust. It is a nice question whether English law will ever recognise remedial
constructive trusts. So far, the English courts have not been in favour of them: see
Angove’s Pty Ltd v Bailey [2016] UKSC 47, [2016] 1 WLR 3179.

Another important (and fairly common) situation in which constructive trusts arise
is where two people acquire a family home together. Normally, they will declare in
writing that they hold the home on express trust for themselves. If no trust is declared,
then a constructive trust can arise in their favour based on assumptions of what they
intended. You will study this in property law. The House of Lords and Supreme Court
have dealt with this trust in Stack v Dowden [2007] UKHL 17, [2007] 2 AC 432 and Jones v
Kernott [2011] UKSC 53, [2012] 1 AC 776, but without explaining why the trust arises.

3.4.4 Implied trusts

There is an uncertain and probably moribund category of trusts called implied trusts.
In law, ‘implied’ can mean at least two different things: (1) implied by law (i.e. imposed
by law), or (2) implied in fact (i.e. inferred from the facts). So, for example, the law for
many years said that the reason why people had to repay mistaken payments was
that they had impliedly promised to do so. However, when the defendant in Moses v
Macferlan (1760) 2 Burr 1005, 97 ER 676 proved by evidence that he had made no such
promise, the court said that it did not matter because the promise was implied by law
(i.e. ‘imposed’ by law). Implied in fact, on the other hand, means an inference of the
parties’ intentions drawn from what they said and did. Thus, when in the morning I
take my car to the garage for repair, there is promise implied in fact on my part to pay
for those repairs when I pick it up later that evening, even though I said nothing of
the sort. Whatever ‘implied’ means in the law of trusts, we can immediately see that
it is a redundant category. If it means a trust implied in law, then it is no different from
a constructive trust. If it means a trust implied in fact, then it is no different from an
express trust. Because of the ambiguity inherent in the words ‘implied trust’, the term
should be avoided, and in that regard it is notable that it is rarely used today.

Summary
Some trusts arise by operation of law, that is, for reasons other than an effective
declaration of trust. In other words, the trust arises as an equitable response to certain
factual circumstances. What is often lacking is a coherent explanation of why this is done.

3.4.5 Resulting trusts

In this context resulting comes from the Latin resalire, meaning ‘to jump back’. A
resulting trust can arise in favour of a person who causes rights to be transferred to
another to compel the recipient to hold those rights in favour of the person who
caused the transfer. When this occurs, we usually call it a resulting trust. Thus, a
situation in which A conveys transfer rights to B which B then holds on trust for A,
might be called a resulting trust. The immediate problem, however, is that the term
‘resulting’ provides no clue as to why that trust arose. It may have done so because
A told B to hold the rights for him on trust, as in the nomineeship example discussed
above. Therefore, it may be an express trust. Or it may have arisen, as in Chase
Manhattan, because A’s transfer was mistaken and so might be a constructive trust. For
this reason, resulting trusts overlap with express and constructive trusts, and should
not appear in the same series. However, the dominant classification of trusts in English
law makes them so appear.

One way to make some sense of resulting trusts is to add another word to indicate
why they arise. This was the strategy of Megarry J in Re Vandervell (No 2) [1974] Ch 269,
who added the labels ‘presumed’ and ‘automatic’. In his view:
Equity and Trusts  3  Types of trusts page 23

uu A ‘presumed’ resulting trust generally arises where A transfers a right to B gratuitously

(i.e. taking no payment of any kind in return, ‘for no consideration’ or ‘voluntarily’)
and there is no evidence of why A did so. Likewise, if A pays C to convey a right to
B then, in the absence of evidence of the manifested intentions of A and provided
certain other conditions are met, B will hold the right on ‘resulting’ trust for A.

uu An ‘automatic’ resulting trust is said to arise when a transfer is made on trusts

which are either wholly or partially invalid. Thus, if A conveys a right to B to hold
on trust for B for life, but says nothing about how B is to hold it after C’s death, the
trust ‘fails’ so far as the remainder is concerned, and normally B will hold the right
for C for life, remainder to A.

There are two questions to be asked about resulting trusts. First, what facts are being
presumed when a ‘presumed’ resulting trust arises? One theory is that it is presumed
that the transferor declared a trust for herself or himself. If so, it is a form of express trust.
As we will see in Chapter 12, this is controversial. Some argue that the presumed fact
triggers a trust that arises by operation of law, in other words, a constructive trust.

Secondly, why does an ‘automatic’ resulting trust arise? Is it because the court ‘presumes’
an intention on the part of the transferor that it should, or is it because the courts impose
a trust? And if the latter, why do the courts impose such a trust? If it is indeed a trust
which is imposed by the courts, then it too is nothing more than a constructive trust. On
either view, resulting trust appears to be a redundant category. Nevertheless, resulting
trusts have an important role.

Summary
A resulting trust arises in favour of someone who caused the rights in question to be
transferred to the resulting trustee. Since Re Vandervell (No 2), two kinds of resulting
trust have been recognised. Presumed resulting trusts arise because of an evidential
presumption that arises on proof by evidence of certain primary facts. If the presumed
fact is a declaration of trust, presumed resulting trusts are a species of express trust,
and if not, they must be constructive. Automatic resulting trusts arise when a transfer
of rights is made pursuant to a declaration of trust which is in some sense defective or
incomplete. The question then is why a trust should arise in such circumstances. If it is
not because of a presumption of intention, then they are constructive. Either way, the
category of resulting trust would appear to be redundant.

3.5 Testamentary and inter vivos trusts

A testamentary disposition is a gift made in the donor’s will, which only takes effect
when the donor dies. A person who dies leaving a will is called a testator. Someone
who dies without disposing of all their assets by will has died intestate, either wholly
or partially. Normally, a testamentary trust is an express trust which is set out in a
person’s will, and comes into operation when the testator dies and the estate is
administered by their executors. Typically the executors are also the first trustees of
any trust which arises under someone’s will. By contrast, an inter vivos (‘among the
living’) trust is one that takes effect during the settlor’s life.

Self-assessment questions
1. Define:

a. an express trust

b. a discretionary trust

c. an automatic resulting trust

d. a constructive trust

e. an implied trust

f. an inter vivos trust

g. testamentary trust.

2. What is ‘fixed’ in a fixed trust?

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3.6 Purpose trusts

Every express trust exists for a purpose in the sense that a settlor creates it with some
purpose in mind. The same is true of constructive trusts which arise by operation of
law to fulfil the purpose for which that legal rule was created. As we have seen, the
central case of the express trust is one in which rights are transferred to trustees
on terms which give the beneficiaries rights against the trustees to the payment
of income or capital, usually over a period of some years. A purpose trust, properly
so called, is one without beneficiaries which is devoted to the carrying out of some
purpose, for example, to devise a 40-letter alphabet for the English language (Re Shaw
[1957] 1 WLR 729). While it might be true that a great many individuals could in fact
benefit from such a trust, they are not beneficiaries in the way that beneficiaries of
a normal trust are. They do not have any defined interests in the trust nor can they
enforce the trust against the trustee. Therefore, trusts for non-charitable purpose are
usually void. If a settlor tries to create a purpose trust, then normally the trust will fail
at the outset unless it is for a charitable purpose.

A trust for charitable purposes, such as a trust to assist the poor, will be valid. How,
you might ask, is such a trust enforced? Can the poor compel the trustee to use the
rights as intended? No. The Charity Commission for England and Wales has the power
to enforce such trusts on behalf of the Crown: Charities Act 2011, ss.13–15. It is for this
reason that charitable trusts are also known as ‘public trusts’, because they involve the
participation of the state. By way of contrast, purpose trusts which are not accepted by
the law as charitable are often called ‘private purpose trusts’.

As we have seen, the basic rule is that private purpose trusts are void. There is,
however, a tiny class of exceptions, all of which are testamentary trusts. These
are trusts for the provision and upkeep of graves and monuments, the care of the
testator’s animals or for private masses for the better repose of the testator’s soul. The
enforcement mechanism is peculiar and fragile, as we shall see in Chapter 10. As we
shall also see in Chapter 10, certain recent cases may appear to have made inroads into
the rule against private purpose trusts.

Summary
Purpose trusts are those in which funds are devoted to the carrying out of a purpose
rather than conferring rights on beneficiaries. Such trusts have no beneficiaries, and
for this reason, among others, most private purpose trusts are invalid. Charitable (i.e.
public) purpose trusts are valid and are enforced by the Charity Commission.

Activity 3.3
Review the following trusts and explain which of the following terms can be
applied to them: ‘express’, ‘fixed’, ‘discretionary’, ‘bare’, ‘constructive’, ‘resulting’,
‘testamentary’, ‘inter vivos’, ‘purpose’, ‘private’, ‘public’, and ‘charitable’.
a. Under her will, A provided £1 million to be held on trust, the income to be
distributed for a period of 21 years to her children and grandchildren in such
shares as her trustees shall in their absolute discretion decide, although any
child or grandchild will lose any further possibility of receiving money if they
establish a residence outside the UK. At the end of the 21-year period, the capital
is to be paid to the British Red Cross.

b. Fred transferred £50,000 to trustees on trust to build a ‘useful memorial to

myself’. (See Re Endacott [1960] Ch 232.)

c. Arthur transferred £10,000 to trustees on trust for ‘such objects as I shall declare
in writing’. Arthur died before declaring any such objects.

d. Beatrice transferred 100 shares in Super plc to her infant niece Florence and
later died. There is no evidence that she spoke to anyone about the transfer (see
Re Vinogradoff [1935] WN 68).
Equity and Trusts  3  Types of trusts page 25

e. In compliance with their contract to pursue the purchase of land for commercial
development, Fred and Bill each transferred £100,000 to a solicitor to complete
the purchase. The solicitor wrongfully paid £10,000 of this to his nephew as a
birthday present.

Sample examination question

How does the law classify trusts? Are there any ambiguities and inconsistencies in
the classifications?

Advice on answering the question

This is a wide-ranging topic which can be addressed in different ways. However, the
two different parts should each receive sustained attention. The law classifies trusts in
different cross-cutting ways for different purposes. The distinction between fixed and
discretionary trusts is based on the structure of the trust (i.e. the terms of the trust
which determine how the rights are to be distributed). It distinguishes cases where
the trustee has no dispositive discretion (i.e. where the trust instrument dictates
the distribution), from cases where the trustee has significant control by way of his
discretion over distribution. The distinction between express and constructive trusts
focuses on how trusts arise. Express trusts arise because right-holders intentionally
create them. Constructive trusts, by contrast, are imposed on right-holders by
operation of law. The category of implied trust is probably redundant. Purpose
trusts are distinguished from typical trusts for beneficiaries, and the public/private
distinction with respect to purpose trusts indicates the mechanism of enforcement
and the charitable, public-serving substance of the former. The distinction between
testamentary and inter vivos trusts is straightforward, reflecting the way in which a
different area of law (the law of succession) interacts with the law of trusts. The special
identification of resulting trusts, although a traditional classification, is problematic,
given both that it covers two cases of trust arising for seemingly different reasons, and
because the term can refer broadly to cases outside these two categories.

The second point to be addressed focuses on the problems of the classifications the
law has traditionally adopted. Implied trusts and resulting trusts should be discussed;
implied trusts as a classic example of an ambiguous term, and resulting trusts for the
uncertain scope of the term, and the difficulty of finding a unifying feature of the two
cases of trust typically referred to by the term. The category of constructive trusts
has also historically been used to group particular sorts of trust together which have
a wide range of rationales and bases. An answer with respect to constructive and
resulting trusts will be enriched by the study of these trusts in depth in later chapters.
page 26 University of London  International Programmes

Reflect and review

Look through the points listed below.

Are you ready to move on to the next chapter?

Ready to move on = I am satisfied that I have sufficient understanding of the principles

outlined in this chapter to enable me to go on to the next chapter.

Need to revise first = There are one or two areas I am unsure about and need to revise
before I go on to the next chapter.

Need to study again = I found many or all of the principles outlined in this chapter very
difficult and need to go over them again before I move on.

Tick a box for each topic

Ready to Need to Need to

move on revise first study again

I can explain what the terms ‘express’, ‘fixed’,

‘discretionary’, ‘bare’, ‘arising by operation of law’,
‘implied’, ‘constructive’, ‘resulting’, ‘testamentary’,
‘inter vivos’, ‘purpose’, ‘private’, ‘public’ and
‘charitable’ mean when used of trusts. ¢ ¢ ¢

I can indicate where some of these terms may have

several, perhaps conflicting, meanings. ¢ ¢ ¢

I can outline the structure of the various kinds of

trust to which these terms refer and am able to
explain the bases upon which they classify trusts. ¢ ¢ ¢

If you ticked ‘need to revise first’, which sections of the chapter are you going to
revise?
Must Revision
revise done

3.1 Express trusts ¢ ¢

3.2 Discretionary and fixed trusts ¢ ¢

3.3 Bare trusts ¢ ¢

3.4 Trusts arising by operation of law ¢ ¢

3.5 Testamentary and inter vivos trusts ¢ ¢

3.6 Purpose trusts ¢ ¢

4 The express trust relationship

Contents
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28

4.1 Introduction to rights and duties . . . . . . . . . . . . . . . . . . . . . 29

4.2 Powers and duties of trustees and others . . . . . . . . . . . . . . . . . 32

4.3 Typical administrative powers and duties . . . . . . . . . . . . . . . . . 34

4.4 Investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34

4.5 Power of delegation . . . . . . . . . . . . . . . . . . . . . . . . . . . 37

4.6 Interests of beneficiaries and objects of powers . . . . . . . . . . . . . 37

Reflect and review . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43

page 28 University of London  International Programmes

Introduction
This is the widest-ranging chapter in this module guide, for it covers a number of
essential aspects of the express trust. It is best to look at them together, because they
are closely related. We will begin by examining the way in which express trusts are a
legal device generating both personal and proprietary rights. We will then focus on
the powers and duties of the trustee and others under the trust, and consider in some
detail the trustees’ powers of maintenance and advancement, duty of investment,
and power of delegation. We will then focus on the rights of the objects of the trust, in
particular the beneficiaries’ rights to information and to collapse the trust under the
rule in Saunders v Vautier (1841) 4 Beav 115, 49 ER 282.

Essential reading
¢¢ Penner, Chapter 2: ‘The nature of the express trust’.

¢¢ Penner, Chapter 3: ‘Express trusts: trusts and powers’.

¢¢ Penner, Chapter 10: ‘The trust up and running’.

Learning outcomes
By the end of this chapter, and having completed the Essential readings and
activities, you should be able to:
uu describe the structure of the typical express trust by setting out the rights the
beneficiaries have, and the powers and duties that the trustees, and others, may
have
uu explain in outline the beneficiaries’ rights to follow and trace rights held on trust
that have been transferred in breach of trust
uu set out the typical sorts of administrative and dispositive powers and duties a
trustee will have
uu describe the law governing the powers of maintenance and advancement, the
duty of investment, and the power of delegation
uu explain the rights of objects to information and to collapse the trust under the
rule in Saunders v Vautier.
Equity and Trusts  4  The express trust relationship page 29

4.1 Introduction to rights and duties

The trust is a combination of personal and property rights and duties. What is the
difference between a personal right and property right? The basic distinction is that
a personal right is a right enforceable only against specific persons (e.g. a right to
the performance of a contract). If I contract with you that you will paint my house, I
cannot sue your brother or sister simply because you breach your promise. The only
person liable to perform is you. By contrast, a property right is one in respect of a
specific thing which can be enforced against any number of people so long as that
thing itself is still in existence. For example, you have a right to exclusive possession
of this module guide, a right which the common law compendiously calls ‘title’ (from
entitlement). Although that right was transferred to you by the University of London,
it binds strangers to the relationship between you and the university. It is a property
right and can therefore be enforced against anyone into whose hands the guide may
come without your consent.

Under a trust, the trustee owes a number of personal obligations to the beneficiaries,
such as the duties to:

uu keep the trust accounts (i.e. proper records of the trustees’ dealings with the trust)

uu distribute the assets according to the trust’s terms

uu invest the trust funds.

If the trustees breach any of these duties they will be personally liable for breach
of trust, and the beneficiaries can sue them for a money judgment but equity also
holds that the beneficiaries have rights in respect of the trust assets themselves. The
beneficiaries do not have direct rights to possession of the things held in trust. So, for
example, if this module guide were being held on trust for you, it is the trustees, not
you, who have the title (i.e. the right to exclusive possession). Similarly, if company
shares are held in trust for you, it is the trustees who will have the rights to receive
dividends and vote at shareholder meetings. They must, however, exercise those rights
in your interests and not for their own benefit. You have a right to call them to account
for their exercise of the rights they hold on your behalf.

Most of the beneficiaries’ rights are enforceable only against the trustees. However,
there are some rights that can be enforced against strangers to the trust relationship.
These arise when the trust assets are transferred by the trustee in breach of trust
to someone who is not a bone fide purchaser (see 4.1.1 below). Although third-party
recipients will not be subject to the normal duties of trustees (e.g. to invest), and
neither will they have the dispositive powers of trustees, they will be obliged to return
the trust assets at the beneficiaries’ request. These rules apply equally to express,
constructive and resulting trusts. They also apply when a sole trustee dies and the
trust assets are transferred via her or his estate. The trustee’s personal representatives
(i.e. the executors or administrators of the trustee’s estate) are under a duty to return
the trust assets at the behest of the beneficiaries, and so too is anyone who receives
those assets under the trustee’s will or upon the trustee’s intestacy. Similar thinking
explains what happens when trustees become bankrupt. In such a case, the assets held
on trust do not vest in their trustees-in-bankruptcy, as do almost all their other rights,
with the result that the trust rights will not be available to satisfy their creditors’
claims against them. It will be recalled that it was for this reason that the claimant
bank in Chase Manhattan was arguing for a trust.

4.1.1 Bona fide purchasers

In the case of property rights, the law has different rules for different kinds of rights
when it comes to the enforcement of those rights against other members of society.
In the case of goods (e.g. this module guide) the rights are very robust. The owners
of goods can in general enforce their rights to exclusive possession (their ‘title’)
against anyone who receives those goods without their consent, including an honest
buyer who paid good money for them to someone who stole them, with no reason
to suspect they were stolen. There are some limited exceptions to that rule, but the
page 30 University of London  International Programmes

dominant approach is to say that the buyer acquires only the thief’s defective title,
which the thief obtained by taking possession, and that owner’s better title was not
destroyed by that sale. The innocent buyer bought a title that was not as good as the
owner’s title. The Latin expression for this rule is nemo dat quod non habet (no one
gives what he or she does not have).

The protection of rights under trusts is not as strong. The beneficiaries’ rights to
recover the trust assets can be enforced:

uu against a donee (sometimes called a ‘volunteer’, who is someone who receives the
assets as a gift)

uu against the trustee’s trustee in bankruptcy, in whom, as we have seen, the assets do
not vest

uu against the trustee’s personal representative on death

but not against the innocent purchaser for value of the trustee’s legal title. The effect
of such a sale is to destroy the beneficiaries’ right to a reconveyance of the trust assets,
with the result that the transferee takes them free of the trust. The beneficiaries will
have personal claims against the trustees for conveying the assets away in breach of
trust, but this may be worthless if the trustees are insolvent. The beneficiaries will also
have a property right to any proceeds of sale received by the trustees.

More precisely, the trust cannot be enforced against someone who acquires the
trust assets as a bona fide purchaser for value without notice. This is usually called the
defence of bona fide purchase, which consists of four separate elements that must be
satisfied:

uu bona fide: the recipient acted in good faith

uu purchaser: the recipient acquired legal title and not merely an equitable interest

uu for value: the recipient gave good ‘consideration’ (i.e. money or money’s worth) in
exchange for the title

uu without notice: the recipient did not have notice that the assets were transferred
in breach of trust.

The question of good faith will normally be satisfied by showing lack of notice, but it
is possible for a person to act in bad faith even without notice of the breach (e.g. if the
purchase was part of an illegal transaction).

It may seem like the requirements of purchase and for value are one and the same,
but purchase is an old term for the acquisition of legal title other than by inheritance.
A person who obtains only an equitable interest is not a purchaser and therefore not
entitled to the defence even if they gave full value in good faith without notice. This is
because someone else (usually, the trustee) has legal title subject to two competing
equitable claims. The beneficiaries’ interest arose first and will almost always prevail
over subsequently acquired equitable interests.

Most cases concerning the bona fide purchase defence turn on the question whether
the recipient had notice of the breach of trust at the time title was acquired.
Therefore, the defence is sometimes called the ‘doctrine of notice’, but this can be
misleading since notice is irrelevant if any other element of the defence is not met.
Notice may be actual or constructive, and it may be imputed:

uu Actual notice: the recipient had knowledge of the breach or was at least alerted to
the possibility of breach.

uu Constructive notice: the recipient is treated as if they had actual notice. This occurs
when the recipient would have discovered the breach if the usual investigations
had been made. A purchaser normally makes extensive searches (through a
solicitor) when buying land or other expensive assets, and if those searches would
have revealed the existence of the trust and possibility of breach, the purchaser
will have constructive notice even if they honestly did not have any actual notice.
Equity and Trusts  4  The express trust relationship page 31

It is sometimes said that such a purchaser is negligent for failing to search, but this
is misleading because the purchaser does not owe a duty of care to anyone else
when making the purchase and does nothing wrong by failing to search. Everyone
is free to take that risk unless acting on someone else’s behalf.

uu Imputed notice: when the recipient employs an agent (such as a solicitor) to help
with the transaction, the agent’s (actual or constructive) notice will be imputed to
the recipient, even if the agent failed to inform the recipient.

In some cases, the bona fide purchase defence does not completely extinguish the
beneficiaries’ right to the trust asset, but gives the purchaser priority over that right.
The defence applies not just to transfers of legal title, but also to grants of other legal
rights, such as a legal mortgage or legal lease of land. If the bona fide purchase defence
applies, the land will still be held in trust for the beneficiaries, but subject to that
mortgage or lease.

It should be noted that the bona fide purchase defence does not apply to registered
land (i.e. to land registered under the Land Registration Act 2002). That Act supplies
its own rules for deciding whether someone who acquires a registered freehold or
leasehold estate or registered charge (i.e. mortgage) takes it free of the trust. We are
not here concerned with those rules, which you will study in the property law module.
However, it is worth noting that good faith and notice are not normally relevant
when those rules apply. If persons acquire registered legal interests in land for value,
then normally they take them free of any trusts unless the beneficiaries’ interests are
‘protected’. A beneficiary’s interest will normally be protected if he or she is in actual
occupation of the land when the registered interest is acquired.

4.1.2 Following and tracing trust rights

When the beneficiaries enforce their trust rights against third parties, they are said
to ‘follow’ those rights. However, the beneficiaries may acquire substitute rights
by operation of law. If, for example, company shares were transferred in breach
of trust to a donee, who then sold them to a bona fide purchaser for £1,000, the
beneficiaries’ right to the shares would be extinguished. However, the beneficiaries
would acquire the right to elect to treat the £1,000 received in exchange as subject
to a trust, and then ask for that money to be conveyed to the persons appointed as
trustees to receive it. This process is known as ‘tracing’, and it can be used multiple
times whenever the trust assets are exchanged for something else. Returning to our
example, if the £1,000 received in exchange for the shares were then used to purchase
a car, the beneficiaries could elect to treat it as a trust asset. This ability to trace will
be lost only when the thing over which the right exists is destroyed (for example, the
car is destroyed by fire and there are no insurance proceeds) or there is no exchange
product (for example, trust money is spent on a round-the-world cruise). The rules of
tracing will be discussed in detail in Chapter 19.

4.1.3 Personal remedies for breach of trust against third parties

In cases of breach of trust, the beneficiaries will also have personal rights against the
errant trustees. They can be sued personally to make good losses to the trust which
have occurred because of their breach, and unless there is an exemption clause in the
trust instrument on which they can rely (see Chapter 17) a trustee is strictly personally
liable for breach of trust, in the same way that a contracting party is strictly personally
liable for breaches of contract. Moreover, recipients of trust assets, at least those with
knowledge that the transfer was in breach of trust, may be also personally liable to
restore the value of what they received to the trust, and third parties who dishonestly
assist the trustee in a breach of trust will also be personally liable to make good the
loss. The liability of these third parties is also discussed in Chapter 17.
page 32 University of London  International Programmes

Activity 4.1
Review Chapter 2 and Chapter 3 of this guide.
Read Penner Chapter 2: ‘The nature of the express trust’ and Chapter 3: ‘Express
trusts: trusts and powers’ Sections ‘Fixed trusts, discretionary trusts, and powers
of appointment’, ‘Duties and powers virtute officii (powers given to office holders),
personal powers (powers nominatum), powers “in the nature of a trust”, fiduciary
powers, bare and mere powers’ and ‘Interests under fixed trusts’.
Explain how the configuration of personal rights and proprietary rights under a
trust differs from those in the case of:
a. an agency under which P’s agent collects rent for him without holding the
money he collects on trust

b. a debt.

4.2 Powers and duties of trustees and others

The structure of express trusts can be complicated. In Chapter 3, we saw how an
express trust can incorporate different elements, some fixed, some discretionary and
some contingent. There we dealt only with dispositive duties and discretions, because
the character of distributive duties under a trust has been regarded as an important
basis upon which to classify trusts. Here we elaborate on the structure of trusts, taking
trustees’ powers into account. Furthermore, we must notice that it is possible and
common for people other than the trustee to have powers or duties under the terms
of the trust. To take a typical example, the settlor of a trust may give himself a power to
revoke it, so that the trust rights then come back to him.

As we have already seen, ‘dispositive’ powers and duties are those that concern the
distribution of trust rights to beneficiaries. ‘Administrative’ powers and duties concern
dealings with the trust rights without their distribution, such as investing the trust
rights, insuring them or using them to pay fees to solicitors and accountants.

Trustees’ duties and powers are the paradigm of fiduciary duties and powers.
‘Fiduciary’ refers to those duties and powers which people must exercise in the best
interests of others and not for their own benefit. Fiduciaries must avoid conflicts of
interest. Thus, express trustees must perform their duties and exercise their powers
only with the interests of the beneficiaries in mind, and in particular, not so as to serve
their own interests or the interests of non-beneficiaries such as their own friends and
relations who they might otherwise be prone to favour.

A power which is not fiduciary is, in the context of trusts, called a ‘personal’ power, which
means that the holder can exercise it, within its proper limits, with their own interests
in mind. Fiduciary powers are subject to fiduciary duties that require the holder of the
power to use it only for the purposes for which it was granted. In a trust for persons, this
normally means that the powers may only be exercised to further the best interests of
the beneficiaries. It is very rare for a trustee to hold any personal powers under a trust,
for trustees are typically only appointed to carry out the trust for the benefit of the
beneficiaries alone; but it is not uncommon for the powers of others under a trust to be
personal. For example the settlor’s power of revocation, mentioned above, may well be
personal. The settlor can revoke the trust and obtain a retransfer of the remaining trust
assets because it is in her or his own interests to do so. Indeed, it might be odd to think
that the settlor would hold such a power as a fiduciary for the beneficiaries, for in what
circumstances would it be in their best interests to have the trust, and thus their rights
under it, revoked?

The overarching dispositive duty is, of course, to distribute the trust rights according
to its terms. But under the terms of the trust, there may be additional dispositive
powers, in respect of which there may or may not be duties. The four most typical
dispositive powers are:

uu power of appointment

uu power to appoint individuals to a class of beneficiaries

Equity and Trusts  4  The express trust relationship page 33

uu power of maintenance

uu power of advancement.

Persons who might obtain some distribution from the trust only if a discretion is
exercised in their favour are generally called the ‘objects’ of the power or discretionary
trust.

Power of appointment
A power of appointment is a power to distribute rights, but normally with no duty to do
so. The person to whom the power is granted is called the donee of the power, and the
persons to whom those rights may be distributed are called the objects of the power.
When a power of appointment is included in a trust, it is usually the trustees who have
the power to exercise it, but powers to appoint trust assets can also be granted to
donees other than the trustees. A general power is a power to appoint to anyone in the
world, including the donee of the power himself. A special power is a power to appoint
to a specific group of objects or a specified class of objects (e.g. all of the employees of
Widgets Ltd). A hybrid power or intermediate power is a power to appoint to anyone
except a specific group or specified class (such as ‘a power to appoint to anyone except
the settlor, his spouse, and the trustee or employees of the trustee’).

Sometimes, the holder of a power is under a duty to exercise it, in which case it is the
same as a dispositive duty. For example, a trust might provide that Alexa is entitled to the
income generated by the trust rights for life, ‘with power by will to appoint the capital
among her children in such shares as she in her absolute discretion thinks fit’. On the
proper construction of the document, it may be determined that Alexa was obliged to
appoint the capital by her will. Note that there is still a discretion here since it is up to
Alexa to decide how much each of the children gets, but she is obliged to appoint. As a
result, this is properly understood as a trust to distribute with a discretion to determine
individual shares, and is known as a ‘Burroughs v Philcox trust’, after a case where
such a trust arose. If Alexa dies without exercising the power, the court will direct the
distribution of the rights evenly among the objects of the class.

On the other hand, a power may be construed to be exercisable only at the option of
the holder. If the power is personal, the holder may exercise it or not as he sees fit. If the
power is subject to a fiduciary duty, the donee must from time to time consider whether
and how to exercise it with the best interests of the beneficiaries in mind.

Power to appoint individuals to a class of beneficiaries

A power to appoint individuals to a class of beneficiaries entitles the holder to add a
named individual to a group which potentially benefits by a distribution of trust rights.
For example, a trust instrument might provide for a discretionary trust of income for the
settlor’s children, with a power granted to the trustees to appoint the settlor’s nephews
and nieces to that class.

Power of maintenance
A power of maintenance is a discretion given to the trustees to apply the income
generated by the trust rights for the benefit of an infant beneficiary (i.e. a beneficiary
under the age of 18). This power is provided by s.31 of the Trustee Act 1925, unless it
is expressly or implicitly excluded by the terms of the trust. Alternatively, it may be
expressly conferred by the trust instrument which will determine how it may be used.

Power of advancement
A power of advancement allows trustees to pay or apply capital for the benefit of a
beneficiary who is an infant or merely has a future or contingent interest. As with
maintenance, the power may be created expressly, or trustees may rely on the statutory
power in the Trustee Act 1925, s.32 unless that power is excluded by the trust instrument.

The powers of maintenance and advancement are related. The power of maintenance
relates to income while the power of advancement relates to the capital. They are
always held by trustees and are therefore fiduciary.
page 34 University of London  International Programmes

Activity 4.2
Review Penner, Chapter 2: ‘The nature of the express trust’, Section ‘Trustees and
fiduciaries’, and try to compose a definition of ‘fiduciary duty’.
No feedback provided.

Activity 4.3
Read Vatcher v Paull [1915] AC 372. What is a ‘fraud on a power’? Make a short (not
more than two minutes) spoken presentation in answer.

4.3 Typical administrative powers and duties

Trustees must keep the trust rights separate from their own and keep trust accounts
(i.e. maintain proper records of their transactions with the trust rights). Trustees
typically also have a power to invest the trust rights to exchange cash and other trust
rights such as shares to achieve a portfolio of rights which will produce a reasonable
return at a reasonable risk. If so, they also have a duty to invest with due care,
exercising or drawing upon investment expertise. Trustees typically have the power
and duty to insure rights held by the trust. They usually have the power to delegate
their administrative functions to agents for the better administration of the trust,
but have a duty to monitor their agents’ performance. Trustees may have powers
to appoint new trustees (see Chapter 15), to seek the variation of a trust (Chapter
16) and to ‘export’ the trust to other jurisdictions (usually for tax reasons). Trustees
have a general duty to apply to the court whenever there is a problem with the
administration of the trust which cannot be resolved without the court’s assistance.

Persons other than trustees may have administrative duties. Settlors might give
themselves or others a power to replace the trustees, to change the jurisdiction in
which the trust is administered, or to veto certain investments. Such powers tend to
be seen as fiduciary for the beneficiaries, whether the holder is a trustee or not, on the
basis that administrative powers are to be exercised for the better administration of
the trust, and the trust is to be administered for the benefit of the beneficiaries.

4.4 Investment
If the trustees have a power to invest trust rights, this carries with it the duties (a) to
preserve the overall value of those rights and (b) to be ‘even-handed’ between the
different classes of beneficiaries. In many trusts, there will be income beneficiaries and
capital beneficiaries.

4.4.1 Even-handedness
Some investments (such as gold and antiques) produce no income, although they may
themselves increase in capital value. Other investments will be all income (i.e. what
are called ‘wasting assets’, such as a 20-year lease in which all the value comes from
the rent). Clearly, then, a trustee may favour income beneficiaries at the expense of
capital beneficiaries, or vice versa, by making particular kinds of investments. Equity
imposes a duty of even-handedness, which requires the trustee to balance these
interests fairly when making investment decisions.

4.4.2 Risk versus return in investment choices

The two chief characteristics of any investment are risk and return. These are directly
related: the greater the risk of loss, the greater the percentage return on capital any
investor will demand. Traditionally, equity favoured safety over high return. Trust
instruments themselves almost always empower the trustee to invest in a wide range
of more or less risky investments. Historically, investment clauses were interpreted
restrictively, but now are given their plain meaning: Re Harari’s Settlement Trusts [1949]
All ER 430. If there is no express investment clause, the statutory regime provided by
the Trustee Act 2000 governs the trustee’s investments.
Equity and Trusts  4  The express trust relationship page 35

4.4.3 The Trustee Act 2000

Prior to 1 February 2001, the Trustee Investments Act 1961 governed the trustee’s
duty of investment unless the trust instrument provided otherwise, and it imposed
inconvenient restrictions upon investment. The Trustee Act 2000 now governs unless
the trust instrument provides otherwise. It (a) gives the trustees very broad powers of
investment, but (b) imposes on them a duty of care to ensure that the power is used
prudently.

Section 3 of the Act provides a general power of investment by which a trustee may
make any kind of investment that they could make if they were absolutely entitled to
the trust rights. That is, they may make any investment they could make if the rights
were held by them outright.

However, the trustees’ power ‘to make investments in land other than in loans secured
on land’ is restricted by s.3(3) and s.8 to the acquisition of land in the UK, unless the
trust instrument provides otherwise: ss.6(1), 9.

Section 8 gives the trustee a power to acquire titles to land in the UK, even if the land
is not to be used to generate rental income but to provide a home for one or more
of the beneficiaries. This separate treatment of land is a reaction to the past. In Re
Power (1947), trustees were barred from buying land to provide a house in which the
beneficiaries could live.

Section 1 of the Act provides for a general duty of care applicable to trustees, and by
schedule 1, this duty applies to the trustee when exercising any power of investment,
either under the statute or conferred by the trust instrument (although the duty of
care may be ousted by the trust instrument. Section 1 provides that the trustee must
exercise:

such care and skill as is reasonable in the circumstances, having regard in particular to (a)
any special knowledge or experience that he has or holds himself out as having, and (b) if
he acts in the course of a business or profession, to any special knowledge or experience
that it is reasonable to expect of a person acting in the course of that kind of business or
profession.

Section 4 requires the trustee when exercising any power of investment to have
regard to the ‘standard investment criteria’, and to review the investments from
time to time with these criteria in mind. The standard investment criteria are (a)
the suitability of particular kinds of investment for the trust, and (b) the need for
diversification of the trust investments. According to modern investment theory
investors should balance the risks of particular investments against the risks of other
investments. Savings bonds generally perform well when inflation is low, whereas gold
generally holds its value in times of high inflation. Buying both allows the investor to
offset the inflation-sensitive risks of one against the other. Thus the modern prudent
investor is to be judged not by the individual investment vehicles they choose but on
the overall ‘portfolio’ of investments.

Section 5 of the Act also requires the trustee, before exercising any power of
investment, to take advice from someone the trustee reasonably believes is able to
provide proper advice of this kind by virtue of their ability and experience in such
matters, unless it would be reasonable in the circumstances to forgo such advice.
(Presumably it would be reasonable not to seek advice in the case of a trust with very
limited funds, or a trust of short duration, for which the only sensible option might
simply be to put the money in a bank.)

4.4.4 The standard of prudence in making trust investments

A standard of prudence, just like the standard of care in the law of negligence, cannot
be spelt out in advance by a set of rules, but dictates reasonable behaviour in the
circumstances.
page 36 University of London  International Programmes

Essential reading
¢¢ Trustee Act 2000, ss.1–10.

¢¢ Speight v Gaunt [1883] 9 App Cas 1; Re Whiteley [1886] 33 Ch D 347; Bartlett v

Barclays Bank Trust Co Ltd [1980] Ch 515; Nestle v National Westminster Bank [1994]
1 All ER 118; Cowan v Scargill [1985] Ch 270.

Further reading
¢¢ Harries v Church Commissioners for England [1992] 1 WLR 1241.

Activities 4.4–4.6
4.4 Read the cases of Speight v Gaunt [1883] 9 App Cas 1, Re Whiteley [1886] 33
Ch D 347, and Re Chapman [1896] 2 Ch 763 and explain how the standard of
prudence applied to the trustees’ actions in those cases.

4.5 Read Bartlett v Barclays Bank Trust Co Ltd [1980] Ch 515. Do any special
considerations apply to the management of investments when the trust has
a large or majority shareholding in a particular company?

4.6 Read Nestle v National Westminster Bank [1994] 1 All ER 118. Why did
Miss Nestle’s claim fail? What did the court say about the duty of ‘even-
handedness’? In the light of this, is the duty of investment an administrative
duty, a dispositive duty, or something of both?

4.4.5 Social or ethical investing

Cowan v Scargill (1985) concerned a dispute among the trustees of the National
Coal Board pension fund for miners. The trustees appointed by the union refused
to consent to an investment plan, including overseas investment and investment
in industries in direct competition with the coal industry. Megarry V-C held that the
refusal of the union trustees was in breach of trust:

When the purpose of the trust is to provide financial benefits for the beneficiaries, as is
usually the case, the best interests of the beneficiaries are normally their best financial
interests. In considering what investments to make, trustees must put to one side their
own personal interests and views. Trustees may have strongly held social or political views.
They may be firmly opposed to any investment in South Africa or other countries, or they
may object to any form of investment in companies concerned with alcohol, tobacco,
armaments or many other things. In the conduct of their own affairs, of course, they are
free to abstain from making any such investments. Yet under a trust, if investments of this
type would be more beneficial to the beneficiaries than other investments, the trustees
must not refrain from making the investments by reasons of the views that they hold.

As Cowan v Scargill is the leading case in this area, one must conclude that social or
ethical investing is not currently permitted for most trusts, although the issue is a
matter of controversy among writers on trusts.

Activity 4.7
Read Cowan v Scargill [1985] Ch 270.
Critically examine the arguments for and against social or ethical investment by
trustees.

Summary
The Trustee Act 2000 has greatly simplified the law on the investment of trust funds
(although professionally drawn trust instruments are likely to continue to provide the
trustees with wide investment powers). First, it provides extremely wide scope for
investment in terms of the sorts of investment a trustee may undertake, but controls
this by imposing a general duty of care on investing, appropriate to the expertise
of the trustee. Trustees may not let their own ethical or political views govern their
advice of investments.
Equity and Trusts  4  The express trust relationship page 37

4.5 Power of delegation

By subs.11(1) and (2) of the Trustee Act 2000, trustees may collectively delegate any of
their functions to an agent except:

uu any function relating to whether or in what way any trust rights should be
distributed

uu any power to decide whether any fees or other payment to be made out of trust
rights should be made out of income or capital

uu any power to appoint a person to be a trustee of the trust, or

uu any power conferred by any other enactment or the trust instrument which
permits the trustees to delegate any of their functions or to appoint a person to act
as a nominee or custodian.

The trustees may delegate tasks to one of themselves (s.12(1)), although not to any
trustee who is also a beneficiary (s.12(3)). By s.15, where the agent is to carry out any
‘asset management functions’, such as investment, the trustees must first provide a
written ‘policy statement’ to guide the agent’s exercise of their powers in the best
interests of the trust, for example, so that the investments provide sufficient income
to meet the level of provision the trustees intend for the income beneficiaries. By s.22
the trustees are required to review any delegation arrangements, and to consider
revising the policy statement. By Schedule 1, para.3, the s.1 duty of care applies to the
trustees’ appointment of agents and their review of them under s.22.

By s.25 of the Trustee Act 1925 any individual trustee may, by power of attorney,
delegate any or all of their duties, powers or discretions, whether administrative or
dispositive, for up to 12 months. Under s.25(4), the trustee must inform in writing any
person entitled to appoint new trustees under the trust and all the other trustees,
which allows them to consider whether the delegation trustee should be replaced.
The trustee is liable under s.25(7) for all acts and defaults of their delegate by power of
attorney as if they were their own acts or defaults.

Essential reading
¢¢ Trustee Act 2000, ss.12, 15, 22–27.

Activity 4.8
Make a short spoken presentation on the following:
‘Under what circumstances would it be prudent, as a trustee, to delegate one’s
power of investment?’

Summary
The Trustee Act 2000 gives trustees wide powers to delegate their ‘administrative’
functions, although not their dispositive discretions or other powers which would
appear to require the judgment of a trustee as to what is in the best interest of the
beneficiaries as a whole, for example, the appointment of successor trustees. By s.25 of
the Trustee Act 1925, a trustee may delegate their rights, duties and powers as a trustee
for a limited time.

4.6 Interests of beneficiaries and objects of powers

The right of a beneficiary under a fixed trust is a right that can be assigned and will vest
in the beneficiary’s trustee-in-bankruptcy in the event of the beneficiary’s insolvency
(except in the case of protective trusts, as discussed above). By contrast, discretionary
trust beneficiaries have no right to receive anything at all, and so have nothing to
assign. They have only a hope (spes) of receiving some of the trust rights. They do,
however, have a right to be considered and a right to due performance of the trust,
which they can enforce against the trustees. In the case of general or hybrid powers,
page 38 University of London  International Programmes

the objects have no rights whatsoever, since the class of objects amounts, essentially,
to the whole world, or in the case of hybrid powers, the whole world minus a few.
Those entitled in default of appointment will only have the right to ensure that the
power is not improperly exercised. The individual objects of special powers are in a
similar position to the objects of a discretionary trust. They can enforce the power
by ensuring no invalid appointments are made, and where the power is fiduciary (as
when held by a trustee), they can insist upon the trustee properly considering its
exercise, although they cannot, of course, insist upon any appointments.

4.6.1 Rights and powers of objects

The ability of the beneficiaries (or the Charity Commission in the case of trusts for
charitable purposes) to require recalcitrant trustees to perform the trust is essential
for the existence of an effective trust. As Millett LJ in Armitage v Nurse [1997] EWCA Civ
1279, [1998] Ch 241 at 253:

There is an irreducible core of obligations owed by the trustees to the beneficiaries and
enforceable by them which is fundamental to the concept of a trust. If the beneficiaries
have no rights enforceable against the trustees, there are no trusts.

The beneficiaries are able to require the trustees to carry out the trust properly
according to its terms, and can sue the trustees for breach of trust or third parties who
knowingly receive trust rights dissipated in breach of trust or dishonestly assist in a
breach of the trust.

4.6.2 Beneficiaries’ right to be informed of their interests under the trust

According to Hawkesley v May [1956] 1 QB 304 beneficiaries whose interests are
vested rather than contingent on the happening of a certain event have a right to be
informed of the fact that they have a right under the trust, and it is within the court’s
discretion in an appropriate case (namely, where it is reasonable to assume that such
beneficiary had a genuine likelihood or expectation that a dispositive discretion might
be exercised in their favour) to require settlors to provide the names and addresses of
trustees even to a discretionary beneficiary: Murphy v Murphy (1998).

4.6.3 Beneficiaries’ right to information

In order to monitor the trustees’ conduct of the trust and hold them to account if
they breach the trust, the beneficiaries must be able to obtain information about the
running of the trust from the trustees. It is now generally accepted that beneficiaries,
whether of a fixed or discretionary trust (Chaine-Nickson v Bank of Ireland [1976] 1R
393; Spellson v George [1987] 11 NSWLR 300), and perhaps even of a contingent interest
(Armitage v Nurse [1998] Ch 241 per Millett LJ) are entitled to copies (made at their
own expense) of the trust accounts and all trust documents and such rights cannot
be limited by contrary provisions in the trust instrument on pain of rendering the
trusts in their favour invalid (on Armitage principles, above). On the other hand, it has
been asserted that objects of powers of appointment (i.e. powers that the donee is
under no duty to exercise, whether fiduciary or personal) are not entitled to see the
trust documents. The Privy Council advised in Schmidt v Rosewood Trust [2003] UKPC
26, [2003] 2 AC 709 that the objects’ rights to information reflect equity’s insistence
that the trust is properly administered. Whether discretionary beneficiaries or objects
of powers have rights to information will turn on the circumstances of the case, in
particular on the likelihood of enforcement by other categories of beneficiary or
object under the particular trust. In Re Londonderry’s Settlement [1965] Ch 918, the
Court of Appeal held that beneficiaries, while entitled to see all other trust documents
which record the trustees’ dealings with the trust property, are not entitled to see
documents which disclose their reasons for exercising a dispositive discretion in
favour of one or some beneficiaries rather than others, as this would inhibit them in
taking such decisions, and might lead to strife among the beneficiaries.
Equity and Trusts  4  The express trust relationship page 39

4.6.4 Beneficiaries’ rights under the principle in Saunders v Vautier

The beneficiaries, if of full age and sound mind, may consent to the trustees acting
outside the terms of the trust (i.e. doing what would otherwise be a breach of trust),
and may consent to the variation of the terms of the trust if they are minded so to
do. The principle, named after the case of Saunders v Vautier (1841), although of much
longer standing, is the logical extension of this fact, and may be stated as follows: if a
beneficiary with an absolute interest under a trust is sui juris and of sound mind, they
may call for a transfer of the trust rights which represent that interest, and the trustees
are obliged to transfer them to the trustee; if the trustee is a sole beneficiary, this will
result in the complete collapse of the trust. Thus if under a trust, Amy is to receive the
income generated by trust rights until she is 30, at which time she is to receive the
capital, she can demand a transfer of the rights as soon as she reaches 18.

Under fixed trusts, the right of sui juris beneficiaries to call for a transfer of trust rights
is subject to a general limitation that such a transfer must not result in the devaluation
of the other beneficiaries’ shares.

As Walton J said in Stephenson v Barclays Bank Trust Co Ltd [1975] 1 WLR 882 at 889–890:

When the situation is that a single person who is sui juris has an absolutely vested
beneficial interest in a share of the trust fund, his rights are not, I think, quite as extensive
as those of the beneficial interest holders as a body. In general, he is entitled to have
transferred to him … an aliquot [i.e. ‘proportionate’] share of each and every asset of the
trust fund which presents no difficulty so far as division is concerned. This will apply to
such items as cash, money at the bank or an unsecured loan, Stock Exchange securities
and the like. However, as regards land, certainly, in all cases, as regards shares in a private
company in very special circumstances … the situation is not so simple, and even a person
with a vested interest in possession in an aliquot share of the trust fund may have to wait
until the land is sold, and so forth, before being able to call upon the trustees as of right to
account to him for his share of the assets.

In the case of discretionary trusts, the principle only operates when all of the
discretionary beneficiaries together call for the rights which, taken together, are held
on trust to be distributed among them: Re Smith [1928] Ch 915. In other words, such
beneficiaries may together call upon the trustees to transfer the trust rights to them
as co-owners. Following McPhail v Doulton (1970), the law has allowed settlors to create
discretionary trusts where the class of beneficiaries is so large as to make it impossible
to compile a complete list of all the beneficiaries (for example, ‘all the employees and
ex-employees of the University of London and their relations’), and in these cases it is
obvious that all the objects of the discretionary trust will not be able to combine to
call for the collapse of the trust.

Summary
The beneficiaries are entitled to enforce the trust against the trustees. If no one has
any rights to enforce any trust against the right-holder, then the latter is not a trustee
and there is no trust. Following on from this principle is the right of beneficiaries to
be informed that they are beneficiaries, and to information from the trustee as to the
carrying out of the trust. However, not all beneficiaries or objects of the trust of whatever
kind of interest (discretionary, contingent, and so on) have equal rights to information,
and the decision of the Privy Council in Schmidt v Rosewood Trust Ltd indicates that much
depends on the circumstances of the particular trust, although the court will insist that
sufficient access to information be granted to allow the trust to be enforced. Under the
principle of Saunders v Vautier, beneficiaries may call for a conveyance of trust rights,
although only collectively in the case of discretionary trusts, and in every case only where
to do so would not detrimentally affect the interests of the other beneficiaries.
page 40 University of London  International Programmes

Activity 4.9

Core comprehension – Trustee Act 2000: duty of care of trustees

Go to [Link] and research ‘Trustee Act 2000’. Answer the following
questions using the Explanatory Notes to inform your responses.
a. According to the Explanatory Notes, what is the purpose of the new precisely
defined statutory duty of care as related to the Act?

b. Explain how the skill and knowledge of trustees contributes to the standard of
care expected from them in the exercise of their duties.

c. Which aspects of any given trust inform decisions on the exercise of reasonable
care?

d. Identify the scope of the applications of the duty of care.

Activity 4.10

Applied comprehension – ethical investment: exceptions to the rule

Using your online library research the following journal article:
uu Thornton, R. ‘Ethical investments: a case of disjointed thinking’ (2008) 67 CLJ
396–422, Section V: Ethical decision making: the exceptions to the rule.
a. State the general rule of ethical decision making for trustees.

b. Outline how perceptions of the concept of benefit may play a role in creating an
exception to the general rule.

c. Why do some commentators view the exception created in Evans to be only

available in extremely limited circumstances? Paraphrase a response in 60
words or less.

d. How has Harries contributed to the development of the third exception to

the general rule within the context of charitable trusts? Give an example to
illustrate the point.

e. In Cowan v Scargill under which narrow circumstance could an investment for

social or political reasons be difficult to criticise?

f. Paraphrase in 50 words or less Thornton’s criticism of this exceptional rule.

g. In Harries, which rigidly constrained policy proposed by Harries, the Bishop of

Oxford, was rejected by the Court?

h. How has Harries contributed to development of a fifth and implied exception to

the general rule?

i. Identify Thornton’s main criticisms of the fifth exception.

Activity 4.11

Applied Comprehension – ethical investment

Using your online library research the following journal article:
uu Thornton, R. ‘Ethical investments: a case of disjointed thinking’ (2008) 67 CLJ
396–422.

Introduction
a. Which two descriptors are given to types of investment which reflect the impact
of different industries and individual enterprises on their workforce, consumers
and the environment?

b. Identify the source of the empirical data which Thornton uses to evidence the
exponential growth of the ethical investment industry?

c. Based on the statistics provided, outline the relationship of the total fund value
of ethical retail funds in 2005 to the total fund value of socially responsible
Equity and Trusts  4  The express trust relationship page 41

investment assets held by churches, charities, pension funds and insurance

companies in 2001.

d. What type of conscience considerations usually guide ordinary citizens when

they make decisions about investments?

Guiding principles of trustee investment

e. Outline the basic principle guiding trustee decision making as stated by Sir
Robert Megarry V-C in Cowan v Scargill.

f. As expressed by Lord Murray in Martin v City of Edinburgh District Council,

which maximisation goal of investment requires trustees to override personal
opinions and preferences?

g. Paraphrase (in fewer than 40 words) the benefit of the application of current
portfolio theory.

Sample examination questions

Question 1 Tim and Toby are the trustees of a large trust fund held on behalf of the
Evangelical Christian Church of Yorkshire. The trust originated informally, and there
is no specific provision in the trust terms concerning investments. Tim and Toby
propose the following investment plan: (1) to put half the funds in a building society
account; (2) to purchase a 50 per cent stake in a local computer technology company
of which Tim has heard good things; and (3) to invest the rest in a financially
stretched company which produces Christian literature. Advise Tim and Toby.
Question 2 ‘The range of sound investments available to trustees is so
extensive that very frequently there is scope for trustees to give effect to moral
considerations … without thereby prejudicing beneficiaries’ financial interests. In
practice, the inclusion or exclusion of particular investments or types of investment
will often be possible without incurring the risk of a lower rate of return or
reducing the desirable spread of investments. When this is so, there is no reason in
principle why trustees should not have regard to moral and ethical considerations,
vague and uncertain although these are. The trustees would not be departing from
the purpose of the trust or hindering its fulfilment.’ Lord Nichols (1995), speaking
extra-judicially. Discuss.
Question 3 ‘The beneficiaries’ rights to inspect trust documents are now seen to be
better based not on equitable proprietary rights but on the beneficiaries’ rights to
make the trustees account for their trusteeship.’ (Hayton, quoted in Re Rabaiotti’s
1989 Settlement.) Discuss.
Question 4 What are the principles governing the trustee’s power to delegate
under the Trustee Act 2000?
Question 5 ‘There is no point in speaking in general terms about the ‘beneficiary’s
rights’ under a trust – it all depends what specific position the beneficiary is in’.
Discuss.

Advice on answering the questions

Question 1 The first thing to note is that the investment of the trust rights will be
governed by the Trustee Act 2000, as there is no specific investment provision. A good
answer will go through the relevant provisions of the Act, in particular the need for
diversification and the duty to seek investment advice. As to the specific provisions of
Tim and Toby’s plan, the whole looks very poorly diversified.

1. Does not look to provide a good return, but may be justified if the trustees foresee
drawing on the fund in large amounts in the near future.

2. Looks hazardous, and the case law concerning trustees’ duties where the trust
holds a controlling interest in a company must be considered.

3. Raises the issue of ‘ethical’ investing by a charity, and Harries v Church

Commissioners (1992) and the surrounding academic debate on ethical investing is
relevant.
page 42 University of London  International Programmes
Question 2 This question deals with ‘ethical’ (or ‘social’) investment of trust funds.
Cowan v Scargill must be discussed to reveal the background principles of law upon
which Megarry V­-C relied in opposing the application of ethical standards to trustee
investments. Lord Nichols appears to suggest that there ought to be a limited scope
for such investing, investing ethically only to the extent that the risk and return profile
of the trust fund is not imperilled. Is this a practicable stance to take? Why should
the trustee have the power to choose the ethical standards to apply (as opposed
to the settlor, who can include them if they want when they create the trust, or the
beneficiaries, who can, if of full age, consent to departures of the trust instrument)?
(See Penner, Chapter 10, Section ‘“Social” or “ethical” investing’.) Whether similar
considerations ought to apply to charitable trusts given their special function might
be discussed, and if so, Harries v Church Commissioners for England (1992) must be
considered.

Question 3 A good answer must discuss the relevant case law, both with respect to
which possible objects of a trust have a legitimate right to see the ‘trust accounts’
and the ‘trust documents’, and with respect to which documents beneficiaries are
entitled to see, with regard to beneficiaries of a fixed or discretionary interest: Chaine-
Nickson v Bank of Ireland (1976), Spellson v George (1987); with regard to those with
contingent interests: Armitage v Nurse (1998) per Millett LJ; with regard to objects of
mere powers: Schmidt v Rosewood Trust Ltd (2003). The quotation states that the law
has generally undergone a shift in regarding the beneficiaries’ rights to information
as flowing from their proprietary interest in the trust to seeing such rights as flowing
from their right to make the trustees account for their stewardship of the trust, which
is one way of reading Re Londonderry’s Settlement (1964); Re Rabaiotti’s 1989 Settlement
(2000). The first thing to note about this view is that the enforcement principle
suggests that objects in different situations (e.g. discretionary beneficiary, income
or capital beneficiary) should only be entitled to such information as is relevant
to the enforcement of their own particular interest, and this appears to have been
considered correct by Hoffmann J at first instance in Nestle v National Westminster Bank
(1988), where the capital beneficiary was not entitled to see the accounts disposing
of the income to income beneficiaries. The student should consider whether Re
Rabaiotti’s 1989 Settlement takes the law in a different direction, from the principle
that beneficiaries’ rights in this respect arise so as to permit them to enforce their
rights against the trustee, to the idea that beneficiaries should be entitled to such
information only when it is ‘in their best interests’, and the facts of Re Rabaiotti should
be discussed.

Question 4 A straightforward question requiring an outline of the principles upon

which the Trustee Act 2000 empowers trustees to delegate their functions. Particular
reference should be made to provisions concerning the trustee’s duty of care in
selecting and monitoring agents. Consideration should also be given to the rationale
for the Act not permitting delegation of certain tasks, and to its more extensive
directions concerning the delegation of the investment of trust funds. A good answer
will review briefly the history of the law of delegation, in particular the perceived flaws
in the provisions under the Trustee Act 1925, to provide a context for understanding
the 2000 Act provisions.

Question 5 Another straightforward question, requiring a discussion of how the

position of a beneficiary of a fixed interest under a trust, an object of a discretionary
trust, and the object of a mere power differ with respect to: (a) their ability to enforce
the trust against the trustees; (b) their rights to information; (c) their Saunders v Vautier
rights, and whether these differences are coherent and justifiable. A good answer
will consider the case of discretionary trusts in which it is impossible or impractical
to compile a complete list of the trust objects. A very good answer will also consider
the question of which beneficiaries have ‘vested’ interests under the trust for various
purposes in law, such as the law of taxation – see Gartside v IRC [1968] AC 553; Re Weir’s
Settlement [1969] 1 Ch 657; Sainsbury v IRC [1970] Ch 712; Re Trafford’s Settlement (1915).
Equity and Trusts  4  The express trust relationship page 43

Reflect and review

Look through the points listed below.

Are you ready to move on to the next chapter?

Ready to move on = I am satisfied that I have sufficient understanding of the principles

outlined in this chapter to enable me to go on to the next chapter.

Need to revise first = There are one or two areas I am unsure about and need to revise
before I go on to the next chapter.

Need to study again = I found many or all of the principles outlined in this chapter very
difficult and need to go over them again before I move on.

Tick a box for each topic.

Ready to Need to Need to
move on revise first study again

I can describe the structure of the typical express

trust by setting out the rights the beneficiaries have,
and the powers and duties that the trustees, and
others, may have.   

I can explain in outline the beneficiaries’ rights to

follow and trace assets held on trust that have been
transferred in breach of trust and the significance of
the term ‘equity’s darling’.   

I can set out the typical sorts of administrative and

dispositive powers and duties a trustee will have.   

I can describe in detail the law governing the powers

of maintenance and advancement, the duty of
investment, and the power of delegation.   

I can explain the rights of objects to information

under the rule in Saunders v Vautier.   

If you ticked ‘need to revise first’, which sections of the chapter are you going to
revise?
Must Revision
revise done

4.1 Introduction to rights and duties  

4.2 Powers and duties of trustees and others  

4.3 Typical administrative powers and duties  

4.4 The duty of investment  

4.5 Power of delegation  

4.6 Interests of beneficiaries and objects of powers  

page 44 University of London  International Programmes

Notes
5 Declarations of trust

Contents
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46

5.1 Intention to create a trust . . . . . . . . . . . . . . . . . . . . . . . . 47

5.2 Identifying the trust assets . . . . . . . . . . . . . . . . . . . . . . . . 49

5.3 Identifying the beneficiaries . . . . . . . . . . . . . . . . . . . . . . . 51

Reflect and review . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58

page 46 University of London  International Programmes

Introduction
To create a valid express trust, the settlor must intend to create it and then do what
is necessary to give effect to that intention. These two basic questions apply to the
intentional creation of legal or equitable rights in all areas of law, including contracts,
wills, and property: what did the parties intend and what do they need to do to give
effect to that intention? In this chapter, we study the necessary intentions to create
a trust, identify the trust assets, and identify the objects of the trust. In the next two
chapters, we consider the steps that are needed to give effect to that intention, which
may require the settlor to observe certain formalities (Chapter 6) and to transfer the
trust assets to the intended trustees (Chapter 7). It is important to keep the matters
covered in this chapter separate from those in the next two chapters. A common
mistake made by students is to confuse these three issues.

There are three points that need to be appreciated at the outset. The first is that only
manifestations of intention count. The mere fact that someone has an unexpressed
intention to create a trust will not cause a trust to come into being. There can be no
express trust unless the intention is made manifest (i.e. expressed) in some way. As
Megarry J said in Re Vandervell’s Trusts (No 2) [1974] Ch 269 at 294, ‘the mere existence of
some unexpressed intention in the breast of the owner of the property does nothing:
there must at least be some expression of that intention before it can effect any
result.’ Also see Byrnes v Kendle [2011] HCA 26, 243 CLR 253.

The second is that the intention will probably only be found from words, either spoken
or written. Although the expression of an offer and acceptance in the context of a
contract can sometimes be deduced from mere conduct alone (e.g. where I walk
into a shop and hand the shopkeeper cash in exchange for a newspaper, neither of us
speaking any words), the concept of a trust is too complex to be expressed otherwise
than by words.

The third is that the test of construction of the manifested intent, just as it is in
contract, is objective. What is relevant is not what the speaker meant by the words, but
what a reasonable person hearing those words would have thought was meant. So, for
example, it is normally irrelevant that the speaker was telling a deliberate lie when they
manifested an intention to hold assets on trust for another. This was made clear by Lord
Diplock in Gissing v Gissing [1970] UKHL 3, [1971] AC 886 at 906, where he said:

As in so many branches of English law in which legal rights and obligations depend upon
the intentions of the parties to a transaction, the relevant intention of each party is the
intention which was reasonably understood by the other party to be manifested by that
party’s words or conduct notwithstanding that he did not consciously formulate that
intention in his own mind or even acted with some different intention which he did not
communicate to the other party.

There are three main requirements of a valid declaration of trust:

1. The intention expressed shows that the settlor intended to create a trust.

2. The rights that are to form the subject-matter of the trust have been identified.

3. The persons who are to be the beneficiaries of the trust have been identified.

The chapter assumes that you know by now the difference between a fixed trust, a
discretionary trust, and a power of appointment. These institutions were introduced
in Chapter 3, which you should now review.

Essential reading
¢¢ Penner, Chapter 7: ‘Certainty’.
Equity and Trusts  5  Declarations of trust page 47

Learning outcomes
By the end of this chapter, and having completed the Essential readings and
activities, you should be able to:
uu explain how the court determines whether a person manifested an intention to
create a trust
uu define the test for certainty of subject-matter of a trust
uu explain why the tests for certainty of objects are different for fixed trusts,
discretionary trusts, and powers of appointment
uu explain the concept of administrative workability.

5.1 Intention to create a trust

The vast majority of trusts come into being because the law responds to a manifestation
of intention to create a trust. As we have seen, we call such a person the ‘settlor’. The first
substantive requirement for a valid declaration of trust is that the words expressed by
the alleged settlor manifest such an intention. As a matter of construction, it will need to
be shown that the settlor intended to place the holder of the trust assets (be it the settlor
or the persons to whom those assets are transferred) under an enforceable obligation
to use those assets for the benefit of another. The imposition of a moral (i.e. non-legal)
obligation, sometimes called an ‘obligation binding in conscience alone’, is not sufficient.
As Christian LJ said in McCormick v Grogan (1867) 1 IR Eq 313, ‘The real question is, what did
[the settlor] intend to be the sanction? Was it to be the authority of a court of justice, or
the conscience of the devisee?’

This issue usually arises on a gratuitous transfer of assets, where the question is
whether the recipient was intended to take those assets absolutely (e.g. as a gift) or to
hold them for another (i.e. as a trustee)? In Re Adams & Kensington Vestry (1884) 27 Ch
D 394 the testator left his whole estate to his wife ‘in full confidence that she will do
what is right as to the disposal thereof between my children, either in her lifetime or
by will after her decease’. During her lifetime, the widow attempted to give some of
the rights away outside her immediate family. The Court of Appeal held that she was
entitled so to do. There had been no declaration of trust because the testator had not
intended to impose any legally enforceable obligation on her. He had instead left the
matter to her ‘conscience’.

Exactly the same question needs to be asked about situations in which it is alleged
that someone made a self-declaration of trust. The cases show that a mere intention
to benefit another person is not enough. In Jones v Lock (1865) LR 1 Ch App 25 a father
handed a cheque for £900 (made out to himself) to his infant son, saying ‘I give this to
baby for himself’. The act was insufficient to transfer the right to sue on the cheque, for
such a right only passed at that time by means of an endorsement to the cheque (in the
son’s name, in this instance). The father died soon afterwards, leaving all his personal
rights to his family by his first marriage. On behalf of the infant, it was argued that the
father had declared himself a trustee of the cheque, so that there was a trust created
in favour of the infant during the father’s lifetime. The argument was rejected. Lord
Cranworth LC said (LR 1 Ch App 25 at 28­­–29):

I should have every inclination to sustain this gift, but unfortunately I am unable to do so;
the case turns on the very short question whether Jones intended to make a declaration
that he held the [right] in trust for the child; and I cannot come to any other conclusion
than that he did not.

As we shall see in Chapter 7, the same thinking applies when it is argued that failed
attempts to transfer rights to others should be construed as self-declarations of trust.
As both Milroy v Lord (1862) 4 De GP & J 264 and Richards v Delbridge (1874) LR 18 Eq 11
demonstrate, such arguments are routinely rejected by the courts.

What words then are most appropriate for expressing the intention to create a trust?
As we have said, it must be shown that the settlor intended that the recipient (or
the settlor in the case of a self-declaration of trust) will be legally obliged to hold the
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rights in question for another. The clearest expression of such an intent will be found
in the use of the word ‘trust’ (‘I give all my estate to my wife to hold on trust for our
children’), although in some contexts, other words may serve as well, for example ‘the
money in the bank is as much yours as it is mine’: Paul v Constance [1976] EWCA Civ 2,
[1977] 1 WLR 527. Note for future reference that the trust in that case was rightly held to
be express (and not constructive).

A borderline case?
A case taking a generous approach to the issue of finding a self-declaration of trust was
T Choithram Int SA v Pagarani [2000] UKPC 46, [2001] 1 WLR 1. The deceased, a wealthy
businessman, wanted to give his vast fortune to a ‘foundation’, which would then
distribute it for various good works. English law knows no concept of a ‘foundation’,
which is essentially a continental European idea. The nearest English equivalent is a
corporation with charitable objects. However, no such body was ever formed. Instead,
his legal advisers drew up the documentation for a trust, although the deceased
continued to use the language of a foundation. His ‘foundation’ (trust) was to have
seven directors (trustees), including himself. During his lifetime, he executed a deed
by which he purported to create the ‘foundation’ (trust) and appointed himself a
‘director’ (trustee). Some of the other ‘directors’ also signed this document. The
deceased later solemnly declared that he gave all his wealth to the ‘foundation’,
but no transfer to the other ‘directors’ (trustees) was ever made. When he died, the
question was whether the deceased had created an inter vivos trust. If he had not, then
his fortune went to his widow under his will.

The courts of first instance and appeal held that there was no trust and that the widow
therefore took because the donor had attempted but failed to make an outright gift.
The Privy Council disagreed. Although the words were words of outright gift, in their
context they were words of gift to the trustees of the foundation to be held by them
on trust. Where one of several intended trustees had the trust rights vested in him, he
was bound by the trust and under a duty to transfer the trust rights into the names of
all the trustees. Although the deceased had not vested the rights in all the trustees of
the foundation, he could not resile from his declaration of gift to the trust which he
had established and of which he had appointed himself to be a trustee.

The decision is a difficult one, and arguably places too generous an interpretation
of the deceased’s words. Even so, it is important to note that the Privy Council does
not here see itself as creating an exception to the rule that equity will not perfect an
imperfect gift (see Chapter 6), but merely finding, albeit somewhat generously, a self-
declaration of trust in a novel circumstance.

What happens if it is not established that the supposed settlor intended to create a
trust? The one thing which does not happen is that those assets are returned whence
they came (compare the case of uncertainty of objects, below). If there has been a
transfer, then the transferee will take the assets outright: Re Adams & Kensington Vestry
(1884) 27 Ch D 394. Where there is a failed allegation of a self-declaration of trust, then
the alleged settlor simply remains absolutely entitled to the assets in question. Do not
be confused here. Re Adams & Kensington Vestry is not a case of a trust ‘failing’ because
the husband used the wrong form of words. His expressed intention was not to create
a trust at all, but that his wife should merely act according to her ‘conscience’. There
is no trust to fail in such circumstances, but merely an allegation that a trust was
declared. Unfortunately, this is not always appreciated by judges and commentators.

Essential reading
¢¢ Milroy v Lord (1862) 4 De GP & J 264; Jones v Lock (1865) 1 LR 1 Ch App 25; Re Adams
& Kensington Vestry (1884) 27 Ch D 394; Paul v Constance [1976] EWCA Civ 2, [1977]
1 WLR 527.

Further reading
¢¢ Lambe v Eames (1871) 6 Ch App 597; Richards v Delbridge (1874) LR 18 Eq 11; Re
Schebsman [1944] Ch 83.
Equity and Trusts  5  Declarations of trust page 49

Activity 5.1
Read and note the decision in Paul v Constance [1977] 1 WLR 527.
a. What was the plaintiff claiming?

b. What arguments did the defendant use to attempt to defeat that claim?

c. How were those arguments dealt with by the Court of Appeal?

Summary
A manifested intention to create a trust is the first substantive requirement for a
valid declaration of trust. For a declaration to have occurred, it must be shown that
the words used by the transferor evinced an intention that the recipient be legally
obliged to hold the assets in question for another. This is different from the imposition
of a moral obligation, which is insufficient to establish a trust. Unfortunately this
distinction can cause difficulty. Re Adams & Kensington Vestry highlights this problem.

5.2 Identifying the trust assets

5.2.1 Types of assets

Almost any assets can form the subject-matter of a trust. Although many judges and
commentators describe the assets forming the subject-matter of the trust as the ‘trust
property’, this catch-all includes all kinds of non-property rights, such as company shares,
bank accounts, and so on. These are rights that are enforceable only against specific
persons and therefore not, strictly speaking, property rights at all. For example, a bank
account (in credit) gives the account holder a right to sue the bank for repayment of the
money loaned to the bank, but no one else is obliged to perform that duty. It is for this
reason that such rights are normally regarded as personal, not property, rights.

Please note that, in some contexts, assignable personal rights may be described as
property. For example, the Insolvency Act 1986 s.436 defines property to include:

money, goods, things in action, land and every description of property wherever situated
and also obligations and every description of interest, whether present or future or vested
or contingent, arising out of, or incidental to, property.

Many, although not all, personal rights are assignable. This is not, however, required
for the creation of a trust, since the holder of that right, even though they might not
be able to transfer it to someone else, could nevertheless make themself a trustee in
respect of it: Don King Productions Inc v Warren [2000] Ch 291. In that case it had argued
that a trust could not be created of the benefit of a non-assignable contract on the
grounds that it would defeat the whole purpose of the non-assignability clause. This
argument was rejected by Lightman J at first instance on the ground, inter alia, that a
declaration of trust would not prejudice the rights of the other party to the contract.
If the contract required any judgment to be exercised, whether by the promisor or
the promisee, a declaration of trust could not alter who was to exercise it or how
that judgment was to be exercised, or confer the power to make that judgment on
the court. This could not be circumvented by an application of the rule in Saunders v
Vautier, since it could not apply if the right in question was not assignable. Lightman J’s
reasoning on this point was not questioned in the Court of Appeal. Also see Barbados
Trust Co Ltd v Bank of Zambia [2007] EWCA Civ 148, [2007] 1 Lloyd’s Rep 495.

5.2.2 Identifying the trust assets

Given that a trust involves holding rights on behalf of another, it follows that it must
be possible to identify exactly what rights are to form the subject-matter of the trust.
If we cannot do this, the trustees cannot do their job. Suppose, for example, I have 100
bottles of wine in my cellar and declare that I hold 50 of them on trust for you. There
can be no trust until I have identified exactly which 50 bottles I am talking about. Until
that is done, if a bottle breaks, is stolen or goes off, it is impossible to say whether it
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was a bottle which I held on trust for you or owned by me absolutely. For this reason,
a claim to be the beneficiary of a trust of bottles of wine failed in Re London Wine Co
(Shippers) Ltd [1986] PCC 121. There is nothing mysterious about this, and it applies
equally to attempts to sell goods as it does to declarations of trust. As Lord Mustill
observed in Re Goldcorp [1994] UKPC 3, [1995] 1 AC 74, the rule is not some arbitrary
creation of the judge but is founded on the nature of things.

A trust failed for a different reason in Palmer v Simmonds (1854) 2 Drew 221, 61 ER 704,
a case involving an attempted testamentary trust of the ‘bulk’ of the testator’s estate.
This was a case of what might be called ‘conceptual uncertainty’; the problem being
uncertainty as to the meaning of the word ‘bulk’. It is therefore different from the
example of the wine bottles where, although we know what 50 bottles means, we do
not know which 50 are referred to.

Palmer v Simmonds should be contrasted with Re Golay’s WT [1965] 1 WLR 969, which
upheld a testamentary trust to provide a ‘reasonable income’ to a beneficiary during
her lifetime. The difference here was that the court was able to determine what was
reasonable by reference to the beneficiary’s previous standard of living.

A common error that students make with regard to certainty of subject-matter is in

relation to a testator’s residuary estate. Note that there is nothing uncertain about a
residuary estate, which is simply everything left after the creditors and taxes are paid
and the specific gifts in the will are made. That which is capable of being ascertained,
even though not currently ascertained, is not uncertain.

A testamentary trust takes effect after the estate has been administered and the
executors (or administrators) allocate the assets to the trust, at which time the
subject of the trust will be certain. Since they are under a duty to constitute the trust
according to the testator’s instructions, there is no problem with certainty of subject
matter, so long as the testator’s instructions are clear.

The issue of certainty of subject-matter was thrown into confusion by the decision
of the Court of Appeal in Hunter v Moss [1993] EWCA Civ 11, [1994] 1 WLR 452 (leave to
appeal dismissed [1994] 1 WLR 614 (HL)). The defendant, Moss, made a voluntary (i.e.
gratuitous) declaration that he held 50 of his 950 shares in a particular company on
trust for the plaintiff. He failed, however, to identify which 50. When the plaintiff later
tried to enforce the trust, Moss, relying on Re London Wine, argued that it failed for
uncertainty of subject-matter. Dillon LJ in the Court of Appeal distinguished London
Wine on the ground that shares were intangible whereas bottles of wine were not. He
held that the trust was valid because, as each share carried identical rights, it did not
matter which 50 were held on trust. This, however, is doubtful. The difficulty is that
it does not provide an answer to the problem of dealings by someone in the position
of Moss. Suppose he had given 50 of the shares to his mother as a birthday present.
How are we to tell whether he gave away trust shares or his own, unless we first know
which of the 950 shares were held in trust? The problem is not solved by applying the
rule of tracing (Chapter 19) that a trustee is presumed to use his own rights first, for
that assumes the very thing we are trying to prove (i.e. that Moss was a trustee), when
in fact the question being asked was whether or not he was a trustee. For a trenchant
criticism, see Hayton (1994) 100 LQR 335.

The result in Hunter v Moss has been approved on the basis that the plaintiff’s
declaration of 50 of his 950 shares for the defendant should create a trust of all 950
shares for both parties as tenants in common in the proportions of 50/950 for the
defendant and 900/950 for the plaintiff. See Pearson v Lehman Brothers Finance SA
[2010] EWHC 2914 (Ch) at [227]–[248]; affirmed [2011] EWCA Civ 1544 at [69]–[77]. Also see
White v Shortall [2006] NSWSC 1379 starting at [148]; affirmed [2007] NSWCA 372.

5.2.3 Future property

It is not possible to create a trust of assets that the settlor does not currently have.
Thus, I cannot today create a trust of the assets I expect to receive under my father’s
will. A trustee must hold assets for another, and if there are no assets, there can be no
trust. Assets that I do not have yet but hope to have in the future are known as ‘future
Equity and Trusts  5  Declarations of trust page 51

property’, which is not property even using the widest possible meaning of that term.
It is of course possible to promise to settle (i.e. create a trust of) assets if and when
they are received, but that is something different again (that we study in Chapter 8).

5.2.4 Consequences of inability to identify trust assets

If the intended trust assets cannot be identified, the effect of the attempt to create
a trust will depend on whether it was a self-declaration of trust or a declaration
accompanying a transfer. In the first case, nothing happens when a settlor fails to
identify which assets are subject to a self-declared trust. Everything remains as before.
Where there is a transfer, the position is more difficult. In Palmer v Simonds, the court
held that the recipient took the assets outright. The thinking here is that uncertainty
as to subject-matter feeds back into uncertainty as to intention to create a trust in the
first place. This will not always be the case.

Essential reading
¢¢ Re Golay’s WT [1965] 1 WLR 969; Hunter v Moss [1993] EWCA Civ 11, [1994] 1 WLR
452, Re Goldcorp Exchange Ltd [1994] UKPC 3, [1995] 1 AC 74.

Further reading
¢¢ Palmer v Simmonds (1854) 2 Drew 221; Re Ellenbrough [1903] 1 Ch 697.

Activity 5.2
Read Hunter v Moss [1993] EWCA Civ 11, [1994] 1 WLR 452.
a. On what grounds did the court distinguish Re London Wine?

b. Is that distinction valid for all possible cases?

c. What explanations have been put forward to cope with the problem of dealings
by the ‘settlor’ with part of the bulk?

No feedback provided.

Summary
The subject matter of a trust can consist of virtually all types of rights. However, it must
be possible to clearly identify what rights are subject to the trust otherwise the trust
cannot function, as shown by Re London Wine and Re Goldcorp. ‘Conceptual uncertainty’
can mean there is no valid declaration of trust, as was seen in Palmer v Simmonds.
However, where a court can determine an appropriate meaning of the terms in the
trust, the declaration of trust will be valid, as Re Golay’s WT illustrates. Special attention
must be given to Hunter v Moss. Despite Re London Wine, the Court of Appeal did not say
that the declaration was invalid but instead distinguished intangibles (shares) from
tangibles (wine). The case consequently raises practical difficulties which currently
have not been resolved. A testator’s residuary estate is always certain. It is everything
left after the satisfaction of specific legacies in the will. A trust of rights, which the
settlor does not at that moment have, cannot be created.

5.3 Identifying the beneficiaries

5.3.1 A non-charitable trust must have beneficiaries

A trust must have beneficiaries, unless it is for a charitable purpose (see Chapter 9) or
for one of the anomalous non-charitable purposes which are permitted in English law
(see Section 10.4). This is said to be one of the most fundamental principles of trust
law. In Re Endacott [1960] Ch 232, a testator left his residuary estate to the North Tawton
Parish Council on trust ‘for the purpose of providing some useful memorial to myself’.
The Court of Appeal held that the trust failed because the testator had not identified
any person or group of persons who were to be the beneficiaries of the trust. Instead
of a trust for persons, the testator had attempted to create a trust for a purpose, and,
since the purpose was not charitable, that was not permitted. Lord Evershed MR said:
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No principle perhaps has greater sanction or authority behind it than the general
proposition that a trust by English law, not being a charitable trust, in order to be effective,
must have ascertained or ascertainable beneficiaries.

We will return to the topic of non-charitable purpose trusts in Chapter 10, where you
will see that some cases have departed from this rule.

5.3.2 The beneficiaries must be identified

It is not enough that a trust has beneficiaries. If the trustees are to perform their
functions under the trust, it must be possible to know who those beneficiaries are.
This is the requirement of certainty of objects. The tests for certainty differ according
to whether the trust is fixed or discretionary. To have a full understanding of this
topic, you will need to know the requirements for certainty of objects in relation to
something that is not a trust at all: a power of appointment (discussed in Chapter 4).
The key to understanding the various tests for certainty is to appreciate that they are
not arbitrary inventions of the judges. Instead, they arise from the nature of things. If
they are not satisfied, the trust (or power) could not function. Note that the problem
of uncertainty only arises where the settlor uses a generic term to describe the class
(for example, my children, my relatives or my friends). Where the beneficiaries are
individually named, no question of uncertainty of objects arises. The whereabouts
of such individuals may be unknown, but that is not something which will cause the
declaration to be adjudged invalid.

Fixed trusts
As you know, in a fixed trust the settlor decides in advance the share each beneficiary
is to receive. An example would be a trust for ‘my children in equal shares’. The test for
certainty of objects for fixed trusts is that the trustee must be able to determine the
identity of all members of the class. This is sometimes called the ‘complete list’ test.
The obvious reason for this is that the trustee cannot distribute a single penny unless
the identity of all members can be known; the amount each is to receive depends
upon first making a complete list of every member of the class.

Discretionary trusts
You also know that in a discretionary trust (sometimes confusingly called a ‘trust
power’, but which you should not mistake for a ‘power of appointment’ or ‘mere
power’) the trustee has a discretion to choose how to distribute the trust assets
among the potential objects. Since the trustee is not required to distribute income
or capital equally to all, the share each person will receive is not contingent on the
number of people in the class. There is therefore no need for the trustees to compile a
complete list of all potential beneficiaries to make any distribution: McPhail v Doulton
[1970] UKHL 1, [1971] AC 424. The trustees do, however, need to be able to tell whether
a potential object is or is not a member of the class, for they (and the court) need to
know whether the proposed distribution is authorised by the terms of the trust. This
test for certainty of objects is generally called the ‘is or is not’ or ‘any given postulant’
test.

If, for example, I give my trustees a discretion to distribute income from a trust fund to
‘tall students of the University of London’, the test of validity is whether they are able
to tell which students are tall and which are not, for otherwise they may stray outside
the terms of their discretion and thereby commit a breach of trust. Since neither they
nor the court can tell where ‘tall’ starts and ‘not tall’ ends, such a trust would fail for
‘conceptual’ uncertainty. It is different where we know what the defining term means
but do not have enough evidence to determine whether a particular person is or is not
a member of the class, sometimes called a case of ‘evidential uncertainty’: Re Baden’s
Deed Trusts (No 2) [1972] EWCA Civ 10, [1973] Ch 9. There, the burden of proof is on the
postulant, the person claiming to be in the class and if the person does not prove that
they are, then they are not.
Equity and Trusts  5  Declarations of trust page 53

It is a difficult question whether conceptual uncertainty can be cured by a term in the

trust which makes a third party the arbiter: compare Re Tuck’s ST [1978] Ch 49 with Re
Wright’s WT (1981) commentary in (1999) 13 Trust Law International 48.

Powers of appointment
Powers of appointment (or ‘mere powers’) are not trusts in themselves, but are often
used in trust instruments. They also raise issues of certainty of objects, since powers
may be created in favour of classes of people described only in generic terms. Since
there is no duty to appoint equally to all members of the class but merely to stay
within the terms of the power, the same test for certainty of objects (the ‘is or is not’
test) applies to powers of appointment as to discretionary trusts: Re Gulbenkian’s ST
[1968] UKHL 5, [1970] AC 508. Indeed, it was from the law on powers of appointment
that the test was taken in McPhail v Doulton.

Gifts subject to conditions

These are not trusts either, but because they are often phrased in generic terms, they
raise similar issues to discretionary trusts. The question here is whether the same
requirement of certainty of object is required, or whether it is enough to say of a
particular candidate that they are or are not a member of the class: Re Barlow’s WT
[1979] 1 WLR 278; criticised by Emery (1982) 98 LQR 551.

5.3.3 Consequences of failure

An attempt to declare a trust with no certain beneficiaries will not create a valid
express trust. The effect of this will depend on whether it was a self-declaration of trust
or a transfer of assets to a third party on trust. In the former case, nothing happens.
However, if the assets were transferred to a third party, a resulting trust will arise, with
the third party as the trustee and the settlor as the beneficiary. This is discussed in
Chapter 12.

Essential reading
¢¢ Re Endacott [1960] Ch 232; McPhail v Doulton [1970] UKHL 1, [1971] AC 424; Re
Baden’s Deed Trusts (No 2) [1972] EWCA Civ 10, [1973] Ch 9; Re Tuck’s ST [1978] Ch 49;
Re Barlow’s WT [1979] 1 WLR 278.

Further reading
¢¢ IRC v Broadway Cottages [1955] Ch 20; Re Leek [1969] 1 Ch 563; Re Gulbenkian’s
Settlements [1968] UKHL 5, [1970] AC 508.

Activities 5.3–5.5
Read and note the decision of the Court of Appeal in Re Baden’s Deed Trusts (No 2)
[1972] EWCA Civ 10, [1973] Ch 9.
5.3 How do the approaches of Megaw LJ and Sachs LJ differ on the question of
certainty of objects? Try to formulate a set of objects which would be valid
under one but void under the other.

5.4 Explain the difference between ‘conceptual uncertainty’ and ‘evidential

uncertainty’.

5.5 What is the effect of evidential uncertainty on (a) a fixed trust, (b) a
discretionary trust, and (c) a power of appointment?

5.3.4 Certainty of beneficiary’s interests

Even though the assets that are to be held on trust and the objects of that trust are
sufficiently identified, it may be that the settlor has not identified the shares in which
the beneficiaries are entitled under the trust. This is not a problem for a discretionary
trust, since that will be determined by the trustees themselves. However, it can be a
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problem in a fixed trust, as in Boyce v Boyce (1849) 6 Sim 476, 60 ER 959, where one of two
beneficiaries was given the task of allocating assets between them but died without
doing so. That was an unusual case. Normally, if a trust is silent on how assets are to be
divided among a list or class of beneficiaries, they will hold them in equal shares.

5.3.5 Workability
It has been suggested that a trust with a certain class of objects may yet be invalid if
the trust is ‘unworkable’. This arises out of the abandonment of the ‘fixed list’ test and
the adoption of the ‘is or is not’ test of certainty of objects for discretionary trusts and
the consequent acceptance of the prima facie validity of conceptually certain classes
as huge as ‘relatives of X’ or ‘all the inhabitants of Greater London’. The members
of such classes cannot be surveyed one by one. It may be suggested that if there is
a ‘core class’ of objects within the larger class to whom the trustees may primarily
devote their survey of objects before making payments, then the trust will not be
administratively unworkable, although no case has explicitly stated that the absence
of a ‘core class’ is the basis for the finding of such unworkability. On the ‘core class’
view, ‘relatives of X’ is workable because a core class easily identifies itself, i.e. the
close relatives of X as opposed to distant relatives. ‘Residents of Greater London’ is not
workable, because there is no such core class.

The problem is not size. ‘Relatives of X’ is a larger class than ‘Residents of Greater
London’. (You may find this surprising, but in law ‘relative’ or ‘relation’ means
descendent of a common ancestor, and so, counting back to more and more distant
ancestors and then back down to living persons, everyone undoubtedly has many
more relations than they could ever identify, and we are all related if we want to
go as far back as the first humans to arise in Africa.) The problem is solely being
able to identify a core class capable of being surveyed. In Re Manisty’s ST [1974]
Ch 17, Templeman J associated the concept of administrative unworkability with
‘capriciousness’, saying that a power of appointment given to a fiduciary in favour
of the ‘residents of Greater London’ was capricious because the terms of the power
negated any sensible intention on the part of the settlor. However, in Re Hay’s ST [1982]
1 WLR 202, Megarry J doubted that such a trust would be capricious if the settlor had
been a former Chairman of the Greater London Council (and in such a case the power,
although valid, would equally disclose no ‘core class’).

Essential reading
¢¢ Re Manisty’s ST [1974] Ch 17; Re Hay’s ST [1982] 1 WLR 202.

Further reading
¢¢ R v District Auditor, ex p W Yorks [1986] RVR 24 ([1986] CLJ 391).

Activity 5.6
Read and note the decision in Re Hay’s ST [1982] 1 WLR 202.
a. Within powers of appointment, why does it matter whether the power is held
by a fiduciary?

b. On what basis does Megarry J suggest that ‘intermediate’ trusts are

administratively unworkable?

Summary
A fundamental principle of trust law is that a trust must have beneficiaries. However,
this is not sufficient. There must also be ‘certainty of objects’. This problem potentially
arises when a generic term is used to describe a class. The criterion for ‘certainty
of objects’ differs depending on whether it is a fixed trust, on the one hand, or a
discretionary trust or power of appointment, on the other. In a fixed trust, a trustee
must be able to compile a complete list of the beneficiaries; while in the case of a
discretionary trust or power of appointment the trustee must be able to determine
whether any given postulant is or is not a member of the class.
Equity and Trusts  5  Declarations of trust page 55

Apart from charitable trusts and a few anomalous exceptions, a trust cannot exist if it
has no beneficiaries or the beneficiaries cannot be identified with certainty. Where the
intended trust is self-declared, the invalid declaration of trust will mean that nothing
has happened, and the would-be settlor will simply retain the assets concerned.
Where the would-be settlor transfers assets to a would-be trustee and the declaration
is invalid for failure to identify the objects, the would-be trustee holds them on
resulting trust for the would-be settlor.

The requirement of administrative workability is unclear, although it may be given

content by regarding the absence of a core class as rendering a trust administratively
unworkable.

5.3.6 Perpetuity

Essential reading
¢¢ Penner, Chapter 3: ‘Express trusts: trusts and powers’, Section ‘The rule against
perpetuities’.

This subject is not examinable, but its understanding will help you to appreciate why
perpetuity can sometimes be problematic. Basically, the rule against perpetuities
prevents settlors creating perpetual trusts. At some point, the beneficiaries must be free
to wind up the trust and call for a transfer of the assets to them. Before the introduction
of legislation in 1964, a trust that violated the common law rule against perpetuities was
void from the outset. Now, under the Perpetuities and Accumulations Act 2009, a trust
that might violate the rule is valid for up to 125 years. There are exceptions (in s.2) for
charitable trusts and pension schemes, to which no perpetuity period applies. The Lord
Chancellor has the power (under s.3) to specify other exemptions.

Activity 5.7

Core comprehension – certainty of objects

Read the following journal article in your study pack.
uu Matthews, P. ‘A heresy and a half in certainty of objects’ (1984) Conv 22.
You can complete this learning activity by reading pp.22–27.

Introduction
a. On which basis does Matthews reject the assertion that the McPhail judgment
made a ‘revolutionary change’ to the law on the test for certainty of objects?

b. According to prevailing orthodoxy, which two things are important when

administering fixed trusts?

Discretionary trusts
c. In IRC v Broadway Cottages which specific problem of ‘conceptual’ or ‘linguistic
or semantic’ uncertainty arose?

d. Despite the use of conceptually certain expressions, which problem of

evidential certainty arose regarding the class of the beneficiaries?

e. Paraphrase in fewer than 50 words how the Crown (IRC) succeeded in arguing
that the trust in Broadway Cottages was void.

Fixed trusts
f. Outline the orthodox view of the ‘complete ascertainment’ or ‘list principle
rule’.

g. Outline the difference between ‘capability of ascertainment’ and ‘actual

ascertainment’.
page 56 University of London  International Programmes

Activity 5.8

Applied comprehension – Pearson v Lehman Brothers: certainty of subject matter

Using your online library resources research the following judgment:
uu Pearson v Lehman Brothers Finance SA [2010] EWHC 2914 (Ch).
You can complete this learning activity by reading the section entitled ‘Certainty’
[227]–[248], unless otherwise directed.
a. From the ‘Introduction’ section, para.1, identify the central business activity of
the parties and characterise the key event that happened on 15 September 2008.

b. As related to Hunter v Moss, which question did Pearson v Lehman Brothers raise?
(para.36)

c. Identify Principle (iii) of the respondent’s submissions.

d. In Hunter v Moss why were the shares held by the defendant capable of satisfying
the trust although there was no identification of any particular 50 shares?
Explain in your own words.

e. In Re London Wine Co (Shippers) Limited why was there no certainty of subject

matter for the purchasers of specific quantities of wine of specific types and
vintages?

f. In Mac-Jordan Construction Limited why was there no certainty of subject matter

for the builder in the building contract?

g. Why is application of the Hunter v Moss judgment difficult in practice?

h. What is meant by the ‘co-ownership approach’?

i. How does the law uphold the principle of legal certainty?

j. How was the principle applied to the circumstances of Pearson v Lehman?

Sample examination questions

Question 1 Advise on the validity of the following provisions in Martin’s will:
a. £50,000 to my executors in trust for distribution among such loyal
supporters of Manchester United Football Club as my executors think fit. In
the event that there is a dispute as to whether any given person is a loyal
supporter, the current captain of Manchester United to decide.

b. £50,000 to my executors on trust for distribution among such members

of the Manchester United Supporters Club who are over six feet tall as my
executor thinks fit.

c. £500,000 to my executors for distribution in equal shares among all persons

listed in the Manchester telephone directory whose surnames begin with Z.

d. My collection of Manchester United football programmes to be available for

purchase at £1 each to any friends who travelled with me to matches.

Question 2 Nigel has recently died. A week prior to his death, he declared in
writing that he held 200 shares in Oilco plc on trust for Martin. At that point, Nigel
held 1,000 shares in Oilco plc outright. By his will, Nigel left his residuary estate to
his widow ‘in the confident expectation that she will use it for the benefit of our
children’.
Advise Nigel’s children.
Equity and Trusts  5  Declarations of trust page 57

Advice on answering the questions

Question 1 This question raises issues of certainty of objects and administrative
workability in relation to trusts and gifts. Each part will be addressed in turn:

a. This is an attempt to create a discretionary trust, the objects of which are the
‘loyal supporters of Manchester United Football Club’. The question is whether
the class is defined with sufficient certainty. The answer should outline the
content of that test, noting the different formulations of Megaw and Sachs LJJ
in Re Baden (No 2). They should then apply those formulations to the facts of
the case before them. A further question is, should the class be too uncertain,
whether that uncertainty can be cured by the provision that the team captain
is to decide on membership.

b. This is again a discretionary trust, although with the difference that there is
no uncertainty as to whether any given individual is or is not a member of
the benefited class. The issue instead is one of administrative workability or
capriciousness, the class as defined seeming to be an arbitrary collection of
individuals.

c. This is a fixed trust, where the test for certainty of objects is different.
Candidates should state what that test is and whether it is satisfied in this case.
There is then a question whether a requirement of administrative workability
can apply in a case such as this.

d. This is not a trust but a gift subject to a condition precedent, to which Browne-
Wilkinson J in Re Barlow’s WT held that a less stringent test that the ‘is or is not’
test applied. Note, however, the trenchant criticism of this decision by Emery
(1982) 98 LQR 551, 562–67.

Question 2 There are two issues which need to be discussed: the inter vivos
declaration of trust in favour of Martin and the testamentary transfer to Nigel’s widow.
The children will want to argue first that the inter vivos declaration of trust was of no
effect, with the result that all 1,000 shares form part of Nigel’s residuary estate. They
will also want to argue that the transfer of the residuary estate to their mother was a
transfer to her on trust for them rather than outright.

As to the first issue, although there is clearly an intent to create a trust and the
identification of a beneficiary, the problematic area is that of the subject-matter of the
trust: Nigel has 1,000 shares and we do not know which of those shares are subject
to the trust and which are not. While there is no doubt that such a problem would be
fatal were we talking about rights to tangible things (e.g. bottles of wine: Re London
Wine), the question is whether a different rule should apply to the case of shares. The
discussion should therefore point out the differences between shares and wine and
go on to discuss the case of Hunter v Moss. The question is essentially asking whether
Hunter v Moss was correctly decided, so you will need to know not only what the Court
of Appeal held but also the academic criticisms (and defence) of that case.

The second issue raises questions of certainty of intention to create a trust. The
question is whether the words used by the testator (‘in the confident expectation that
she will use it for our children’s benefit’) are sufficiently mandatory to create a trust;
or, as in Re Adams & Kensington Vestry, simply express a preference by the testator as
to what the recipient should do with the rights. Note that there is no problem over
certainty of subject-matter with the gift of the residuary estate.
page 58 University of London  International Programmes

Reflect and review

Look through the points listed below.

Are you ready to move on to the next chapter?

Ready to move on = I am satisfied that I have sufficient understanding of the principles

outlined in this chapter to enable me to go on to the next chapter.

Need to revise first = There are one or two areas I am unsure about and need to revise
before I go on to the next chapter.

Need to study again = I found many or all of the principles outlined in this chapter very
difficult and need to go over them again before I move on.

Tick a box for each topic.

Ready to Need to Need to
move on revise first study again

I can explain how the court determines whether the

words expressed by a person showed an intention to
create a trust.   

I can define the test for certainty of subject-matter

of a trust.   

I can explain why the tests for certainty of objects

differ between fixed trusts, discretionary trusts, and
powers of appointment.  

I can explain the concept of administrative
workability.   

If you ticked ‘need to revise first’, which sections of the chapter are you going to
revise?
Must Revision
revise done

5.1 Intention to create a trust  

5.2 Identifying the trust assets  

5.3 Identifying the beneficiaries  

6 Formalities

Contents
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60

6.1 Declarations of trusts of land . . . . . . . . . . . . . . . . . . . . . . . 61

6.2 Testamentary trusts . . . . . . . . . . . . . . . . . . . . . . . . . . . 64

6.3 Transfer of equitable interests . . . . . . . . . . . . . . . . . . . . . . 64

Reflect and review . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68

page 60 University of London  International Programmes

Introduction
This chapter is concerned with the formalities required to create a valid express trust.
As discussed in the previous chapter, the intention to create a trust must be expressed
in some way to be effective. This is true of all trusts. For many trusts, it is sufficient.
However, certain formalities must normally be observed if either (a) the subject of the
trust is an interest in land, or (b) the trust is testamentary (i.e. takes effect on the death
of the settlor). These two requirements operate in different ways. For interests in land,
the formalities concern the evidence needed to prove the declaration in court. For
testamentary trusts, they concern the way in which the trust must be created.

This chapter also deals with the formalities required to transfer an equitable interest,
such as the beneficiary’s interest under a trust. The transfer of an existing equitable
interest is entirely different from the creation of a new equitable interest by a
declaration of trust. They bear no relation to each other, save that the rules governing
both are stated in the same sub-section of a statute. Experience, however, shows that
students (and some judges) are prone to confuse them, so you should ensure that,
despite their proximity, both in legislation and in the textbooks, you do not fall into
that trap.

Essential reading
¢¢ Penner, Chapter 6: ‘Formalities and secret trusts’.

Learning outcomes
By the end of this chapter, and having completed the Essential readings and
activities, you should be able to:
uu identify the difference between substantive requirements of a declaration of
trust and procedural rules relating to its proof
uu describe the origin and nature of these procedural rules
uu identify the substantive rules relating to how dispositions of interests under
trusts are made.
Equity and Trusts  6  Formalities page 61

6.1 Declarations of trusts of land

In truth, this topic is part of the law of evidence. One issue in the law of evidence
is the type of evidence admissible in court to prove the truth of allegations of the
occurrence of events. To take just one example, the law of evidence decrees that
hearsay evidence – testimony of one person as to what another person is supposed to
have said – is admissible to prove events alleged to have occurred in civil proceedings
but generally not in criminal proceedings. The type of evidence we are concerned with
here is oral testimony. Generally speaking, oral testimony is admissible in civil cases to
prove the truth of an allegation that a particular event occurred. For example, you will
have seen when you studied the law of contract that there is generally no restriction
on the types of evidence which the court will admit to prove that a contract had been
made. So too as to whether a tort was committed.

The same general rule applies to allegations that a right-holder has made a declaration
of trust. In general, as you will have seen from your reading of Paul v Constance in
Chapter 5, there is no objection to oral evidence being admitted to make good such an
allegation. There are, however, two exceptions to this rule. The first, which is dealt with
here, concerns declarations of trusts of land. The second, addressed below, concerns
testamentary trusts.

6.1.1 The admissibility rule

Statute provides that declarations of trust regarding land must be ‘manifested and
proved’ by some writing. The rule is an ancient one, s.7 of the Statute of Frauds 1677
providing that:

all declarations or creations of trust or confidences of any lands, tenements or

hereditaments shall be manifested and proved by some writing signed by the party who
is by law enabled to declare such trust, or by his last will in writing, or else they shall be
utterly void and of none effect.

That section was re-enacted as s.53(1)(b) of the LPA 1925 as follows:

a declaration of trust respecting any land or any interest therein must be manifested and
proved by some writing signed by some person who is able to declare such trust or by his
will.

The reason for the enactment of s.7 in 1677 was, as the name of the statute implies, to
prevent fraud. To understand how it and its successor operate, we must determine
the fraud it was trying to prevent. Details of this can be found in the article by Youdan
referred to below. Very briefly, the problem at that time was perjury, the giving of false
evidence in court proceedings. The law of evidence in 1677 was in a primitive state,
and it was consequently easy for fraudulent allegations to be made good in court. The
fraudulent allegation in question was that the holder of title to land had declared himself
a trustee of his title for the claimant. The title-holder, of course, had done no such thing,
but because of the then primitive state of the law of evidence, the court would often find
as a fact that such a declaration had been made and as a consequence order the title-
holder to convey their title to the claimant. By this method, many title-holders effectively
had their titles stolen from them. To put a stop to this abuse, the legislature provided that
such allegations could henceforth only be substantiated by written evidence which bore
the signature of the person alleged to have made the declaration. Fraudulent allegations
of self-declaration of trust were now less likely to succeed.

Note that the statute says nothing about the time when the written evidence must
come into being. It is therefore no objection that it antedates or postdates the
declaration of trust itself. Thus, it is perfectly possible to adduce written evidence
which came into being today to prove a declaration of trust made a year ago. This is
in stark contrast to the writing requirements which concern dispositions of equitable
interests under trusts, which are not procedural but substantive. Nor, as some judges
will tell you (for example, Lord Diplock in Gissing v Gissing [1970] UKHL 3) does the
statute provide that the declaration itself be ‘in’ writing. This is an important point to
grasp, for it is probably the most common mistake that students make in this area.
page 62 University of London  International Programmes

6.1.2 Effect of oral declaration

Since s.53(1)(b) of the LPA 1925 only states a rule of evidence, an oral declaration
of trust can be valid. The problem will come in litigation if it is denied that such a
declaration was made and there is no evidence sanctioned by the statute to prove that
controverted fact.

It is often said of such a case that there is a ‘valid but unenforceable’ trust. This is
unfortunate, and seemingly based on a false analogy with the old rule on contracts for
the sale of interests in land (see, for example, Scott, A.W. [1955] ‘Construction trusts’ 71
LQR 39, 43). Section 40(1) of the LPA 1925, a provision repealed in 1989, used to provide
that:

No action may be brought upon any contract for the sale or other disposition of land or
any interest in land, unless the agreement upon which such action is brought, or some
memorandum or note thereof, is in writing, and signed by the party to be charged or by
some person thereunto by him lawfully authorised.

Under this provision, the lack of a written memorandum or note thereof did not
render the contract void, merely unenforceable by court action. The contract
was perfectly valid, and its existence could be proved by oral evidence. The only
prohibition was on its enforcement. Section 53(1)(b), by contrast, is not concerned
with enforceability but with proof, a logically prior question. If a declaration of trust
is alleged to have been made, but an application of the statute means that that
allegation cannot be made good, there will in the eye of the court be no trust at all,
not a valid but unenforceable one.

6.1.3 Exceptions to the rule

The difficulty with a statute that excludes evidence because it is not of a particular type
is that it necessarily excludes both true and false evidence. It might be thought that that
was a price worth paying. It has, however, caused the courts to pause, and in certain
circumstances they have been ready to admit evidence which the statute says they
cannot. The leading case is Rochefoucauld v Boustead [1897] 1 Ch 196, where the Court of
Appeal held that a statute designed to prevent fraud could not be used to perpetrate a
fraud, and therefore admitted oral evidence to substantiate an allegation of a declaration
of trust on the ground that the ‘trustee’ himself would commit a fraud if he were allowed
to shelter behind the statutory provision and deny the declaration of trust. You should
ask whether the reasoning in Rochefoucauld is not circular. It will only be a fraud if the
defendant is a trustee, but at the point where the argument over admissibility is made,
we do not yet have evidence showing that the defendant is a trustee.

6.1.4 The type of trust enforced in Rochefoucauld

What type of trust is enforced in a case such as Rochefoucauld v Boustead? Logically, it
must be an express trust, for the event that triggers the finding that a trust exists is
the declaration of trust. Indeed, this is exactly what the Court of Appeal held (as part
of the ratio of the case). Other cases, however, have called it constructive (Bannister v
Bannister [1948] 2 All ER 133; Paragon Finance v Thakarer [1998] EWCA Civ 1249; [1999] 1
All ER 400). However, as we saw in Chapter 3, a constructive trust normally arises for
some reason other than a declaration of trust on the part of a title-holder. The trust in
Rochefoucauld, by contrast, arose because of proof by evidence of a declaration of trust.

6.1.5 A statutory exception to the formality requirement

Section 7 of the Statute of Frauds was qualified by s.8, which read as follows:

Provided always, that where any conveyance shall be made of any lands or tenements by
which a trust or confidence shall or may arise or result by the implication or construction
of law, or be transferred or extinguished by an act or operation of law, then and in every
such case such trust or confidence shall be of the like force and effect as the same would
have been if this statute had not been made; any thing herein before contained to the
contrary notwithstanding.
Equity and Trusts  6  Formalities page 63

Section 8 was re-enacted as the much shorter s.53(2) of the LPA 1925:

This section does not affect the creation or operation of resulting, implied or constructive
trusts.

The subsection merely states the obvious. Given that s.53(1)(b) is concerned with
questions of the type of evidence admissible to prove that a declaration of trust was
made, it makes perfect sense to exclude from its operation those trusts which, for one
reason or another, do not require proof by evidence of a declaration of trust.

6.1.6 The family homes cases

There are a group of cases, the most of prominent of which are Pettitt v Pettitt [1970]
UKHL 3, Gissing v Gissing [1969] UKHL 5, Lloyds Bank plc v Rosset [1990] UKHL 4, Stack v
Dowden [2007] UKHL 17, and Jones v Kernott [2011] UKSC 53, that concern attempts to say
there is a trust of the family home. Such cases usually run into problems with, among
other things, s.53(1)(b) of the LPA 1925. Such trusts are therein called ‘constructive trusts’,
and more specifically, ‘common intention constructive trusts’. Given that a constructive
trust is one which normally arises for a reason other than of a declaration of trust by a
title-holder, it may seem that the idea of a constructive trust based on an intention to
create a trust is something of a misnomer. However, as Professor Birks famously said in An
introduction to the law of restitution (Oxford: Clarendon Press, 1985), p.65:

There is a fine but important distinction between intent conceived as creative of rights, as
in an express trust or a contract, and intent conceived as a fact which, along with others,
calls for the creation of rights by operation of law.

The family home cases can be understood as cases in which the intention to share
the property is not sufficient on its own to create an express trust, but is a fact that
calls for the imposition of a constructive trust when there have been sufficient acts of
detrimental reliance on that intention. This is similar to proprietary estoppel and was
clearly the approach taken in Lloyds Bank plc v Rosset, where Lord Bridge said:

Once a finding [of an agreement or arrangement to share] is made it will only be necessary
for the partner asserting a claim to a beneficial interest against the partner entitled to
the legal estate to show that he or she has acted to his or her detriment or significantly
altered his or her position in reliance on the agreement in order to give rise to a
constructive trust or a proprietary estoppel.

However, more recently in Jones v Kernott, the Supreme Court made no mention of
detrimental reliance nor did it provide any explanation why an unexpressed intention
to share a home can give rise to a trust without having to comply with s.53(1)(b) of the
LPA 1925.

Essential reading
¢¢ Rochefoucauld v Boustead [1897] 1 Ch 196; Gissing v Gissing [1970] UKHL 3, [1971] AC
886; Hodgson v Marks [1971] EWCA Civ 8, [1971] Ch 892; Jones v Kernott [2011] UKSC
53, [2011] 3 WLR 1121.

Further reading
¢¢ Bannister v Bannister [1948] 2 All ER 133; Pettitt v Pettitt [1969] UKHL 5, [1970] AC
777; Eves v Eves [1975] 1 WLR 1338; Paul v Constance [1976] EWCA Civ 2, [1977] 1 WLR
527; Grant v Edwards [1986] EWCA Civ 4, [1986] Ch 638; Lloyds Bank plc v Rosset
[1990] UKHL 4, [1991] 1 AC 107; Stack v Dowden [2007] UKHL 17, [2007] 2 AC 432.

Activity 6.1
Read and note the decision in Gissing v Gissing.
a. What did the House of Lords say about the courts’ ability to create trusts in the
absence of a declaration of trust?

b. If a trust was declared, what problem would stand in the way of its proof?

c. What, for Lord Diplock, is the purpose of detrimental reliance in such a case?
page 64 University of London  International Programmes

d. How did Lord Diplock categorise the trust that would be consequently
enforced? Was he correct to do so? Why do you think he classified it so?

No feedback provided.

6.2 Testamentary trusts

A testamentary trust is one that takes effect on the death of the settlor. Like most
testamentary dispositions, it normally must be made in compliance with the Wills Act
1837, s.9, which states that:

No will shall be valid unless –

(a) it is in writing, and signed by the testator, or by some other person in his presence and
by his direction; and

(b) it appears that the testator intended by his signature to give effect to the will; and

(c) the signature is made or acknowledged by the testator in the presence of two or more
witnesses present at the same time; and

(d) each witness either –

(i) attests and signs the will; or

(ii) acknowledges his signature,

in the presence of the testator (but not necessarily in the presence of any other witness),
but no form of attestation shall be necessary.

In the Wills Act 1837, s.1, ‘the word “will” shall extend to a testament, and to a codicil,
…and to any other testamentary disposition’. It should be noted that s.9 concerns
the manner in which wills are made. In this respect, it is similar to s.53(1)(c) of the LPA
1925 and not merely an evidential requirement like s.53(1)(b). A will must be made in
writing and not merely evidenced by writing: see Lim v Thompson [2009] EWHC 3341
(Ch) at [25]. Nevertheless, as we shall see (in Chapter 14), courts have long been willing
to give effect to secret trusts despite the failure to comply with the Wills Act 1837.

The valid execution of a will in compliance with the Wills Act 1837 has no immediate
legal effect. The testator is free to destroy, replace, or amend the will as he or she sees
fit. It is only when the testator dies that the will takes effect.

Two further provisions of the Wills Act 1837 should be noted. First, in order to ensure
the impartiality of the witnesses, s.15 provides that any ‘beneficial devise’ to an
attesting witness or that attesting witness’s spouse shall be void. Note that a gift
to an attesting witness does not make that witness incompetent to attest to the
genuineness of the testator’s signature; the only effect is that the gift to the attesting
witness or their spouse will be void. Second, s.20 provides that any alteration to the
will (a codicil) must comply with the same formalities required of wills (i.e. in writing,
signed and witnessed properly).

Activity 6.2
Make a short spoken presentation summarising the requirements for admission of
evidence to prove a will.
No feedback provided.

6.3 Transfer of equitable interests

This part of the chapter deals with the formalities required to transfer an equitable
interest and not with the formalities required to prove a declaration of trust.
Therefore, it more logically belongs in the next chapter on the constitution of the
trust, since the settlor may need to transfer equitable interests in assets to the
trustees to be held on trust, in which case the settlor will need to comply with s.53(1)
(c) of the LPA 1925 in order to make an effective transfer of those equitable interests.
Equity and Trusts  6  Formalities page 65

However, the discussion is located here for convenience. Comparing s.53(1)(b) with
s.53(1)(c) may help you understand both provisions better.

The beneficiary of a fixed trust has an interest which is capable of assignment

(transfer) to others. So far as courts of equity were concerned, this could be done
orally. However, statutory rules have long said that only written assignments are
effective. The original provision was s.9 of the Statute of Frauds 1677, which provided
that:

all grants and assignments of any trust or confidence shall likewise be in writing, signed by
the party granting or assigning the same or by such law will or devise, or else shall likewise
be utterly void and of none effect.

The current rule is contained in s.53(1)(c) of the LPA 1925:

a disposition of an equitable interest or trust subsisting at the time of the disposition

must be in writing signed by the person disposing of the same or by his agent thereunto
lawfully authorised in writing or by will.

While we saw that s.53(1)(b) of the LPA 1925 is evidential, s.53(1)(c) is dispositive. In
other words, it is a rule of substantive law, not procedure. What this means is that
there is no question of an unwritten disposition being valid in the absence of litigation
disputing its occurrence. There will instead, as Grey v IRC [1959] UKHL 2 demonstrates,
be no disposition until the writing is executed. It might be asked whether, given the
similarity in wording between ss.7 and 9 of the Statute of Frauds 1677, there should
be this fundamental difference between the two provisions. However, this is the
approach the courts have taken and to understand this area of law, that fundamental
difference must never be forgotten.

6.3.1 What transactions are caught?

This all depends on what is considered a ‘disposition’. The leading case is Grey v IRC.
Although the 1677 statute talked only of ‘assignments’, the House of Lords in Grey
held that the two were not to be equated, and that the word ‘disposition’, although
it included assignments, had a wider meaning. For that reason, a direction by a
beneficiary to his trustees to hold the rights on trust for a third party, although it
might not have been caught by s.9, was held to be covered by s.53(1)(c), with the result
that there was no effective disposal by the beneficiary of his interest under the trust
until he put his direction in writing. Other transactions which you need to consider
are a direction by the beneficiary to the trustee to assign the right to a third party
(Vandervell v IRC [1966] UKHL 3); a self-declaration of trust by the beneficiary (Grainge v
Wilberforce (1889) 5 TLR 436); a declaration of trust by the trustee for a third party with
the consent of the existing beneficiary (Re Vandervell’s Trusts (No 2) [1974] EWCA Civ 7);
a contract by a beneficiary to assign their rights (Oughtred v IRC [1959] UKHL 3, Neville v
Wilson [1997] Ch 144); a surrender of a beneficial interest (IRC v Buchanan [1958] Ch 289);
and a disclaimer of a beneficial interest (Re Paradise Motors Ltd [1968] 2 All ER 625).

6.3.2 The rationale of s.53(1)(c)

As a re-enactment of a provision of the Statute of Frauds, the purpose of s.53(1)(c)
must, like that of s.53(1)(b), be the prevention of fraud. But exactly what fraud is
the provision trying to prevent? That question is discussed in Vandervell v IRC, the
leading case on the topic. There, a beneficiary under a bare trust of shares gave an
oral direction to his trustees to convey the shares to a third party, which transfer was
then made. The beneficiary’s intention was that the third party would hold the shares
outright. However, the Inland Revenue argued that the third party was a resulting
trustee of the rights, the beneficiary’s interest still being vested in him because of his
failure to comply with s.53(1)(c). The argument was rejected by the House of Lords.
Section 53(1)(c) was a provision designed to protect trustees, and in the situation
where the rights were no longer to be held on trust, there were no trustees to protect.
The sub-section had no work to do and did not therefore apply.
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Thus, it is the trustees whom the provision is designed to protect, but from what do
they need protection? The answer is false allegations by someone claiming to be an
assignee of the beneficiary’s interest. The difficulty for the trustee in such a case is that
if they pay out to the false assignee they thereby commit a breach of trust (a wrong of
strict liability) and consequently incur a liability to the true beneficiary to reinstate the
trust fund. A requirement that assignments be made in writing protects the trustees
because they can now, by demanding sight of the documentary transfer, ensure they
pay out only to genuine assignees.

In light of this, the question arises whether Grey needs to be revisited. It will be
recalled that the trustees were there directed by the beneficiary, albeit orally, to hold
the rights for a new set of beneficiaries. And because they received their instructions
from the beneficiary himself, they knew it was genuine. Forcing the beneficiary to put
his direction in writing would tell them nothing they did not already know. It is, of
course, different with an assignment, where the claim for payment now comes from a
third party, the putative assignee, and where the trustees are consequently vulnerable
to fraud. But that concern is not present in a case like Grey. Were, therefore, the courts
to adopt the purposive approach of Vandervell, it might also be said that in Grey, the
subsection had no work to do.

Essential reading
¢¢ Re-read Penner, Chapter 6: ‘Formalities and secret trusts’, Section ‘Disposition of
subsisting equitable interests: Law of Property Act 1925, s 53(1)(c)’.

¢¢ Grainge v Wilberforce (1889) 5 TLR 436; Grey v IRC [1959] UKHL 2, [1960] AC 1;
Oughtred v IRC [1959] UKHL 3, [1960] AC 206; Vandervell v IRC [1966] UKHL 3, [1967]
2 AC 291; Re Holt’s ST [1969] 1 Ch 100; Re Vandervell’s Trusts (No 2) [1974] EWCA Civ
7, [1974] Ch 269; Neville v Wilson [1997] Ch 144 (CA).

Further reading
¢¢ Feltham, J.D. ‘Informal trusts and third parties’ (1987) Conv 246.

Activity 6.3
Read and note the decision in Vandervell v IRC (1966), although ignoring for now all
discussion of the option to purchase and resulting trusts. We will return to them in
Chapter 12.
a. What, according to the arguments of the Inland Revenue, is the role of s.53(1)(c)
in this case?

b. How successful is the Revenue’s argument in the eyes of Lords Upjohn and
Wilberforce?

c. According to Lord Upjohn, what purpose does s.53(1)(c) serve?

No feedback provided.

Sample examination questions

Question 1 How, if at all, should s.53(1)(b) and s.53(1)(c) of the Law of Property Act
1925 be reformed?
Question 2 Alfred holds 10,000 shares on trust for Peter for life, remainder to
Maud. Consider the effect of the following:
a. Peter orally declares himself trustee of his interest for Carol.

b. Maud and Roger agree that Roger will exchange his unique stamp collection
for Maud’s remainder interest, and Roger delivers Maud his collection in
furtherance of this agreement.

c. Alfred, on the oral instructions of Peter and Maud, transfers the shares to
Brian, Peter and Maud having previously instructed Brian by telephone to
hold them on trust for David.
Equity and Trusts  6  Formalities page 67

Advice on answering the questions

Question 1 Any question which asks about the reform of statutory provisions has
to first ask what problem the statute was designed to solve and how successful the
solutions were in tackling it. A specific issue here concerns the age of the statutory
provisions, which date back to 1677. The question which must be asked is whether the
problem is one peculiar to that time.

If we start with s.53(1)(b), the first thing which needs to be done is to explain what
the statute prescribes. Candidates should state that it is a provision designed to
prevent fraud by excluding certain types of evidence being admitted to substantiate
an allegation that a declaration of trust was made and comment on how successful it
was in meeting the problems of the time. They should also explain how the provision
has caused courts problems, as witness the circular logic adopted by the Court of
Appeal in Rochefoucauld v Boustead, and the total mess in which we currently find the
matrimonial homes cases. They might also question whether the provision is needed
today, the law of evidence having improved greatly over the last 300 and more years.
Support for this proposition could be sought from the observation that there is no
clamour to expand s.53(1)(b) to encompass allegations that declarations of trust were
made in respect of rights other than property rights in respect of land. This could be
said to show that the problems of perjury are not as great nowadays as they were in
1677. This would indicate that the best reform of s.53(1)(b) would be its abolition.

As for s.53(1)(c), candidates should once again start with its legislative history,
explaining, by reference to Vandervell v IRC, the purpose of the provision. But since
it was less about courts and more about trustees being deceived, the same call for
abolition as made for s.53(1)(b) might not be appropriate. Indeed, if anything, the
section might be strengthened. It might be worth considering whether to tighten it
up by making it a condition of the effectiveness of the disposition that it be notified to
the trustee. A good analogy in this respect would be s.136 of the LPA 1925, a provision
concerned with the assignment of choses in action, where similar issues arise.

Question 2 The issue in every part of this question is the same: is the transaction in
question a ‘disposition of an equitable interest or trust’ and thereby void because not
in writing? Each sub-part of the question should be taken in turn:

a. Although prima facie not caught by the rule, there is a danger that this could be
seen as a disposition rather than a declaration because of the operation of the
rule in Grainge v Wilberforce. Candidates should argue the merits of this dictum,
and, if correct, suggest ways in which such a conclusion might be avoided.

b. This part raises questions about the effect of a specifically enforceable contract
and whether the sub-trust thereby arising will also amount to a purported
disposition and be invalidated by s.53(1)(c). This issue was the subject of
discussion in Oughtred v IRC and Neville v Wilson. One point which needs to be
asked is whether the contract here is specifically enforceable, for if it is not, no
question of a constructive trust arises. That will depend on whether the shares
are in respect of a private or a public company.

c. This part is a cross between the facts of Grey and Vandervell. Although there is
a direction to transfer the rights held by the trustees, as in Vandervell, there is
no intent to vest them outright in the transferee. It might, therefore, be argued
that Grey applies and that there is a consequent need to comply with s.53(1)(c).
However, as noted in the text above, there is an argument that Grey should be
reconsidered, and this would appear to be an ideal case in which to do so.
page 68 University of London  International Programmes

Reflect and review

Look through the points listed below.

Are you ready to move on to the next chapter?

Ready to move on = I am satisfied that I have sufficient understanding of the principles

outlined in this chapter to enable me to go on to the next chapter.

Need to revise first = There are one or two areas I am unsure about and need to revise
before I go on to the next chapter.

Need to study again = I found many or all of the principles outlined in this chapter very
difficult and need to go over them again before I move on.

Tick a box for each topic.

Ready to Need to Need to
move on revise first study again

I can identify the difference between substantive

requirements of a declaration of trust and
procedural rules relating to its proof.   

I can identify the substantive rules relating to how

testamentary trusts are declared.   

I can identify the substantive rules relating to how

dispositions of interests under trusts are made.  


If you ticked ‘need to revise first’, which sections of the chapter are you going to
revise?
Must Revision
revise done

6.1 Declarations of trusts of land  

6.2 Testamentary trusts  

6.3 Transfer of equitable interests  

7 Constitution

Contents
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70

7.1 Constituting a trust . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71

7.2 Defective constitution . . . . . . . . . . . . . . . . . . . . . . . . . . 72

Reflect and review . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76

page 70 University of London  International Programmes

Introduction
This chapter is concerned with the constitution of express trusts, by which is meant
the transfer to the intended trustees of the assets that will form the subject-matter of
the trust. There are three issues to discuss. First, how is a trust constituted? Second,
what will the court do if the constitution is in some way defective? Third, because the
same rules of constitution also apply to the making of gifts, it is helpful to ask what
equity does about defective gifts and unperformed promises to make gifts. Strictly
speaking, this is a diversion, for when the courts do intervene, they do so by imposing
trusts. Since these trusts are constructive rather than express, the topic properly forms
part of Chapter 13. It is dealt with here for reasons of convenience. A related topic is
that of unperformed promises to create trusts. These are dealt with in Chapter 8.

Essential reading
¢¢ Penner, Chapter 8: ‘The constitution of trusts’, Sections ‘Equity will not assist a
volunteer’ and ‘Perfecting an imperfect gift’.

Learning outcomes
By the end of this chapter, and having completed the Essential readings and
activities, you should be able to:
uu identify the different ways in which a trust can be constituted
uu describe and analyse the situations in which a court may make perfect a
defective gift.
Equity and Trusts  7  Constitution page 71

7.1 Constituting a trust

7.1.1 The requirement of constitution

A trust will be constituted where the assets in question are vested in the intended
trustees. This involves a transfer of those assets to the trustees. Where the settlor
himself is to be the sole trustee, then no transfer is required. There are therefore
never issues of constitution in such cases. As discussed in the previous chapter,
where the settlor is one of several intended trustees, the settlor as trustee will come
under an enforceable trust duty to transfer the trust assets into the joint names of
all the trustees, so there is a mechanism to achieve proper constitution: T Choithram
International SA v Pagarani [2000] UKPC 46, [2001] 1 WLR 1.

Assume, therefore, that we are dealing with the (more usual) case of a settlor who
wants other people to act as the trustees. How that settlor manages to pass the assets
to the trustees depends on the nature of those assets.

uu For title to land, the trustees will need to become the registered proprietors of the
title. This requires execution of a deed in the proper form and its registration at the
Land Registry. If the land is unregistered, then the transfer will trigger compulsory
registration under the Land Registration Act 2002.

uu For title to tangible chattels (including goods, documents, and cash), it will
have to be conveyed by delivery (i.e. a physical handing over of the thing) or
deed (i.e. a document that is validly executed as a deed; see the Law of Property
(Miscellaneous Provisions) Act 1989, s.1).

uu For a chose in action (e.g. a right to sue on a debt or company shares) then the
rules differ as between the different types of choses in action. Shares in a private
company can only be transferred by the making of an entry in the company’s
books by the company secretary. In the case of public companies traded on stock
exchanges, there are now computer-automated systems for the transfer of shares.
A debt can only be transferred at law by a written instrument: s.136 LPA 1925.

uu For equitable interests, such as interests under trusts or equitable charges, these
normally must be assigned in writing signed by the assignor: s.53(1)(c) LPA 1925.

It should be stressed that these methods describe the ways in which the relevant
rights need to be transferred to the intended trustees. They do not apply to self-
declarations of trust, for which a transfer is not required. Students often assume they
do, but you should not make that mistake.

It is also important to note that constitution is not normally a problem for

testamentary trusts, which are created by the settlor’s will. When the settlor dies, their
assets will be transferred by operation of law to the executors or administrators of the
estate. They have a duty to administer the estate, including the constitution of any
trusts set out in the will. In many cases, the executors will also be the trustees of those
trusts and so will already have title to the trust assets when administration is complete
and the trusts take effect. A problem can arise if there are insufficient assets in the
estate, because the estate debts must be paid first. All or some of the assets that were
supposed to be settled in trust might have to be used to pay those debts.

The methods described above are also those which need to be used to make outright
gifts of the various types of right.

7.1.2 The effect of constitution

Once a trust is constituted, the beneficiaries of that trust can enforce it against the
trustees, whether or not they have given value to anyone in exchange for its creation.
Like an outright gift, a settlor cannot revoke a constituted trust on the ground that the
beneficiaries gave nothing in return. It matters not in the case of a constituted trust
that the beneficiaries are donees (i.e. volunteers). The point only becomes contentious
where there is some defect of constitution.
page 72 University of London  International Programmes

Essential reading
¢¢ Milroy v Lord (1862) 4 De GP & J 264, 45 ER 1185; Paul v Paul (1882) 20 Ch D 742.

7.2 Defective constitution

7.2.1 The general rule

The general rule, set out in Milroy v Lord, is that equity will not assist a volunteer
to perfect an imperfect trust. This is consistent with the general attitude of both
the common law and equity to the enforcement of gratuitous promises which you
saw when studying the law of contract. Consistently with this approach, Milroy v
Lord further holds that an imperfect attempt to create a trust with other persons as
trustees will not be interpreted as a declaration by the settlor of themself as trustee.
As the court there pointed out, an intention to constitute others as trustees is
inconsistent with any argument that the settlor intended to make themself a trustee.

Exactly the same thinking means that a donor who tried but failed to make an outright
gift will not be seen as having declared himself a trustee: Richards v Delbridge (1874) LR
18 Eq 11. As was pointed out in Milroy v Lord, if that were possible, there would be no
such thing as an imperfect gift.

7.2.2 Departures from the general rule

As we have seen, the general rule is that if the settlor has not managed to create a
perfect trust, the courts will not intervene to create one for him. Any intervention by
the court, as Milroy v Lord and Richards v Delbridge demonstrate, would be to create a
trust that was not intended by the settlor or donor. In other words, it would produce
a constructive trust. We will see immediately below that the courts do sometimes
intervene and impose a trust on the purported donor in favour of the donee. Indeed,
there are six situations in which courts have departed from the rule in Milroy v Lord. It
should be asked whether all these departures are justified.

Activity 7.1
What limits does Milroy v Lord place on what (a) settlors and (b) the courts can do in
respect of constituting a trust?

1. Detrimental reliance
Where there is an imperfect gift or trust, there may be detrimental reliance on the part
of the intended donee/beneficiary. For example, the intended donee of a gift of a title
to land might detrimentally rely on the supposed validity of the transfer by expending
money building a house on that land. Detrimental reliance may lead the court to order
the perfection of the imperfect gift or trust: Dillwyn v Llewelyn (1862) 4 De GF&J 517;
Pascoe v Turner [1978] EWCA Civ 2; Thorner v Major [2009] UKHL 18. If so, the purported
transferor will hold the promised right on constructive trust for the intended donee.
This process is usually called ‘proprietary estoppel’ (which is similar to, but different
from, ‘promissory estoppel’ studied in the law of contract). It might be asked why the
law does not simply respond by forcing the ineffective donor to pay compensation for
the donee’s loss rather than making good the donee’s expectation.

2. The rule in Re Rose

Where a donor or settlor requires the assistance of a third party to perfect a gift or
trust (which happens in cases where the transfer must be completed by registration
of title, either to land or to shares in a private company), there will be a gap between
the time at which the donor does everything within their power to perfect the gift or
trust (i.e. fills in and provides the donee with the relevant transfer request forms) and
the time when it is actually perfected by the change of the entry in the register. The
question that arose in Re Rose [1952] EWCA Civ 4 was whether an intended gift and trust
could be said to be perfect at the first stage. The Court of Appeal held that the donor/
Equity and Trusts  7  Constitution page 73

settlor was a constructive trustee of the rights at this point. The reason, said the court,
was to be found in notions of ‘common sense’, which, of course, is no reason at all.
Note that there was no detrimental reliance in this case nor can it be explained by an
application of the magic formula that ‘equity looks upon that as done which ought to
be done’, for there was no ‘ought’ here. There is no duty in English law to make gifts.

3. The rule in Strong v Bird

At common law, the appointment of a debtor to be the creditor’s executor erased the
debt, on the ground that it was not possible for the executor to sue himself to recover
it. Equity very soon intervened to correct what was seen to be an unjust rule and held
that a liability still existed in equity. In Strong v Bird (1874) LR 18 Eq 315 the testatrix
had purported to release the debt during her lifetime. That release was ineffective
since it was not made by deed, so it was nothing more than a bare promise not to
sue. However, because there was an intention to relieve the debt and that intention
continued until the testatrix’s death, the court refused to intervene in its usual
manner. Technically, this might not be seen as the court perfecting an imperfect gift,
for all it did was decline to interfere with the common law position. However, later
cases extended the rule beyond the release of debts to imperfect transfers of all types
of rights: see Re Stewart [1908] 2 Ch 251. It has even been used in the case of imperfect
inter vivos gifts to administrators: Re James [1935] Ch 449. Once again, there is no
requirement of detrimental reliance.

4. The rule in Re Ralli

This looks similar to the rule in Strong v Bird, but seems to form a separate rule (if that
is what it is, since it was only an obiter pronouncement in a first instance case), because
it applies even though there is no continuing evidence of an intention to give. Indeed,
given that it involved an unperformed promise to give rather than a failed donation, any
talk of a continuing intention is nonsense. In Re Ralli [1964] Ch 288, a promise by deed
(covenant) to create a trust had not been performed during the lifetime of the promisor.
The promisee was appointed executor of the promisor’s will, and on the latter’s death,
received the promised rights by virtue of that office. Buckley J held, obiter, that this
was enough to constitute the covenanted for trust. The fact that the executor came by
the right fortuitously was irrelevant. The decision is difficult to square with the earlier
decision of Re Brook’s ST [1939] Ch 993, which was not cited to the judge.

5. Donatio mortis causa

A donatio mortis causa is a gift which is made in contemplation of the donor’s death
and is conditional upon that death. A typical case is where I hand you my watch and
tell you that, if I do not survive the dangerous operation I am about to undergo, the
watch is yours to keep. In Re Beaumont [1902] 1 Ch 889 at 892, Buckley J said:

A donatio mortis causa is a singular form of gift. It may be said to be of an amphibious

nature, being a gift which is neither entirely inter vivos nor testamentary.

It does not have to satisfy the normal requirements for making either form of gift. It is
sufficient if the donee merely acquires control over the intended gift so that the donor
can no longer deal with it freely. If the donee does not obtain legal title by delivery,
the donor’s executors or administrators will hold title on constructive trust for the
donee: Duffield v Elwes (Hicks) (1827) 1 Bli NS 497; Sen v Headley [1991] EWCA Civ 13. The
conditions for the operation of the rule are laid down in Cain v Moon [1896] 2 QB 283.

6. Unconscionability
A further dilution of the Milroy v Lord principle occurred in Pennington v Waine
[2002] EWCA Civ 227, where the Court of Appeal said of an imperfect gift of shares,
that the donor need not even have done everything necessary to perfect the gift.
What mattered instead was whether it would be ‘unconscionable’ for her to resile
from her gift. On the facts of this particular case, it was said to be ‘unconscionable’
for the donor to resile as she had told the donee that the gift was perfect. Why this
makes it ‘unconscionable’ was not explained: see Zeital v Kaye [2010] Civ 159 at [40].
page 74 University of London  International Programmes

Moreover, no member of the court seems to have noticed that this is precisely what
happened in Milroy v Lord. The court relied on T Choithram v Pagarani Int SA [2000]
UKPC 46 as authority, although that was, as we saw in the previous chapter, a case
of an express trust, where it would of course be ‘unconscionable’ to resile from a
perfectly valid trust: see Paul v Paul. Pennington v Waine, on the other hand, was a case
of a constructive trust, for whichever way one views it, the purported donor did not
make a self-declaration of trust. It is also important to note that the result cannot be
defended through an application of the dubious doctrine in Re Rose, since the donor
had not done all she needed to perfect the gift, nor can it be justified on the basis of
detrimental reliance on the part of the purported donee. Although such reliance was
arguably present, this was not the basis on which the case was reasoned.

Essential reading
¢¢ Milroy v Lord (1862) 4 De GP & J 264, 45 ER 1185; Re Stewart [1908] 2 Ch 251; Re
James [1935] Ch 449; Re Rose [1952] EWCA Civ 4, [1952] Ch 499; Re Ralli’s WT [1964]
Ch 288; Mascall v Mascall [1984] EWCA Civ 10, 50 P & CR 119; Sen v Hedley [1991]
EWCA Civ 13, [1991] Ch 425; T Choithram Int SA v Pagarani [2000] UKPC 46, [2001]
1 WLR 1; Pennington v Waine [2002] EWCA Civ 227, [2002] 1 WLR 2075.

Further reading
¢¢ Duffield v Elwes (Hicks) (1827) 1 Bli NS 497, 4 ER 959; Dillwyn v Llewelyn (1862) 4 De
GP & J 517, 45 ER 1285; Richards v Delbridge (1874) LR 18 Eq 11; Strong v Bird (1874)
LR 18 Eq 315; Cain v Moon [1896] 2 QB 283; Re Beaumont [1902] 1 Ch 889; Pascoe v
Turner [1978] EWCA Civ 2, [1979] 1 WLR 431; Re Basham [1986] 1 WLR 1498; Thorner v
Major [2009] UKHL 18, [2009] 1 WLR 776; Zeital v Kaye [2010] EWCA Civ 159, [2010]
2 BCLC 1.

Self-assessment questions
1. When is a trust constituted?

2. What are the ‘constitution’ requirements in the case of a self-declaration of trust?

3. What means must be used to transfer the following to a third-party trustee:

a. title to land

b. shares in a private company

c. the benefit of a debt.

4. What is the general rule contained in Milroy v Lord?

5. What is a donatio mortis causa?

6. What is the closest that English law comes to the continental European notion of
a ‘foundation’?

7. What is a ‘perfect’ gift?

Activity 7.2
a. Assume that you want to make a gift of some shares and your title to a painting
to a friend. Give a short spoken explanation of the different ways in which that
gift can be made. Which is the simplest to effect?

b. Read the decision of the Court of Appeal in Re Rose. Is it really true that it
presents no conflict with the same court’s earlier decision in Milroy v Lord?

c. Does the law in this area teach us anything of the meaning of

‘unconscionability’?
Equity and Trusts  7  Constitution page 75

Summary
‘Equity will not assist a volunteer to perfect an imperfect trust’ is the general rule
contained in Milroy v Lord. However, it has been shown that the courts have departed
from this rule and intervened in six situations:

1. detrimental reliance

2. the rule in Re Rose

3. the rule in Strong v Bird

4. the ‘rule’ in Re Ralli

5. donatio mortis causa

6. unconscionability.

The effect of the courts’ intervention has been to effectively confer an intended right Go to your study pack and
on a donee despite the donor failing to comply with the necessary legal requirements. read ‘Share transfers and the
In each case, one should question whether these interventions can be justified; first, as complete and perfect rule’ by
a matter of principle; and second, in light of the general rule laid down in Milroy v Lord. L. McKay.

Sample examination questions

Question 1 How far is it true to say that equity will not perfect imperfect gifts?
Question 2 Sarah owns 500 shares in a private company. She executes an instrument
of transfer of the shares in the form required by the company’s Articles, and hands it,
together with the share certificates, to Daphne, to whom she has promised them as a
gift. Sarah dies before the share transfers are registered by the company.
By her will, Sarah appoints Bernard her executor, leaving all her real and personal
property to Jacob who, immediately on her death, cancels the instrument of transfer.
Advise Daphne. How, if at all, would your answer differ if Daphne rather than
Bernard had been appointed Sarah’s executor?

Advice on answering the questions

Question 1 A good answer would start by outlining what is meant by a perfect gift,
explaining that there are effectively three methods of giving, either through an
outright transfer, a transfer on trust, or a self-declaration of trust. It would then explain
that the possibility of an imperfect gift only arises in the first two cases, and that the
imperfection would be caused by an ineffective attempt to transfer the assets which
are to form the subject-matter of the gift or trust. No question of an imperfect gift
could arise in the case of the third method, for no transfer of any assets is necessary.

The next question is whether a court will intervene to force the perfection of the
imperfect gift by imposing a trust on the donor of the assets in question for the
putative donee/beneficiary. The answer given by the Court of Appeal in Milroy v Lord
and Richards v Delbridge was that it would not. Nor would it reinterpret what had
happened as a self-declaration of trust by the donor/settlor, for in neither case had the
donor/settlor ever made a self-declaration of trust. Indeed, the evidence of the failed
gift contradicts such an interpretation of events.

Having stated the general rule, the answer would go on to detail the situations in
which departures from this rule have been made. A good answer would notice that
in only one instance is any detrimental reliance required, and ask how those in which
it is not can be squared with the rule that courts will not assist volunteers to perfect
imperfect gifts.

Question 2 A good answer would start by explaining why this gift is problematic and
explaining what steps Sarah should have taken to perfect it. The answer would outline
the general rule in Milroy v Lord (as per Question 1), noting that the facts here might
fall within the exception in Re Rose. In that respect, there are essentially two issues to
consider: (i) whether on these facts the rule in Re Rose will apply; and (ii) if so, whether
the rule is open to challenge. Finally, the answer should consider the application of the
rule in Strong v Bird in the event that Daphne is appointed executor.
page 76 University of London  International Programmes

Reflect and review

Look through the points listed below.

Are you ready to move on to the next chapter?

Ready to move on = I am satisfied that I have sufficient understanding of the principles

outlined in this chapter to enable me to go on to the next chapter.

Need to revise first = There are one or two areas I am unsure about and need to revise
before I go on to the next chapter.

Need to study again = I found many or all of the principles outlined in this chapter very
difficult and need to go over them again before I move on.

Tick a box for each topic.

Ready to Need to Need to
move on revise first study again

I can identify the different ways in which a trust can

be constituted.   

I can describe and analyse the situations in which a

court may make perfect a defective gift.   

If you ticked ‘need to revise first’, which sections of the chapter are you going to
revise?
Must Revision
revise done

7.1 Constituting a trust  

7.2 Defective constitution  

8 Promises to create trusts

Contents
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78

8.1 Promises in deeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79

8.2 Promises for consideration . . . . . . . . . . . . . . . . . . . . . . . . 82

8.3 Promises and detrimental reliance . . . . . . . . . . . . . . . . . . . . 83

Reflect and review . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85

page 78 University of London  International Programmes

Introduction
This chapter is concerned with promises to create trusts which have not been
performed. The starting point is to appreciate that a bare promise is unenforceable in
English law. This is the view of both the common law and equity. There are only three
types of promise that courts will enforce:

uu promises in deeds

uu promises given for consideration (i.e. contracts)

uu promises detrimentally relied upon.

It is not, however, enough to decide that a particular promise is enforceable. We must

also ask who it is who wishes to enforce it, and in which court.

This chapter builds on work done in Chapter 7, and you should review that chapter
before embarking on this topic. It also requires knowledge of the contractual rules of
privity and of consideration, and you should go back over the work you did on those
topics in the law of contract.

Essential reading
¢¢ Review Chapter 7 of the module guide: ‘Constitution’.

¢¢ Penner, Chapter 8: ‘The constitution of trusts’, Sections ‘Covenants to settle’ to

end of chapter.

Learning outcomes
By the end of this chapter, and having completed the Essential readings and
activities, you should be able to:
uu state the circumstances in which promises to create trusts will be enforced
uu identify the persons who can enforce such promises
uu describe how promises to create trusts are enforced
uu critically appraise those decisions which deny the enforcement of promises.
Equity and Trusts  8  Promises to create trusts page 79

8.1 Promises in deeds

8.1.1 The basic rule

A promise contained in a deed is called a covenant. Where a promise is contained
in a deed it can be enforced at common law by those who are party to it. Thus, if I
execute a deed by which I promise you that I will give you £10 for your birthday, you
can sue me at law for damages if I do not make good my promise. It does not matter
that you gave no consideration in return, or, in other words, that we are dealing with
a ‘voluntary covenant’. Thus, in Cannon v Hartley [1949] Ch 213, a father promised his
daughter by deed that he would pay her any sum exceeding £1,000 which he received
under his own father’s will. When he failed to do so, she successfully sued him at law
for the amount she would have obtained had he kept his promise. However, we should
note that equity will enforce some promises if made for consideration, but will not
enforce a promise merely because it is made by deed. In such a case, equity leaves the
promisee to their remedy at common law.

Even at common law, it is not enough to show that the promise is contained in
a deed. There is the further issue of privity. Is the person seeking to enforce the
promise a party to the deed? Suppose, for example, that I make a promise by deed
to your brother that I will make a gift to you of £10. Only those to whom the promise
was made can enforce it, and you are not such a person. Note that this rule was not
changed by the enactment of s.56 of the LPA 1925. Whether it was changed by the
Contracts (Rights of Third Parties) Act 1999 depends on whether a voluntary promise in
a deed is a contract. The view taken by the authors of this guide is that it is not.

The typical scenario

The typical case involving trusts is where S (the settlor) promised T (the trustee) by
deed that they would transfer rights to S for T to hold on trust for B (the beneficiary).
There are two separate issues. First, is the promise enforceable, and secondly, by
whom? We need to consider these questions from the point of view of enforcement
by both T and by B. For reasons which will become apparent later, it is best to begin
with B.

8.1.2 Enforcement by the intended beneficiary

The immediate problem for B is that B is not party to the deed. In other words, the
promise was made to T, not B. However, there are three situations in which B will be
able to enforce the promise.

a. B is made party by statute

If the Contract (Rights of Third Parties) Act 1999 applies to voluntary covenants (which
is doubtful), then assuming the requirements of the Act are satisfied, B would be able
to enforce the covenant at law and obtain damages. However, the covenant would still
not be enforceable in equity (via an order for specific performance). This might make a
difference in the event of S’s insolvency (see below).

b. B is within the marriage consideration

The word ‘consideration’ nowadays has a technical meaning in the law of contract of
quid pro quo. It originally meant the reason for doing something. The consideration for
a promise was the reason for a promise. This old meaning still lingers on in the case of
marriage settlements (described in Penner, Chapter 8, Section ‘Covenants to settle and
marriage settlements’). At one time, it was traditional upon marriage for the bride’s
father to set up a trust for the husband and wife for their joint lives and the survivor for
life, with the remainder for any children of the marriage and, if there are no children, for
the wife’s next of kin. The wife would also enter into a covenant whereby she promised
to convey to the trustees any rights she might later receive above a certain value to be
held on the same trusts. The parties to this deed would be the wife, her husband and the
trustees. As the ‘consideration’ for her doing so was to provide for her family, any children
or grandchildren were seen by courts of equity (although not the common law) as
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‘within the marriage consideration’. Accordingly, they were able to enforce the covenant
if broken, albeit only through a claim for specific performance and not damages (a
common law response). Moreover, an application of the magic formula that ‘equity looks
upon that as done which ought to be done’ meant that the wife was now a constructive
trustee of any rights she received. This would certainly have advantages if the wife
became bankrupt (and also had implications for the running of limitation periods (i.e. the
times when legal actions in respect of the rights in question might lapse)). However, the
wife’s next of kin were not within the ‘marriage consideration’, and, not being parties to
the covenant, they had no claim at law or in equity.

c. Trust of the right to sue on the covenant

T is, of course, the one person who does not suffer from problems of privity. Being a
party to the covenant, T will have a right to sue S at common law for non-performance.
An argument has sometimes been made that T holds that common law right to sue on
trust for B. If this argument (the ‘trust of the covenant’ argument) is made out, then B
can compel T to exercise the right and sue S. The assumption is that T would recover
substantial damages at common law from S which T would then hold on trust for B.

There are two difficulties standing in the way of this argument, both of which are
illustrated by Re Cook’s ST [1965] Ch 902. The first is that it will almost always be the
case that the requisite declaration of trust of the right to sue will not be present on the
facts (i.e. there will be no particular further intention than the one expressed in the
deed). There are a number of academic authorities who argue that such an intention
should be found from the mere fact that the promise to create a trust was contained
in a deed, but it is difficult to see why the court should impose a trust, for that is what
it would be, in these circumstances. You should therefore ask yourself whether these
views can be justified. The second – and arguably unjustified – objection is that the
trust of the covenant argument has been said only to work in the case of rights which
the covenantor had at the time they made the covenant and not in respect of rights to
be acquired later (after-acquired property).

8.1.3 Enforcement by the intended trustee

Assume that none of the situations outlined above apply, with the result that B cannot Go to your study pack and
enforce the promise to create a trust in his favour. We have already seen how T does read ‘The power of trustees to
not suffer from the cause of B’s inability to enforce, a lack of privity, for the covenant enforce covenants in favour
was made with T. Therefore T undoubtedly has a claim at law for breach of covenant of volunteers’ by D.W. Elliott.
but will not be able to enforce it in equity. The enforcement of this claim, however, is
far from straightforward, for there are a number of decisions which say that T will be
prevented by a court of equity from suing S at law.

The authorities
In Re Pryce [1971] Ch 234 the trustees of a marriage settlement (T) sought the direction Go to your study pack and
of the court whether they were bound to sue the wife (S) for non-performance of read ‘Trusts of voluntary
her covenant. There were no children of the marriage, so the only person who could covenants’ by W. Meagher
possibly benefit was the wife’s next of kin (B). Eve J directed the trustees that they and J.R.F. Lehane.
ought not to sue, because to do so would give B by indirect means what B could not
obtain directly. In saying this, Eve J arguably went beyond the rule we encountered in
Chapter 7, that ‘equity will not assist a volunteer to perfect an imperfect gift or trust’.
The trustees were not asking for equity’s assistance, but merely a ruling on whether
they were required to sue. However, the case was followed by Simonds J in Re Kay
[1939] 1 Ch 329 and Buckley J in Re Cook’s ST. These cases have never been overruled,
although it should be noted that they are only decisions at first instance.

Substantial or nominal damages?

Even if a court were to accept that these authorities were wrongly decided, there
is the further question of what damages T would recover by suing S at law. Are they
substantial or only nominal? The normal measure of damages will be measured by the
Equity and Trusts  8  Promises to create trusts page 81

loss of the expectation (i.e. substantial damages). There is an argument which says that
T suffers no loss of expectation, because had the covenant been performed, T would
be a trustee and a trustee makes no personal gain from their trusteeship. T is therefore
no worse off because of the non-performance. The person who has lost out is B, and T
cannot recover for B’s losses. All that B is entitled to is an order for nominal damages
and for this reason (although not those given in the case) Eve J was correct in Re Pryce
to deny to T the ability to sue S at law.

The problem with this argument, however, is that it forgets that T’s claim is being
brought at law, and at law T would hold any rights transferred to him in performance
of the covenant for himself, and not for B, for the common law does not recognise
trusts. Thus, in the common law’s eyes – and those are the only eyes that matter for
the moment – T has suffered a substantial loss and so should recover substantial
damages. While this seems correct, and we assume that T should be able to sue for
substantial damages at law, this result leads to a further difficulty.

Even if T were to recover substantial damages, would T necessarily hold them on

trust for B? There is an argument which says that T would in fact hold the damages on
resulting trust for S, and would therefore be immediately liable to repay it to S, the
person T had just sued to recover it. This circularity of action is in nobody’s interest,
and so the decision of Eve J in Re Pryce is ultimately correct (although again not for the
reasons there stated). But how can it be said that there is a resulting trust for T?

The argument proceeds as follows:

1. Going back to our discussion of the question whether B could enforce the covenant
in B’s own right, we said that one situation in which B could was where there was
found to be a trust of the benefit of the covenant in B’s favour.

2. But to get to the point at which we are now, we have assumed that this option is
not available on our particular facts.

3. It is then argued that, the trust of the benefit of the covenant in favour of B having
failed, there must be a resulting trust of the benefit of the covenant in favour of S.

We will encounter resulting trusts again in Chapter 12 and you would do well to return
to this part of the syllabus when you know what resulting trusts are and when they
arise. For the moment, we need know only that they are trusts under which the assets
are held on trust for the person who provided those assets to the trustee, and that
one instance in which they arise is where rights are transferred on trusts which fail,
for example, for uncertainty of objects. The trust of the covenant here having failed,
it is argued there is then a resulting trust of the right to sue on the covenant in favour
of the transferor, S. Since the right to sue is held on trust for S, so will be any damages
acquired through the exercise of that right.

The difficulty with this argument is that any trust in favour of B cannot be said to have
‘failed’ at all. It was simply the case that no trust in favour of B arose because there was
no declaration of trust in B’s favour. In other words, it was not the trust which failed,
but only the argument that there was a trust. As we saw in our discussion of Re Adams
& Kensington Vestry in Chapter 5, it is wrong to talk of a trust failing in circumstances
where there is simply no declaration of trust at all. A transfer which is not a transfer
on trust is an outright transfer, not a failed trust. If we do not find a trust in favour of
B, therefore, T will hold the right to sue absolutely, not on resulting trust for S. Any
damages T receives when suing under the covenant would not be held on trust for S
either. The damages will instead be held by T on trust for B, for the damages are simply
the law’s substitute for performance of the covenant.

Essential reading
¢¢ Fletcher v Fletcher (1844) 4 Hare 67; Re Pryce [1917] 1 Ch 234; Re Kay [1939] 1 Ch 329;
Re Cook’s Settlement Trusts [1965] Ch 902.

¢¢ Contracts (Rights of Third Parties) Act 1999.

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Further reading
¢¢ Davenport v Bishopp (1843) 2 Y & CCC 451; Lloyds v Harper (1880) 16 Ch D 290; Re
Plumptre’s Marriage Settlement [1910] 1 Ch 609; Re Ellenborough [1903] 1 Ch 697;
Pullan v Koe [1913] 1 Ch 9; Re Cavendish-Browne’s Settlement Trust [1916] WN 341;
Re Schebsman [1944] Ch 83; Cannon v Hartley [1949] Ch 213.

Activity 8.1
Make a short spoken presentation explaining why some commentators consider
that the cases of Re Pryce, Re Kay and Re Cook’s ST are wrongly decided.

Self-assessment questions
1. What is a covenant?

2. What is a deed?

3. What is ‘marriage consideration’?

4. What is the trust of the covenant argument? What are the views for and against
it operating to allow the beneficiary to sue on a covenant?

5. What are the arguments for and against saying that Eve J’s decision in Re Pryce,
that a trustee will be directed not to sue on a gratuitous covenant to settle, was
correct? (Remember to consider how the question, for whom does a trustee who
successfully sues and gets substantial damages hold them, bears on the issue.)

Summary
A covenant is a promise contained in a deed. Unless made for consideration, it can be
enforced only at common law and only by those party to it.

Where S (settlor) gratuitously covenants to transfer rights to T (the trustee) on trust

for B (the beneficiary), B can enforce the covenant where B is privy to the covenant,
or is made privy under the Contract (Rights of Third Parties) Act 1999 (although it is
doubtful whether the statute applies to covenants), or where B is within the ‘marriage
consideration’ in the case of marriage settlements. Where T holds the right to sue
on trust for B, then B can direct T to sue S. However, a trust in such circumstances is
unlikely to be found. First, the requisite intention, whatever that might be, is generally
missing and difficult to conceive in any case; and secondly, there is authority that this
concept cannot apply to after-acquired property.

T, of course, is a party to the covenant and so can enforce it at common law. However,
T may be barred from doing so by the Re Pryce line of cases, and even if successful in
their action for substantial damages, it is not clear whether equity will require T to
hold them on trust for B rather than on resulting trust for S.

8.2 Promises for consideration

If consideration in the normal contractual sense has been given in exchange for the
promise to set up a trust (or to make a gift), and that promise has not been performed,
the promise will be enforceable at law through a claim for damages or, if damages are
thought to be an inadequate response, by an award of specific performance in equity.
There still, of course, remains the problem of privity, for the promisee might not be
the intended beneficiary or donee. Thus, in Re Cook’s ST, the court held that it did not
help someone in the position of B to show that consideration for S’s promise had been
given by T. As Buckley J explained, ‘conduct by [S] which is unconscientious in relation
to [T] so as to entitle B to equitable relief may not be unconscientious in relation to [B]
so that [B] will have no standing to claim relief notwithstanding that the conduct in
question may affect [B]’. Re Cook’s ST was of course decided before the enactment of
the Contract (Rights of Third Parties) Act 1999, and it should now be asked whether s.1
of that Act might give the beneficiary/donee a right to sue in their own name.

Essential reading
¢¢ Re Cook’s ST [1965] Ch 902.
Equity and Trusts  8  Promises to create trusts page 83

8.3 Promises and detrimental reliance

Although there are no cases on this topic, there are some concerning promises of outright
gifts, and it is assumed that a promise to create a trust will be treated no differently
from them. Normally, the promisee would have no redress if such a promise is not to be
performed. Things will be different, however, where the promisee has detrimentally relied
on the promise (i.e. changed their position to their detriment in the reasonable belief
that the promise would be performed). In such a case, equity (although not the common
law) will compel the promisor to perform their promise. In the interim, the promisor will
arguably hold the right in question on constructive trust for the promisee.

Essential reading
¢¢ Re Basham [1986] 1 WLR 1498.

Further reading
¢¢ Barton, J.L. ‘Trusts and covenants’ (1975) 91 LQR 236.

¢¢ Hornby, J. ‘Covenants in favour of volunteers’ (1962) 78 LQR 228.

Activity 8.2
Read Re Basham. What role did detrimental reliance play in that case?

Sample examination questions

Question 1 The rule is: ‘Equity will not assist a volunteer to perfect an imperfect
gift’, not: ‘Equity will stand in the way of a volunteer suing for non-performance of a
promise to give’.
Discuss.
Question 2 Toby covenants that he will convey £10,000 from the £100,000
currently in his account with the London Bank plc and any winnings he might
receive from next week’s lottery draw to Ella to hold on trust for James. Although he
subsequently wins £1 million on the lottery, Toby fails to do either of these things.
Advise James. Would it help him if he could persuade Ella to sue Toby?

Advice on answering the questions

Question 1 This question is directed to the attitude of the courts to the enforcement of
promises to create trusts. Specifically, it is directed to the judgment of Eve J in Re Pryce.

A good answer would begin with a discussion of equity’s attitude to imperfect trusts/
gifts, pointing out the general rule in Milroy v Lord and the various exceptions to it. It
would not, however, be appropriate in this question to examine those exceptions in
detail, merely to note their existence.

Having outlined Equity’s negative approach to imperfect trusts/gifts, the situation where
Equity could be said to stand in the way of the enforcement of a promise to give should
be described. The case in which this happened was of course Re Pryce, and the facts of
that case should be recounted, along with a general discussion of the enforcement of
promises to settle. The main question is whether the decision in Re Pryce was correct,
either on its own reasoning or for reasons which are not contained in the judgment. At
this point, the wealth of academic literature on this topic should be discussed.

Question 2 We need to consider the position of both Ella and James with regard to
the enforcement of this promise. It is best to start with James, the putative beneficiary,
and only then go on to consider the position of Ella, the putative trustee.

James will only be able to enforce this covenant in three circumstances:

a. he is privy to the covenant;

b. it is a marriage settlement and he is within the marriage consideration;

c. the right to sue on the covenant is held for him on trust.

We will consider each in turn.

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Privity
Since the covenant is made with Ella and not James, James is not a party to the
covenant made by Toby. It might be the case, however, that he is given the rights of
a party by the Contracts (Rights of Third Parties) Act 1999, which abolished one limb
of the privity rule in contract, viz. that a third party could not take a benefit under a
contract. Whether this Act confers on James the right to sue depends on two things:

a. whether the Act applies to voluntary promises in deeds; and

b. if it does, whether this covenant is caught by s.1 of the Act.

Whether the Act applies depends on how the word ‘contract’ in the 1999 Act is
interpreted. Understandably, the Act gives no definition of what is meant by this word.
Generally, however, a contract is a bargain, an exchange of promises for consideration.
This is not what we have here. We have only a unilateral promise for no consideration.
On that basis, it is arguable that such a promise, although enforceable at common law,
is not a contract. There is no authority on this question. If, contrary to this argument,
voluntary covenants were to be considered as species of contracts, then it has to be
asked whether the specific provisions of the 1999 Act apply. Given that the deed does
not expressly give James the right to sue, the question will be whether, under s.1(1)
(b), the term purports to confer a benefit on him. It clearly does and there seems to
be nothing in the deed to show that James was not intended to be able to enforce
the promise: s.1(2). There is then the further question what response James will get.
The answer is that he will be able to enforce the promise in the same way as if he was
named as a party: s.1(5). And although he will be able to claim common law damages
for loss of expectation, he will not be entitled to specific performance, as equity always
refuses to grant specific performance of a voluntary covenant.

Marriage settlement
If this is a marriage settlement (we are not told either way) and James is within the
marriage consideration (again we are not told), then James can enforce the promise in
equity. In the meantime, applying the maxim ‘Equity regards as done that which ought
to be done’, Toby will hold the rights on constructive trust for James.

Right to sue on the covenant held on trust

There is no doubt that a chose in action can form the subject-matter of a trust. There is
no doubt also that Ella has the benefit of a chose in action, the right to sue Toby under
the covenant. The question is whether we can say that Ella holds her right on trust for
James. The problem is that there was no declaration of trust by Toby to this effect. Note
the academic arguments which say that a trust, presumably some sort of constructive
trust, should always be found in such cases. Note the further difficulty that Buckley
J said in Re Cook that a trust of the right to sue is only possible in the case where the
covenant relates to present rather than future rights, and that the money won on the
lottery was not a present right at the time the covenant was made. You should discuss
whether Buckley J was right in his view.

On the assumption that none of these exceptional cases avail James, he will not be able
to enforce the covenant. Then comes the question whether Ella will be allowed to do
so. She, of course, is party to the deed, so would seem to have an unquestionable right
to sue at common law. The problem is that three cases from equity, Re Pryce, Re Kay, and
Re Cook, stand in her way. You should discuss the reasoning in Re Pryce, with the aim of
showing that it cannot stand. Further discussion should then be made concerning the
question whether the decision can be defended on other grounds, those being: (i) that
any damages Ella could recover from Toby at law would be nominal; and (ii) even if they
were substantial, they would be held on resulting trust for Toby. Arguments as to why
both those propositions are false have been rehearsed above.
Equity and Trusts  8  Promises to create trusts page 85

Reflect and review

Look through the points listed below.

Are you ready to move on to the next chapter?

Ready to move on = I am satisfied that I have sufficient understanding of the principles

outlined in this chapter to enable me to go on to the next chapter.

Need to revise first = There are one or two areas I am unsure about and need to revise
before I go on to the next chapter.

Need to study again = I found many or all of the principles outlined in this chapter very
difficult and need to go over them again before I move on.

Tick a box for each topic.

Ready to Need to Need to
move on revise first study again

I can state the circumstances in which promises to

create trusts will be enforced.   

I can identify the persons who can enforce such

promises.   

I can describe how promises to create trusts are

enforced.   

I can critically appraise those decisions which deny

the enforcement of promises.   

If you ticked ‘need to revise first’, which sections of the chapter are you going to
revise?
Must Revision
revise done

8.1 Promises in deeds  

8.2 Promises for consideration  

8.3 Promises and detrimental reliance  

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Notes
9 Charitable purpose trusts

Contents
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88

9.1 Charitable status . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89

9.2 The meaning of ‘charity’ . . . . . . . . . . . . . . . . . . . . . . . . . 90

9.3 The public benefit requirement . . . . . . . . . . . . . . . . . . . . . 95

9.4 Contaminating non-charitable elements . . . . . . . . . . . . . . . . . 96

9.5 Cy‑près . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97

Reflect and review . . . . . . . . . . . . . . . . . . . . . . . . . . . 103

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Introduction
The question addressed in both this chapter and the next is whether it is possible to
have a trust, not for persons, but for a purpose. Where the purpose is public, that is, a
purpose recognised by the law to be charitable, then it is indeed possible to have such
a trust. The difficult question is in deciding what amounts to a charitable trust. In this
chapter, we will consider the various types of charitable purposes, the over-arching
requirement of public benefit which is considered essential to charitable status,
and elements of a purpose which may contaminate it, rendering it not exclusively
charitable. We will then consider a special rule, cy-près, which applies on the failure
of a charitable purpose. The Charities Act 2006 was a major development in the law
relating to charity. It has since been replaced by the Charities Act 2011, but according
to the Charity Commission, ‘The 2011 Act is intended to make the law easier to
understand by replacing four Acts of Parliament with one. It doesn’t make any changes
to the law.’ Non-charitable purpose trusts are the subject of the next chapter.

Essential reading
¢¢ Penner, Chapter 13: ‘Charitable trusts’.

Learning outcomes
By the end of this chapter, and having completed the Essential readings and
activities, you should be able to:
uu differentiate between purposes that are prima facie charitable and those that are
not
uu explain how a prima facie charitable object might nevertheless be disqualified
from charitable status
uu explain the ‘public benefit’ requirement
uu explain the requirement that a valid charitable trust must be exclusively
charitable, and discuss the factors that may prevent it from being so
uu explain the operation of the cy-près doctrine
uu outline why particular areas of charities law raised calls for reform, and the
advantages and disadvantages of the enacted reforms.
Equity and Trusts  9  Charitable purpose trusts page 89

9.1 Charitable status

9.1.1 A benefit to society

Purpose trusts have for centuries been an important vehicle by which charitable
works are carried out. However, it is important to realise that charitable work does not
depend on the use of trusts. Most large charitable organisations, such as universities,
operate as corporations, not trusts. Most of the law you will study in this chapter will
be the law of charity as it applies to all kinds of charitable organisations. In particular,
you will be trying to grasp what the law regards as a charitable purpose. Because
charitable works are regarded as beneficial to society as a whole, a distribution of
funds or an ongoing activity that counts as charitable is typically given preferential
treatment under the law, especially in terms of the payment of taxes.

9.1.2 Relaxation of trust rules to benefit charities

A number of rules affecting the validity of a trust are relaxed in the case of trusts for
exclusively charitable objects as follows.

The beneficiary principle

A charitable trust has no beneficiaries. This is true even where the individuals who
in fact benefit from the trust are clearly ascertainable, say in the case of a residential
home for the blind. The residents of the home are not beneficiaries of the trust in any
legal sense, so they cannot enforce the trust nor could they call for a transfer of the
trust rights under the Saunders v Vautier principle. That trust, like all charitable trusts,
can only be enforced by the Charity Commission, which acts on behalf of the Crown:
Charities Act 2011, s.13(3). You should bear this point in mind in the discussion of Re
Denley’s Trust Deed [1969] 1 Ch 373 in the next chapter.

Certainty of objects
The requirement of certainty is relaxed in the case of a charitable trust in the following
sense: so long as it is clear that the settlor intended to devote funds to charity, it
matters not whether the particular charitable purposes the settlor intended are
clearly defined; the court will devise a scheme for the charitable use of the funds. So,
for example, a trust simply ‘for charitable purposes’ would be perfectly valid.

The rule against perpetual duration

A charitable trust may last forever. Where charitable trust funds remain, but the
particular charitable purpose can no longer practically be carried out, the cy-près
doctrine will be applied to determine a new, workable, charitable purpose for the
funds (see 9.5 below).

The rule against remoteness of vesting

This rule does not apply to a gift over from one charity to another. For example, a
charitable trust established for a particular residential home for the blind ‘so long as it
is situated in Tavistock Square’, and then to the Royal National Institute for the Blind,
the shift of funds to the RNIB will be perfectly valid whenever the defeating condition
(i.e. the home no longer being located in Tavistock Square) occurs.

The rules of taxation

There are substantial fiscal advantages, in the form of reduction or exemption from
various taxes and charges. The details of these tax advantages need not be known, but
one should recognise their practical importance to the particular charities and the
wider issues raised by this form of tax relief for any purpose falling within the legal
definition of charity. There is no agreement among the judiciary whether issues of
taxation should inform their decision as to what purposes count as charitable.
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With the broad scope of charity currently in place, there may be a concern that not
all charitable purposes are equally deserving of the fiscal advantages that charitable
status confers. There have been suggestions that special tax privileges for charities
should be abolished and replaced by direct government grants to those charities
which serve more important or vital public services. The chief concern with this idea
is that it would reduce the independence of charities from the government of the
day, causing them to tailor their activities to please the government; it would also
inevitably involve charities devoting a greater portion of their funds and time to
political activity, such as lobbying for grants.

Essential reading
¢¢ Charities Act 2011, ss.13–16, 84, 85.

Activity 9.1
Look again at the four ways in which charitable trusts have special status, and write
brief summaries of each.
No feedback provided.

Activity 9.2
Based on your reading and your general sense of politics and what counts as a
public good, write a brief essay (300–400 words) discussing:
a. Why does the state allow fiscal privileges to charities?

b. Given the existence of fiscal privileges, is it appropriate for courts to determine,

without the benefit of a statute, which private bodies should receive relief from
normal taxation?

c. If fiscal privileges were withdrawn, should the courts be prepared to widen the
category of valid purpose trusts?

9.2 The meaning of ‘charity’

Essential reading
¢¢ Charities Act 2011, ss.1–6.

¢¢ Income Tax Commissioners v Pemsel [1891] UKHL 1, [1891] AC 531; Gilmour v Coats
[1949] UKHL 1, [1949] AC 457; McGovern v A-G [1982] Ch 321; Oppenheim v Tobacco
Securities Trust Co Ltd [1950] UKHL 2, [1951] AC 297; National Anti-Vivisection Society
v IRC [1947] UKHL 4, [1948] AC 31; Dingle v Turner [1972] UKHL 2, [1972] AC 601;
Independent Schools Council v Charity Commission [2011] UKUT 421 (TCC), [2012]
Ch 214; A-G v Charity Commission for England and Wales [2012] UKUT 420 (TCC),
[2012] WTLR 977.

Further reading
¢¢ Williams Trustees v IRC [1947] UKHL 1, [1947] AC 447; IRC v Baddeley [1955] UKHL 1,
[1955] AC 572; Incorporated Council of Law Reporting for England and Wales v A-G
[1971] EWCA Civ 13, [1972] Ch 73; IRC v McMullen [1980] UKHL 3, [1981] AC 1; Guild v
IRC [1990] UKHL 10, [1992] 2 AC 310; Helena Partnerships Ltd v HMRC [2012] EWCA
Civ 569.

9.2.1 Charitable purposes

Whether a particular purpose is charitable or not is a question of considerable
difficulty, and one which students can find very confusing. The best way to approach
the issue is in two stages, asking the following questions:

uu Is the purpose prima facie charitable?

uu If so, is it for the benefit of the public?

Equity and Trusts  9  Charitable purpose trusts page 91

These questions are now on a statutory footing in s.2(1) of the Charities Act 2011. The
first is considered here and the second in Sections 9.3 and 9.4 below.

We begin with the first question. Is the purpose prima facie charitable? Prior to the
Charities Act 2006 (now 2011) an important factor in determining whether a purpose
was charitable was whether it fell within the wording of the Preamble to the Statute of
Charitable Uses 1601, which provided as follows:

Whereas lands, tenements, rents, annuities, profits, hereditaments, goods, chattels,

money and stocks of money have been heretofore given, limited, appointed and
assigned, as well by the Queen’s most excellent majesty, and her most noble progenitors,
as by sundry other well disposed persons; some for the relief of aged, impotent
and poor People, some for Maintenance of sick and maimed soldiers and Mariners,
Schools of Learning, Ports, Havens, Causeways, Churches, Sea-Banks and Highways,
some for Education and Preferment of Orphans, some for or towards the Relief, Stock
or Maintenance of Houses of Correction, some for Marriages of poor maids, some for
Supportation, Aid and help of Young Tradesmen, of Prisoners or Captives, and for Aid or
Ease of any poor Inhabitants concerning payments of Fifteens, setting out Soldiers and
other Taxes; which Lands, Tenements, Rents, Annuities, Profits, Hereditaments, Goods,
Chattels, Money and Stocks of Money, nevertheless have not been employed according to
the charitable intent of the givers and founders thereof, by reason of frauds, Breaches of
trust and Negligence in those that should pay, deliver and employ the same.

In Income Tax Commissioners v Pemsel (1891), Lord Macnaghten distilled the preamble
down to four categories:

a. trusts for the relief of poverty

b. trusts for the advancement of education

c. trusts for the advancement of religion

d. trusts for other purposes within the ‘spirit and intendment of the preamble’.

The most difficult head of charity – because it the hardest to define – is the last. It is
not enough simply to show that the purpose confers a benefit on the public – it must
also be shown that the benefit conferred is within the spirit and intendment of the
preamble: see Williams v IRC (1947).

Under the Charities Act 2011, s.3(1), these four heads are now 13 heads. There have been
some new additions, but most of the extra nine were pulled out of Lord Macnaghten’s
residual fourth category (leaving a smaller residue still working on the same basic
principle):

a. the prevention or relief of poverty

b. the advancement of education

c. the advancement of religion

d. the advancement of health or the saving of lives

e. the advancement of citizenship or community development

f. the advancement of the arts, culture, heritage or science

g. the advancement of amateur sport

h. the advancement of human rights, conflict resolution or reconciliation or the

promotion of religious or racial harmony or equality and diversity

i. the advancement of environmental protection or improvement

j. the relief of those in need because of youth, age, ill-health, disability, financial
hardship or other disadvantage

k. the advancement of animal welfare

l. the promotion of the efficiency of the armed forces of the Crown or of the
efficiency of the police, fire and rescue services or ambulance services
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m. any other purposes—

i. that are not within paragraphs (a) to (l) but are recognised as charitable
purposes by virtue of section 5 (recreational and similar trusts, etc.) or under
the old law

ii. that may reasonably be regarded as analogous to, or within the spirit of, any
purposes falling within any of paragraphs (a) to (l) or sub-paragraph (i), or

iii. that may reasonably be regarded as analogous to, or within the spirit of, any
purposes which have been recognised, under the law relating to charities in
England and Wales, as falling within sub-paragraph (ii) or this sub-paragraph.

9.2.2 The prevention or relief of poverty

Trusts for the relief of poverty provide for those who are deprived of a reasonable
standard of living. The intended recipients do not have to be destitute. The recipients
do actually have to be poor, however, so in Re Scarisbrook [1951] Ch 622, a trust for
an individual’s ‘poor relations’ was charitable, but in Re Sander’s WT [1954] The Times
22 July, one for the ‘working classes’ was not charitable because not all those in ‘the
working class’ are poor.

The Charities Act 2011, s.3(1)(a) adds ‘prevention’ to the traditional head of relief of
poverty. This was considered by the Upper Tribunal (Tax and Chancery Chamber) in
Charity Commission for England and Wales v A-G [2012] UKUT B19 (TCC) at [75]:

[T]he prevention of poverty entails addressing the causes of poverty, while relief entails
addressing the consequences of poverty. The prevention of poverty is recognised by
section [3(1)(a)] as a stand-alone purpose which can be pursued, for example, by charities
which provide money management advice… [W]e know of no authority which has
considered trusts for the prevention of poverty.

This case is discussed further below in connection with the public benefit requirement.

Activity 9.3
Read Re Niyazi’s WT [1978] 1 WLR 910 and explain why Megarry V-C thought the facts
were ‘desperately near the borderline’.

9.2.3 The advancement of education

Traditional forms of education and training clearly fall under this head, so trusts for
schools, colleges, universities and so on are valid. ‘Education’, however, is much broader,
covering research, the dissemination of useful knowledge (Incorporated Council of Law
Reporting v A-G [1972] Ch 73), artistic education (Royal Choral Society v IRC [1943] 2 All ER
101), museums (British Museum Trustees v White (1826) 2 Sim & St 594), the promotion of
culture (Re Delius [1957] Ch 299), school sports facilities (Re Mariette [1915] 2 Ch 284), and
activities associated with education such as student unions (London Hospital Medical
College v IRC [1976] 1 WLR 613) and professional bodies that advance education (Royal
College of Surgeons of England v National Provincial Bank Ltd [1952] AC 631).

However, while courts are careful to ensure that this head is not used to provide
charitable status for political purposes masquerading as education such as the
production and publication of propaganda or party political literature (Re Hopkinson
[1949] 1 All ER 346), the mere fact that research, education, or the dissemination
of knowledge concerns politically controversial issues does not disqualify it from
charitable status (Re Koeppler WT [1986] Ch 423).

Activity 9.4
In his will, the famous writer George Bernard Shaw left money on trust for research
into the development of a 40-letter alphabet for English. Do you think the trust was
a valid charitable trust? Read Re Shaw [1957] 1 WLR 729 for the answer, and then read
Re Hopkins’ WT [1965] Ch 669. Were the decisions in these cases correct?
Equity and Trusts  9  Charitable purpose trusts page 93

9.2.4 The advancement of religion

Religion comprises all the variety of religions human beings practise – the law takes
the general view that any religion is better than none, but is neutral as between them
(see Neville Estates Ltd v Madden [1962] Ch 832). But trusts for the promotion of ethical
behaviour without a component of spiritual belief are not trusts for the advancement
of religion (Re South Place Ethical Society [1980] 1 WLR 1565), although such trusts may
be charitable under the fourth head of charity.

The Charities Act 2011, s.3(2)(a) now provides that:

‘religion’ includes—

(i) a religion which involves belief in more than one god, and

(ii) a religion which does not involve belief in a god.

This confirms that faiths with multiple deities (e.g. Hinduism) or with no deities (e.g.
Buddhism) are included in the definition of religion. In R (Hodkin) v Registrar-General of
Births, Deaths and Marriages [2013] UKSC 77, [2014] 2 WLR 23, the Supreme Court decided
that the Church of Scientology in London was a ‘place of meeting for religious worship’
within the meaning of s.2 of the Places of Worship Registration Act 1855, and therefore
it could be used for marriage ceremonies. The court decided that Scientology was a
religion within the meaning of s.3(2)(a) of the Charities Act 2011. This was not a decision
concerning its status as a charity. Previously, the Charity Commission had decided that
Scientology was not a religion for the purposes of English charity law, but this was
before the new definition of religion in the 2006 Act. However, the Commission had
also decided that the church was not established for the public benefit.

Activity 9.5
Consider whether a movement which claims that its members are able to ‘raise
their consciousness and realise their place in the Universe’ by ‘getting in touch with
their inner child’ is a religion under charity law. Then read R v Registrar General, ex p
Segerdal [1970] 2 QB 697 and see if you would change your mind.
No feedback provided.

9.2.5 Other purposes beneficial to the community

This was always the most difficult category on which to set coherent boundaries, and
it is here that reference was most often made to the Preamble of the 1601 Act. The
essential point to grasp is that a trust is not charitable merely because it benefits some
section of the public. As Viscount Cave said in A-G v National Provincial and Union Bank
of England [1924] AC 262, ‘it is not enough to say that the trust in question is for public
purposes beneficial to the community; you must also show it to be a charitable trust’.
It must be for the public benefit in a way which can be related to the purposes set out
in the Preamble or to purposes which later courts have found to be analogous to those
in the Preamble.

The ‘relief of aged, impotent and poor’ people was construed disjunctively; that is, a
charity can be for the aged or the impotent or the poor and be valid – it need not be for
people with all three misfortunes. ‘Impotent’ provided an explicit basis for trusts for the
disabled (Re Lewis [1955] Ch 104; Re Fraser (1883) 22 Ch D 827), and for trusts for hospitals
generally. These purposes continue under the Charities Act 2011, s.3(1)(d) and (j):

(d) the advancement of health or the saving of lives;

(j) the relief of those in need because of youth, age, ill-health, disability, financial hardship
or other disadvantage.

Trusts for disaster relief are problematic. While trusts for the relief of victims of
disasters are charitable (Re North Devon and West Somerset Relief Fund Trusts [1953] 1
WLR 1260), they are so only to the extent they provide benefits to the ill or disabled,
relieve victims of poverty or fall under another recognised head of charity (e.g.
rebuilding a school or church). The Charity Commission strongly encourages people
page 94 University of London  International Programmes

to donate to, or work with existing charities rather than creating a new charity to
respond to a particular disaster: see Charity Commission guidance on starting, running
and supporting charitable disaster appeals (CC40).

While trusts related to school activities are charitable under the education head, trusts
for sport or recreation outside the education context are not (Re Nottage [1895] 2 Ch
649). However, the provision of public facilities which can be used for recreation is
charitable (Re Hadden [1932] 1 Ch 133). This is now governed by the Charities Act 2011,
s.5. It does not matter if the rich benefit from the recreational facility as well as the
poor or deprived, so long as it is genuinely open to all members of the public, although
it can be restricted to male or female only.

The Charities Act 2011, s.3(1) now includes ‘(e) the advancement of citizenship or
community development’, ‘(g) the advancement of amateur sport’, ‘(h) the advancement
of human rights’ and ‘(k) the advancement of animal welfare’. Would Williams Trustees v
IRC (1947) now count as charitable? Would McGovern v A-G (1982) now be charitable, or
would the fact that it purported to operate overseas still be problematic?

In Incorporated Council of Law Reporting for England and Wales v A-G (1971), the Court
of Appeal decided that the publication of law reports at a moderate price was a valid
charitable purpose for the advancement of education, but also under the residual
category as purpose ‘of general public utility’, since it was necessary for the proper
administration of justice, like a public court house. The concept ‘of general public
utility’ was considered by the Court of Appeal in Helena Partnerships Ltd v HMRC (2012),
where it decided that the provision of social housing did not qualify (per Lloyd LJ at
[108]):

In its nature, the benefit afforded by the provision of housing to the person who is thereby
housed is of an altogether different order, as it seems to me, to the benefit afforded by the
construction or maintenance of a road, a bridge or a sea-wall, or the maintenance of a fire
brigade or a lifeboat service. The former provides direct benefits to the occupants of the
accommodation which far outweigh the degree of indirect benefit that other members of
the community may derive from the existence of the housing stock.

If the housing had been provided only to disadvantaged people in need of relief, due
to poverty, old age, infirmity, etc., it would have qualified as charitable, but without
such a restriction, it was not.

Activity 9.6
Consider whether each of the following purposes is charitable, read the case
following to see how your views compare with those of the courts, and then
consider how the Charities Act 2011 might apply.
a. A gift on trust to establish and maintain an institute, to be known as the ‘London
Welsh Association’, the purposes of which included maintaining an institute
for the benefit of Welsh people in London, and promoting their language and
culture (Williams’ Trustees v IRC [1947] UKHL 1, [1947] AC 447).

b. The work of the National Trust for Places of Historic Interest or Natural Beauty
(Re Verrall [1916] 1 Ch 100).

c. The work of the Society for the Prevention of Cruelty to Animals (Thatam v
Drummond (1864) 2 Hem & M 262).

d. A gift for an animal sanctuary which specifically excluded humans so that the
animals would not be molested (Re Grove-Grady [1929] 1 Ch 557).

e. A trust for the purpose of promoting athletic sports and general pastimes for the
Glasgow police (IRC v City of Glasgow Police Athletic Association [1953] AC 380).

f. The provision of facilities for religious services and instruction and for the
social and physical training and recreation of persons who would otherwise be
deprived of these services and who were or were likely to become members of
the Methodist Church (IRC v Baddeley [1955] UKHL 1, [1955] AC 572).

No feedback provided.
Equity and Trusts  9  Charitable purpose trusts page 95

Summary
There is a two-stage test to determine whether a particular purpose is charitable. Is
the purpose prima facie charitable and if so, does it provide a public benefit?

There are 13 main categories of charity under the Charities Act 2011, which build on the
four categories set out by Lord Macnaghten in Pemsel (1891). There remains a residual
category of other purposes beneficial to the community which is still difficult to
define. Essentially, a purpose must benefit the public in a way which can be related to
the purposes which later courts have found to be analogous to those in the preamble.

9.3 The public benefit requirement

We need to distinguish between abstract benefit and actual benefit. A charitable
purpose must be beneficial to the public, not detrimental. So far as the first three
heads are concerned, it was often said to be a ‘presumption’ of public benefit. What
seems to be meant by this is that it need not be shown how the particular purpose
benefits the public, provided only that there is a sufficient element of the public who
are ‘benefited’. So, for example, in a trust for the saying of masses in public, it need
not be shown how the public who attend such masses, or those who are edified
by knowing that others do so, are benefited by that activity. If there was such a
presumption, it appears to have been removed by the Charities Act 2011, s.4(2):

In determining whether the public benefit requirement is satisfied in relation to any

purpose falling within section 3(1), it is not to be presumed that a purpose of a particular
description is for the public benefit.

In Independent Schools Council v Charity Commission [2011] UKUT 421 (TCC), [2012] Ch
214, the Upper Tribunal decided that there was no presumption of public benefit in
relation to education and therefore the statute did not change the law. In Charity
Commission for England and Wales v A-G [2012] UKUT B19 (TCC) at [39], it came to the
same conclusion regarding trusts for the relief of poverty. However, in Catholic Care
(Diocese of Leeds) v Charity Commission [2010] EWHC 520 (Ch) at [67], Briggs J suggested
that the statutory provision might have some effect:

[I]t is no longer to be presumed that any particular type of purpose is for the public
benefit. Section 3 [now 4] therefore expressly contemplates that purposes commonly
regarded as charitable, such as the advancement of religion or education, the relief of
sickness or poverty, or the care of children in need, may not be for the public benefit, for
example if they are sought to be achieved in a particular manner. It therefore admits of
the possibility that the question whether a particular purpose which is within section
2(2) [now 3(1)] is charitable may require a weighing of the public benefits and dis-benefits
associated with its implementation.

In any event, there was never any such ‘presumption’ in relation to Lord Macnaghten’s
fourth category, where it must be shown how the proposed charity will actually
benefit the public. In such cases, the balance of benefit against detriment may be an
issue. Thus, in National Anti-Vivisection Society v IRC (1947), the House of Lords held it
imperative to decide whether the benefits to human beings of suppressing vivisection
outweighed the benefits to medical science and research that depended on it. (See
also Re Foveaux [1895] 2 Ch 501 where the court preferred to offer no opinion on the
public benefit of abolishing vivisection.)

All four heads, however, are subject to the requirement that it be shown that a section
of the public receives the ‘benefit’, and no ‘presumptions’ operate here. That said this
requirement seems to be non-existent when it comes to trusts for the relief of poverty.
A trust for one’s poor relations is valid (Re Scarisbrick (1951)) even though only a private
class in fact benefits. In Charity Commission for England and Wales v A-G [2012] UKUT B19
(TCC), the Upper Tribunal decided that the Charities Act 2006 (now 2011) had no effect
on this aspect of the law, so that trusts for the relief of poverty are still capable of being
charitable even though they are limited by relationships based on family, employment
or membership in an unincorporated association.
page 96 University of London  International Programmes

Concerning the advancement of religion, in Neville Estates Ltd v Madden (1962) the court
said it would assume that ‘some benefit accrues to the public from the attendance at
places of worship of persons who live in this world and mix with their fellow citizens.’
However, if there is no engagement with the public, for example in the case of a
contemplative order of nuns, there is no public benefit (Gilmour v Coats [1949] UKHL 1,
[1949] AC 426).

Previously, it was assumed that fee-charging schools and hospitals were charitable,
even though only those who can afford the fees can use them, so long as they are
not profit-distributing. The Upper Tribunal decided in Independent Schools Council v
Charity Commission (2011) that a trust that excludes the poor would lack the necessary
public benefit to be charitable. This is due to its restriction on public access and not
about the relief to poverty. Trusts for the education of children of one locality, such as
university scholarships for children of Yorkshire, are valid. However, trusts restricted to
children of a family or particular company are not, in particular where the ‘educational
trust’ really amounts to a fringe benefit for employees (Re Koettgen’s WT [1954] Ch 252;
IRC v Educational Grants Association Ltd [1967] Ch 993), although this requirement gives
rise to some difficult decisions for the courts (e.g. Oppenheim v Tobacco Securities Trust
Co Ltd [1951] AC 297).

Activity 9.7
Consider whether the following meet the ‘public benefit’ requirement, and then
read the relevant cases to see if the law agrees with you:
a. A gift to train spiritual mediums (Re Hummeltenberg [1923] 1 Ch 237).

b. A trust to campaign for the release of prisoners of conscience in foreign

countries (McGovern v A-G [1982] Ch 321).

c. A trust for the education of sons and daughters of coal miners (Oppenheim v
Tobacco Securities Trust Co Ltd [1951] AC 297).

No feedback provided.

9.4 Contaminating non-charitable elements

An otherwise valid charitable trust may fail because it contains one of a number of
‘contaminating’ elements.

Politics
Political purposes are not charitable.

Making or distributing profits

Charities may charge for the benefits they confer, as in the case of private hospitals
and non-state schools, and charities may engage in fundraising activities which
themselves make a profit, so long as the profit is turned to the charities’ purposes and
not distributed to private individuals.

Activity 9.8
Read National Anti-Vivisection Society v IRC [1948] AC 31 and McGovern v A-G [1982]
Ch 321.
a. What reasons do the courts give for denying charitable status to political
purposes?

b. Are such reasons persuasive?

c. In what sort of limited political activities are charities allowed to engage?

No feedback provided.
Equity and Trusts  9  Charitable purpose trusts page 97

9.5 Cy‑près
Cy-près is an Old French legal term meaning ‘as near as possible’. Where a valid
charitable purpose would fail because the means chosen by a testator for carrying it
out are impractical or impossible, the court will apply the judicially developed cy-près
doctrine, and more recently, ss.62 and 67 of the Charities Act 2011. These powers allow
the court to order the trust fund to be applied to a different but similar purpose.

It must be noted that the cy‑près doctrine is only available where the original trust
is for a valid charitable purpose. Do not make the common mistake of thinking that
where a purpose trust is invalid because it is not charitable (e.g. because it is for a
political purpose) the court may then apply the cy‑près doctrine and devote the funds
in question to some valid charitable purpose. In such cases there is no charitable trust
at all, and the funds will be held on resulting trust for the settlor.

The first issue to determine is whether the trust has truly failed, for it is only then that
cy‑près may be invoked. If failure has occurred, it is then necessary to decide when that
failure occurred. If it was an initial failure, the rights will go on resulting trust unless
the donor had a general, or paramount, charitable intention. In the case of subsequent
failure (i.e. once rights have been ‘dedicated to charity’), cy‑près is available regardless
of the presence or absence of any ‘general charitable intent’. Cy-près does not apply if
there was a specific gift over to take effect in the event of failure of the gift to charity.

Essential reading
¢¢ Charities Act 2011, ss.61, 62, 67.

¢¢ Re Lysaght [1966] Ch 191; Re Faraker [1912] 2 Ch 488; Re Harwood [1936] Ch 285; Re

Vernon’s Will Trusts [1972] Ch 300n; Re Finger’s Will Trusts [1972] Ch 286; Re Spence
[1979] Ch 483; Re ARMS (Multiple Sclerosis Research) Ltd [1997] 1 WLR 877.

Activity 9.9
Bill dies, leaving by his will funds on trust ‘for the Bermondsey Home for the Aged’.
Consider what should happen to the funds in the following situations.
a. There never existed a Bermondsey Home for the Aged or any similarly named
institution.

b. A Bermondsey Home for the Aged existed until 1991, but its work was taken over
by the local NHS hospital.

c. The Bermondsey Home for the Aged is the name of a charitable company which
no longer operates a home but provides care in the community for the elderly.

Read Re Faraker (1912), Re Vernon’s Will Trusts (1972), Re Finger’s Will Trusts (1972), Re
Spence (1979) and Re ARMS (Multiple Sclerosis Research) Ltd (1997) and Re Harwood
(1936) to see how the law deals with these cases.

Activity 9.10
Are the following trust purposes charitable under the present law, and if so, under
what head?
a. ‘To finance opposition to a proposed motorway through the Peak District which
I regard as an area of outstanding beauty.’

b. ‘To support the public school education of children of employees of the British
Steel Corporation, with preference to families in needy circumstances.’

c. ‘To support a Marxist association in its research designed to prove that God does
not exist and in campaigning against religion.’

d. ‘To the research unit of the Conservative Party for the advancement of learning
in economic policy and electoral reform.’

e. ‘To finance the provision of new squash courts at London University that are to
be open for use by members of the local police force as well as by members of
the university.’
page 98 University of London  International Programmes

f. ‘To provide refurbishment funds for the Our Lady of Forest Hill Hospital’ (a
private hospital that is run by a religious order and charges fees).

g. ‘At such times and in such manner as my trustees in their absolute discretion
think fit for the benefit of any of my relatives who, in the opinion of my trustees,
lack ordinary comforts.’

h. ‘To campaign for the abolition of torture, capital punishment and corporal
punishment.’

Activity 9.11

Core comprehension — CHARITY COMMISSION, ‘PUBLIC BENEFIT: THE PUBLIC BENEFIT

REQUIREMENT’
Read the following publication from the Charity Commission for England and Wales:
uu ‘Public benefit: Analysis of the law relating to public benefit’, which is freely
available online: [Link]
attachment_data/file/589796/Public_benefit_analysis_of_the_law.pdf
and

Available from the Charity Commission (original format) at:

[Link]

The Charities Act 2011 can be accessed at: [Link]/ukpga/2011/25/

contents
You can complete this learning activity by reading limited materials from the
identified sections.

Introduction
a. Identify the three main statutes which have contributed to the development of
the modern legal concept of charity.

b. Identify the four principle classifications of charities which would fall within
the legal meaning of ‘charity’ as adopted by Lord Macnaghten in Income Tax
Commissioner v Pemsel (1891).

c. In Attorney-General v National Provincial & Union Bank of England how did Lord
Cave clarify the difference between ‘a trust which is for a purpose beneficial to
the community’ and ‘a charitable trust’? Explain in fewer than 50 words, using
the example of ‘the provision of housing’.

The Charities Act 2011

d. Identify the statutory definition of ‘charity’ and ‘charitable purpose’. How has
the 2011 Act provided for continuity of the law on the meaning of ‘charity’,
‘charitable purpose’ and ‘public benefit’?

e. List the 13 descriptions of purposes in the Act.

f. Explain in 50 words or less why the ‘no presumption of public benefit’ approach
is necessary.

The two aspects of public benefit

g. Identify the two principal aspects of the concept of public benefit in the context
of charities.

h. Explain the legal requirements which have to be satisfied to meet each of the
two principal aspects.

Activity 9.12

Applied comprehension — Synge: the public benefit requirement and the poor
Using your online library resources, research the following journal article:
uu Synge, M. ‘Independent Schools Council v Charity Commission for England and Wales
[2011] UKUT 421 (TCC)’ (2012) 75(4) Modern Law Review 624–39.
Equity and Trusts  9  Charitable purpose trusts page 99

You can complete this learning activity by reading pp.624–29.

a. Why is ‘the public benefit requirement’ important and how is it defined?

b. What is meant by ‘public benefit in the first sense’?

c. With regards to the ‘second sense’ of public benefit how is ‘a sufficient class of
the public’ defined in Oppenheim v Tobacco Securities?

d. Which new interpretation is identified in the Independent Schools Council case?

e. Outline Synge’s criticism of the Tribunal’s interpretation of the University

College of Wales case.

A trust which excludes the poor cannot be a charity

f. Identify the two approaches of the Tribunal to the issue of whether a trust
excludes the poor.

g. In your own words, outline the core ambiguity of the law regarding the
terminology of the ‘poor’ (60 words maximum).

h. How has the problem of defining who is poor and who is not produced
an approach of considering issues of inclusion/exclusion in the context of
charitable educational institutions? Explain in fewer than 80 words.

i. Using a case example, explain why the exclusion of the poor might contravene
public policy as being capricious.

Activity 9.13

Applied comprehension – purpose trusts and the advancement of human rights

Using your online library resources, research the following judgment:
uu Human Dignity Trust v Charity Commission for England and Wales 2014 WL 8663481.
You can complete this learning activity by reading the following sections:
Introduction, Background, and Issues 3, 7 and 8.

Background
a. What are the purposes of the Human Dignity Trust?

b. Why did the Charity Commission refuse to enter the Human Dignity Trust on to
the Register of Charities?

c. On which grounds did the Human Dignity Trust appeal the Charity Commission’s
decision?

d. Paraphrase in fewer than 60 words the type of strategic litigation which is

central to the Human Dignity Trust’s current activities.

Issue 3: The scope of ‘human rights’ in s. 3(1)(h) of the Charities Act 2011
e. Why does the Tribunal reject the Charity Commission’s submission that the term
‘human rights’ has a particular meaning in charity law?

Issue 7: Are the Appellant’s purposes political?

f. In McGovern how was ‘a political purpose’ defined?

g. How did the HDT seek to distinguish its work from activities which would fall
under the ‘political purpose definition’? Give two examples.

h. On which grounds does the Tribunal distinguish the purposes of the Human
Dignity Trust from the categories of activity in McGovern?

Issue 8: Are the Appellant’s purposes for the public benefit?

i. Why are the authorities of Bowman, National Anti-Vivisection Society and
McGovern of limited usefulness in the determination of the public benefit
requirement?
page 100 University of London  International Programmes

j. Using the approach in the ISC case, which two questions did the Tribunal ask to
determine the public benefit requirement for the purpose of the advancement
of human rights?

k. Why is the conduct of the type of litigation which the Human Dignity Trust
supports of public benefit?

Self-assessment questions
1. Who, if anyone, is the beneficiary of a charitable trust to, say, ‘educate children
in the principles of Buddhism’?

2. Who, if anyone, can enforce a charitable trust?

3. What is cy-près?

4. When can cy-près be invoked?

5. Lord Macnaghten identified four categories of valid purposes for charitable

trusts. What are they?

6. Which of the 13 categories in the Charities Act 2011, s.3(1) were not previously
contained in Lord Macnaghten’s four categories?

7. In what circumstances can the provision of facilities for sport and recreation be
considered charitable?

8. What problem may arise with charitable trusts for disaster relief?

9. What might be the disadvantages of replacing tax relief for charities with direct
government grants?

Sample examination questions

Question 1 Answer both parts
a. On what basis does the law determine whether a proposed trust, which appears
to provide for a novel purpose (i.e. one not found to be either charitable or
uncharitable by a previous judicial decision) is charitable? Are any reforms of
the law indicated?

b. Siegfried died, leaving in his will ‘£50,000 to the Stepney Grammar School for
scholarships to deserving boys’ and ‘£50,000 for the work of “Stepney Food
for the Homeless’’’. Stepney Grammar School, although it previously had only
male pupils, is now mixed, and the current board of governors has advised the
trustees that they would not administer a scholarship scheme for boys only.
Stepney Food for the Homeless was a corporate charitable body which has since
been wound up. Its work, however, was continued and is now carried on by East
London Food for the Homeless. Advise the trustees.

Question 2 Consider four of the following six purposes, and discuss whether they
are charitable in English law, and if not, whether they ought to be:
a. To provide scholarships to assist students to learn ballroom dancing while at
university, with the condition that the trustees may, in applying up to 75 per
cent of the income of the trust, give preference to children of employees of
Capezio Ltd.

b. To campaign for a modern national health service in Erehwon, a country

plagued by poverty and disease, where there are strong religious objections to
medical procedures which involve any invasion of the body, such as surgery or
vaccination by syringe.

c. To support the work of Osiris, a cult whose way of life and philosophy is based on
an interpretation of ancient Egyptian supernatural beliefs, and whose doctrines
require adherents to cut themselves off entirely from their families and retire to
Osirian communities, where they make themselves available several times each
month to discuss their faith with members of the public.
Equity and Trusts  9  Charitable purpose trusts page 101

d. To provide funds to the Sisters of 2001, an association of Roman Catholic nuns

whose sole activity is to persuade the Vatican to allow the ordination of women
priests.

e. ‘£10 million to my trustees upon trust for the purpose of setting up an Olympic
Sporting Institute, for the better training of Great Britain’s most promising
young amateur athletes.’

f. ‘£1 million for the provision of condoms and other means of birth control to
students in schools in London.’

Question 3 What is the ‘public benefit’ requirement? How, if at all, does it vary
across the range of charitable purposes?
Question 4 Answer both parts:
a. ‘Despite the enactment of the Charities Act 2011, the present definition of
charity is still in need of reform because we must still rely on analogies that are
haphazard and capricious. The statutory list should exclude purposes that are
not genuinely altruistic, redistributive and socially useful.’
Discuss.

b. ‘It is of course unfortunate that the recognition of any trust as a valid charitable
trust should automatically confer fiscal privileges, for the question whether a
trust to further some purpose is so little likely to benefit the public that it ought
to be declared invalid and the question whether it is likely to confer such great
benefits on the public that it should enjoy fiscal immunity are really two quite
different questions’ (per Lord Cross in Dingle v Turner (1972)).
Discuss.

Advice on answering the questions

Question 1
a. An answer to this question will explain the ‘growth by analogy’ approach to novel
purposes seen in Scottish Burial Reform and Cremation Society v Glasgow Corp
(1968) and will compare it with the more broad-ranging ‘public benefit’ approach
Russell LJ in Incorporated Council of Law Reporting for England and Wales v A-G (1972).
Students should consider possible reforms such as the provision of a statutory
definition of charity, and consider both the advantages and disadvantages of
particular proposed reforms.

b. These are cases of impracticality or impossibility of performance of a charitable

purpose at the outset and the possible application of the cy-près doctrine. The
student should consider how the court would assess whether the apparent
intention of the testator to determine whether the gift of scholarships to boys is an
essential element of the gift, and whether the court could apply the funds cy-près
to allow the fund to be used for scholarships for girls as well as boys. Consideration
of Re Lysaght (1966) is essential. The second concerns the case of a charitable
institution whose work is continued by another. Normally, the funds will be
transferred to the continuing body, but this is not a case of cy-près – see Re Farakar
(1912).

Question 2
a. While learning ballroom dancing may not appear to be particularly educational,
such an activity could easily be regarded as ancillary to university education, and
therefore a charitable purpose. However, the preference may well render the trust
non-charitable (Re Koettgen’s WT (1954), IRC v Educational Grants Association Ltd
(1967)).

b. This would probably fail to be a valid charitable purpose, being tainted by politics
under McGovern v A-G (1982) principles, even though the provision of healthcare in
a poor country would count as charitable.

c. Whether Osiris’s work is charitable under the head of religion will depend upon
whether their way of life is ‘religious’, involving belief in a higher power, or merely
page 102 University of London  International Programmes

moral or philosophical (Re South Place Ethical Society (1980), R v Registrar-General

(1970)) and whether the extensive isolation of their members removes any public
benefit (Neville Estates v Madden (1962)).

d. While this purpose is situated within a religious context, it is not clear that
the activity is itself religious or a matter of church politics. As the Vatican is
an independent state, the trust may raise some McGovern v A-G (1982) issues
concerning politics. On the other hand, the purpose may be regarded as
educational in the sense that it provides for the discussion of Church doctrine,
although again the dissemination of research or activity which is organised to
promote one side of a debate would appear to fail as charitable research.

e. This concerns the apparent prohibition on trusts for sporting activity not
associated with traditional education (Re Nottage (1895), the Birchfield Harriers
decision by the Charities Commissioners (Annual Report, 1989); this might appear
unjustifiable if there is a public interest in Britain’s achieving international sporting
excellence; one might try to fit the ‘training of Britain’s most promising young
athletes’ under the education head, but this may seem somewhat strained given
that the proposed institute is independent of any regular educational institution;
the trust will not be validated under the Recreational Charities Act 1958, since this
institute will not serve social welfare by improving the conditions of life of the
athletes, and is not open to the public.

f. Concerns public benefit and possible public detriment; sex education might
be education, but the mere provision of means of birth control is not; it might
advance the health of students to the extent that unwanted pregnancies and
sexually transmitted diseases are avoided; however, some might regard it as
encouraging sex among the young, which is not universally regarded as beneficial.

Question 3 This question is straightforward, requiring the student to discuss how

the requirement applies to cases under each of the heads of charity, and in particular
a student must discuss how the requirement may appear artificial in the case of
religious charities and becomes problematic in the case of educational charities and
charities under the fourth head when cases concerning employee ‘fringe benefits’ and
fee-charging charities arise.

Question 4 Another straightforward question concerning the reform of charities, (a)

being directed to the definition of charities, (b) regarding the automatic fiscal benefits
accorded to charity. With regard to (a), criticisms of the current scope of charities
should be identified and explained, and proposals for reform discussed. In particular,
the difficulties in formulating a satisfactory statutory definition should be addressed,
as well as any problems that might arise (e.g. the rendering non-charitable of long-
standing charities). As to (b), Lord Cross’s suggestion that fiscal benefit and charitable
status be decoupled is a common one. A good answer would consider not only the
reasons why it has often been thought a good way forward, but how a new regime of
tax subsidy, or direct government grants might be structured, and the advantages and
possible drawbacks of particular reforms.
Equity and Trusts  9  Charitable purpose trusts page 103

Reflect and review

Look through the points listed below.

Are you ready to move on to the next chapter?

Ready to move on = I am satisfied that I have sufficient understanding of the principles

outlined in this chapter to enable me to go on to the next chapter.

Need to revise first = There are one or two areas I am unsure about and need to revise
before I go on to the next chapter.

Need to study again = I found many or all of the principles outlined in this chapter very
difficult and need to go over them again before I move on.

Tick a box for each topic.

Ready to Need to Need to
move on revise first study again

I can differentiate between purposes that are prima

facie charitable and those which are not.   

I can explain how a prima facie charitable object

might nevertheless be disqualified from charitable
status.   

I can explain what the ‘public benefit’ requirement

amounts to.   

I can explain the requirement that a valid charitable

trust must be exclusively charitable, and discuss the
typical sorts of factors which may prevent its being so.   

I can explain the operation of the cy-près doctrine.   

I can outline why particular areas of charities law

raised calls for reform, and the advantages and
disadvantages of the enacted reforms.   

If you ticked ‘need to revise first’, which sections of the chapter are you going to
revise?
Must Revision
revise done

9.1 Charitable status  

9.2 The meaning of ‘charity’  

9.3 The public benefit requirement  

9.4 Contaminating non-charitable elements  

9.5 Failure of charitable trusts: Cy‑près  

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Notes
10 Private purpose trusts

Contents
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 106

10.1 Objections to private purpose trusts . . . . . . . . . . . . . . . . . . 107

10.2 The ‘beneficiary principle’ . . . . . . . . . . . . . . . . . . . . . . . . 108

10.3 Trusts for persons limited by a purpose . . . . . . . . . . . . . . . . . 110

10.4 Anomalous valid private purpose trusts . . . . . . . . . . . . . . . . . 111

10.5 Departures from the beneficiary principle . . . . . . . . . . . . . . . 112

Reflect and review . . . . . . . . . . . . . . . . . . . . . . . . . . . 114

page 106 University of London  International Programmes

Introduction
In this chapter we look at the general prohibition upon settlors creating trusts for
non-charitable purposes. The law does not frown upon persons spending their money
as they see fit on a particular purpose, but finds it impossible to accommodate the
dedication of assets to the carrying out of certain purposes within the mechanism of
the trust, unless there is someone who can enforce the trust.

As we will see, attempts have been made to circumvent the rule, but a clear
understanding of its nature shows how these attempts fail to deliver the intended
result. The basic reason for this is simple: there is no one with a right to enforce the
trust against the trustee unless there are beneficiaries under the trust (or the trust
is for a charitable purpose enforced by the Charity Commissioners). A purpose can
neither hold any rights nor enforce them, so a private purpose trust cannot amount
to an enforceable trust for a purpose. The work in this chapter builds on that already
studied in Chapter 5 and you should reacquaint yourself with that material before
attempting this topic.

Essential reading
¢¢ Review Chapter 5: ‘Declarations of trust’.

¢¢ Penner, Chapter 9: ‘Trusts and purposes’, Sections ‘The beneficiary principle

and the invalidity of private purpose trusts’, ‘Anonymous valid purpose trusts’,
‘Powers for purposes’, ‘An enforcer principle?’ and ‘Valid trust for persons
“limited by a purpose”: Re Sanderson’s Trust’.

Learning outcomes
By the end of this chapter, and having completed the Essential readings and
activities, you should be able to:
uu state the main objections to private purpose trusts
uu discuss the interrelationship between the requirement of certainty of objects
and the beneficiary principle, and how the beneficiary principle can be seen as a
‘rights’ principle or an ‘enforcement’ principle
uu discuss cases in which apparent trusts for purposes were held valid and why this
does not upset the beneficiary principle
uu describe the few private purpose trusts that will nevertheless be upheld and
how they are enforced
uu explain why the trust validated in Re Denley’s Trust Deed [1969] 1 Ch 373 might be
seen as a problematic example of a private purpose trust.
Equity and Trusts  10  Private purpose trusts page 107

10.1 Objections to private purpose trusts

Private (i.e. non-charitable) purpose trusts pose difficulties for trusts law because
they do not satisfy some of the traditional trust law doctrines. As a result, a trust that
requires assets to be used for a designated purpose which is not exclusively charitable
may be void on one of a number of grounds.

10.1.1 Uncertainty of objects

A direction to carry out a purpose generally fails to indicate a clear class of individuals
who will benefit if it is carried out, and so it is impossible to identify a class of
beneficiaries: see e.g. Re Astor’s ST [1952] Ch 534; Morice v Bishop of Durham (1804) 9 Ves
399, 32 ER 656 (Grant MR); affirmed (1805), 10 Ves 522, 32 ER 947 (Eldon LC).

10.1.2 Excessive duration

The rule is generally taken to be that a trust fails if it may last beyond the various
perpetuity periods allowed by law. Trusts that require rights to be retained for a
period in excess of any valid perpetuity period will clearly infringe the rule, and since
purposes generally do not expire within a limited time, they tend to violate the rule:
see e.g. MacAulay v O’Donnell [1943] Ch 435. If that is correct, then the rule was applied
liberally in Mussett v Bingle [1876] WN 170, where a trust to erect a monument was held
not to be perpetuitous, even though there would have been some (remote) possibility
that it would take more than the allowable defined period of 21 years to carry out the
terms of the trust (see also Re Lipinski’s Will Trusts [1976] Ch 235). In practice, a settlor
could avoid infringing this rule by specifically stating a period for the operation of
the trust within the periods allowed, rather than relying upon the limitless ‘natural’
lifetime of the purpose. According to s.18 of the Perpetuities and Accumulations
Act 2009, ‘This Act does not affect the rule of law which limits the duration of non-
charitable purpose trusts.’ So the trust would have to comply with the common law
rule. However, such a solution to this perpetuity problem does not solve the more
fundamental issue of whether private purpose trusts per se are valid at all.

10.1.3 Lack of beneficiary

It is a core feature of the trust that it is enforced against the trustee by the
beneficiaries and by no one else (including the settlor). It would therefore seem to
follow that any effective trust must have beneficiaries, for only beneficiaries have the
ability to enforce it against the trustee. (In the case of charitable or public trusts, the
Charity Commission has this power.) This point has been dwelt upon in many cases:
see, for example, Re Astor’s ST [1952] Ch 534; Re Shaw [1957] 1 WLR 729; [1957] 1 All ER 745;
Re Endacott [1960] Ch 232; Leahy v A‑G for NSW [1959] UKPC 1, [1959] AC 457. In Re Denley’s
Trust Deed [1969] 1 Ch 373, this question was reduced by Goff J to one of ‘standing’,
holding that the prospect of obtaining some ‘factual benefit’ from the performance of
the trust was sufficient. Some think that this is too remote an interest: J.M. Evans (1969)
32 MLR 96. Re Endacott, a decision of the Court of Appeal, on the other hand, holds that
it must be possible to point to someone with an equitable interest, and it is difficult to
see how Re Endacott and Re Denley can be reconciled.

Activity 10.1
Make a short spoken statement outlining the reasons why it is difficult to reconcile
Re Endacott and Re Denley.
No feedback provided.

10.1.4 Excessive testamentary delegation

It is sometimes suggested that a testator creating a trust for a non‑charitable purpose
fails to exercise their testamentary power because they leave it to the trustee to
decide whether or not the rights will be so used: see Leahy v A‑G for NSW. This objection
is insubstantial on its own. If someone with sufficient standing to enforce the trust is
available, then the trustee will be under an enforceable duty to carry out the purpose,
page 108 University of London  International Programmes

whether or not to carry it out will not be a matter for their discretion. Thus this
objection begs the question: if purpose trusts are valid, then testamentary purpose
trusts will not represent a failure to exercise a testamentary power. If they are invalid,
then they will ipso facto be invalid testamentary dispositions. Nothing in particular to
do with testamentary dispositions affects the issue.

Clearly, objections 1 (uncertainty of objects) and 3 (lack of beneficiary) are the most
crucial, and it is upon these that we will spend most of our time in the remaining
sections of this chapter.

Activity 10.2
Devise two non-charitable purposes that you would like to see carried out, then list
the people or sorts of people who would most likely benefit in fact from their being
carried out. State whether those persons:
a. would be likely to take the effort to enforce the purpose against a holder of
funds for the purpose

b. should be allowed by law to enforce the purpose

c. should be allowed by law to come to an agreement with the holder of the

funds to use the funds for some other purpose or to divide the funds up among
themselves.

Summary
A private purpose trust may be void on a number of grounds. The two most important
grounds are (1) uncertainty of objects, as a purpose trust does not clearly indicate a
class of beneficiaries, and (2) the absence of any beneficiaries. An effective trust must
have at least one beneficiary, as only the beneficiaries have rights enforceable against
the trustee. Furthermore, excessive duration may cause a trust to fail, if the trust
purpose extends beyond the various perpetuity periods allowed by law.

10.2 The ‘beneficiary principle’

The ‘beneficiary principle’ states that a valid trust must be for the benefit of
ascertainable individuals (i.e. the trust must have beneficiaries). In consequence,
the courts will not normally enforce a trust to carry out a private purpose since the
benefits of carrying it out are not owed to any specific individuals. As Sir William Grant
MR said in Morice v Bishop of Durham (1804) 9 Ves 399 at 405–406, 32 ER 656 at 658:

There can be no trust, over the exercise of which this Court will not assume a control; for
an uncontrollable power of disposition would be ownership, and not trust … There must
be somebody, in whose favour the court can decree performance.

For comparison, consider the privity rule of contract law as it existed before the
statutory reforms in 1999. Only parties to a contract could enforce it. Even if some third
party might benefit from the performance of a contract, that alone gave the party no
interest under the contract, and thus no right to enforce it.

10.2.1 A ‘rights’ principle or an ‘enforcer’ principle?

The beneficiary principle can, from one perspective, be seen as a corollary of the
certainty of objects required for a valid declaration of trust. If a declaration of trust
expresses the trustee’s distributive duties in terms of a purpose, then clearly there are
no definite trust objects.

Further, since the execution of a trust must be under the control of the court:

it must be of such a nature, that it can be under that control; ...unless the subject and the
objects can be ascertained, upon principles, familiar in other cases, it must be decided,
that the court can neither reform maladministration, nor direct a due administration.
(Morice v Bishop of Durham (1805) per Lord Eldon LC).
Equity and Trusts  10  Private purpose trusts page 109

Compare the following statement by Roxburgh J in Re Astor’s ST (1952):

The typical case of a trust is one in which the legal owner of property is constrained by a
court of equity so to deal with it as to give effect to the equitable right of another. These
equitable rights have been hammered out in the process of litigation in which a claimant
on equitable grounds has successfully asserted rights against a legal owner or other
person in control of property. Prima facie, therefore, a trustee would not be expected to
be subject to an equitable obligation unless there was somebody who could enforce a
correlative equitable right, and the nature and extent of that obligation would be worked
out in proceedings for enforcement.

Together, these two passages express the beneficiary principle as a ‘rights’ principle: if
there is no one with rights against the trustee, then there is no one who can enforce
the trust and thus no trust. The problem with purpose trusts, on this view, is simply
that expressing a trust in terms of a purpose confers no rights upon anyone in equity.
Trusts (except for charitable trusts) are devices of private law after all, and for a private
law transaction of whatever kind to have any legal effect, it must actually confer rights
or powers, with corresponding duties or liabilities. Dedicating rights to a purpose does
neither.

However, some commentators have attempted to distinguish two aspects of the role
of beneficiaries: first, they have equitable interests in the trust assets, and second,
they have standing to enforce the trust. Of course, where a trust is for ascertainable
beneficiaries, they should, for the most part, be the proper enforcers of their own
rights. But why should a court of equity not validate a trust for beneficiaries where the
settlor has nominated someone else to serve as the enforcer of those beneficiaries’
rights? If this seems workable, why should a court of equity not validate a trust for
a private, non-charitable purpose, where the settlor has nominated an enforcer,
who can take the trustees to court if they fail to carry it out? On this reasoning, the
‘beneficiary principle’ should be regarded as an ‘enforcer principle’, and would state
that a trust is only invalid where there is no one with standing to enforce the trust,
either beneficiaries or nominated enforcers.

The problem raised by such an approach becomes apparent upon a little thought, so
long as you keep in mind that trusts are arrangements of private law. The state has
no interest in seeing trusts for private purposes enforced. Whether enforcement,
or something else, occurs following the validation of these trusts by the court is a
matter of the private rights of individuals. Remember that beneficiaries under a trust
have no duty to enforce their rights against the trustee. The state does not require
them to see that the trustee gives them any proper distributions under the terms of
the trust. Indeed, beneficiaries can release them, or can assign them to the trustee if
they are so minded (although the trustee will have the burden of showing that such
an assignment was fairly and freely entered into, as discussed in Chapter 18). This
ethos, that it is up to individuals themselves to enforce their private rights, must apply
equally to the person nominated ‘enforcer’ of the purpose trust. If that person chooses
not to enforce the trust against the trustee, or release their rights of enforcement,
the state will not step in. And if that person comes to an agreement with the trustee
to use the rights in other ways, or divide them up between themselves, this would be
perfectly lawful, for there is no one else whose rights have been infringed.

If this is true, then how is this a trust to carry out a purpose, rather than just a trust
with a particular distribution of rights and duties among individuals? In some
jurisdictions where legislation has been enacted to permit non-charitable purpose
trusts, the enforcer is under a statutory duty to enforce the trust (e.g. Cayman Islands
Trust Law (2011 Revision), s.101; The Trusts (Guernsey) Law, 2007, s.12; Trusts (Jersey) Law
1984, s.13). Such enforcers can be regarded as quasi-public officials whose duties are
imposed by public law. However, in the absence of such legislation, as in England and
Wales, enforcers of private purpose trusts would have no similar public law duties.
page 110 University of London  International Programmes

Activity 10.3
a. What does it mean to say that the beneficiary principle is a ‘rights’ principle
rather than an ‘enforcer’ principle?

b. What flaw does there seem to be in the ‘enforcer’ principle in the case of private
purpose trusts?

No feedback provided.

10.2.2 Powers for purposes

While the orthodox principles of trust law seem to invalidate trusts to carry out private
purposes, the grant of a power to a trustee to use trust funds to carry out a purpose
appears to be perfectly valid. There is no similar problem of enforcement with respect
to powers, for there is no duty to carry out powers and therefore no problem of
nonfeasance. Regarding misfeasance, those who would take in default of appointment
have the power to bring the trustees to account if they purport to exercise the power
in a way which is outside its intended purpose. The court will not, however, validate
invalid trusts for purpose by construing them as valid powers for purposes: Re Shaw.

Summary
Private purpose trusts are invalid under English law, but different explanations of
why this is so have been offered. The essential problem appears to lie in the fact that
unless there are beneficiaries to enforce the trust, no-one is bound to perform it. The
naming of an enforcer to enforce a purpose trust against the trustee does not solve
the problem, for the enforcer can treat their enforcement rights as merely rights they
hold for their own benefit, so that they can depart from enforcing the trust and may
release their rights or bargain with the trustee for a division of the trust rights. In short,
there is no duty to enforce the trust purpose that can bind an enforcer. Powers to carry
out purposes are perfectly valid. Here there is no duty on the trustee to exercise the
power to carry out the purpose, so no concern to find a mechanism to enforce that
duty against the trustee.

Reflection point
Is there a case for making private purpose trusts valid in English law?

10.3 Trusts for persons limited by a purpose

There is a class of trusts which are often mistaken for true purpose trusts by the
unwary. These are trusts like Re Sanderson’s Trust (1857) K & J 497, 69 ER 1206, where the
beneficiary’s interest under the trust is determined by the expense of a certain benefit
for him. So for example, trusts for the maintenance, advancement, or education of
sons or daughters were popular in the 19th century. While these trusts are created to
fulfil a purpose (e.g. to maintain Emily, advance Frederick or educate Rita), they are not
purpose trusts without beneficiaries. Emily has a claim against the trustees for such
amounts as are needed for her maintenance, Fred for as much as is needed to, say, buy
a commission in the army and Rita for as much as is needed to pay for her education.
They are, in other words, trusts for people, in which the subject-matter of the trust
for the individual beneficiary is not determined by a straightforward allocation of a
share of income or capital, but by the cost or expense of a particular benefit for the
beneficiary. For this reason, the trust may exhaust all the funds set aside for it, or may
fail to exhaust those funds.

It is often difficult to distinguish a Re Sanderson-type trust from a trust where the

intention of the settlor is to give an entire fund to a beneficiary, but the settlor
expresses ‘education’ or some other expense as the motive for the gift. A mere
expression of motive cannot limit a gift, and so in these latter cases, if the fund
provided for the beneficiary is not exhausted by the expressed expense, this is of
Equity and Trusts  10  Private purpose trusts page 111

no matter, for the whole fund was held for the beneficiary from the outset. Where,
however, there is a true Re Sanderson-type trust, the beneficiary only has a right under
the trust commensurate with the named expense, and any remaining funds must
be disposed of by way of a gift over, or will otherwise go on resulting trust. Re Abbott
[1900] 2 Ch 326 and Re Andrew [1905] 2 Ch 48 provide an interesting contrast between
the two types of case. Both concerned funds raised by public subscription, to provide
for two disabled ladies and a cleric’s children, respectively. See also Re Osoba [1978] 1
WLR 791 varied [1979] 1 WLR 247 (CA).

Activity 10.4
a. What sorts of purposes typically defined the extent of a beneficiary’s interest
under a Re Sanderson type of trust?

b. Explain why the Re Sanderson type of trust is often difficult to distinguish from
a trust of the whole of a fund with an expressed motive for the gift, and the
practical difference between the two kinds of trust.

10.4 Anomalous valid private purpose trusts

A number of purpose trusts have been upheld, despite infringing the beneficiary
principle, and in Re Dean (1889) 41 Ch D 552, despite also infringing the rule against
perpetuities. The categories, which are not to be extended (Re Endacott; Re Astor), are:

uu reasonable provision for tombs and monuments (but not something more general,
such as ‘some useful memorial to myself’, as in Re Endacott itself)

uu the care of specific animals (Re Dean)

uu the saying of masses (religious services in the Catholic Church) to the extent that
these are not charitable in advancement of religion (Bourne v Keane [1919] AC 815;
Re Hetherington [1990] Ch 1).

The furtherance of fox‑hunting was included in the list in Re Thompson [1934] Ch 342,
but fox-hunting is now illegal in England and Wales: Hunting Act 2004. It should be
noted that no real challenge to the validity of the trust was made in that case.

10.4.1 The Pettingall order and ‘trusts of imperfect obligation’

Where an anomalous trust of one of these kinds is upheld, the court will make a Pettingall
order (Pettingall v Pettingall (1842) 11 LJ Ch 176) under which the trustee or executor of
the will undertakes to carry out the purpose, and the court grants leave to those persons
who would receive the funds if the gift had been declared invalid to approach the court if
the trustee or executor fails to carry out the purpose or misuses the funds. The Pettingall
order is a judicial attempt to deal with the fact that these are ‘trusts of imperfect
obligation’, which are so called because there are no beneficiaries and therefore no
persons to whom any genuine duties are owed to carry out the trust.

Self-assessment questions
1. What anomalous purpose trusts are allowed by law?

2. How does the court provide for their enforcement?

3. What is testamentary delegation?

4. What is the beneficiary principle?

5. Who, if anyone, has a duty to enforce a private purposes trust?

6. What is nonfeasance?

7. What is a true Re Sanderson-type trust?

page 112 University of London  International Programmes

10.5 Departures from the beneficiary principle

10.5.1 Re Denley’s Trust Deed (1969)

In Re Denley, Goff J upheld a trust under which title to land was held on trust for the
purpose of providing a recreation ground for the employees of a particular company.
Goff J regarded the employees as persons so directly benefitted by the purpose that (1)
the purpose was not of such an abstract kind as to fall foul of the beneficiary principle,
and (2) that the employees had standing to enforce the purpose against the trustees.

Subsequent commentary has tended to treat the case as merely one of a particular
kind of discretionary trust (Re Grant’s Will Trusts [1980] 1 WLR 360) or as a trust for
persons, with the purpose being treated merely as a superadded direction or motive
for the gift (Re Lipinski’s Will Trusts [1976] Ch 235). In other words, the case appears to
have been read so as to deny that it represents a departure from the beneficiary
principle. Go to your study pack and
read ‘From obligation to
In any case, the class of beneficiaries must, it is assumed, comply with the certainty property, and back again?
requirements laid down in McPhail v Doulton [1970] UKHL 1, [1971] AC 424. R v District The future of the non-
Auditor ex p West Yorkshire MCC [1986] RVR 24, noted by Harpum [1986] CLJ 391, is charitable purpose trust’ by P.
of relevance on this point. There, a trust for purposes benefiting the residents of Matthews.
West Yorkshire was invalid both because the class of ‘indirect’ beneficiaries was not
sufficiently ascertainable, and more simply, it was a private purpose trust.

Activity 10.5
Consider whether it is really necessary for all non-charitable trusts to have a
beneficiary and, if so, why?
Is the relevant objection adequately met by the presence of persons benefiting
from the carrying out of the purpose as in Re Denley?
Should the law in this area be reformed?

Essential reading
¢¢ Re Astor’s ST [1952] Ch 534; Leahy v A-G New South Wales [1959] UKPC 1, [1959] AC
457; Re Endacott [1960] Ch 232 (CA); Re Denley’s Trust Deed [1969] 1 Ch 373.

Further reading
¢¢ Re Sanderson’s Trust (1857) 3 K&J 497, 69 ER 1206; Re Lipinski’s WT [1976] Ch 235;
Re Osoba [1978] 1 WLR 791; varied [1979] 1 WLR 247 (CA).

Sample examination questions

Question 1 ‘No principle has perhaps greater sanction of authority behind it than
the general proposition that a trust by English law, not being a charitable trust, in
order to be effective, must have ascertained beneficiaries’ (per Lord Evershed MR in
Re Endacott (1960)).
How accurately does this statement represent the present law relating to the
dedication of property to private purposes?
Question 2 The following provisions are found in Samantha’s will:
a. ‘£20,000 on trust to care for my two favourite horses, Stan and Oliver, for the
rest of their lives but for no longer than a period of 21 years.’

b. ‘£100,000 on trust to provide a stain-glassed window in my honour in my parish

church of St. Cuthberts, depicting me as Mary Magdelene.’

c. ‘£50,000 for the organisation and funding of an annual fête at Oak Farm school
for 20 years following my death’ (assume this is not a charitable purpose).

Advise Samantha’s executor.

Equity and Trusts  10  Private purpose trusts page 113

Advice on answering the questions

Question 1 This is a general survey question of this area of law, focusing on the correct
interpretation of the beneficiary principle. A good answer will consider whether a
beneficial interest under a trust is required to enforce a trust, or whether an ‘enforcer’
of some kind is sufficient. The view of judges in the leading cases, Re Astor, Re Leahy and
Re Endacott, should be discussed. Re Denley, as a possible departure from the principle,
and its interpretation in subsequent cases, should receive attention, and the existence
of anomalous testamentary purpose trusts should be briefly mentioned, along with
the oft-expressed judicial view that the categories of valid testamentary purpose
trusts are not to be expanded.

Question 2

a. This is valid as an anomalous private purpose trust (Re Dean) properly limited to a
valid perpetuity period.

b. This is very similar to the facts in Re Endacott and is therefore almost certainly
invalid as was the trust in that case.

c. The facts here are similar but not identical to those in Re Denley; although no
specific class of factual beneficiaries is named, the students of the school might be
interpreted to be an appropriate and ascertainable class. On this reading, Re Denley
and subsequent cases need to be discussed. However, notice that the word ‘trust’
is not employed in this provision; it may merely give a power to spend the money
in this way, in which case the power would be valid (Re Shaw).

Regarding both (b) and (c), you might briefly advise the executor that the current
limitations upon purpose trust remain to an extent controversial, and if the views
of a commentator such as Hayton were to persuade a court, an action seeking a
declaration that either or both were valid might be appropriate.
page 114 University of London  International Programmes

Reflect and review

Look through the points listed below.

Are you ready to move on to the next chapter?

Ready to move on = I am satisfied that I have sufficient understanding of the principles

outlined in this chapter to enable me to go on to the next chapter.

Need to revise first = There are one or two areas I am unsure about and need to revise
before I go on to the next chapter.

Need to study again = I found many or all of the principles outlined in this chapter very
difficult and need to go over them again before I move on.

Tick a box for each topic.

Ready to Need to Need to
move on revise first study again

I can state the main objections to private purpose

trusts.   

I can discuss the interrelationship between the

requirement of certainty of objects and the
beneficiary principle, and how the beneficiary
principle can be seen as a ‘rights’ principle and/or an
‘enforcement’ principle.   

I can discuss cases in which apparent trusts for

purposes were held valid and why this does not
upset the beneficiary principle.   

I can describe the few private purpose trusts that will

nevertheless be upheld and how they are enforced.   

I can explain why the trust validated in Re Denley is a

problematic example of a private purpose trust.   

If you ticked ‘need to revise first’, which sections of the chapter are you going to
revise?
Must Revision
revise done

10.1 Objections to private purpose trusts  

10.2 The ‘beneficiary principle’  

10.3 Trusts for persons limited by a purpose  

10.4 Anomalous valid private purpose trusts  

10.5 Departures from the beneficiary principle  

11 Unincorporated associations

Contents
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 116

11.1 Transfers to unincorporated associations . . . . . . . . . . . . . . . . 117

11.2 The distribution of rights upon dissolution . . . . . . . . . . . . . . . 119

Reflect and review . . . . . . . . . . . . . . . . . . . . . . . . . . . 123

page 116 University of London  International Programmes

Introduction
An unincorporated association is a group of people who act together to achieve
some purpose, often social, such as bridge clubs and student law societies. How do
such associations hold assets? How, for example, does a student law society hold
the funds which it acquires through the collection of dues or the profits from the
events it organises? As the society is not incorporated, it has no legal personality
in itself and so cannot hold rights in the way that a company can. These are the
questions this chapter addresses. The material covered in this chapter is somewhat
marginal to the law of trusts. Once properly understood, the problem of how rights
are held by unincorporated associations can be seen typically to employ trusts in a
straightforward fashion, and at first glance this rather simple use of the trust does not
deserve a chapter in its own right. But the importance of the material in this chapter
lies in the somewhat tortured history of the case law, by which several mistaken
approaches to the question created a series of misunderstandings about trusts.

Clarifying these, so that such mistakes do not cloud your understanding of the law of
trusts, is the primary purpose of looking at this material in some detail. Two topics in
particular must be addressed:

uu the proper construction of gifts and other transfers to an unincorporated

association, and

uu the destination of such assets when the association dissolves.

Although the two are inextricably linked, it is not unusual to find them dealt with
separately in the standard textbooks.

Essential reading
¢¢ Review Chapter 10 of the module guide: ‘Private purpose trusts’.

¢¢ Penner, Chapter 9: ‘Trusts and purposes’, Sections ‘Gifts to unincorporated

associations’ to the end of the chapter.

Learning outcomes
By the end of this chapter, and having completed the Essential readings and
activities, you should be able to:
uu explain why gifts and other transfers to unincorporated associations give rise to
problems of construction for the courts
uu describe the different constructions a court might place on such a gift or other
transfer
uu explain the contract-holding theory and why holding rights that way does not
offend the rule against private purpose trusts
uu explain what happens to rights given to an unincorporated association when the
association is dissolved.
Equity and Trusts  11  Unincorporated associations page 117

11.1 Transfers to unincorporated associations

Although the unincorporated association itself is not a legal person, and so has no
capacity to hold rights, people nevertheless insist on trying to transfer assets to it,
either by way of gift or pursuant to some contract which they believe they have with
the association. It is then for the courts to try to make sense of what is, as a matter of
law, a nonsensical act. Although courts could just say that such a transfer was void, as
they would, for example, say of a transfer to a tree or to my pet cat, they find a way
to validate the transfer. Their method is to say that even though the association itself
has no legal personality, its members and officers do. The transfer is therefore to be
construed as one to the members or officers of the association. The question then is
the capacity in which those members or officers hold the rights received.

11.1.1 A transfer to members

Traditionally, the courts took the simplest approach, and viewed such transfers as
made to all the members personally (either directly as co-owners of the assets or
through the medium of a trust, the treasurer or other officers of the club acting
as trustee for the members). This interpretation would allow each member of the
association to claim their share of the right, and use the money as they wished, and
this would normally be contrary to the intentions of the donor.

11.1.2 A purpose trust

Probably in view of the last consideration, courts occasionally regarded the transfer
as made to the members or officers of the association on trust, not for the members
themselves but for the purposes of the association. This would prevent individuals
from claiming and taking away their individual shares, for they would not be
beneficiaries under a purpose trust. But this approach is disastrous for the transferor,
because it would generally invalidate the transfer as a private purpose trust, unless the
purposes were exclusively charitable (see Leahy v AG for New South Wales [1959] UKPC 1,
[1959] AC 457).

11.1.3 Contract-holding theories

A third, more recent, approach is to resort to contractual notions rather than the
device of the trust. It takes advantage of the fact that unincorporated associations
always proceed on the basis of explicit or implicit understandings between the
members, which give rise to duties between them. As these understandings and
obligations are mutual and consensual, in law they are contractual relations, even
if informal. Of course, some clubs are very formal about their understandings. They
produce constitutions and rules and organise themselves into committees and so
on. But even the most informal association operates by contractual obligations,
however informal they are, if it is an association at all. Recognising the existence of
these contractual obligations expressed in the club rules, where possible, gifts and
other transfers to such associations are construed as being transfers to the members,
but subject to their contractual obligations inter se (‘between themselves’) to use
the assets to promote the purposes of the association: Re Recher’s WT [1972] Ch 526;
Re Lipinski’s WT [1976] Ch 235. The reason why this construction works is that it uses a
contract to control the expenditure of the fund rather than the terms of a trust, so that
the carrying out of the purpose is enforced by way of compliance with a contract, not
by way of a private purpose trust. There are, however, two variants of this ‘contract-
holding theory’: the ‘bare trust/contractual mandate’ solution and the ‘purely
contractual’ approach.

A bare trust/contractual mandate solution

This solution recognises the contractual aspect of right-holding by unincorporated
associations, but also recognises that the contractual obligations of the members
between themselves almost always work in combination with a trust, as follows. Recall
the discussion of bare trusts in 3.3 of this guide. In such cases, the trustees hold the
page 118 University of London  International Programmes

rights to the order of the beneficiaries. At any one time, however, the trustees may
be given orders as to how to deal with the rights. These orders, sometimes called
mandates, allow the trustees to deal with the trust rights without acting in breach
of trust. Without such a mandate, they would be acting in breach of trust. The way
in which unincorporated associations take advantage of this is to control the giving
of mandates to the trustees of the association by way of contract. The rights of the
association are held on trust by one or two members of the association (usually the
treasurer and another officer) for all the members in equal shares. The association’s
rules provide the mandates authorising the trustees to use the rights, perhaps
directly but more likely by providing the procedures for making decisions, whether by
committee, or by unanimous vote, etc. In this way, the rights are held for the purposes
to which the members want them put, not under a purpose trust, but as the result of
their contract governing the way their own rights, which are held under a bare trust,
are dealt with.

A purely contractual approach

This ‘bare trust/contractual mandate’ interpretation of the situation is not the only
one that might work, but it is the best. We can compare it to the ‘purely contractual
approach’. Under this, the members all individually hold the rights as co-owners, so there
is no trust, but they are bound by their contract between themselves to deal with the
rights as decided by the association rules, etc. There are two problems with this solution.
The first is that co-ownership without a trust is wholly impractical when there are more
than three or four members. They cannot all be signatories of the association’s bank
account or parties to the lease or licence of its premises. To function properly, one or two
members of the association will have to hold rights in trust for the others.

The second problem is making sense of gifts (or other transfers) to the association.
A person cannot give rights ‘subject to contract’. You cannot give a friend rights to
be held on the terms of a contract with another party, for a contract is a personal
obligation between individuals, and you are not privy to their contract. In ‘A
problem in the construction of gifts to unincorporated associations’ [1995] Conv 302,
Matthews suggested that the members of an association could avoid this problem
by incorporating in their rules a provision that any gifts or contractual payments
(for example, money received for tickets to a dance that the association sponsors)
received are taken by members individually but subject to their contract. While this
could work – on this basis the members bind themselves by contract to treat transfers
to them in a certain way – it is fanciful to think that many associations have such rules.

Rather, the court reasons using the bare trust/contractual mandates approach as
follows: when a donor makes a gift to an association, they make it on trust by making
an addition to the current trust by which the trustees hold other rights so given.
Anyone can settle rights by transferring them to trustees on trust to hold them in the
same way as they hold other trust rights. This happens, for example, when employers
and employees make regular contributions to a pension fund. The trust upon which
the additional funds are held is determined by reference to the already existing trust.
This is how such gifts are treated as ‘accretion to the funds’ of the association (Re
Recher’s WT), with the court never bothering to enquire as to whether the rules of the
fund provide for Matthews’ purely contractual approach.

11.1.4 The construction of transfers to political parties

To achieve the bare trust/contractual mandate solution, the courts have been
prepared to ignore words which in other contexts would suggest that a true purpose
trust is intended (e.g. ‘solely’ in Re Lipinski’s WT), although they will not construe a
gift as one to the members where the members do not have complete control of
the rules of the association: Re Grant’s WT [1980] 1 WLR 360. This case concerned a
local Labour Party constituency association, and the court held that it did not fulfil
the requirements of an unincorporated association, but the reasoning is doubtful.
In Conservative and Unionist Central Office v Burrell [1981] ECWA Civ 2, [1982] 1 WLR
Equity and Trusts  11  Unincorporated associations page 119

522, the Court of Appeal held that political parties were ‘political movements’, not
unincorporated associations, and so the bare trust/contractual mandate solution
could not work, since movements do not have the membership of an association
(although it is not clear why political parties cannot be associations with a definite
membership even if they are political). Instead, the court explained a gift to the
political party in Burrell as given under an agency arrangement, with the treasurer to
use the funds for the purposes of the party as the donor’s agent. This construction is
unsatisfactory in several ways, failing in particular to account for testamentary gifts
(i.e. gifts made in a will) for when a will comes into operation the testator is dead, and
a dead person cannot be a principal for any agent.

Self-assessment questions
1. Why does an attempted transfer of rights to an unincorporated association give
rise to problems?

2. Why is a transfer to the members as co-owners outright likely to defeat the

donor’s purpose?

3. Why are such transfers not construed as transfers on trust for the purposes of
the association?

4. What are the contractual obligations of the members? Give some examples.

5. What is a contract-holding theory by members of an unincorporated

association?

6. What are the two different versions of the contract holding theory, and which is
preferable?

7. How have the courts construed attempted transfers to political parties? What
difficulties arise with this construction?

Activities 11.1 and 11.2

Read Re Lipinski’s WT [1976] Ch 235 and answer the following questions:
11.1 What was the expressed purpose of the gift? On your reading, would you
say that the settlor intended the money to be used solely for a particular
purpose?

11.2 On what basis or bases did Oliver J hold the gift valid?

No feedback provided.

11.2 The distribution of rights upon dissolution

The correct assessment of how assets were received and held by an unincorporated
association will also explain what is to happen to any funds that remain when the
association dissolves. While that is obviously correct, too often the case law decisions
regarding the distribution of assets on dissolution have proceeded on the basis that
the association itself held those assets in ways that would have been untenable, if that
basis had been examined in terms of how gifts or other transfers were validly made to
the association.

For example, on dissolution the court might unwittingly proceed on the basis that
the funds were given and held on private purpose trusts, which would have made
those gifts invalid at the outset, given that private purpose trusts are invalid. Indeed,
the distinction in the law between the cases dealing with the validity of gifts to
unincorporated associations and the law found in cases dealing with the dissolution
of associations is such that the two lines of cases are basically irreconcilable. It has not
helped matters that these two topics were generally treated separately in texts and
treatises. It was only with the recent development (from Re Recher’s WT) of the bare
trust/contractual mandate theory that a sensible reconciliation has begun. For that
reason, cases on the dissolution of unincorporated associations decided earlier must
be read with care.
page 120 University of London  International Programmes

11.2.1 How were the rights originally received?

The key question to ask here is how the rights were received, for that will tell you
how they were held to the time of dissolution. The question to then ask is how, if
at all, dissolution has changed that entitlement. If the association’s purposes were
charitable, and the rights were held by its officers/members on trust for charitable
purposes, the rights will be applied cy-près to a similar purpose (see Re Vernon’s WT
and Re Finger’s WT, discussed in 9.5). In the unlikely event that the rights were held
on trust for valid noncharitable purposes (recall that there are some valid non-
charitable purposes, discussed in 10.4), then the trust should not fail, as the winding
up of the association will not in itself be a winding up of the purpose. Unfortunately,
most decisions in which the court takes the view that the rights were held on
purpose trusts regard the purpose, quite wrongly of course, as the purposes of the
association, a purpose which then fails because of the dissolution of the association.
On this interpretation, a resulting trust should arise in favour of those who originally
contributed the right. Where the rights were received under either version of the
contract-holding theory elaborated above, they will simply be distributed among
the membership existing at the time of dissolution, because under the contract-
holding theories the members of the association hold the rights outright. When the
association dissolves, their contractual obligation to use the rights in a particular way
simply disappears, so that they can distribute the rights to themselves in equal shares,
or do anything else with them that they want.

11.2.2 Some wrongly decided cases

Re Printers and Transferrers Amalgamated Trades Protection Society [1899] 2 Ch 184 and
Re Hobourn Aero Components Ltd’s Air Raid Distress Fund [1946] Ch 194 concerned rights
collected to provide benefits to members of employees’ associations. In both cases,
when the associations dissolved, the court held that there was a resulting trust of
the remaining rights in favour of the members in proportion to their contributions.
As this was a resulting trust, the court must have regarded the funds as held upon
purpose trusts which failed when the associations dissolved. Such private purpose
trusts, however, are invalid. On the contract holding theory, the result would be
essentially the same: on dissolution, the rights would be distributed to the members,
and presumably their individual shares would be determined by the terms of the
association, even implicit terms, and shares proportionate to contributions might well
have best reflected their mutual understanding.

Cunnack v Edwards [1896] 2 Ch 679 (CA) concerned an association that provided

benefits to the widows of deceased members, paid from a fund to which the members
contributed. Upon dissolution, the court reasoned that the members had received
all they had contracted for (i.e. the provision of pensions for widows), so the surplus
went to the Crown as bona vacantia (ownerless goods). As with the preceding two
cases, the only possible basis for this finding was that the rights were devoted to a
private purpose trust, to provide pensions for members’ widows, which failed upon
dissolution. Yet the application of a kind of ‘contract theory’ to private purpose trusts
(that donors donate to the purpose trust thereby contracting with the trustees to
obtain a particular personal benefit out of the purpose), makes a nonsense of the idea
that the money is held genuinely on purpose trust. This is an anomalous case, and it is
difficult to put any reasonable construction on it.

Reflection point
Cases are sometimes wrongly decided. Why do wrong decisions occur? How much
reliance can we place on judges’ decisions? How does this relate to the doctrine of
precedent?

11.2.3 Modern dissolution cases

Re West Sussex Constabulary’s Widows, Children and Benevolent (1930) Fund Trusts [1971]
Ch 1 and Re Bucks Constabulary Widows’ and Orphans’ Fund Friendly Society (No 2) [1979]
Equity and Trusts  11  Unincorporated associations page 121

1 WLR 936 both addressed the dissolution of associations of members of particular

police forces in England. Re West Sussex basically followed the earlier flawed cases,
even drawing in part upon Cunnack v Edwards. Re Bucks, by contrast, applied the
modern contract-holding theory and held that on dissolution, the rights were held by
the members of the association outright.

In Hanchett-Stamford v A-G [2008] EWHC 330 (Ch), [2009] Ch 173, Lewison J carefully
reviewed and followed Re Bucks with one important exception. In Re Bucks, Walton
J suggested (as obiter dictum) that an association’s assets would become ownerless
if the association ceased to exist and therefore become bona vacantia. In Hanchett-
Stamford, an association (the Performing and Captive Animal Defence League)
had ceased to exist when there was only one member left (since a single person
cannot associate or make contracts with himself). She was absolutely entitled to the
association’s assets for her own benefit (which she then donated to the Born Free
Foundation, a registered charity).

11.2.4 A restitutionary solution in certain cases

It has been noted that while the contract-holding theories do provide for a workable
legal construction for rights given to unincorporated associations, such a construction
does not ensure that donors who donate money to an association for the use of the
association in its activities will get what they want, for the association may always
change its rules or goals (as a contractual relationship it can always be varied by
consent of the parties) and thus devote its funds to other activities. The members
might even decide to disband the association and divide its remaining funds among
themselves. In light of this, Swadling has proposed that a disgruntled donor could claim
that their gift was made on condition that it be used for a specified purpose (Swadling,
W.J. ‘Property: general principles’ in Burrows, A. (ed.), 2013). This is not a purpose trust,
but a conditional gift recognised at common law. If this construction can be put on the
gift, and the gift is not devoted to the purpose, the donor can bring a personal action
under the law of unjust enrichment for restitution of an equivalent sum.

Self-assessment questions
1. What does it mean to say that an unincorporated association is dissolved?

2. How do the members’ contractual relations change upon dissolution?

3. Under the contract-holding theory, how does the dissolution of an

unincorporated association affect the members’ rights in rights given to the
association?

4. How is the law concerning conditional gifts relevant to the dissolution of an

unincorporated association?

Essential reading
¢¢ Re West Sussex Constabulary’s Widows, Children and Benevolent (1930) Fund Trusts
[1971] Ch 1; Re Bucks Constabulary Widows’ and Orphans’ Fund Friendly Society (No
2) [1979] 1 WLR 936; Hanchett-Stamford v A-G [2008] EWHC 330 (Ch), [2009] Ch 173.

Further reading
¢¢ Swadling, W.J. ‘Property: general principles’ in Burrows, A. (ed.) English private
law. (Oxford University Press, 2013) third edition [ISBN 9780199661770].

Activity 11.3
Read Re West Sussex (1971), Re Bucks (1979) and Hanchett-Stamford (2008).
Explain how these decisions differ in their approach to the way that rights are ‘held’
by unincorporated associations, and which view is better.
page 122 University of London  International Programmes

Sample examination questions

Question 1 How are rights purportedly given to unincorporated associations held,
and what rules govern the distribution of such rights upon dissolution?
Question 2 In 1989, the 20 members of the Bloomsbury Rock-climbing Club each
transferred £2,000 on trust to their trustee-treasurer to hold as the ‘Accident
Fund’ pursuant to a resolution of their annual meeting. The minutes of the
meeting disclose that the fund was to be invested, and money be paid out to a
member or his or her surviving spouse on a certain payment scale should the
member be injured or die as a result of a rock-climbing accident. Since that time,
further contributions to the fund have been received from new members upon
joining, and other funds have been added as a result of various fund-raising
events. The payment scale has been updated from time to time, and one payment
of £25,000 has been paid to the widower of a member who died climbing, and
further amounts totalling £25,000 have been paid to members following non-
fatal accidents. By January, 2008, the club’s membership had dwindled to three
members, and two of these died in a rock-climbing accident, leaving only the
treasurer trustee. Following payments to the surviving spouses, the funds stand at
£43,000. Advise the trustee-treasurer as to how he should distribute these funds.

Advice on answering the questions

Question 1 A good answer will distinguish this situation from that of a purpose
trust, and will explain the contract-holding theory and its consequences for the
distribution of funds on dissolution. The prior law concerning the construction of gifts
to unincorporated associations, in particular that the gift is a gift to members to take
as co-owners outright, or is a gift on purpose trust, should be canvassed to show its
weaknesses, and the two versions of the contract-holding theory should be explained.

Similarly, with the distribution of rights on dissolution, a good answer would consider
the earlier law leading up to Cunnack v Edwards, and then go on to consider the more
recent developments in Re West Sussex, Re Bucks and Hanchett-Stamford, explaining
why Re Bucks and Hanchett-Stamford express the better view. It would explain how
the law concerning construction of gifts and other transfers to unincorporated
associations must match up with the law concerning the distribution of rights upon
their dissolution.

Question 2 According to the modern law which embraces the contract-holding

theory, there is no room for a purpose trust analysis here, although past case-law
which seems to indicate this as the best analysis might be considered and shown to be
flawed. A purpose trust construction is possible, although it would not seem that the
setting up of this fund should be invalidated given the decision in Re Lipinski.

The issue is clearly that, as the sole remaining member of the club, the treasurer-
trustee now holds the rights outright on contract-holding principles: Hanchett-
Stamford. This may appear unjust, although it must be remembered that such a
result flows from the law, and it is not clear that any past member has any right to
complain, for a contractual provision dealing with the situation might always have
been made. Indeed, the first piece of advice to the treasurer-trustee is that the rules of
the association, or common understandings as expressed in various minutes, should
be examined to see whether any guidance on this situation can be given. If not, it
would appear that the funds belong to the treasurer-trustee. The bona vacantia result
as applied in Cunnack v Edwards has little to commend it. Lastly, the restitutionary
approach might be considered. If the various contributions can be construed as
conditional gifts (which appears most strained in the case of funds raised at events),
then the treasurer-trustee might be bound to make restitution of the funds to past
contributors on some sort of pro-rata basis.
Equity and Trusts  11  Unincorporated associations page 123

Reflect and review

Look through the points listed below.

Are you ready to move on to the next chapter?

Ready to move on = I am satisfied that I have sufficient understanding of the principles

outlined in this chapter to enable me to go on to the next chapter.

Need to revise first = There are one or two areas I am unsure about and need to revise
before I go on to the next chapter.

Need to study again = I found many or all of the principles outlined in this chapter very
difficult and need to go over them again before I move on.

Tick a box for each topic.

Ready to Need to Need to
move on revise first study again

I can explain why gifts and other transfers to

unincorporated associations give rise to problems
of construction for the courts.   

I can describe the different constructions a court

might place on such a gift or other transfer.   

I can explain the contract-holding theory of right-

holding and why holding rights that way does not
offend the rule against private purpose trusts.   

I can explain what happens to rights given to an

unincorporated association when the association
is dissolved.   

If you ticked ‘need to revise first’, which sections of the chapter are you going to
revise?
Must Revision
revise done

11.1 Transfers to unincorporated associations  

11.2 The distribution of rights upon dissolution  

page 124 University of London  International Programmes

Notes
12 Resulting trusts

Contents
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 126

12.1 When do resulting trusts arise? . . . . . . . . . . . . . . . . . . . . . 127

12.2 Why do resulting trusts arise? . . . . . . . . . . . . . . . . . . . . . . 131

Reflect and review . . . . . . . . . . . . . . . . . . . . . . . . . . . 136

page 126 University of London International Programmes

Introduction
This chapter is concerned with resulting trusts. You were introduced to them in
Chapter 3, where a brief overview of the different types of trust was given. Broadly
speaking, a resulting trust is one in which the assets are held by a transferee on trust
for the person who made or caused the initial transfer. The word ‘resulting’ comes
from the Latin resalire, meaning ‘to jump back’. It should, however, be noted that
nothing literally ‘jumps back’. The assets that A previously had are now vested in B,
and the rights A has as the beneficiary of a trust are rights A did not have prior to the
transfer. It is essential to bear this point in mind in any discussion of resulting trusts,
especially the so-called ‘automatic’ resulting trust.

It is also vital to any understanding of resulting trusts to appreciate how they overlap
with the other categories of trust. We also touched upon this point in Chapter 3. A
trust might be resulting because of proof by evidence that A conveyed the assets to
B, declaring that they be held on trust for A. Such a trust would be traditionally called
express, not resulting, even though the trust arises in favour of the transferor. So too
with money mistakenly paid by A to B. If B holds the mistaken payment on trust for
A, as was the case in Chase Manhattan v Israel-British Bank, that could be viewed as
resulting (because it arises in favour of the transferor) and constructive (in that it
arises for a reason other than a declaration of trust).

The great controversy in this subject is why resulting trusts arise, a controversy not
helped by the overlap just mentioned. Some say it is because the law reacts to the
presumed (as opposed to proven) intention of the transferor. Others say it is because
the law responds to either proof or presumption that the transferor did not intend
to benefit the transferee. Others still say that there is no unitary explanation, and
that there are in fact at least two distinct reasons why resulting trusts arise. Before
examining these theories, we need to ask when resulting trusts arise, for only then can
we start to ask why.

Essential reading
¢¢ Penner, Chapter 5: ‘Resulting trusts’.

Learning outcomes
By the end of this chapter, and having completed the Essential readings and
activities, you should be able to:
uu state the circumstances in which resulting trusts arise
uu outline the competing theories of resulting trusts
uu judge which theory best fits the incidence of resulting trusts.
Equity and Trusts  12  Resulting trusts page 127

12.1 When do resulting trusts arise?

12.1.1 Express, constructive, implied, and resulting trusts

We have already seen how resulting trusts do not fit into a logical series with express,
implied, and constructive trusts, for the word resulting tells us only who is the object
of the trust and not – as the labels ‘express’, ‘constructive’ and ‘implied’ do – why the
trust arises. Because these labels answer different questions, overlaps are inevitable. In
order to avoid such overlaps, the courts have pragmatically limited resulting trusts to
three main situations:

uu the ‘voluntary conveyance’ resulting trust

uu the ‘purchase money’ resulting trust

uu the ‘failed trust’ resulting trust.

1. The voluntary conveyance resulting trust

If A makes an inter vivos, gratuitous transfer of assets to B, and there is no evidence

to prove why the transfer was made, a presumption of resulting trust arises. Unless
that presumption is rebutted, B will hold those assets on resulting trust for A. The
presumption does not apply to testamentary transfers, for it is clear that testators
intend to give their estates away. There are three situations in which the presumption
of resulting trust does not apply to transfers inter vivos from A to B:

uu If A is B’s father or husband, or standing in loco parentis (in the place of a father) to
B, then a ‘presumption of advancement’ applies instead and B will keep the rights
as a gift unless A can rebut that presumption.

uu If the right transferred is an interest in the family home of A and B, then it is

presumed that ‘equity follows the law’: Stack v Dowden [2007] UKHL 17, [2007] 2 AC
432; Jones v Kernott [2011] UKSC 53, [2011] 3 WLR 1121. Normally, a resulting trust will
not arise, but a ‘common intention constructive trust’ is possible.

uu If the right in question is an interest in land, then s.60(3) of the LPA 1925 probably
precludes the presumption of resulting trust.

It was accepted obiter by the Court of Appeal in Lohia v Lohia [2001] EWCA Civ 1691 and
Ali v Khan [2002] EWCA Civ 974 that the presumption of resulting trust was abolished in
the case of a gratuitous transfer of land by s.60(3) of the LPA 1925, which states:

In a voluntary conveyance a resulting trust for the grantor shall not be implied merely by
reason that the property is not expressed to be conveyed for the use or benefit of the grantee.

The presumption of resulting trust had its origins in the resulting use. In the early 16th
century, a transfer of land for no consideration would give rise to a resulting use for
the transferor. The Statute of Uses 1535 eliminated most uses by ‘executing the use’
and causing legal title to be transferred to the beneficiary of the use. It would execute
a resulting use, thereby returning legal title to the transferor and nullifying the
transaction, unless the land was transferred ‘unto and to the use of’ the transferee. The
Statute of Uses 1535 was repealed by the LPA 1925 and there is an argument that s.60(3)
was included merely as a word-saving provision,† without any substantive effect on the †
Word-saving
modern presumption of resulting trust. provision: a statutory
provision which is
2. The purchase money resulting trust
intended to reduce
A presumption of resulting trust also arises if A inter vivos pays C to transfer assets to the length of written
B, unless the presumption of advancement applies, the rights are the family home instruments.
of A and B, or the presumption is rebutted by evidence. This is no different from the
‘voluntary conveyance’ resulting trust, discussed above, except that s.60(3) of the LPA
1925 is not relevant. This is not surprising since transfers and purchases are simply two
different ways to make gifts. If, for example, you wanted to buy a book from an online
bookseller to give to your friend, you could have it delivered either directly to your
friend or to yourself to then give to your friend. The transaction is essentially the same
in both cases: your friend will receive a book at your expense.
page 128 University of London  International Programmes

Apart from the effect of s.60(3), should it make any difference whether an apparent
gift is made by transfer or purchase? In Dummer v Pitcher (1833) 2 My & K 262, 39 ER
944, a husband transferred some of his stock to himself and his wife as joint tenants.
He later purchased more of the same stock for both of them as joint tenants. The
presumption of advancement applied to both the transfer and the purchase, but Lord
Brougham LC said (at 273) that ‘the presumption of intention to give is considerably
stronger’ for the transfer.

A purchase money resulting trust can also arise where A and B inter vivos pay C to
convey assets to B. In such a case, B will hold those assets on trust for A and B as tenants
in common in shares proportionate to their contribution. For example, in The Venture
[1908] P 218 (CA), two brothers contributed funds towards the purchase of a ship. Title
was conveyed to one brother alone, and after he died, his widow claimed to be entitled
to the ship outright as the beneficiary of his will. She alleged that her brother-in-law
had merely loaned his brother the contribution to the purchase price. The contributing
brother alleged that he had put the money up on the basis of a partnership. Neither
party, however, adduced any evidence in support of their respective allegations. The
Court of Appeal held that on proof by evidence of the contribution to the purchase
price, a presumption of resulting trust arose in favour of the contributing brother. It
was then for the widow to adduce evidence to the contrary, which she had not done.
The widow was therefore a trustee for herself and the contributing brother in shares
proportionate to the contributions of the two brothers.

3. The failed trust resulting trust

A resulting trust can arise when an express trust fails to dispose of all of its subject
matter. This failure can happen either because the express trust is invalid completely
or partially (e.g. for lack of certainty of objects) or because it is fully performed but
fails to exhaust the subject matter (e.g. an express trust for B for life with no provision
for the remainder). If the failed express trust was self-declared (i.e. with the settlor
acting as trustee), nothing further happens: the settlor/trustee merely retains title
to the subject matter free of the trust. If the settlor transferred the subject matter to
different trustees to hold on an express trust that fails, then normally they will hold
the subject matter on resulting trust for the settlor.

Thus, in Morice v Bishop of Durham (1804) 9 Ves 399, 32 ER 656; affirmed (1805) 10 Ves
522, 32 ER 947 (discussed in Chapter 10), a testatrix left her residuary estate to the
Bishop ‘on trust for such objects of benevolence and liberality as the bishop in his
absolute discretion might choose’. The trust failed for want of objects and the court
held that ‘the property that is the subject of the trust is undisposed of, and the benefit
of such trust must result to whom the law gives the ownership in default of disposition
by the former owner.’

This type of resulting trust is not based on a presumption. The transfer on trust
normally provides sufficient evidence that the trustees were not intended to take the
subject matter of the failed express trust for their own benefit. So, there is no need for
the presumption of resulting trust and no room for the presumption of advancement.
It arises equally in cases of testamentary or inter vivos transfers for the purpose of
creating express trusts.

It should not be assumed that a resulting trust is the ‘automatic’ consequence of every
failure of an express trust. A resulting trust always arises when the intended express
trust is void (e.g. for lack of beneficiaries, as in Vandervell v IRC [1966] UKHL 3, [1967]
2 AC 2 91, discussed below). Those facts show that the trustee was intended to hold
the subject matter in trust for others and not for their own benefit. However, when
the express trust is fully performed leaving a surplus in the trustee’s hands, it may
be possible to prove by admissible evidence that the settlor intended the trustee to
keep the surplus as a gift. This occurred in several cases in which there had been a
close relationship between the settlor and trustee. Their relationship was one of the
facts that led the courts to conclude that a gift of the surplus was intended: see Cook
v Hutchinson (1836) 1 Keen 42, 48 ER 222 (father and son), Croome v Croome (1888) 59 LT
582 (CA) (brothers) and Re Foord [1922] 2 Ch 519 (brother and sister).
Equity and Trusts  12  Resulting trusts page 129

12.1.2 Rebuttal
As we have seen, the first presumption of resulting trust yields to contrary evidence.
Thus, if evidence is adduced in the case of a voluntary conveyance which convinces the
court that A intended B to take the assets outright (either as a gift or loan), no resulting
trust will arise. The presumption that triggers the trust is then said to have been
rebutted. Thus, in Fowkes v Pascoe (1875) LR 10 Ch App 343 an old lady paid for some shares
to be transferred into the names of herself and the son of her daughter-in-law’s second
marriage, whom she treated as a grandchild and who lived in her house. The question
arose on the lady’s death whether he held the shares for her on trust or whether, as the
survivor of joint tenants, they were his absolutely. At first instance, Sir George Jessel MR
applied the presumption and held that there was a trust for the old lady’s estate. The
Court of Appeal reversed his decision. James LJ asked whether it was possible to reconcile
the theory that she put money into the names of herself and the surrogate grandson
as trustee upon trust for herself. What object could there conceivably be in doing this?
Mellish LJ said that the circumstances showed that it was utterly impossible to come to
any other conclusion than that this was intended as a gift, a species of outright transfer.

Another case in the same vein is Goodman v Gallant [1985] EWCA Civ 15, [1986] 1 All ER
311 (which was a case concerning the family home, but before Stack v Dowden, when
the presumption of resulting trust could still apply). A man and a woman contributed
unequally to the purchase of a title to land, the woman contributing 75 per cent, the
man only 25 per cent. The title was conveyed to them as ‘joint tenants at law and
equity’. When they later split up, the woman claimed to be entitled to the benefit of a
purchase money resulting trust interest of 75 per cent. The Court of Appeal held that
there could be no room for the operation of a presumption when the conveyance
contained a declaration of trust.

More recently, in Westdeutchse Landesbank Girozentrale v Islington LBC [1996] UKHL 12,
[1996] AC 699, a bank paid £2.5 million to a local authority under an ultra vires loan
contract. The invalidity of the contract meant that the courts treated the payment as
gratuitous. The bank argued for a resulting trust, but the House of Lords held that any
presumption of trust in favour of the bank was rebutted by proof by evidence that the
money was paid under a supposed obligation to make the local authority outright
owner. This showed that the bank intended the local authority (albeit mistakenly) to
take outright, rather than as trustee for the bank.

The presumption of advancement

We have seen that the presumption of resulting trust does not arise when B receives
an apparent gift (by transfer or purchase) from B’s husband or father or from someone
standing in loco parentis to B, in which case a presumption of advancement applies
instead. The presumption of advancement was so called because fathers used to be
under a moral duty to advance their children in life, and when a child received rights
gratuitously from their father, it was assumed that the father had acted to fulfil his
moral duty. It is still called the presumption of advancement even though that moral
duty no longer applies to fathers (and never applied between husbands and wives).

The presumption may someday be abolished by s.199(1) of the Equality Act 2010:

The presumption of advancement (by which, for example, a husband is presumed to be

making a gift to his wife if he transfers property to her, or purchases property in her name)
is abolished.

That section has not yet been proclaimed in force. You should ask whether the only
effect of this provision, if it ever comes into force, will be to widen the situations in
which a presumption of resulting trust will be made. Read the analysis by J. Glister in
‘Section 199 of the Equality Act 2010’ (2010) 73 MLR 807.

The presumption of advancement now applies equally to fathers and mothers in

Australia: Nelson v Nelson [1995] HCA 25, 184 CLR 538. In Canada, mothers and fathers are
treated equally, but the presumption of advancement applies only in favour of infant
children. Apparent gifts to adult children attract the presumption of resulting trust:
Pecore v Pecore 2007 SCC 17, [2007] 1 SCR 795, 279 DLR (4th) 513.
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Like the presumption of resulting trust, the presumption of advancement can also be
rebutted, although now by evidence showing that the transferor did not intend the
transfer to be outright. An example is Warren v Gurney [1944] 2 All ER 472 (CA), where
a father paid for a title to land to be conveyed to his daughter, but retained the title
deeds in his possession. On his death, the question arose whether the daughter held
her title absolutely or on trust for her father’s estate. The fact that this was a purchase
by a father in the name of his daughter raised a presumption of advancement. The
Court of Appeal, however, held that the father’s retention of the title deeds showed
that he did not intend the daughter to take the title outright, in which case the
presumption of advancement was rebutted and a resulting trust arose.

A presumption is an inference that a fact exists. Upon proof by evidence of the

existence of relevant facts (e.g. that A transferred company shares to B gratuitously
and is not B’s father or husband), the court assumes that an additional fact exists that
will have legal significance. There is an ongoing debate about what is being presumed
when the presumptions of resulting trust or advancement apply. William Swadling has
argued that the presumption of advancement is not a true presumption, but simply
a situation in which the presumption of resulting trust does not apply: ‘Explaining
resulting trusts’ (2008) 124 LQR 72. He regards the presumption of resulting trust as a
presumption that the transferor or purchaser declared a trust for themself.

In contrast, Robert Chambers has argued that the presumption of advancement is a

true presumption that the transferor or purchaser intended to make a gift: ‘Is there
a presumption of resulting trust?’ in Mitchell, C. (ed.), 2010, p.267. He said that the
presumption of resulting trust is not a true presumption, but simply a situation in
which the presumption of advancement does not apply, in which case, a resulting
trust arises because there is no explanation for the transaction.

When one recalls that what is needed to rebut the presumption of resulting trust is
evidence that the transferor intended the transferee to take the rights outright and not
as trustee, it becomes obvious that the failed trust resulting trust is not normally capable
of rebuttal. The reason is that the settlor’s declaration of express trust provides evidence
that the settlor did not intend the trustees to take absolutely for their own benefit.
Another way of putting this is to say that there is nothing ambiguous about the transfer
in such a case. No facts are missing, and so there is nothing to presume. The leading case
on this type of resulting trust is Vandervell v IRC [1966] UKHL 3, [1967] 2 AC 291. The facts
are complex, but essentially mirror Morice v Bishop of Durham (1804) in that there was a
transfer of rights ‘on trust’, but with no beneficiaries identified as objects of that trust.
Vandervell, the effective grantor of the right concerned (an option to purchase) argued
that there could be no resulting trust in his favour because he had shown that for tax
purposes he did not want to be the beneficiary of a trust of that right. However, Lord
Wilberforce held that this was irrelevant, for the resulting trust here was not triggered by
the operation of a presumption (at 329):

The transaction has been investigated on the evidence of the settlor and his agent and
the facts have been found. There is no need, or room, as I see it, to invoke a presumption.
The conclusion, on the facts as found, is simply that the option was vested in the trustee
company as a trustee on trusts, not defined at the time, possibly to be defined later.

It is noteworthy that both Lord Reid and Lord Donovan dissented over the issue of
what Mr Vandervell actually intended. They both believed that he had intended to
grant the rights outright and not on trust.

Because the presumptions of resulting trust and advancement have no role to play in
the ‘failed trust’ cases, Megarry J, in the subsequent case of Re Vandervell’s Trusts (No
2) [1974] Ch 269, christened this type of resulting trust ‘automatic’, which in truth is
nothing more than saying that it arose for a reason other than a declaration of trust. In
this context, ‘automatic’ is simply a synonym for ‘constructive’. It does not mean that
a resulting trust always arises in this situation. As discussed above, if an express trust is
fully performed leaving a surplus, the trustee may be entitled to keep the surplus as a
gift if the admissible evidence establishes that is what the settlor intended.
Equity and Trusts  12  Resulting trusts page 131

Self-assessment questions
1. Define ‘resulting trust’.

2. What is the ‘presumption of advancement’?

3. When does a presumption become necessary?

Summary
There are three types of resulting trust:

1. The ‘voluntary conveyance’ resulting trust.

2. The ‘purchase money’ resulting trust.

3. The ‘failed trust’ resulting trust.

The presumption of resulting trust can arise when A gratuitously transfers assets
to B or pays for assets to be transferred to B, and there is no evidence to prove
what A intended. If A is B’s father or husband or stands in loco parentis to B, then the
presumption of advancement applies instead of the presumption of resulting trust.
Either presumption can be rebutted by admissible evidence showing what A intended.
There is an ongoing debate about what is being presumed.

The presumptions do not apply to the ‘failed trust’ cases, since the circumstances of
the transfer to the trustees to hold in trust provide evidence of the settlor’s intention.
Exceptionally, in cases where the express trust was fully performed and the settlor and
trustee were in a close relationship, the trustee may be permitted to keep the surplus
as a gift if it can be proved that this was what the settlor intended.

Activity 12.1
Read McGrath v Wallis [1995] 3 FCR 661, and explain the decision.

12.2 Why do resulting trusts arise?

Now that we know when resulting trusts arise, we can begin to address the most
contentious issue in this area of law: why do they arise? There are several views, which
we will now outline. Each is supported by eminent judges and academics and the
question is still unresolved. It may help you to take a position on this question which
you can defend in the examination. It will not adversely affect your mark if you adopt
one with which the examiners may disagree.

The essential questions to consider are (a) what are the facts (established either by
evidence or presumption) that will give rise to a resulting trust in each of the three
different traditional categories, and (b) are these facts the same or different in each of
those categories?

According to Lord Browne-Wilkinson in Westdeutsche [1996] AC 699, all resulting trusts

arise because of a presumption that the transferor intended to create a trust for
himself. He said (at 708):

Under existing law a resulting trust arises in two sets of circumstances: (A) where A
makes a voluntary payment to B or pays (wholly or in part) for the purchase of property
which is vested either in B alone or in the joint names of A and B, there is a presumption
that A did not intend to make a gift to B: the money or property is held on trust for A
(if he is the sole provider of the money) or in the case of a joint purchase by A and B in
shares proportionate to their contributions. It is important to stress that this is only a
presumption, which presumption is easily rebutted either by the counter-presumption
of advancement or by direct evidence of A’s intention to make an outright transfer… (B)
Where A transfers property to B on express trusts, but the trusts declared do not exhaust
the whole beneficial interest… 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
page 132 University of London  International Programmes
gives effect to his presumed intention. Megarry J. in Re Vandervell’s Trusts (No. 2) suggests
that a resulting trust of type (B) does not depend on intention but operates automatically.
I am not convinced that this is right. If the settlor has expressly, or by necessary
implication, abandoned any beneficial interest in the trust property, there is in my view no
resulting trust: the undisposed-of equitable interest vests in the Crown as bona vacantia…

So far as the first type of resulting trust is concerned, his lordship’s view makes some
sense if there is a gap in the evidence and therefore some room for a presumption
to operate. It does, however, require one qualification. As we have seen, a mere
intention to create a trust normally has no effect. The intention must be manifested,
or expressed. Since presumptions are merely creatures of the law of procedure,
facts proved by presumption can logically have no greater force than facts proved
by evidence. As a consequence, Lord Browne-Wilkinson might have spoken of a
presumption of ‘manifested intention’ or presumption of ‘declaration of trust’, so
making the ‘presumed resulting trust’ a species of express trust. Exactly why the law
should find a declaration of trust proved by presumption in such circumstances can
only be explained by reference to legal history, and in the attempt of holders of titles
to land to escape the burdens of feudalism.

Where Lord Browne-Wilkinson’s analysis breaks down, however, is in thinking that a

presumption can operate with regard to the ‘failed trust’ resulting trust. However, it
cannot explain a case like Vandervell, where it is absolutely clear that Mr Vandervell
did not want to create a trust for himself. It also fails to explain numerous cases in the
other categories where the evidence is clear that the transferor or purchaser did not
make a declaration of trust nor intended to create a trust. For example, in Brown v
Brown (1993) 31 NSWLR 582 (CA), a mother’s house was sold and the proceeds used to
purchase a house for her sons. The presumption of advancement applied (to mothers
in Australia), but was rebutted because she never thought about the consequences
of the transaction and therefore never formed the intention to make a gift. She never
formed an intention to create a trust for herself and certainly never declared a trust,
but the resulting trust responded to evidence that no gift was intended.

According to Lord Millett, all resulting trusts respond to the absence of intention to
benefit the recipient. He has expressed this view writing extra-judicially in ‘Restitution
and constructive trusts’ (1998) 114 LQR 399. It also provided the basis for the Privy
Council’s advice in Air Jamaica Ltd v Charlton [1999] UKPC 20, [1999] 1 WLR 1399. In that
case, a pension fund trust failed because it violated the common law rule against
perpetuities. Clause 4 of the trust deed stated: ‘No moneys which at any time have
been contributed by the Company under the terms hereof shall in any circumstances
be repayable to the Company.’ It was argued that this prevented a resulting trust in
favour of the company, but this was rejected by the Privy Council. Lord Millett said (at
[45]):

In Re ABC Television Ltd Pension Scheme, unreported, 22nd May 1973, Foster J. held that a
clause similar to clause 4 of the present Trust Deed ‘negatives the possibility of implying a
resulting trust’. This is wrong in principle. Like a constructive trust, a resulting trust arises
by operation of law, although unlike a constructive trust it gives effect to intention. But
it arises whether or not the transferor intended to retain a beneficial interest – he almost
always does not – since it responds to the absence of any intention on his part to pass
a beneficial interest to the recipient. It may arise even where the transferor positively
wished to part with the beneficial interest, as in Vandervell v Inland Revenue Commissioners
[1967] 2 AC 291.

According to Swadling, the fact proved by presumption is a declaration of trust:

‘Explaining resulting trusts’ (2008) 124 LQR 72. This can be supported both by legal
history and logic in the case of the ‘voluntary conveyance’ and ‘purchase money’
resulting trusts. As with Lord Browne-Wilkinson’s view, the difficulty it encounters is
trying to explain the numerous cases in which resulting trusts have arisen even though
it was clear that the transferor or purchaser never declared a trust. Swadling does not
address the ‘failed trust’ cases.

According to Chambers, the presumptions are no longer important except in cases

where relevant evidence is inadmissible because it would reveal an illegal purpose
Equity and Trusts  12  Resulting trusts page 133

(Mitchell, C. (ed), 2010, p.267). In almost every case, there is sufficient circumstantial
evidence to allow a court to decide what the parties intended. For example, in Lohia
v Lohia [2001] EWCA Civ 1691, land was transferred from a father and son into the
father’s name alone. Many years later, after the father was dead, the son claimed
that the land was held on resulting trust for the father’s estate and the son in equal
shares, and testified that the transfer was a forgery. The trial judge rejected the son’s
evidence of forgery and decided that the transfer must have been part of some
family arrangement in which the father was intended to receive title for his own
benefit. In other words, very slender circumstantial evidence was sufficient to rebut
the presumption of resulting trust (and it was unnecessary to decide whether the
presumption was displaced by s.60(3) of the LPA 1925). The outcome would have been
the same regardless of which presumption (if any) applied at the start.

The real worry used to be the cases involving illegal purposes: if evidence of intention
is inadmissible, the presumptions can lead to arbitrary (and therefore unjust)
outcomes. In Tinsley v Milligan [1993] UKHL 3, [1994] 1 AC 340, a same-sex couple
purchased a home together in Tinsley’s name. They then pretended to the Department
of Social Services that Milligan was only a lodger and fraudulently obtained housing
benefits to pay her rent. The House of Lords held that evidence of Milligan’s
contribution to the purchase price gave rise to a presumption of resulting trust in
her favour which could not be rebutted because evidence of their intention was
inadmissible due to illegality. This was the just result in the particular case, since this
is what the parties intended, both were complicit in the fraud, and there is no reason
why one fraudster should obtain a windfall at the other’s expense. However, the result
would have been different if the presumption of advancement had applied (if Milligan
had been Tinsley’s husband or father). There is no reason why this additional fact,
which has nothing to do with the illegality at the heart of the case, should reverse
the outcome. As Peter Birks wrote in ‘Recovering value transferred under an illegal
contract’ (2000) 1 Theoretical Inquiries in Law 155 at 166:

Where the litigation concerns the assertion of proprietary rights the courts thus seem
prepared to watch the parties play an amoral game of cards, in which the party who turns
over the illegality card loses…

Tinsley v Milligan was overruled by the Supreme Court in Patel v Mirza [2016] UKSC 42,
[2016] 3 WLR 399, in which the claimant had paid £620,000 to the defendant under
an agreement to use insider information to bet on the price of shares in Royal Bank
of Scotland. The betting did not happen and the claimant sued to recover the money.
Their agreement was illegal under s.52 of the Criminal Justice Act 1993, since it was a
conspiracy to commit an offence of insider dealing. The Supreme Court held that there
had been a failure of consideration and so the claimant was entitled to recover the
money as restitution of unjust enrichment, despite having to rely on evidence of his
own illegality. While Patel v Mirza did not involve a trust, it applies with equal force to
trusts.

Patel v Mirza is a controversial decision, but it does sort out the difficulty created
by the inability to lead the evidence needed to rebut the presumption of resulting
trust or advancement. The presumptions should no longer lead to unfair results, and
they should rarely be needed since courts are now willing to decide what the parties
probably intended based on minimal circumstantial evidence: Lohia v Lohia [2001]
EWCA Civ 1691.

Chambers believes that all resulting trusts arise for the same reason, because the
recipient has obtained assets that were not intended to be retained for her or his own
benefit. In most cases, this is established by evidence, but the presumption of resulting
trust or advancement may have a role to play when there is no evidence of what was
intended. In many cases, the transferor or purchaser will intend to create a trust for
themselves, and if expressed in the proper form, this should give rise to an express
trust. However, evidence of an absence of intention to give is sufficient to give rise to a
resulting trust: Hodgson v Marks [1971] EWCA Civ 8, [1971] Ch 892; Vandervell v IRC [1966]
UKHL 3, [1967] 2 AC 291; Air Jamaica Ltd v Charlton [1999] UKPC 20, [1999] 1 WLR 1399. This is
similar to Lord Millett’s view. Where they differ is that Chambers believes that resulting
page 134 University of London  International Programmes

trusts should have a wider role and apply in cases of mistake (like Chase Manhattan Bank
NA v Israel-British Bank (London) Ltd [1981] Ch 105), while Lord Millett believes that resulting
trusts should be limited to cases where there was a complete absence of intention to
benefit the recipient. A mistaken intention to confer a benefit is in Lord Millett’s view
sufficient to preclude a resulting trust.

Activities 12.2–12.4
12.2 Read Hodgson v Marks (1971). What does this case tell you about the reason
why resulting trusts arise?

12.3 Read Vandervell v IRC (1966). What is the difference between the approach
of the Court of Appeal and the House of Lords to the resulting trust of the
option to purchase?

12.4 How might Lord Browne-Wilkinson argue that the failed trust resulting
trust can be explained as arising to reflect the presumed intention of the
transferor? How might Lord Millett respond to that argument?

Essential reading
¢¢ Re Foord [1922] 2 Ch 519; Vandervell v IRC [1966] UKHL 3, [1967] 2 AC 291; Hodgson v
Marks [1971] EWCA Civ 8, [1971] Ch 892; Re Vandervell’s Trusts (No 2) [1974] EWCA Civ
7, [1974] Ch 269; Lohia v Lohia [2001] 2 WTLR 101; affirmed [2001] EWCA Civ 1691.

Further reading
¢¢ Dyer v Dyer [1788] EWHC Exch J8, 2 Cox 92, 30 ER 42; Fowkes v Pascoe (1875) LR
10 Ch App 343; Bennet v Bennet (1879) 10 Ch D 474; The Venture [1908] P 218; Re
Vinogradoff [1935] WN 68; Warren v Gurney [1944] 2 All ER 472 (CA); Shephard
v Cartwright [1955] AC 431; Re Gillingham Bus Disaster Fund [1958] Ch 300; Re
Sharpe [1980] 1 WLR 219; Goodman v Gallant [1985] EWCA Civ 15, [1986] 1 All ER 311;
Westdeutsche Landesbank Girozentrale v Islington LBC [1996] UKHL 12, [1996] AC
669; Air Jamaica Ltd v Charlton [1999] UKPC 20, [1999] 1 WLR 1399; Twinsectra Ltd v
Yardley [2002] UKHL 12, [2002] 2 AC 164.

¢¢ Birks, P. ‘Restitution and resulting trusts’ in Goldstein, S. (ed.) Equity and

contemporary legal developments. (Jerusalem: The Hebrew University of
Jerusalem, 1992) p.335.

¢¢ Birks, P. ‘Trusts raised to reverse unjust enrichment’ (1996) 4 Restitution Law

Review 3.

¢¢ Chambers, R. Resulting trusts. (Oxford: Clarendon Press, 1997)

[ISBN 9780198764441].

¢¢ Chambers, R. ‘Resulting trusts in Canada’ (2000) 38 Alberta Law Review 378;

reprinted (2002) 16(2) Trust Law International 104, 138.

¢¢ Chambers, R. ‘Is there a presumption of resulting trust?’ in Mitchell, C. (ed.)

Constructive and resulting trusts. (Oxford: Hart Publishing, 2010) p.267.

¢¢ Glister, J. ‘The presumption of advancement’ in Mitchell, C. (ed.) Constructive and

resulting trusts. (Oxford: Hart Publishing, 2010) [ISBN 9781841139272] p.289.

¢¢ Mee, J. ‘“Automatic” resulting trusts: retention, restitution, or reposing trust?’ in

Mitchell, C. (ed.) Constructive and resulting trusts. (Oxford: Hart Publishing, 2010)
[ISBN 9781841139272] p.207.

¢¢ Penner, J.E. ‘Resulting trusts and unjust enrichment: three controversies’ in

Mitchell, C. (ed.) Constructive and resulting trusts. (Oxford: Hart Publishing, 2010)
[ISBN 9781841139272] p.237.

¢¢ Swadling, W. ‘A new role for resulting trusts?’ (1996) 16(1) Legal Studies 110.

¢¢ Swadling, W. ‘Explaining resulting trusts’ (2008) 124 LQR 72.

Equity and Trusts  12  Resulting trusts page 135

Sample examination questions

Question 1 ‘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’ (Lord Browne-Wilkinson in Westdeutsche
Landesbank Girozentrale v Islington LBC (1996)).
Discuss.
Question 2 A week before he died, Fred conveyed a freehold title to land and
some shares to his son, Joe, to be held on trust for ‘such objects of benevolence and
liberality as Joe in his absolute discretion might choose’. By his will, Fred left all his
real and personal estate to his wife, Sarah.
Advise Sarah.

Advice on answering the questions

Question 1 This essay is directed to the vexed question why resulting trusts arise. A
good answer would begin by explaining what resulting trusts are and stating when
they arise. It would then outline the views of the major players in the debate, taking
careful account of the precise state of the law here, noting especially that some of
Lord Browne-Wilkinson’s comments in Westdeutsche were obiter, while those of the
House of Lords in Vandervell were ratio. Candidates might also question Lord Browne-
Wilkinson’s focus on the intentions of the trustee rather than the settlor. Where
evidence is adduced to prove that a declaration of trust has taken place, no enquiry is
made into the state of mind of the transferee. This must equally be the case where a
resulting trust arises in response to a presumption.

Question 2 In answering this short question, candidates should start by outlining

how the problem would be resolved using the orthodox theory of resulting trusts
contained in Vandervell v IRC (1967). According to Lord Wilberforce, this would not
be an occasion for presuming that Fred intended Joe to hold the rights on trust for
Fred, because Fred made it clear that he wanted them to be held on other trusts,
although those trusts were void. The failure of the intended trusts would mean, as per
Lord Upjohn and Lord Wilberforce, that Fred never divested himself of his beneficial
interest, with the consequence that Joe will now hold the rights on a resulting trust
for Fred arising by operation of law. Using Lord Millett’s approach, Joe would also be a
resulting trustee for Fred, since proof by evidence that Joe was meant to be a trustee
also proved that Joe was not meant to take beneficially.

It is slightly more difficult to analyse this case according to Lord Browne-Wilkinson’s

views. According to him, the situation is governed by presumptions of intent.
Normally, he would say that, in the circumstances, a presumption operates to the
effect that Fred wants the rights back, so a presumed resulting trust will arise in his
favour. However, since we are dealing with presumed intentions, we should apply the
presumption of advancement to transfers between father and son, which means that
Joe will take at least the shares absolutely unless further evidence is adduced to rebut
that presumption. The declaration of (the failed) express trust would provide sufficient
evidence that no gift was intended and rebut that presumption. The transfer of land is
simpler, for there the presumption of resulting trust has supposedly been abolished in
the case of gratuitous conveyances of land (which this is), with the result that we start,
at least we assume we start, from a presumption of advancement.
page 136 University of London  International Programmes

Reflect and review

Look through the points listed below.

Are you ready to move on to the next chapter?

Ready to move on = I am satisfied that I have sufficient understanding of the principles

outlined in this chapter to enable me to go on to the next chapter.

Need to revise first = There are one or two areas I am unsure about and need to revise
before I go on to the next chapter.

Need to study again = I found many or all of the principles outlined in this chapter very
difficult and need to go over them again before I move on.

Tick a box for each topic.

Ready to Need to Need to
move on revise first study again

I can state the circumstances in which resulting

trusts arise.   

I can outline the competing theories of resulting

trusts.   

I can judge which theory best fits the incidence of

resulting trusts.   

If you ticked ‘need to revise first’, which sections of the chapter are you going to
revise?
Must Revision
revise done

12.1 When do resulting trusts arise?  

12.2 Why do resulting trusts arise?  

13 Constructive trusts

Contents
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 138

13.1 Genuine constructive trusts . . . . . . . . . . . . . . . . . . . . . . . 139

13.2 False constructive trusts . . . . . . . . . . . . . . . . . . . . . . . . 139

13.3 Types of constructive trust . . . . . . . . . . . . . . . . . . . . . . . 140

13.4 Making sense of constructive trusts . . . . . . . . . . . . . . . . . . . 141

13.5 Wrongs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 141

13.6 Unjust enrichment . . . . . . . . . . . . . . . . . . . . . . . . . . . 142

13.7 Other events . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 144

Reflect and review . . . . . . . . . . . . . . . . . . . . . . . . . . . 147

page 138 University of London  International Programmes

Introduction
Some of the material found in textbook chapters entitled ‘Constructive trusts’ is dealt
with in other chapters of this guide. This has to do with the uncertain meaning of
‘constructive trust’. What we mean by it in this guide is a trust that arises by operation
of law, which is a trust that the legal system imposes on people normally without
their consent. This is in contrast to an express trust, which arises because a settlor has
manifested an intention that a trust come into existence.

As we shall see, many cases that are sometimes labelled ‘constructive trusts’ are not
really constructive trusts at all. Part of this chapter involves weeding out such trusts,
so you should review the chapters of the module guide listed in the Essential reading
now.

Essential reading
Quick review of:
¢¢ Chapter 3: ‘Types of trust’.

¢¢ Chapter 6: ‘Formalities’.

¢¢ Chapter 7: ‘Constitution’.

¢¢ Penner, Chapter 4: ‘Constructive trusts’.

Learning outcomes
By the end of this chapter, and having completed the Essential readings and
activities, you should be able to:
uu explain why certain trusts that are sometimes thought to be constructive are, in
reality, express
uu explain why ‘constructive trustee’ is a confusing term
uu explain the controversy over whether the receipt of unauthorised profits by a
fiduciary should be held on constructive trust
uu explain how some trusts can be seen as responses to a defendant’s unjust
enrichment
uu define the circumstances in which constructive trusts will arise in circumstances
which involve neither wrongdoing nor unjust enrichment.
Equity and Trusts  13  Constructive trusts page 139

13.1 Genuine constructive trusts

The first aim of this chapter is to distinguish genuine cases of constructive trusts from
false ones. We begin by describing a few genuine cases, so as to give you a flavour of
the subject. In the next section, we address cases that are mistakenly thought to be
examples of constructive trusts.

Where the holders of a title to land enter into a contract to sell it, equity will usually
enforce that contract specifically. It will also apply the maxim ‘equity looks upon that
as done which ought to be done’ and treat the vendors as holding their title on trust
for themselves and the purchasers from the moment the contract is formed: Lysaght v
Edwards (1876) 2 Ch D 499; Jerome v Kelly [2004] UKHL 25, [2004] 1 WLR 1409. There is no
declaration of trust by anyone, so this is a genuine example of a constructive trust.

Recall from Chapter 7 that there are a number of circumstances in which equity will
perfect imperfect gifts. It generally does so through the imposition of a trust on the
donor. So, for example, in Re Rose [1952] EWCA Civ 4, [1952] Ch 499, a trust was imposed
on Mr Rose when he had done what he needed to do to make a gift of shares to his
wife, and she had the power to complete the transfer by registration, even though
legal title had not yet passed to her. There was no declaration of trust on his part, so
this too was a genuine example of a constructive trust.

In FHR European Ventures LLP v Cedar Capital Partners LLC [2014] UKSC 45, [2015] AC 250,
a secret commission received by a fiduciary was held on constructive trust for his
principal from the moment of receipt. A trust of a mistaken payment was imposed
in Chase Manhattan Bank NA v Israel-British Bank (London) Ltd [1981] Ch 105. These are
both controversial decisions, but there is no doubt that the trusts imposed were true
constructive trusts.

13.2 False constructive trusts

As discussed in Chapter 17 in the guide, there are a number of circumstances in
which third parties involved in a breach of trust are held to be ‘liable to account as
constructive trustees’, that is, they are personally liable to restore the trust with
money from their own pockets ‘as if they were a trustee’. This is only a personal
liability, because there are often no rights being held on trust. The label ‘constructive
trustee’ is potentially confusing because it can mean either someone who is (a) not a
trustee, but being treated as one, or (b) an actual trustee of a constructive trust. For
this reason, this usage is frowned upon, and in Dubai Aluminium Co Ltd v Salaam [2002]
UKHL 48, [2003] 2 AC 366, Lord Millett suggested that the language of constructive
trusteeship should be jettisoned and the defendant described simply as ‘liable to
account in equity’. One might ask, in the light of the fact that the duty to give an
‘account’ is also fictitious in such circumstances, whether the courts should not go
further and simply describe the liability as one to pay damages, for that is what it
seems to be.

In Williams v Central Bank of Nigeria [2014] UKSC 10, [2014] AC 1189, a majority of the
Supreme Court decided that dishonest assistants (i.e. those who dishonestly assist
trustees to commit a breach of trust) and knowing recipients (i.e. those who knowingly
receive assets transferred in breach of trust) are not constructive trustees for the
purposes of the Limitation Act 1980. We are not concerned with the limitation issue, but
with what the judgments tell us about the nature of the liability for assisting a breach of
trust or receiving assets in breach of trust. At [9], Lord Sumption distinguished between
those constructive trustees who ‘are true trustees’ and those who are not:
In its second meaning, the phrase ‘constructive trustee’ refers to something else. It
comprises persons who never assumed and never intended to assume the status of
a trustee, whether formally or informally, but have exposed themselves to equitable
remedies by virtue of their participation in the unlawful misapplication of trust assets.
Either they have dishonestly assisted in a misapplication of the funds by the trustee, or
they have received trust assets knowing that the transfer to them was a breach of trust.
In either case, they may be required by equity to account as if they were trustees or
fiduciaries, although they are not.
page 140 University of London  International Programmes

It is notable that he did not distinguish between assistants and recipients in this
context, since the latter will be holding trust assets when liability arises.

As we saw in Chapter 3, an express trust is synonymous with a declared trust, for what
is expressed in an express trust is a declaration of trust. We also saw that, in certain
cases, the legislature has restricted the type of evidence which courts are allowed to
admit to prove that such a declaration has occurred, specifically in cases of alleged
declarations of trust of land (LPA 1925, s.53(1)(b)) and testamentary trusts (Wills Act
1837, s.9). As we also saw in Chapter 6, courts will sometimes admit such evidence
regardless, thereby allowing the allegation of a declaration of trust to be made
good. In Rochefoucauld v Boustead [1897] 1 Ch 196 (CA), the trust imposed was clearly
identified by the court as an express trust, but has often been treated as constructive
by subsequent courts and commentators. As discussed in the next chapter, there is a
debate over whether secret trusts should be classified as express or constructive.

Self-assessment questions
1. Why are trusts enforced despite the lack of admissible evidence under s.53(1)(b)
of the Law of Property Act 1925?

2. Why is it potentially misleading to say that a dishonest assistant is personally

‘liable to account as a constructive trustee’?

13.3 Types of constructive trust

Having now expelled the false ‘constructive trusts’, it is time to move to the
genuine article, and in this respect, the most important question one can ask about
constructive trusts is why they arise. To say that they are imposed by courts without a
settlor’s consent tells us only that they do not arise because of a declaration of trust.
The question why they arise will be addressed in the rest of this chapter. Before doing
so, we need to consider two different types of constructive trust: the ‘institutional’
constructive trust and the ‘remedial’ constructive trust. Much confusion will be
avoided if we make clear at the outset what these terms mean. Unfortunately, the only
way to understand the terminology is to realise that the words do not mean what they
say.

13.3.1 Institutional constructive trusts

The vendor-purchaser constructive trust and the Re Rose constructive trust are both
regarded as institutional constructive trusts. This means that they arise because of the
application of rules, not by order of the court. The trust arises by operation of law in
response to relevant facts, and the court declares that this has happened. Even though
we might criticise the imposition of a trust in such cases, we can at least predict with
some certainty when such a trust will arise, and moreover, engage in meaningful
debate over the reasoning of the judges who lay down the rules which trigger such
trusts.

13.3.2 Remedial constructive trusts

The first thing to note is that the phrase ‘remedial constructive trust’ does not refer to
the personal liability to account as a constructive trustee. As we have seen, although
this liability might be thought of as remedial, it does not give rise to a trust. A remedial
constructive trust, by contrast, really is a trust. In what way, therefore, does it differ
from its institutional counterpart? The explanation is that it does not arise through
the application of rules but through the exercise of judicial discretion, one concerned
with notions of fairness in the individual circumstances. As such, it offends the
constitutional principle of the rule of law, and it is not surprising to find our courts
rejecting it on a number of occasions, most notably by the House of Lords in Pettitt v
Pettitt [1969] UKHL 5, [1970] AC 777 and Gissing v Gissing [1970] UKHL 3, [1971] AC 886, by
the Privy Council in Re Goldcorp Exchange Ltd [1994] UKPC 3, [1995] 1 AC 74, and by the
Court of Appeal in Polly Peck International plc v Nadir (No 2) [1992] EWCA Civ 3, [1992] 4
Equity and Trusts  13  Constructive trusts page 141

All ER 769 and Sinclair Investments (UK) Ltd v Versailles Trade Finance Ltd [2011] EWCA Civ
347, [2012] Ch 453. Indeed, in Polly Peck, Mummery LJ said that the idea that English law
could have a remedial constructive trust was ‘inconceivable’.

However, there are some signs of such a trust, at least at the level of the Court of
Appeal, where recent cases seem to be being decided on the ground of nothing more
than ‘unconscionability’. The worst offender in this regard is Pennington v Waine [2002]
EWCA Civ 227, [2002] 1 WLR 2075, although it is far from alone. We hope that this trend
will not survive the scrutiny of the Supreme Court. The decisions of the House of Lords
in Stack v Dowden [2007] UKHL 17, [2007] 2 AC 432 and the Supreme Court in Jones v
Kernott [2011] UKSC 53, [2012] 1 AC 776 do not give much cause for optimism in this
regard, but in Angove’s Pty Ltd v Bailey [2016] UKSC 47, [2016] 1 WLR 3179 at [27], Lord
Sumption said:

English law is generally averse to the discretionary adjustment of property rights, and has
not recognised the remedial constructive trust favoured in some other jurisdictions, notably
the United States and Canada. It has recognised only the institutional constructive trust…

13.4 Making sense of constructive trusts

On the basis that English law knows only the institutional constructive trust, a trust
arising through the application of rules and not because of a declaration of trust, the
question is whether it is possible to make sense of such trusts. As we have seen, to say
that a trust is constructive (i.e. that it arises by operation of law), gives us only negative
information, that it arises for a reason other than an effective declaration of trust. Is it
possible to identify the reasons why such trusts arise?

Professor Birks famously suggested that rights (including trusts) arise in response to
events which happen in the world. So, for example, if I punch you on the nose (event),
the law gives you a right to the payment of damages from me (response).

The events giving rise to rights can be subdivided into four main categories:
(1) manifestations of consent, (2) wrongs, (3) unjust enrichments, and (4) other
miscellaneous events. The punch on the nose, for example, was a wrong. The most
common event generating rights is a manifestation of consent, and there is no doubt
that most trusts arise because of such manifestations of consent. We call these express
trusts. Events 2, 3, and 4 might then be described as events that give rise to rights by
operation of law. The question we will ask is which constructive trusts belong in which
category. This will help us develop a critical approach to this topic.

13.5 Wrongs
The usual response to wrongdoing, both at law and equity, is an award to its victim
of a monetary remedy. At common law, we call this damages. In equity, it goes, as we
have seen, by the confusing name of a ‘liability to account as a constructive trustee’
or sometimes ‘equitable compensation’. For most legal or equitable wrongs, there is
no possibility of a trust. So, for example, where a defendant is liable for dishonestly
assisting a trustee to commit a breach of trust, the defendant will have no particular
asset which the beneficiary can claim is held for them on trust. But in some cases,
an asset will have been received as a consequence of the wrong, and the question is
whether the court will say that it is held by the wrongdoer on trust for the victim (or
the victim’s estate).

A constructive trust can arise when one joint tenant murders the other and thereby
acquires sole legal ownership by way of survivorship. The murderer will hold title on
constructive trust for him or herself and the victim’s estate in equal shares. This rule
also applies in cases of manslaughter. It also applies when there are more than two
joint tenants, although it does not affect the rights to survivorship of the innocent
joint tenants: see Troja v Troja (1994) 33 NSWLR 269 (CA). Under the Forfeiture Act 1982,
the court has the power to modify the rule: see Dunbar v Plant [1997] EWCA Civ 2167,
[1998] Ch 412.
page 142 University of London  International Programmes

A constructive trust can also arise in response to the equitable wrong of breach of
fiduciary duty. As discussed in Chapter 18, a fiduciary is someone who manages the
affairs of others or manages assets on their behalf. Express trustees are fiduciaries
and so are company directors and officers, partners, agents, and solicitors. The list is
not closed. As fiduciaries, they are required to exercise their discretions and powers
properly and only for the purposes for which they were given. They must avoid
conflicting interests and duties and must not profit from their fiduciary offices, unless
they have the consent of their principals. If fiduciaries make unauthorised profits or
accept bribes in breach of fiduciary duty to their principals, they will hold those assets
on constructive trust for them: FHR European Ventures LLP v Cedar Capital Partners LLC
[2014] UKSC 45, [2015] AC 250.

For over 100 years, there was considerable controversy over whether a fiduciary should
hold a bribe in trust for the principal. In Lister v Stubbs (1890) 45 Ch D 1, the Court of
Appeal held that the fiduciary would be liable to account as a constructive trustee for
the value of the bribe, but was not in fact a trustee at all. The Privy Council refused to
follow Lister v Stubbs in an appeal from New Zealand and advised that the bribe was
held in trust: A-G Hong Kong v Reid [1993] UKPC 2, [1994] 1 AC 324, [1994] 1 NZLR 1.

Reid was followed in Singapore and British Columbia: Sumitomo Bank Ltd v Kartika Ratna
Thahir [1992] SGHC 301, [1993] 1 SLR 735; Insurance Corp of British Columbia v Lo, 2006
BCCA 584, 278 DLR (4th) 148. The Federal Court of Australia chose not to follow Lister v
Stubbs or Reid, but held that a remedial constructive trust was available if needed ‘to
achieve “practical justice” in the circumstances’: Grimaldi v Chameleon Mining NL (No 2)
[2012] FCAFC 6 at [583].

In Sinclair Investments (UK) Ltd v Versailles Trade Finance Ltd [2011] EWCA Civ 347, [2012]
Ch 453, the Court of Appeal decided that it was bound to follow Lister v Stubbs and not
Reid. This was overruled by the Supreme Court in FHR European Ventures LLP v Cedar
Capital Partners LLC [2014] UKSC 45, [2015] AC 250.

Essential reading
¢¢ FHR European Ventures LLP v Cedar Capital Partners LLC [2014] UKSC 45, [2014] 3
WLR 535.

Further reading
¢¢ Keech v Sandford (1726) Sel Cas T King 61, 25 ER 223; Lister & Co v Stubbs (1890)
45 Ch D 1 (CA); A-G Hong Kong v Reid [1993] UKPC 2, [1994] 1 AC 324; Soulos v
Korkontzilas [1997] 2 SCR 217, 146 DLR (4th) 214; Sinclair Investments (UK) Ltd v
Versailles Trade Finance Ltd [2011] EWCA Civ 347, [2012] Ch 453.

¢¢ Birks, P. ‘Rights, wrongs, and remedies’ (2000) 20 Oxford J Legal Studies 1.

¢¢ Millett, P. ‘Bribes and secret commissions again’ (2012) 71 CLJ 583.

¢¢ Smith, L. ‘Constructive trusts and the no-profit rule’ (2013) 72 CLJ 260.

¢¢ Virgo, G. ‘Profits obtained in breach of fiduciary duty: personal or proprietary

claim?’ (2011) 70 CLJ 502.

¢¢ Worthington, S. ‘Fiduciary duties and proprietary remedies: addressing the

failure of equitable formulae’ (2013) 72 CLJ 720.

13.6 Unjust enrichment

Like wrongdoing, the most common response to unjust enrichment is the award
to the claimant of a money payment from the defendant. Thus, if I pay you £100 by
mistake, the common law says that, provided certain conditions are met, you owe me
£100. The same view is taken by equity. Thus, if by the exercise of undue influence, I
make a gift to you of £100, you will be ‘liable to account’ for that money to me. You
will, in other words, be a debtor in equity to me in the sum of £100. The question is
whether in either case I can claim that you hold the £100 or its traceable proceeds for
me under a constructive trust.
Equity and Trusts  13  Constructive trusts page 143

13.6.1 Mistaken payments

In Chase Manhattan Bank v Israel-British Bank London Ltd [1981] Ch 105, a case we first
encountered in Chapter 3, Goulding J held that a mistaken payment is held in trust for the
payer. Why did such a trust arise? According to Goulding J, it was because the mistaken
payer retained equitable ownership of the money paid, and since the legal title was held
by the recipient, the consequence was a trust which arose by operation of law.

The problem with this reasoning is that it is premised on the existence of equitable
property separate from legal property prior to the mistaken transfer. As we saw in
the discussion of the resulting trust (in Chapter 12), this is not correct. There is no
pre-existing equitable interest. If a trust arises, an equitable interest arises for the
first time. For this reason, the analysis of Goulding J was rightly disapproved by Lord
Browne-Wilkinson in Westdeutsche Landesbank Girozentrale v Islington LBC [1996] UKHL
12, [1996] AC 669. However, that does not address the question whether a new trust
should arise after the mistaken payment is made, and if so, whether it should arise
immediately upon payment being made or only later when the recipient becomes
aware of the mistake.

In Angove’s Pty Ltd v Bailey [2016] UKSC 47, [2016] 1 WLR 3179, mistaken payments were
held in trust for the payers, but the Supreme Court did not explain why the trust arose.
The claimant was an Australian wine maker. Its agent in the UK sold wine on its behalf
and collected the proceeds of sale. The agent became insolvent and the claimant
terminated the agency. The court was asked to decide whether the agency had been
terminated and who was entitled to the sale proceeds that had been paid to the agent
and not paid over to the claimant. The trial judge decided that the agency had been
terminated, that the sale proceeds paid to the agent before the termination belonged
to the agent, and that the proceeds paid after the termination were held in trust for the
customers who paid it: [2013] EWHC 215 (Ch). This was affirmed by the Supreme Court.

Neither court spent much time discussing why the trust arose, but it seems to be
because the customers paid the agent by mistake, believing that it still had the
authority to collect that money. Lord Sumption said, at [32], that a trust would not
arise if the agency had not been terminated:

The money was paid to [the agent] by the customers… They no doubt paid it in the belief
that [the agent] was authorised to collect it, or at least that payment to them would
discharge their liability for the price. The question of trust arises on the hypothesis that
[the agent] was authorised to collect the proceeds of the invoices, and on that hypothesis
their belief was not mistaken.

At [30], Lord Sumption identified mistake and wrongdoing as two reasons why
constructive trusts arise:

For present purposes it is enough to point out that where money is paid with the
intention of transferring the entire beneficial interest to the payee, the least that must be
shown in order to establish a constructive trust is (i) that that intention was vitiated, for
example because the money was paid as a result of a fundamental mistake or pursuant to
a contract which has been rescinded, or (ii) that irrespective of the intentions of the payer,
in the eyes of equity the money has come into the wrong hands, as where it represents
the fruits of a fraud, theft or breach of trust or fiduciary duty against a third party. One or
other of these is a necessary condition, although it may not be a sufficient one.

It has been suggested that a mistaken payment should give rise, not immediately to a
trust, but to an equitable interest in the nature of power to recover the money, which
would only become a trust when the claimant exercises that power: see Birke Häcker,
‘Proprietary restitution after impaired consent transfers: a generalised power model’
(2009) 68 CLJ 324. Cases of rescission operate in a similar way. A claimant who can rescind
a transaction and thereby recover assets from the defendant has an equitable interest in
the recoverable assets. However, there is no trust unless the claimant elects to rescind
the transaction: see Peter Millett, ‘Restitution and constructive trusts’ (1998) 114 LQR
399 at 416. Until that time, the defendant is bound by the transaction. One significant
difference between rescindable transactions and mistaken payments is that in the case
of mistaken payments, there is normally no transaction to rescind. Should that make a
difference?
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13.6.2 Resulting trusts

As we also saw in Chapter 12, resulting trusts arise by operation of law and can be
regarded as a sub-species of the constructive trust. The question is why they arise.
We saw that the explanation proffered by Lords Upjohn and Wilberforce was that
it was triggered by the retention by the transferor of his equitable interest in the
rights transferred to the transferee. This explanation, however, does not work for
precisely the same reason as Goulding J’s reasoning in Chase Manhattan. Birks and
Chambers have argued that all resulting trusts arise to reverse the unjust enrichment
of the recipient. Although it may well be correct to say that the recipient is thereby
unjustly enriched, what still needs to be explained is why the law gives the transferor
the benefit of a trust in addition to a personal claim to recover the value of the right
transferred. Why is one creditor being treated more favourably than the rest? Of
course, we should be asking the same question about constructive trusts of bribes.

13.6.3 Other instances of unjust enrichment

There is no doubt that there are other instances of constructive trusts which can be
explained as responses to unjust enrichment. Thus, in Allcard v Skinner (1887) 36 Ch
D 145, Cotton LJ said that rights transferred because of the undue influence of the
transferee were held on trust for the transferor. You should, however, note that this
was a minority opinion. The majority said that the plaintiff had only a right to rescind
the transfer and thereby create a trust in her favour, a weaker species of right. It is
also important to note that Cotton LJ’s reasoning seems to depend on some theory of
equitable retention.

In Blacklocks v JB Developments (Godalming) Ltd [1982] Ch 183, the claimant transferred

land by mistake. He had intended to keep part of the farm he was selling, but the plan
that he attached to the deed of transfer indicated that the whole farm was being
transferred. Years later, after the farm was sold on to a new purchaser, the mistake
was discovered and the claimant was entitled to recover the land he had transferred
by mistake. The judge held that the land had been held on constructive trust for the
claimant all along. Is there some reason why a mistaken transfer of land should give
rise to a constructive trust, but not a mistaken payment? Should a mistaken transfer of
land give rise to a power to recover it rather than a trust?

Further reading
¢¢ Chase Manhattan Bank v Israel-British Bank London Ltd [1981] Ch 105; Blacklocks
v JB Developments (Godalming) Ltd [1982] Ch 183; Westdeutsche Landesbank
Girozentrale v Islington LBC [1996] UKHL 12, [1996] AC 669; Angove’s Pty Ltd v Bailey
[2016] UKSC 47, [2016] 1 WLR 3179.

¢¢ Chambers, R. ‘Distrust: our fear of trusts in the commercial world’ (2010) 63

Current Legal Problems 631.

¢¢ Häcker, B. ‘Proprietary restitution after impaired consent transfers: a

generalised power model’ (2009) 68 CLJ 324.

¢¢ Millett, P. ‘Restitution and constructive trusts’ (1998) 114 LQR 399.

13.7 Other events

Those constructive trusts which do not respond to either wrongdoing or unjust
enrichment must by definition fall within this last category, and there is no doubt
that it has content. Indeed, the vast majority of constructive trusts are to be found
here. There is no space to cover them all. Instead, a list of the main incidences is
provided, along with a detailed discussion of an area of law called ‘tracing’, by which
rights in substitute assets are created when the original assets are substituted in an
unauthorised fashion for other rights.

The vast majority of constructive trusts belong in this category. Here is an incomplete
list of the situations in which they arise:
Equity and Trusts  13  Constructive trusts page 145

uu specifically enforceable contracts to transfer interests in land (Lysaght v Edwards

(1876) 2 Ch D 499; Jerome v Kelly [2004] UKHL 25, [2004] 2 All ER 835)

uu incomplete gifts of land or company shares (Re Rose [1952] EWCA Civ 4, [1952] Ch
499; Mascall v Mascall [1984] EWCA Civ 10, 50 P & CR 119)

uu donatio mortis causa (Sen v Headley [1991] EWCA Civ 13, [1991] Ch 425)

uu mutual wills (Walters v Olins [2008] EWCA Civ 782, [2009] Ch 212)

uu proprietary estoppel (Thorner v Major [2009] UKHL 18, [2009] 1 WLR 776)

uu shared ownership of the family home (Stack v Dowden [2007] UKHL 17, [2007] 2 AC
432; Jones v Kernott [2011] UKSC 53, [2012] 1 AC 776).

If secret trusts are constructive, they belong here as well. Some of these trusts are
discussed in this subject and others are encountered in Property law. None of them
can be explained as responses to wrongdoing or unjust enrichment. Elias called them
‘perfectionary’, by which he meant that they arise to perfect unperfected promises or
intentions to benefit others. This distinguishes them from ‘restitutionary’ trusts which
arise to compel people to give up assets acquired either wrongfully or as an unjust
enrichment.

A difficult issue is why trusts are imposed in the situations listed above. Detrimental
reliance is an important factor in the proprietary estoppel cases and possibly also
relevant for some of the others. You will need to consider why incomplete gifts are
sometimes held on constructive trust. You will also need to consider the reasons why
secret trusts arise (if they are constructive) or why they are enforced despite the Wills
Act 1837 (if they are express).

Further reading
¢¢ Chambers, R. ‘Constructive trusts in Canada’ (1999) 37 Alberta L Rev 173; reprinted
in (2001) 15 Trust L Int 214, (2002) 16 Trust L Int 2.

¢¢ Elias, G. Explaining constructive trusts. (Oxford: Clarendon Press, 1990) [ISBN

9780198254157].

Activity 13.1

Applied comprehension – bribes, policy and remedies

Using your online library resources, research the following judgment:
uu Attorney-General for Hong Kong v Reid [1993] 3 WLR 1143.
You can complete this learning activity by reading Lord Templeman’s judgment.
a. What was Mr Reid by profession, which public offices had he held, and how did
he breach his fiduciary duty?

b. Identify the underlying policy concerns which explain the justice system’s
response to fiduciaries in public office who accept bribes in the course of their
duties.

c. How does the doctrine of unconscionability assist the person injured in these
circumstances?

d. Which approach is applied when the property representing the bribe decreases
in value?

e. Which approach is applied when the property representing the bribe increases
in value?

No feedback provided.

Sample examination question

What is a constructive trust?
page 146 University of London  International Programmes

Advice on answering the question

At first glance, this might seem like a simple question, requiring nothing more than
a definition such as ‘a constructive trust is a trust which arises by operation of law’.
While correct, it is clearly insufficient, for properly understood the question requires
you to consider when and why constructive trusts arise by operation of law. This
requires a survey of those circumstances in which they arise (and for this you will also
need to make reference to the next chapter), and those circumstances where they are
mistakenly thought to arise.

The best way to approach such a question is to remember the cases and texts you
have read, and try to produce some ideas about why constructive trusts arise in the
wide disparity of circumstances in which they do. It is perfectly sensible to claim
that constructive trusts arise in response to different fact situations to advance
different policies of the law, or to respond to different aspects of justice. Compare,
for example, the rationale that might lie behind the constructive trust that converts a
contractual obligation to convey land into a constructive trust for the parties, with the
constructive trust that arises when a fiduciary receives a bribe or otherwise obtains an
unauthorised profit.
Equity and Trusts  13  Constructive trusts page 147

Reflect and review

Look through the points listed below.

Are you ready to move on to the next chapter?

Ready to move on = I am satisfied that I have sufficient understanding of the

principles outlined in this chapter to enable me to go on to the next chapter.

Need to revise first = There are one or two areas I am unsure about and need to revise
before I go on to the next chapter.

Need to study again = I found many or all of the principles outlined in this chapter
very difficult and need to go over them again before I move on.

Tick a box for each topic.

Ready to Need to Need to
move on revise first study again

I can explain why certain trusts which are thought to

be constructive are, in reality, express.   

I can explain why ‘constructive trusteeship’ when

used to describe the personal liability of third parties
is a misleading expression which should be avoided.   

I can identify the main reasons why constructive

trusts arise.   

If you ticked ‘need to revise first’, which sections of the chapter are you going to
revise?
Must Revision
revise done

13.1 Genuine constructive trusts  

13.2 False constructive trusts  

13.3 Types of constructive trust  

13.4 Making sense of constructive trusts  

13.5 Wrongs  

13.6 Unjust enrichment  

13.7 Other events  

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Notes
14 Secret trusts

Contents
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 150

14.1 What are secret trusts? . . . . . . . . . . . . . . . . . . . . . . . . . 151

14.2 Justifications for the admission of evidence of secret trusts . . . . . . . 151

14.3 Some specific issues . . . . . . . . . . . . . . . . . . . . . . . . . . . 154

14.4 What type of trust is ultimately enforced? . . . . . . . . . . . . . . . 156

Reflect and review . . . . . . . . . . . . . . . . . . . . . . . . . . . 159

page 150 University of London  International Programmes

Introduction
This chapter is concerned with secret trusts, which are testamentary trusts that arise
without complying with the formalities required by the Wills Act 1837. The reason
why there is a whole chapter devoted to them here is not because they are especially
important in the law of trusts, but because it is difficult to know where else to put
them. Some people believe that they are express trusts that are enforced despite the
Wills Act 1837, while others believe that they are constructive trusts. A close study
of them can help you understand the essential difference between express and
constructive trusts and the reasons why trusts arise.

Begin by reviewing the formalities required to declare a testamentary express trust,

which are discussed in Chapter 6. Recall that the Wills Act 1837 defines ‘the word “will”’
to include ‘any … testamentary disposition’ (s.1) and states that ‘No will shall be valid
unless’ it is in writing and signed by the testator in the presence of two witnesses (s.9).
Recall also that codicils (i.e. amendments to wills) must satisfy the same formalities
(s.20). If a will contains a ‘beneficial’ gift to a witness or a witness’s spouse, that will not
affect the validity of the will, but that gift is void (s.15).

Essential reading
¢¢ Penner, Chapter 6: ‘Formalities and secret trusts’, Sections ‘Testamentary trusts:
Wills Act 1837, s 9’ and ‘Informal testamentary trusts: secret and half-secret
trusts’.

Learning outcomes
By the end of this chapter, and having completed the Essential readings and
activities, you should be able to:
uu state the formal requirements for a valid will
uu describe the problems raised by secret trusts
uu analyse the different responses of the courts to secret trusts
uu state when evidence of a declaration of trust which does not take the form of
signed, witnessed writing will be admitted in the case of a secret trust.
Equity and Trusts  14  Secret trusts page 151

14.1 What are secret trusts?

There are two types of secret trust, fully secret and half secret. In a fully secret trust,
the will makes no mention whatever of a trust. The testator has declared that a legatee
under the will takes absolutely, but is in fact secretly a trustee who is to hold on trust
for a third party. The same occurs in a half secret trust, except that the will contains a
declaration of trust, but fails to disclose the objects of that trust: e.g. ‘£10,000 to John
on trust for the persons or purposes I have communicated to him’.

It is not always easy to tell whether a trust is fully or half secret. The essential question
is whether the gift in the will appears to be intended for the recipient’s own benefit
or to be held in trust. In Rawstron v Freud [2014] EWHC 2577 (Ch), a famous and wealthy
artist, Lucien Freud, left the residue of his estate to his solicitor and daughter, who
were the executrices of his estate. They admitted that they were secret trustees of
the residue, but argued that it was a fully secret trust. The artist’s son argued that a
proper construction of the entire will showed that the residue was to be held in trust
and therefore it was a half secret trust which might be invalid (see 14.3.1, below).
The judge, Richard Spearman QC, held at [64] that ‘in the light of (a) the natural and
ordinary meaning of the words used…, (b) the overall purpose of the Will, (c) the other
provisions of the Will, (d) the material factual matrix when the Will was made and (e)
common sense’, the residue was given to the executrices for their own benefit, and
therefore the trust they admitted was fully secret.

Two questions arise. First, why are secret trusts problematic, and secondly, why do
testators create them? As to the first, secret trusts are problematic because if they
are going to be given effect by the courts, then evidence in a form not sanctioned
by the Wills Act 1837 will need to be admitted, for the declaration of trust will not
be in writing, signed by the settlor, and properly witnessed as required by s.9. If
the evidence is not admitted in the case of a fully secret trust, the legatee will take
outright. In the case of a half secret trust, the trust will fail for want of objects,
generating a resulting trust in favour of the testator’s estate. As to why testators create
secret trusts, the two most common reasons are to avoid publicity and to be able to
change their minds without the need for a codicil. The desire to avoid publicity comes
from the fact that wills are public documents which anyone can inspect on payment of
a nominal fee. If the testator wants, for example, to make provision for an illegitimate
child, that might be something which they do not want placed in the public domain.

Essential reading
¢¢ Review Chapter 6: ‘Formalities’.

¢¢ Wills Act 1837, ss.9, 15, 25.

Summary
In the case of a fully secret trust, the will makes no mention of the trust, and in the
case of a half-secret trust, although there is a declaration of trust on the face of the
will, it is void for want of objects. Problems are raised by secret trusts because the
evidence required to prove the making of the declaration of trust is not in the form
sanctioned by s.9 the Wills Act 1837.

14.2 Justifications for the admission of evidence of secret trusts

Why should the courts admit evidence of the declaration of a trust which is not in
the form prescribed by the statute? Given that evidence not in such form has been
adjudged unreliable by the legislature, it might be thought that the court should
simply refuse to admit it and:

uu in the case of a fully secret trust, allow the legatee to take absolutely, or

uu in the case of a half-secret trust hold that the testamentary trust fails for want of
objects and that there is consequently a resulting trust (see Chapter 12) in favour of
the testator’s estate.
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14.2.1 The fraud theory

The earliest justification for enforcing secret trusts was based on the idea that the
statutory provisions, which were originally contained in the Statute of Frauds 1677,
were designed to prevent fraud, and a legatee who took on the basis that they were
a trustee but who later relied on the statute to take absolutely, would be using the
statute as an engine of fraud: compare Thynn v Thynn (1684) and Rochefoucauld v
Boustead (discussed in Chapter 6). There are, however, a number of problems with the
fraud theory. Apart from the fact that it fails to address the point that such evidence
is inherently unreliable, it is circular (for the same reasons that the thinking in
Rochefoucauld v Boustead is circular). Moreover, it struggles to explain the admission
of evidence in cases of half secret trusts, for if the evidence is refused admission there,
there will be a resulting trust for the testator’s estate and no possibility of personal
gain by the secret trustee. Also, in most cases, the secret trustee is not trying to deny
what happened, but honestly gives evidence of the communication and seeks the
court’s advice concerning the validity of the secret trust and disposition of the estate.

In Blackwell v Blackwell, Lord Buckmaster and Lord Hailsham had to redefine the fraud
which the courts were trying to prevent as not just a personal gain to the trustee but
the defeating of the expectations of the secret beneficiaries or the disappointment
of the wishes of the testator. If the secret beneficiary has indeed detrimentally relied
on the expectation of receiving a gift from the estate, then it should be possible to
provide some relief by way of proprietary estoppel, as in Thorner v Major [2009] UKHL
18, [2009] 1 WLR 776 (discussed in Chapter 7). However, this is seldom the case. It is true
that in every case the testator has relied on the secret trustee’s promise to carry out
the testator’s wishes, and having died, it is too late to make alternate arrangements.
This form of detrimental reliance might explain the enforcement of the secret trust,
but we should ask whether, and to what extent, it is reasonable for a testator to rely on
an informal promise instead of setting out the terms of the trust in the will, which the
testator has taken the trouble to execute.

14.2.2 The outside (dehors) the will theory

An alternative theory was put forward in Cullen v A-G for Ireland (1866) LR 1 HL 190
and adopted by Viscount Sumner and Lord Warrington in Blackwell v Blackwell [1925]
AC 318. In Blackwell, the testator had made a will by which he left £12,000 to five
people on trust ‘for the purposes indicated by me to them’. The court admitted the
oral testimony of the trustees to identify the objects of the trust. In answer to the
objection that in so doing the courts were ignoring the statutory provisions (in the
words of the judges, ‘giving them the go-by’) Lord Warrington said (at 342) that it must
be remembered that:

what is enforced is not a trust imposed by the will, but one arising from the acceptance
by the legatee of a trust, communicated to him by the settlor, on the faith of which
acceptance the will was made or left unrevoked, as the case might be. If the evidence had
merely established who were the persons and what were the purposes indicated it would
in my opinion have been inadmissible, as to admit it would be to allow the making of a will
by parol. It is the fact of the acceptance of the personal obligation which is the essential
feature, and the rest of the evidence is merely for the purpose of ascertaining the nature
of that obligation.

Viscount Sumner expressed himself in similar terms (at 339):

It is communication of the purpose to the legatee, coupled with acquiescence or promise

on his part, that removes the matter from the provision of the Wills Act and brings it
within the law of trusts…

There are several problems with what has been termed the ‘outside the will’ or ‘dehors
the will’ theory (dehors being the French word for outside). First, it still fails to address
the fundamental objection that the evidence the court admits is inherently unreliable.
Secondly, it assumes a dichotomy between the law of trusts and the law of wills in
spite of considerable overlap, since many trusts are created by wills.
Equity and Trusts  14  Secret trusts page 153

Thirdly, this theory does not explain why the acceptance of the trust by the trustee
should be important, since that is normally not a requirement in English law for the
creation of a valid trust. Finally, it is founded on an unduly narrow interpretation of
what is a will. It assumes that it is the formal document executed by the testator
but this is not what the statute means. Prior to the Statute of Frauds 1677, wills could
be made orally. By ‘will’ we normally mean the totality of the testator’s valid wishes
concerning the distribution of their rights on their death. The intention that certain
rights be held on trust for others can be regarded as part of the will. The Wills Act 1837,
s.1 states that ‘the word “will” shall extend to a testament, and to a codicil, … and to
any other testamentary disposition’.

Note that both the fraud theory and the outside the will theory are still in play,
although some judges talk of the outside the will theory as representing the ‘modern
view’ which explains the admission of the otherwise inadmissible evidence.

A third theoretical justification, that the doctrine of secret trusts is part of the law on
incorporation by reference, cannot be accepted for a number of reasons, the most
obvious of which is that the doctrine only applies to documents, whereas in secret
trusts the courts will admit oral testimony.

Essential reading
¢¢ Penner, Chapter 6: ‘Formalities and secret trusts’, Section ‘Informal testamentary
trusts: secret and half-secret trusts’.

¢¢ Blackwell v Blackwell [1929] UKHL 1, [1929] AC 318.

Further reading
¢¢ Thynn v Thynn (1684) 1 Vern 296; Cullen v A-G for Northern Ireland (1866) LR 1 HL
190; McCormick v Grogan (1869) LR 4 HL 82; In Bonis Smart [1902] P 238.

Reflection point
Why are secret trusts considered so important that judges are willing to accept
evidence ‘which is not in the form prescribed by the statute’?

Summary
There are two main theories that attempt to justify the admission of the otherwise
inadmissible evidence in the case of secret trusts.

1 The fraud theory. This is based on the concept that the statutory provisions were
designed to prevent fraud, and that a legatee who had agreed to be a trustee and
who was only given the rights on that basis but who later relied on the statute to
take absolutely, would be using the statute as an engine of fraud. This theory creates
some problems, however. It fails to deal with the point that the courts are admitting
unreliable evidence; it is circular; it struggles to explain the admission of evidence in
the case of half secret trusts; and it does not explain the many cases in which secret
trustees honestly give evidence of the secret trust. In both Blackwell v Blackwell and
Cullen v A-G for Northern Ireland an alternative theory was put forward to attempt to
resolve this problem.

2 The outside (dehors) the will theory. This theory also raises a number of problems.
It too fails to address the fundamental objection that the evidence the court admits is
inherently unreliable, it falsely assumes a dichotomy between the law of trusts and the
law of wills, it fails to explain why the acceptance of the trust by the trustee should be
important and it is founded on an unduly narrow interpretation of what is a will.

Courts make reference to both theories, although some regard the dehors the will
theory as the modern justification of admission.
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14.3 Some specific issues

We have seen that, in general, courts will in cases of secret trusts admit evidence not in
the form sanctioned by the statute to prove the declaration of trust. We have also seen
that the various explanations for doing so do not stand up. There are, however, a number
of situations in which courts still refuse to admit the non-conforming evidence.

Problem questions on secret trusts generally revolve around the question whether in
the case of the particular secret trusts described, the non-conforming evidence will
be admitted. Some of the main factors which stand in the way of admission are set out
below. You should note, however, that this list is not exhaustive.

14.3.1 Timing of acceptance

As we have seen, both the fraud theory and the outside the will theory require the
secret trustee to have accepted, or at least acquiesced in, the office of trusteeship.
Both acceptance and acquiescence require at the very least that the declaration
of trust be communicated to the secret trustee. The crucial question is when that
communication must take place.

For fully secret trusts, the rule is that the communication to the secret trustee be
made before the testator’s death. The reason is that if the trustee did not know
they were intended to be a trustee, they could hardly be said to have accepted or
acquiesced in their appointment: Re Boyes [1884] 26 Ch D 531. However, the rule is more
restrictive for half secret trusts, where, at least according to the Court of Appeal in Re
Keen [1937] Ch 236, the communication must not take place after the execution of the
will. The reason for this was that otherwise the testator would be free to change their
will without the execution of a codicil.

The difficulty with this reasoning is that, if the trust really does arise outside the will, then
a change of mind over the terms of the trust is not a change in the will at all. Moreover, it
seems strange that a communication post execution is acceptable for a fully secret but
not for a half-secret trust. Several other jurisdictions have refused to follow this rule and
you should ask whether it can be supported. It should also be noted that the finding in Re
Keen is arguably obiter as the secret trust was struck down on the separate and logically
prior ground of inconsistency between the time at which the terms of the trust were
communicated to the trustees and the will’s account of this event.

Further problems arise where there are intended to be two or more trustees but
communication is not made to all of them. Are the trustees who have not been
told bound by the trust or can they take the rights for themselves? The rules are
contained in Re Stead [1900] 1 Ch 237, a fully secret trust case. They provide that where
the trustees take as tenants in common, then only those who know of the trust are
bound, but where they take as joint tenants, then it has to be asked whether the
communication was made before or after the execution of the will. If the former, then
all will be bound, but if the latter, only those who were told. There is no case law on
this point with regard to half-secret trusts, although in such a case they will almost
certainly take as joint tenants and if Re Keen is correctly decided, the communication
will anyway have to precede the execution of the will.

14.3.2 Predecease of the secret beneficiary

What happens if the secret beneficiary predeceases the testator? The starting point, it
is suggested, is to ask what would have been the result had this trust been expressed
in the form required by s.9 of the Wills Act 1837. The answer is that the doctrine of
lapse would apply and the gift will fall into residue. There is no good reason why the
same result should not obtain where the declaration of trust is not proved by signed,
witnessed writing. However, in Re Gardner (No 2) [1923] 2 Ch 230, Romer J held that the
secret trust was an inter vivos trust which was in existence before the death of the
beneficiary, and therefore passed to her estate. The problem with this reasoning is that
there could be no inter vivos trust because there was no self-declaration of trust and
therefore the intended trust had not been constituted before the death of the testator.
Equity and Trusts  14  Secret trusts page 155

14.3.3 Predecease of the secret trustee

If the trust had been spelt out on the face of the will, it is clear that it would not fail
if the trustee predeceased the testator. Applying the rule that ‘equity will not allow
a trust to fail for want of a trustee’, a substitute trustee would be appointed. The
difficulty here, however, is that secret trusts seem to be based on acceptance or
acquiescence by a particular trustee and it is that agreement that takes them outside
the statutory rules on formality. If that is right, then the doctrine of lapse should apply
and the gift should fall into residue. The textbooks, however, generally distinguish
between fully secret and half secret trusts in this regard, arguing for failure only in the
case of the former.

14.3.4 Witnessing by secret beneficiary

As we have seen, s.15 of the Wills Act 1837 makes void any gift to an attesting witness
or their spouse. If a trust in favour of a witness had been included in the will, then
it is clear that the witnessing beneficiary could not take the benefit of that trust,
which would then be void for want of objects and give rise to a resulting trust for the
residuary legatees. It might be thought that the position should be no different in the
case of a secret trust. However, in Re Young [1951] Ch 344, Dankwerts J upheld a half
secret trust in favour of a witness. Since the trust took effect outside the will, the Wills
Act rules did not apply.

14.3.5 Witnessing by secret trustee

There is normally no problem with a trustee witnessing the will, for the trustee can
take no benefit from their office as trustee, but the question is difficult in the case of
secret trusts. If the trust is fully secret, then the operation of s.15 will mean that the
rights will not reach the trustee and so the trust will never be constituted. In the case
of a half secret trust, admissible evidence will show the court that the legatee is a
trustee and so arguably s.15 would not apply.

Self-assessment questions
1. What is the difference between a fully secret trust and a half secret trust?

2. What are the justifications for the admission of non-conforming evidence in the
case of secret trusts?

3. What does it mean to say that a gift ‘falls into residue’?

4. Can a trustee witness a will, and if so, in what circumstances?

Summary
Timing of communication of the trust: In the case of both fully and half-secret trusts
the trustee must have accepted or acquiesced in the office of trusteeship. However,
the crucial question is when that communication has to be made. In fully secret trusts,
it must be before the death of the testator. In half-secret trusts, it must precede the
death of the testator and the execution of the will, although the reasons justifying the
difference are doubtful.

Where the secret trust assets are given to two or more trustees but communication
is not made to all of them, Re Stead provides a rule for determining which of them is
bound in the case of fully secret trusts. Only the trustee to whom communication is
made is bound unless the trustees take as joint tenants and communication is made
before the making of the will, in which case all are bound. However, the justification of
this rule is doubtful.

If the secret beneficiary predeceases the testator, the doctrine of lapse should apply
and the gift should fall into the residue. Romer J’s decision to the contrary in Re
Gardner (No 2) is doubtful.

If a half secret trustee dies before the testator, it is said that the trust will not fail
because ‘equity will not allow a trust to fail for want of a trustee’. The case is less
page 156 University of London  International Programmes

certain for a fully secret trust, in particular following the fraud theory, where the
decease of the secret trustee would ensure that no fraud could occur. But query
whether the first proposition is correct.

In Re Young, Dankwerts J upheld a secret trust in favour of a beneficiary who witnessed

the will on the basis of the dehors the will theory.

If a fully secret trustee witnesses the will, the operation of s.15 will mean that the
rights will not reach the trustee and so the trust will never be constituted, unless some
extension of the dehors the will theory is brought into play. In the case of a half-secret
trust, s.15 should not apply as the will itself shows that the legatee is intended to be
a trustee, but if this is correct, then Re Young must be wrong, for the dehors the will
theory cannot save a gift in both the case of a witnessing beneficiary and the case of a
witnessing trustee.

14.4 What type of trust is ultimately enforced?

What type of trust is a secret trust? More specifically, is it express or constructive?
We saw in Chapter 6 how the trust in Rochefoucauld v Boustead was express, despite
the fact that some later cases call it constructive. Perhaps the same is true of secret
trusts, with the fraud and outside-the-will theories providing justifications (albeit, not
very strong ones) for the admission of evidence of a declaration of trust not in a form
sanctioned by statute. If so, the trust arises directly from an expression of intention to
create a trust (i.e. it is an express trust). Alternatively, secret trusts might be regarded
as constructive, with the testator’s detrimental reliance on the secret trustee’s
undertaking providing a sufficient reason to impose a trust even though their informal
arrangement was ineffective to create an express trust. This could explain why timely
communication to and acceptance by the secret trustee are required, for they are not
requirements to create a valid express trust, which can be created even though the
intended trustee is wholly unaware of its existence: Smith v Wheeler (1671) 1 Lev 279, 83
ER 406; Siggers v Evans (1855) 5 E&B 367, 119 ER 518.

Does it matter whether we class secret trusts as express or constructive? It would

certainly help us better understand why they arise. It might also be argued that it
matters in the case of a secret trust of an interest in land where there is no written
evidence of a declaration of trust. Having surmounted the hurdle of s.9 of the Wills
Act 1837, would the claimant be defeated by s.53(1)(b) of the LPA 1925? Such a result
would be strange, for the requirements of s.9 are more onerous than those of s.53(1)
(b). Nourse LJ’s comments in Sen v Headley [1991] EWCA Civ 13, [1991] Ch 425 regarding a
donatio mortis causa of land should apply with equal force to a secret trust:

A donatio mortis causa of land is neither more nor less anomalous than any other. Every
such gift is a circumvention of the Wills Act 1837. Why should the additional statutory
formalities for the creation and transmission of interests in land be regarded as some
larger obstacle?

The trust in Sen v Headley was clearly and properly identified as constructive and
so exempted from the operation of s.53(1)(b) by s.53(2). If secret trusts are also
constructive, then they too are exempt, but even if they are express, the reasons for
ignoring the Wills Act 1837 should also apply to s.53(1)(b).

Essential reading
¢¢ Re Boyes (1884) 26 Ch D 531; Re Gardner (No 2) [1923] 2 Ch 230; Re Keen [1937] Ch
236; Re Young [1951] Ch 344; Ottaway v Norman [1972] Ch 698.

Further reading
¢¢ Re Fleetwood (1880) 15 Ch D 594; Re Baillee (1886) 2 TLR 660; Re Colin Cooper [1939]
Ch 811; Re Browne [1944] IR 90; Re Edwards [1948] Ch 440; Re Bateman’s WT [1970]
3 All ER 817; Re Snowden [1979] Ch 528; Ledgerwood v Perpetual Trustee (1997) 41
NSWLR 532.
Equity and Trusts  14  Secret trusts page 157

¢¢ Holdsworth, W.S. ‘Secret trusts’ (1937) 53 LQR 501.

¢¢ Perrins, B. ‘Can you keep half a secret?’ (1972) 88 LQR 225.

¢¢ Mee, J. ‘Half-secret trusts in England and Ireland’ (1992) Conv 202.

¢¢ Critchley, P. ‘Instruments of fraud, testamentary dispositions and the doctrine of

secret trusts’ (1999) 115 LQR 631.

Activities 14.1–14.4
14.1 Compare the formality rules of s.53(1)(b) of the Law of Property Act 1925 and
s.9 of the Wills Act 1837. Which is the more stringent? And why? In particular,
why was s.15 of the Wills Act 1837 enacted?

14.2 In what way are secret trusts in conflict with these formality rules?

14.3 Read carefully the speeches in Blackwell v Blackwell. How do the different
judges formulate their justifications for not insisting on the strict formality
requirements of the Wills Act? Are they convincing?

14.4 Go through the specific factors which might disqualify non-conforming

evidence in the case of a secret trust from being admitted, asking yourself
whether it makes any difference to the result which justification, fraud or
dehors, is used.

Sample examination questions

Question 1 Is there yet any coherent justification for the admission of non-
conforming evidence in the case of secret trusts?
Question 2 Peter has recently died. By his will, he left his vast shareholding to
his close friend, Denis. Prior to his death, he told Denis to hold the shares on trust
for Mary, Peter’s illegitimate daughter. He also left his house to Robert, ‘who has
already been informed in writing that it is to be held in trust’. In fact, Robert had
been told by Peter before the will was made that the house was to be held for Mary,
although orally and not in writing. The two witnesses to the will are Denis’s wife,
Jane, and Mary.
Advise Laura, Peter’s residuary legatee.

Advice on answering the questions

Question 1 A good answer to this question would start by outlining what a secret
trust is and why people create them. It would then go on to explain why secret trusts
are problematic and how the courts have managed to admit the non-conforming
evidence, first through the fraud theory and later through the dehors the will
theory. Having outlined the various justifications for admission, a critique of those
justifications should be given. Some indications of what might be said are outlined
above and need not be repeated here.

Question 2 In any problem question, you should start by outlining the issues raised.
The first is obviously the general question of whether evidence not in the form
required by the statute will be admitted to prove the declaration of trust. The more
specific points raised by the question are the inconsistency over the method of
communication, the fact that the subject matter of the trust is an interest in land and
there does not seem to be any written evidence of that declaration to satisfy s.53(1)(b),
the fact that the secret beneficiary is a witness to the will, and finally, that the secret
trustee’s spouse is the other witness.

As to the general question of the admission of evidence to prove the declaration of

trust, a brief outline of the fraud theory and the outside the will theory needs to be
given. As this is a problem question rather than an essay, it is not so vital that a critique
of these two theories be provided. Once these two theories have been outlined, the
question then is how they apply to the specific problems raised.
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The first is the inconsistency between the terms of the will (‘notified in writing’) and
the evidence sought to be admitted (‘communicated orally’). This point forms the
narrow ratio of Re Keen. Students should outline the rule laid down by Re Keen and
then apply it to the facts of this case. They might then raise the question whether
an inconsistency such as that in Re Keen should be fatal, for in a fully secret trust
the fundamental inconsistency between what the will says (that the legatee takes
absolutely) and the evidence admitted (that the legatee takes as trustee) seems never
to have been an issue.

The second issue concerns the fact that the subject matter of the trust is a title to
land but the declaration of trust cannot be proved by written evidence as required by
s.53(1)(b) LPA 1925. There are two issues here, both of which are discussed above. First,
is a secret trust an express or a constructive trust? Second, if it is an express trust, will
such a finding be necessarily fatal?

The third issue is the witnessing of the will by the secret beneficiary. Students should
explain the usual consequences of beneficiaries of trusts witnessing wills (the
avoidance of their gift) and note the different conclusion reached in the case of secret
trusts by Dankwerts J in Re Young.

The fourth and final issue is the witnessing of the will by the spouse of the secret
trustee. Students should explain what would normally happen in such a case (i.e. if the
trust was not secret). Students should then explain that although the act of witnessing
might have been problematic had the trust been fully secret, in the case of a half-
secret trust this should not cause problems.
Equity and Trusts  14  Secret trusts page 159

Reflect and review

Look through the points listed below.

Are you ready to move on to the next chapter?

Ready to move on = I am satisfied that I have sufficient understanding of the principles

outlined in this chapter to enable me to go on to the next chapter.

Need to revise first = There are one or two areas I am unsure about and need to revise
before I go on to the next chapter.

Need to study again = I found many or all of the principles outlined in this chapter very
difficult and need to go over them again before I move on.

Tick a box for each topic.

Ready to Need to Need to
move on revise first study again

I can state the formal requirements for a valid will.   

I can describe the problems raised by secret trusts.   

I can analyse the different responses of the courts to

secret trusts.   

I can state when evidence of a declaration of trust

which does not take the form of signed, witnessed
writing will be admitted in the case of a secret trust.   

If you ticked ‘need to revise first’, which sections of the chapter are you going to
revise?
Must Revision
revise done

14.1 What are secret trusts?  

14.2 Justifications for the admission of evidence not in the

form sanctioned by the statute  

14.3 Some specific issues  

14.4 What type of trust is ultimately enforced?  

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Notes
15 Appointment, retirement and removal of trustees

Contents
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 162

15.1 The appointment, retirement and removal of trustees in outline . . . . 163

15.2 Powers in the trust instrument . . . . . . . . . . . . . . . . . . . . . 164

15.3 Powers under ss.36 and 39 of the Trustee Act 1925 . . . . . . . . . . . 164

15.4 Powers under s.19 of the Trusts of Land and Appointment of

Trustees Act 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 165

15.5 The statutory and inherent jurisdiction of the court . . . . . . . . . . . 165

15.6 The vesting of the trust rights upon a change of trustee(s) . . . . . . . 166

Reflect and review . . . . . . . . . . . . . . . . . . . . . . . . . . . 169

page 162 University of London  International Programmes

Introduction
The trustees of a trust may change over the life of the trust. It is essential both that
there are trustees to carry out the trust, and that the current trustees are capable of
doing so.

A trustee may become incapable of carrying out the trust because of illness or mental
incapacity or may become unfit to carry out the trust because they are revealed to
be dishonest, or because their own interests are in conflict with their duties under
the trust. It is therefore essential that there are powers to appoint new trustees, to
allow trustees to retire, and to remove trustees. Such powers can be conferred by
the settlor when the trust is created, by statute, or may lie within the jurisdiction
of the court in its general supervisory role over trusts. Although these powers are
simple to understand in principle, their exercise can be somewhat technical and
generally involve taking a number of considerations into account. This is especially
true in respect of the operation of powers conferred by statute. Different sorts of
considerations apply to the appointment, retirement and removal of trustees, and we
will examine each in turn.

Essential reading
¢¢ Penner, Chapter 10: ‘The trust up and running’, Section ‘Appointment,
retirement, and removal of trustees’.

Learning outcomes
By the end of this chapter, and having completed the Essential readings and
activities, you should be able to:
uu give examples of circumstances in which the appointment, retirement, or
removal of a trustee is desirable or necessary
uu explain why the statutory powers of appointment, retirement, and removal
of trustees are generally relied upon in preference to powers in the trust
instrument or the jurisdiction of the court
uu explain how the statutory powers found in ss.36 and 39 of the Trustee Act 1925
and s.19 of the Trusts of Land and Appointment of Trustees Act 1996 work, and
explain the extent to which they are fiduciary powers
uu explain the court’s powers in relation to the appointment and removal of
trustees
uu explain when, why, and how rights held on trust are dealt with upon a change of
trustees.
Equity and Trusts  15  Appointment, retirement and removal of trustees page 163

15.1 The appointment, retirement and removal of trustees in

outline

15.1.1 The appointment of first trustees

In the case of an inter vivos trust, the appointment of the first trustees is generally
straightforward. In the case of a self-declaration of trust, the settlor is of course the
first trustee. In the case of a trust constituted by transfer of the subject matter to
trustees, such persons become trustees when it is received. Trusts are generally
created by using a written document (the trust instrument) which recites the terms
of the trusts and is often the instrument that constitutes the trust (e.g. it operates
as a deed of transfer of title to chattels). This document will name the first trustees
of the trust. Problems are more likely to arise in the case of testamentary trusts (i.e.
trusts that come into effect as part of the testator-settlor’s will). In many cases, the
first trustees of the trust will be the same persons appointed as the executors of the
will. However, a person nominated under a will to be executor or trustee can refuse
the appointment or may have died by the time the will comes into operation upon the
testator’s death. Thus, a power to appoint trustees held by someone other than the
settlor may be needed even to appoint the first trustees.

15.1.2 Appointment of new trustees and the discharge of trustees

There are three basic occasions when it may be necessary to appoint new trustees:

1. Upon the death of a human trustee, or more rarely, upon the effective
incapacitation of a trust company (due to insolvency or loss of the right to carry on
a trust business).

2. On the occasion of the retirement or removal of a trustee.

3. Where it is desirable to increase the number of trustees.

Generally speaking, it is important that a trust have at least two trustees (as
joint owners of the relevant rights) for two main reasons. First, it is felt that the
opportunities for fraud or incompetent dealing are much reduced when decisions
are taken by two persons rather than one. Secondly, where the trust assets include
interests in land it is essential that there are two trustees for the trustee to provide a
proper receipt for purchase monies if that land is later sold: Trustee Act 1925, s.14; LPA
1925, s.27. Note that these sections provide an exception for a ‘trust corporation’ to
act as sole trustee. This is not the same thing as an ordinary trust company, but has a
special meaning: Trustee Act 1925, s.68(18); LPA 1925, s.205(1)(xxviii). Also note that the
Trustee Act 1925, s.34(2) limits the number of trustees to four in the case of a trust of
land (in keeping with the LPA 1925, s.34(2), which limits legal ownership of land to a
maximum of four joint tenants).

Upon the death of a trustee or the incapacitation of a trust company, new trustees
must be appointed. Trustees may retire, but as we will see, the power to retire is
typically conditional upon the appointment of a new replacement trustee. The basic
reasons that govern a trustee’s power to retire from the trust are obvious. People
should not be obliged to serve as trustees against their will, but on the other hand,
retirement may cause expense and inconvenience to the trust (and thus to the rights
of beneficiaries) and indeed could endanger the trust if one of two trustees were
retired without replacement.

Trustees are therefore typically required to ensure their replacement before exercising
their power to retire. The difference between retirement and removal is that a trustee
chooses to retire voluntarily, whereas a trustee is removed at the order of another
(either by the other trustees, someone else with the power to do so, or by order of
the court) when the trustee is unfit to serve as trustee or incapable of doing so. Finally,
there may be cases where it is desirable to add a new trustee. This will most obviously
be so where the trust was originally constituted with only one human trustee, for the
reasons stated above, but may also be desirable in the case where the new trustee will
page 164 University of London  International Programmes

provide a benefit in terms of judgment. Thus, it may be desirable to appoint a human

trustee related to the beneficiaries to act as co-trustee with a trust company in order
to assist in the exercise of dispositive discretions, or to add a professional trustee in
the case where a family trust is conducted by two family member trustees, to take
advantage of the professional’s expertise.

15.2 Powers in the trust instrument

Powers to appoint or remove trustees or to retire from the trust may be given by
the terms of the trust. However, there may be difficulties in framing such powers
so that they operate effectively over the lifetime of the trust. It is not uncommon
for the settlor of a trust to reserve such powers. But if the settlor should become
incapacitated or die, there will be no one with those powers. The same problem would
attend the grant of those powers to any named individual. The problem is obvious:
the trust may endure for longer than the life of any particular individual, and for that
reason, those powers are normally granted to the current trustees, whoever they are
(i.e. to office holders rather than to named individuals). The statutory provisions in
place essentially provide the same thing (i.e. trustees or their personal representatives
if they die in office), so it is common to rely upon them. A further problem can arise
if the powers are poorly drafted or conditional (see, for example, Re Wheeler and De
Rochow [1896] 1 Ch 315), since they may fail to operate properly when the discharge or
appointment of trustees is necessary. In practice, the statutory powers of appointment
must once again be relied upon.

Self-assessment questions
1. What are the circumstances in which a new trustee might need to be appointed?

2. Why does the trust instrument usually give the trustees the power to appoint
new trustees?

15.3 Powers under ss.36 and 39 of the Trustee Act 1925

The general scheme of statutory powers of appointment is provided by ss.36 and 39 of
the Trustee Act 1925.

Only by dying is a trustee automatically discharged from the trust, and since trustees
normally hold the trust assets as joint tenants and not as tenants in common,
none of the trust rights will pass to the deceased trustee’s estate. If there is no one
able or willing to exercise a power conferred by the trust instrument to appoint a
replacement trustee, then the surviving or continuing trustees have that power,
and if all the trustees are dead, the personal representatives of the last surviving or
continuing trustee have that power: s.36(1). By virtue of s.36(8), a refusing or retiring
trustee may appoint their replacement or successor if willing to do so. This can give
rise to problems: an appointment is void if a refusing or retiring trustee is willing to
participate in the appointment and does not: Re Coates to Parsons (1886) 34 Ch D 370.
However, a trustee who is liable to be removed because they fall within one of the
grounds for replacement in s.36(1) (i.e. a trustee who is unfit, incapable, or abroad for
more than 12 months) may be replaced by the other trustees without the trustee’s
participation, even though the trustee may be willing to so participate in their own
removal (i.e. otherwise would count as a ‘retiring’ trustee under s.36(8)): Re Stoneham
ST [1953] Ch 59.

Activity 15.1
On what statutory provisions would you rely to:
a. replace one trustee with another?

b. add an additional trustee?

c. retire as trustee?
Equity and Trusts  15  Appointment, retirement and removal of trustees page 165

15.4 Powers under s.19 of the Trusts of Land and Appointment of

Trustees Act 1996
Recall the principle in Saunders v Vautier (Chapter 4) by which beneficiaries who are of
full age and of sound mind and absolutely entitled under the trust may collapse the
trust. In Re Brockbank [1948] Ch 206, the court held that this principle did not entitle
the beneficiaries to direct the trustees to retire in favour of new trustees they desired.
Section 19 of the Trusts of Land and Appointment of Trustees Act 1996 reverses Re
Brockbank in part.

This power can be excluded by the settlor of a trust under s.21 of the Act.

There is a problem created by s.22(1) of the Act, which reads:

In this Act ‘beneficiary’, in relation to any trust, means any person who under the trust has
an interest in property subject to the trust (including a person who has such an interest as
a trustee or a personal representative).

Recall from the discussion of the principle of Saunders v Vautier in Chapter 4 that,
although discretionary beneficiaries may together take advantage of the rule (Stephenson
v Barclays Bank Trust Co [1975] 1 WLR 882), they are not regarded as individually having any
subsisting beneficial interest (Gartside v IRC [1968] AC 553). It is arguable that s.22 excludes
beneficiaries under discretionary trusts from the benefit of s.19.

Activity 15.2
Read Re Brockbank and explain the reasons given for the decision.

15.4.1 Fiduciary nature of the powers

Review Section 4.2 on the nature of fiduciary duties and powers. The fiduciary
nature of the powers to appoint or remove trustees, or retire from the trust, is
straightforward: in exercising these powers, the power-holders are exercising a
discretion, one which concerns the operation of the trust, and so will affect the
interests of the beneficiaries. Such powers must, therefore, be exercised with the
interests of the beneficiaries as paramount.

Activities 15.3 and 15.4

15.3 Taking into account the fiduciary nature of the powers concerned, explain
whether the following exercises of powers of appointment, retirement and
removal are valid:

a. Fred and Joe are trustees. They appoint Fred’s sister Stella to replace Joe
because Stella is ‘down on her luck’ and could use the trustee’s fees.

b. Simon retires from a discretionary trust because he has grown to hate the
beneficiaries and can no longer bear to decide how to distribute funds to
them.

c. Sam, the settlor of a trust of shares in his private company, replaces

X Co as trustee with Y Co under a power in the instrument because X
Co refuses to vote in the way he thinks best for the operation of the
company.

d. Arthur retires from the trust in favour of Madge because the majority of
beneficiaries ask him to. His co-trustee, Paul, consents to this.

15.4 Review s.19 of the Trusts of Land and Appointment of Trustees Act 1996. Is the
power given therein to the beneficiaries a fiduciary power?

15.5 The statutory and inherent jurisdiction of the court

It is a maxim of equity that ‘a trust will not fail for want of a trustee’. At the same time,
no one can be compelled to accept the office of trustee (although people can become
resulting or constructive trustees by operation of law without their knowledge or
page 166 University of London  International Programmes

consent). Situations may therefore arise in which there is no one willing or able to
exercise a power in the trust instrument or a statutory power to appoint trustees. In
such cases, the court must step in. The court, in its inherent jurisdiction to ensure that
trusts are carried out, may appoint trustees, but s.41 of the Trustee Act 1925 provides
that the court may appoint new trustees where it is ‘expedient’ to do so and it is
‘inexpedient, difficult, or impracticable so to do without the assistance of the court’.
Resort to this power of the court should not be made where a person can appoint
trustees under a power in the instrument or a statutory power (Re Gibbon’s Trusts
(1882) 30 WR 287), although if the existence of a valid power is uncertain resort to the
court may properly be made (Re May’s Will Trusts [1941] Ch 109).

Similarly, there may be cases where it is desirable to remove or replace trustees, but
there is no one with a power under the trust instrument or a statutory power who is
willing or able to do so. Again, the court serves as a last resort. Here, there is no specific
statutory provision, and the inherent jurisdiction of the court must be relied upon.

Activities 15.5 and 15.6

15.5 Read Re Tempest (1866) LR 1 Ch 485 and describe the principles which guide
the court in appointing trustees.

15.6 Read Letterstedt v Broers (1884) 9 App Cas 371 and describe the scope of the
court’s inherent jurisdiction to remove trustees and the considerations
which guide it when so doing.

15.6 The vesting of the trust rights upon a change of trustee(s)

When trustees are appointed, they must acquire the subject matter of the trust.
Similarly, when they are discharged from the trust, they must give up those assets.
Typically, there will be more than one person holding the assets on trust. So the newly
appointed trustee must become a joint owner of the rights with the continuing
trustees, and a retiring trustee must cease to be a joint owner of the rights. So, if A and
B are trustees and A retires and is replaced by C, then A and B as joint owners must
together transfer the subject matter to B and C as joint owners. If a trustee is removed
(i.e. ‘ordered to retire’) the trustee must act so as to transfer or release the right to the
new and continuing trustees. If the trustee refuses to do so, they will be in breach of
trust, or if they fail to respond to such an order of the court, will be in contempt.

Section 40 of the Trustee Act 1925 provides that where an appointment is made, the
deed by which a trustee is appointed will serve to vest the trust assets in the trustee
in so far as a deed can do so. Title to chattels can be transferred by deed, and the deed
can be used as a deed of conveyance with respect to unregistered titles to land, and
will serve as a transfer document which can be registered in the case of registered
titles to land. However, assets that cannot be transferred by deed, such as shares in a
private company, must be conveyed in the appropriate way.

Partly because of the inconvenience and cost of re-vesting the assets upon a change
of trusteeship, large trusts with boards of trustees (such as large charities or pension
funds) which may change the composition of the set of trustees on a regular basis,
often have managing trustees and a custodian trustee. The custodian trustee (always a
company) is a bare trustee that simply holds the trust assets and follows the direction
of its beneficiaries, but in this case those beneficiaries are the managing trustees who
in turn hold their equitable interests in trust for the real beneficiaries. The managing
trustees are the real trustees because they operate the trust via their directions to the
custodian trustee. When a managing trustee is discharged or a new one appointed,
this can be done by deed and no re-vesting of the underlying trust rights is required,
for they remain with the custodian.
Equity and Trusts  15  Appointment, retirement and removal of trustees page 167

Self-assessment questions
1. Why is the presence of managing and custodian trustees in a trust relevant to
the issue of the appointment and discharge of trustees?

2. How did the Trusts of Land and Appointment of Trustees Act 1996 change the law
concerning the appointment and discharge of trustees?

Sample examination questions

Question 1 By his will, a testator, who died last year, appointed Tick and Tock to be
his executors and trustees and left his residuary estate, consisting of freehold and
leasehold estates, company shares and bearer securities, upon trust for his three
sisters in equal shares absolutely. The three sisters are all of full age and desire the
trust to continue. Tock has been living in Spain for the last six weeks, and although
he intends to remain ordinarily resident in England, he has indicated that he will
spend much of his time in Spain in the future. Tick wishes to appoint Little in place
of Tock, but the three sisters either want Tock to remain or Large to be appointed in
his place. Advise Tick.
Question 2 Discuss the reasons for the various statutory provisions which concern
powers to appoint and discharge trustees and explain the considerations governing
their operation.

Advice on answering the questions

Question 1 This question raises four main issues:

1. Who has the power to decide on the person to be appointed?

Who, in the circumstances, has a discretion to decide upon appointments, and

if more than one, who has priority? If there was a power in the trust instrument,
that would have priority (s.36(1)(a) Trustee Act 1925), but there appears to be none.
Therefore, Tick and Tock will have a power under s.36(1)(b). But the three sisters
also have a power by virtue of s.19 Trusts of Land and Appointment of Trustees Act
1996 (as they are fixed interest beneficiaries there is no s.22(1) problem) to direct
the trustees to retire and/or appoint new trustees according to their written
direction.

2. By whom must the appointment be made?

Whether in response to a written direction from the sisters or acting under s.36(1),
the appointment or discharge must be made by Tick and Tock. If one is unwilling to
act, his replacement under s.36(1) can be made by the other. Tock has not been out
of the country for 12 months so cannot be removed unilaterally by Tick.

3. By what method must the appointment be made?

Any appointment or discharge must be made by deed.

4. How will the trust rights be vested in the trustees?

The vesting of trust rights in new trustees must occur by way of the appropriate
modes of transfer of the rights in question, except where it is provided that the
deed of appointment or discharge serves to divest the discharged trustee and vest
the new trustee with the trust rights (s.40). In this case, the transfer of freehold and
leasehold and freehold estates (over seven years) will require registration of the
deed as a transfer document at the Land Registry. The shares must be transferred
separately, either by transfer form and registration by the company, or via the
CREST system. Bearer securities are transferred by delivery.
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Question 2 This question involves two parts:

1. An explanation of ss.36, 39, and 41 of the Trustee Act 1925, and of s.19 of the
Trusts of Land and Appointment of Trustees Act 1996; with regard to ss.36 and
39, it should be explained how they relate to powers provided in the trust
instrument (if any) and to the powers of the court. With respect to s.41, the
background of the inherent jurisdiction of the court should be explained. With
s.19, the background of the previous law under Re Brockbank [1948] Ch 206 and
the possible uncertainty of its application to discretionary and similar trusts
should be described.

2. Regarding the considerations which go into the exercise of powers of

appointment, it should be noted that they are fiduciary powers when
exercised by trustees, and the best interests of the beneficiaries should be
the only considerations. With respect to the court, similar considerations
apply (Re Tempest; Letterstedt v Broers); with respect to the beneficiaries’
exercise of their rights under s.19, there would appear to be no scope for any
fiduciary obligation, but beneficiaries should be wary of using the threat of
removal to ‘micro-manage’ the trust, making the trustee act to their order. In
such circumstances, they might be regarded as having established an agency
relationship, with the trustee simply doing their bidding.
Equity and Trusts  15  Appointment, retirement and removal of trustees page 169

Reflect and review

Look through the points listed below.

Are you ready to move on to the next chapter?

Ready to move on = I am satisfied that I have sufficient understanding of the principles

outlined in this chapter to enable me to go on to the next chapter.

Need to revise first = There are one or two areas I am unsure about and need to revise
before I go on to the next chapter.

Need to study again = I found many or all of the principles outlined in this chapter very
difficult and need to go over them again before I move on.

Tick a box for each topic.

Ready to Need to Need to
move on revise first study again

I can give examples of circumstances in which the

appointment, retirement, or removal of a trustee is
desirable or necessary.   

I can explain why the statutory powers of

appointment, retirement, and removal of trustees
are generally relied upon in preference to powers in
the trust instrument or the jurisdiction of the court.   

I can explain how the statutory powers found in ss.36

and 39 of the Trustee Act 1925 and s.19 of the Trusts
of Land and Appointment of Trustees Act 1996 work,
and explain the extent to which they are fiduciary
powers.   

I can explain the court’s powers in relation to the

appointment and removal of trustees.   

I can explain when, why, and how rights held on trust

are dealt with upon a change of trustees.   

If you ticked ‘need to revise first’, which sections of the chapter are you going to
revise?
Must Revision
revise done

15.1 The appointment, retirement, and removal of trustees in

outline  
15.2 Powers in the trust instrument  

15.3 Powers under ss.36 and 39 of the Trustee Act 1925  

15.4 Powers under s.19 of the Trusts of Land and

Appointment of Trustees Act 1996  

15.5 The statutory and inherent jurisdiction of the court  

15.6 The vesting of the trust rights upon a change of trustee(s)  

page 170 University of London  International Programmes

Notes
16 Variation of trusts

Contents
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 172

16.1 The principle in Saunders v Vautier . . . . . . . . . . . . . . . . . . . . 173

16.2 The grant of administrative powers: Trustee Act 1925, s.57 . . . . . . . 174

16.3 The variation of beneficial interests: Variation of Trusts Act 1958 . . . . 174

Reflect and review . . . . . . . . . . . . . . . . . . . . . . . . . . . 177

page 172 University of London  International Programmes

Introduction
Many trusts last for a long time. Family trusts are typically designed to distribute the
settlor’s wealth over several generations. Because circumstances may change, in
particular the tax environment in which a trust operates, the original terms of the
trust may give rise to difficulties. In such cases, variation of the terms of the trust may
be desirable. Variations must benefit all the beneficiaries under the trust, or at least
not disadvantage any of them, and it is this concern which has generated the current
legal regime. As we will see, the law’s answer to the problem, provided by case law
and statute, is essentially to require each beneficiary who is sui juris (i.e. of full age
and sound mind) to consent to a proposed variation, while the court will consent
on behalf of those who are not sui juris. However, the court will not do so unless it is
convinced that a genuine benefit has been conferred on the incapable beneficiaries by
the proposed variation.

Essential reading
¢¢ Penner, Chapter 10: ‘The trust up and running’, Section ‘Variation of trusts’.

Learning outcomes
By the end of this chapter, and having completed the Essential readings and
activities, you should be able to:
uu explain how the principle in Saunders v Vautier is relevant to the variation of
trusts
uu describe the scope of the court’s inherent jurisdiction to vary trusts and the
problems that arise in consequence
uu explain the operation of s.57 of the Trustee Act 1925
uu explain the operation of the Variation of Trusts Act 1958.
Equity and Trusts 16 Variation of trusts page 173

16.1 The principle in Saunders v Vautier

Review the principle in Saunders v Vautier (1841) in Chapter 4. The general formulation
of the principle is typically that a beneficiary who is sui juris and absolutely entitled
under the trust may collapse the trust (i.e. ‘call’ for the trust rights to be conveyed to
himself). The same principle applies to a group of beneficiaries if they can all agree to
do so. By the same token, sui juris beneficiaries can instead consent to a variation of
trusts (i.e. a change in the terms upon which the trust rights are held).

16.1.1 Limitations on the principle

There are two limitations on the principle.

The first arises out of the case of Re Brockbank [1948] Ch 206, which (as we saw in
Chapter 15) lays down the rule that the beneficiaries, although sui juris, are not entitled
to direct the trustees in the exercise of their discretions under the trust. They can
collapse the trust or insist upon a variation, but are not entitled to ‘micro-manage’ the
trust by themselves, taking the decisions that a trustee is authorised to take to give
effect to the trust. That would completely defeat the point of there being a trust.

The second limitation is pertinent to this chapter. Only sui juris beneficiaries can
consent to a variation. Under-age beneficiaries and those who are otherwise unable
to act for themselves (e.g. someone lacking mental capacity) cannot consent. Since
many trusts are intergenerational, there will often be minor beneficiaries who cannot
consent to a proposed variation even if it was clearly in their interests. There will
often also be the possibility of potential beneficiaries yet to be born into the class of
beneficiaries. The Variation of Trusts Act 1958 has largely overcome these limitations.

Activity 16.1
a. What is the principle in Saunders v Vautier and how does it apply to the issue of
the variation of trusts?

b. What limitation of the Saunders v Vautier principle makes it an ineffective basis

for varying trusts in many cases?

No feedback provided.

16.1.2 The inherent jurisdiction of the court

As we have seen throughout this guide, the Court of Equity has an inherent supervisory
jurisdiction over trusts. Where a proposed variation is for the benefit of all the
beneficiaries, including those not sui juris, does the court have an inherent jurisdiction
to consent on behalf of those not sui juris? This issue was considered by the House of
Lords in Chapman v Chapman [1954] UKHL 1, [1954] AC 429. Although the speeches in
that case seem to indicate that a practice had developed in which Chancery judges
(in chambers) would approve of certain variations on behalf of those not sui juris, the
House firmly rejected the existence of any such jurisdiction.

The inherent jurisdiction of the Court is limited to:

1. Granting additional administrative powers to the trustee in emergencies (i.e.

situations where the limitations in the trust instrument upon the investment or
management of the trust assets jeopardise the functioning of the trust); and
2. Sanctioning maintenance payments to a beneficiary otherwise not provided for.

The court also has the jurisdiction to sanction a compromise on behalf of minor
beneficiaries where there was a dispute as to the rights of beneficiaries under a trust.
This last jurisdiction is best seen not as a jurisdiction to sanction a variation of the rights
of beneficiaries, but to sanction an agreement as to what those rights actually are.
However, by extending this jurisdiction to sanction a compromise, Chancery judges had
considered themselves empowered to consent to certain variations in the beneficial
interests of those not sui juris under the trust, and it was this practice that the House held
to be invalid in Chapman. In the wake of this decision, the Variation of Trusts Act 1958 was
passed, which provided the court with the very power the House said it lacked.
page 174 University of London  International Programmes

Activity 16.2
Read Denning LJ’s judgment in the Court of Appeal in Re Chapman [1953] Ch 218 at
269–79 and then Lord Simonds LC’s speech in the House of Lords [1954] AC 429 at
442–47.
How do the two judges’ views differ as to the inherent jurisdiction of the court in
the matter of trusts? Whose views do you prefer?

16.2 The grant of administrative powers: Trustee Act 1925, s.57

This provision extends the court’s power to confer upon trustees additional
administrative powers to cases where in the opinion of the court it is expedient to do
so. Thus, by virtue of the statute, the situation need not be an emergency, to which
cases the House in Chapman v Chapman said the inherent jurisdiction was confined.
Use of s.57 was made in Trustees of the British Museum v A-G [1984] 1 WLR 418, where
the trustees of the British Museum successfully persuaded the court to extend their
powers of investment so that they would continue to amass the funds necessary to
enhance the museum’s collection by purchases from time to time.

Activity 16.3
Make a short spoken statement on why the enlargement of investment powers in
Trustees of the British Museum v A-G could be authorised by the court under s.57 of
the Trustee Act 1925 but not under the court’s inherent jurisdiction.

Summary
As a corollary of the principle in Saunders v Vautier, sui juris beneficiaries can consent
to any variation of trust, but those under-age or otherwise incompetent cannot. The
court’s inherent jurisdiction is limited to the grant of further administrative powers in
cases of ‘emergency’ powers, although s.57 of the Trustee Act 1925 enlarges the court’s
power to any case where the enlargement of the trustee’s powers is expedient, and,
with respect to dispositive provisions of a trust, to allowing maintenance payments.
The court can consent to a compromise of rights, but this is not properly seen as a
power to vary dispositive trust provisions. Chapman establishes that the court has no
inherent jurisdiction to consent to the variation of trust on behalf of those beneficiaries
who are not sui juris, however much in their beneficiaries’ interests such a variation
might be.

16.3 The variation of beneficial interests: Variation of Trusts Act

1958
To a large extent, the Variation of Trusts Act 1958 reversed the decision in Chapman,
empowering the court to consent to a variation on behalf of beneficiaries who are not
sui juris.

The Act appears merely to authorise the court to approve a variation of the trust on
behalf of ascertained beneficiaries. The remaining beneficiaries (essentially all those
who are sui juris and ascertainable) must give their own consent if they are to be bound
by the variation (IRC v Holmden [1968] AC 685; Re Holt’s ST [1969] 1 Ch 100). In earlier
cases, it was assumed that the court would only make an order of variation when all
the sui juris beneficiaries consented and the court was able to consent on behalf of the
others. The difference is substantial, for arguably, if the sui juris beneficiaries’ consent
to the variation agreement effects the variation of the trust – rather than the court’s
order – they ‘dispose’ of their equitable interests under the trust and must do so in
writing to comply with s.53(1)(c) of the LPA 1925 (see Section 6.2). If this were indeed
the law, variations would be more inconvenient and many past variations would be
void. In Re Holt’s ST, Megarry J held that although, from one perspective, the sui juris
beneficiaries ‘dispose’ of their equitable interests under the trust when they consent
to the variation, the court’s declared consent on behalf of the other beneficiaries is
sufficient to make the variation effective, even in the absence of writing.
Equity and Trusts 16 Variation of trusts page 175

The court may give its approval on behalf of the classes of beneficiaries set out in s.1
of the Act. Section 1(1)(a) comprises minors and others lacking capacity to consent.
Section 1(1)(b) is difficult to interpret, but Re Suffert’s Settlement [1961] Ch 1 and Re
Moncrieff’s ST [1962] 1 WLR 1344 hold that the court may approve on behalf of those
who may in the future become entitled under a trust, except for ascertainable (i.e.
identifiable) persons who would become entitled on the happening of a single
event – such persons, if sui juris, must give their own consent. For example, if Paul,
aged 25 and mentally competent, will become entitled to an interest under the trust
if his widowed mother remarries, then he must consent to any proposed variation.
The court cannot consent for him. Section 1(1)(c) comprises the unborn, while s.1(1)
(d) comprises those who would become beneficiaries under the discretionary trust
following the end of the principal trust under a protective trust (see Section 3.2).

The court must be satisfied that any variation benefits each member of classes (a),
(b), or (c) before giving its approval on their behalf. Typically, the benefit will be
financial, usually as a result of tax savings, but financial advantage is neither sufficient
(Re Weston’s Settlement [1969] 1 Ch 223) nor necessary (Re Remnant’s ST [1970] Ch
560). Given the limited predictability of future events, it may be uncertain whether
a proposed variation will in fact result in a benefit to someone on whose behalf the
court consents, but the court will consent to a variation if in so doing it only takes risks
which an adult would be prepared to take (Re Cohen’s WT [1959] 1 WLR 865).

An important question is the extent to which, if at all, the court should have regard
to the settlor’s intentions. Clearly, the court may override the settlor’s plan where it
is satisfied that the variation is of benefit to the beneficiaries (Re Remnant’s ST). More
recently, the Court of Appeal in Goulding v James [1997] 2 All ER 239 affirmed the basic
principle (from which Re Steed’s WT [1960] Ch 407 appeared to have deviated) that the
settlor’s intentions are relevant only in so far as they assist the court in determining
what is of benefit to the beneficiaries on behalf of whom the court consents. The court
is not bound by the settlor’s intention and neither are the sui juris beneficiaries. This
principle of English trust law stands in contrast to the ‘material purpose’ doctrine
prevalent in many USA jurisdictions and which has been imported by statute
elsewhere. Under this doctrine, no variation of a trust, even if all the beneficiaries are
sui juris, may occur if a ‘material purpose’ of the settlor in creating the trust may yet be
fulfilled. This doctrine detracts from the principle of Saunders v Vautier and has so far
received no judicial attention in this country.

Summary
The Variation of Trusts Act 1958 allows the court to consent to a variation of trust
on behalf of beneficiaries who are not sui juris and on behalf of potential future
beneficiaries who are unborn or unascertainable, if the variation would be for their
benefit (except for beneficiaries under s.1(1)(d)). Benefit is more broadly construed
than ‘financial’ benefit, although financial benefits (in particular the saving of tax) are
typical, and reasonable risks as to the future may be consented to. In general, the court
is not bound in any way to observe the settlor’s motives, purposes, or expectations for
the trust, although the settlor’s views may be relevant in determining the extent of the
benefit any proposed variation would have for the beneficiaries for whom the court
consents.

Activity 16.4
Although facilitative and generally regarded as beneficial, the Act has not disposed
of all problems in this area. Read the case of Knocker v Youle [1986] 1 WLR 934 and
explain why the Act may give rise to substantial inconvenience.
page 176 University of London  International Programmes

Sample examination questions

Question 1 Either the settlor’s intentions should prevail, in which case no variation
of a trust should be allowed, or the foundational equitable principle that the trust
rights in effect belong to the beneficiaries, in which case the trust should be varied
in whatever way is most beneficial to them.’
Discuss.
Question 2 What differences are apparent in the law’s attitude to variations of
administrative provisions and dispositive provisions in trusts? Are these differences
justifiable?

Advice on answering the questions

Question 1 This question poses much the same issue as that faced by the court in
Chapman, and the alternative views appear to mirror in large part those expressed
by Lord Simonds LC and Denning LJ respectively, and a good answer would make
reference to them. The question goes beyond the role of the court’s inherent
jurisdiction, raising the stronger claim, not just about whether a court should act to
vary a trust to benefit the beneficiaries, but whether anyone, in particular the sui juris
beneficiaries, should be able to do so based on their Saunders v Vautier rights. Should
the law recognise something akin to the ‘material purpose’ doctrine in the US, which
cuts those rights down?

Question 2 The first point your answer should capture is that according to Chapman
v Chapman the inherent jurisdiction of the court is limited to that of varying the
administrative provisions of trusts, and then only in restricted circumstances. The
administrative/dispositive split is mirrored in the separate legislation dealing with
variations, s.57 of the Trustee Act 1925 and the Variation of Trusts Act 1958. There is
an arguably sound rationale for this difference in attitude. In Chapman, the House of
Lords said that for the court to vary the dispositive terms of a trust would be to replace
their own distribution of bounty for the settlor’s, a power which would unjustifiably
interfere with the settlor’s right to give their assets to whomever they wished in
whatever shares and on whatever conditions they wished. Varying administrative
provisions can be portrayed as merely providing better means to carry out what is the
same trust in substance. On the other hand, the stark division does give rise to some
inconveniences, for example the Knocker v Youle problem, where arguably the law
extends too much care over the variation of dispositive provisions which may have
little or no practical effect.
Equity and Trusts 16 Variation of trusts page 177

Reflect and review

Look through the points listed below.

Are you ready to move on to the next chapter?

Ready to move on = I am satisfied that I have sufficient understanding of the principles

outlined in this chapter to enable me to go on to the next chapter.

Need to revise first = There are one or two areas I am unsure about and need to revise
before I go on to the next chapter.

Need to study again = I found many or all of the principles outlined in this chapter very
difficult and need to go over them again before I move on.

Tick a box for each topic.

Ready to Need to Need to
move on revise first study again

I can explain how the principle in Saunders v Vautier

is relevant to the variation of trusts.   

I can describe the scope of the court’s inherent

jurisdiction to vary trusts and the problems
that arise in consequence.   

I can explain the operation of s.57 of the

Trustee Act 1925.   

I can explain the operation of the Variation

of Trusts Act 1958.   

If you ticked ‘need to revise first’, which sections of the chapter are you going to
revise?
Must Revision
revise done

16.1 The principle in Saunders v Vautier  

16.2 The grant of administrative powers: Trustee Act

1925, s.57  

16.3 The variation of beneficial interests: Variation of

Trusts Act 1958  
page 178 University of London  International Programmes

Notes
17 Breach of trust

Contents
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 180

17.1 Liability of trustees for breach of trust . . . . . . . . . . . . . . . . . . 181

17.2 Liability of trustees inter se . . . . . . . . . . . . . . . . . . . . . . . 185

17.3 Liability of third parties . . . . . . . . . . . . . . . . . . . . . . . . . 188

17.4 Dishonest assistance . . . . . . . . . . . . . . . . . . . . . . . . . . 188

17.5 Knowing receipt . . . . . . . . . . . . . . . . . . . . . . . . . . . . 189

Reflect and review . . . . . . . . . . . . . . . . . . . . . . . . . . . 197

page 180 University of London  International Programmes

Introduction
A trust can be breached in different ways. For example, a trustee:

uu might fail to carry out the terms of the trust and fail to pay the beneficiaries what
they are due

uu might enter into transactions with the trust assets that are prohibited by the terms
of the trust or by the general law.

The general rule is that trustees are strictly liable for any loss caused by their breach of
trust; that is, they are liable to pay money out of their own pockets to make up any loss
to the trust funds caused by their breach of duty. It is vital to realise that this liability
is only personal. If a trustee is insolvent, the beneficiaries’ claim that the trustee make
good the loss will generally be not worth pursuing.

Trustees are not necessarily liable for the breaches of their co-trustees. Trustees may
be relieved of liability by an exemption clause in the trust instrument or by the court
in certain circumstances.

Third parties (i.e. non-trustees) may also incur personal liabilities when a trust has
been breached. They may be liable if they were accessories to the breach of trust or
received trust assets or their traceable proceeds (see Chapter 19: ‘Claims based on
tracing’) in breach of trust. In addition, they will be liable to reconvey any trust assets
received in breach of trust, unless they are protected by the defence of bona fide
purchaser for value without notice or similar immunity provided by land registration
statutes.

Essential reading
¢¢ Chapter 4 of this module guide, 4.1.

¢¢ Penner, Chapter 11: ‘Breach of trust’, except sections dealing with tracing and
claims to traceable proceeds.

Learning outcomes
By the end of this chapter, and having completed the Essential readings and
activities, you should be able to:
uu describe the various ways in which a trust can be breached
uu explain the various personal and proprietary rights that the beneficiaries may
have against trustees and third parties when a trust is breached
uu explain the process of ‘surcharging’ or ‘falsifying’ the trust accounts
uu explain the liability of trustees for breach of trust among themselves, and the
consequences of a beneficiary’s consent to a breach of trust
uu explain and apply s.61 of the Trustee Act 1925 and the law governing trustee
exemption clauses
uu explain and apply the tests which govern third-party liability for assisting in a
breach of trust and receiving trust property.
Equity and Trusts  17  Breach of trust page 181

17.1 Liability of trustees for breach of trust

17.1.1 Personal and proprietary rights

Perhaps the most straightforward breach of trust is the case where the trustee fails to
carry out a term of the trust, for example, to invest the trust property, or to dispose of
it according to the terms of the trust. In such cases, the beneficiaries can apply to the
court, which will order the trustee to carry out their duties. Perhaps more effectively,
the beneficiaries may have the power or may seek the court’s assistance to replace a
defaulting trustee with one who will carry out the trust (see Chapter 15). The remedy
here is essentially an order for performance of the trust. The court will either order the
trustees to carry out their duties on pain of being in contempt of court or replace them
with trustees who are willing to do so. The liability of the trustee to such an order is
clearly personal, to deal with their trustee’s nonfeasance (i.e. failure to act).

Personal liability indicates the case where trustees are liable to pay money out of their
own pockets to restore the value of the trust assets. It is a personal right to require a
payment of a sum of money enforceable against specific persons (i.e. trustees). This is
different from the beneficiaries’ property right to the specific assets that are held in
trust for them. The same distinction between personal and property rights applies to
the liability of third parties who assist a breach of trust or receive assets dissipated in
breach of trust. They may be personally liable to pay out money from their own pockets
to restore the value of the trust or may be required to give up specific assets that are held
in trust.

17.1.2 Falsifying and surcharging the trust account

As discussed in Chapter 4, one of the trustees’ primary duties is to keep trust accounts
(i.e. proper records of the trustees’ dealings with the trust) and, when required, to
provide them to the beneficiaries, to the court, or to others who are entitled to receive
them (e.g. the Charity Commission). Because the trust assets often constitute a fund
that changes over time (e.g. as the trust assets are invested in various ways, income is
added to the trust, and payments are made to beneficiaries), the trustees must keep
track of the assets coming into and going out of the trust fund. They must maintain
records of these transactions, such records being the trust account.

The main way in which trustees are made personally liable to restore the value of
the trust is through the accounting process. The trust account is adjusted to remove
unauthorised disbursements and to add amounts that the trustees would have received
if they had acted properly, and the trustees are then required to make up the difference
from their own pockets. When an item is removed from the account, we say that the
account is ‘falsified’ and when an item is added, the account is ‘surcharged’. A basic
division can be made between breaches of trust where the trust account can be falsified
and those where it can be surcharged. This is an odd use of the word falsify, not to mean
‘to make false’ as it usually does, but ‘declare to be false’. The terminology of falsifying and
surcharging the account follows from the trustee’s primary duty to keep trust accounts.

Falsifying
When the beneficiaries sue the trustees for breach of trust, this is traditionally framed
as calling for an account. The beneficiaries apply to court asking the trustees to
account for what they have done with the trust rights. Where the trustees have made
an unauthorised transfer of trust assets (e.g. by making an unauthorised investment
or paying someone who is not a proper beneficiary of the trust) the beneficiaries are
entitled to falsify the account in respect of that particular transaction. Where possible,
the trustees can remedy the breach by reversing the transaction to restore the trust.
For example, they can remedy an unauthorised sale of land previously held on trust by
re-purchasing it, making up any difference in price from their own pockets. If they cannot
reverse the transaction (e.g. where money was paid away to a non-beneficiary who
became insolvent), the trustees will be personally liable to pay an equivalent sum (plus
interest) from their own pockets into the trust.
page 182 University of London  International Programmes

Surcharging
The beneficiaries surcharge the account where the trust fund has less value than
it should, but not because the trustee entered into any particular, identifiable
transaction which can be falsified. Two examples of this kind of breach are:

1. Where trustees fail to take sufficient care when investing the trust fund causing it
to be worth less than it would have been if they had acted properly;
2. Where trustees fail to insure trust assets, which are then damaged, destroyed or
stolen.

In both these examples, there is no particular unauthorised transfer that can be

falsified. The real problem is the failure to enter a transaction that should have taken
place (to make a better investment or purchase insurance). The trustees are personally
liable to make good the loss from their own pockets. The trust account is surcharged
to add the value that should have been received either from proper investments or
from insurance proceeds. Note that in cases where the trust is surcharged, there is no
way to restore the trust by reversing any particular transaction, and so the liability of
the trustee can only be personal.

Strict liability
It is important to note that in most of the above cases, the liability of the trustees
is strict. The law does not ask whether the trustees breached the trust honestly,
negligently or intentionally, except in cases where they are liable for taking sufficient
care when investing or preserving the trust assets. The trustees are liable for the
breach regardless, in just the same way as a contracting party is strictly liable for
breach of contract. However, there are certain circumstances in which trustees may
escape liability for breaches they have committed. Principally, these are where (a)
the beneficiaries consent to the breach, (b) the trust instrument contains a clause
exempting the trustees from liability or (c) the court relieves the trustees of liability
under s.61 of the Trustee Act 1925 (discussed below).

In all the above cases, one identifies a breach of trust by showing that a term of the
trust or a general duty imposed on trustees has been breached. An entirely different
circumstance in which trustees may be liable for breach is where they are in breach of
a fiduciary obligation owed to the beneficiaries. This is different from a breach of trust
because fiduciary duties apply not only to trustees but to other legal actors, such as
agents, company directors and solicitors. Fiduciary duties, in short, are not the same
thing as trust duties, although trustees typically have both. For this reason, fiduciary
duties will be dealt with separately, in the next chapter.

17.1.3 Liability to account and equitable compensation

Trustees (or third parties, for that matter) may be liable to pay money out of their own
pockets to restore a loss caused to the trust, either by an unauthorised transaction
which can be falsified or by a failure to acquire assets or value for which the account
can be surcharged. This liability is by and large the counterpart in equity to the liability
at common law to pay money damages to compensate for a loss caused by a tort or
breach of contract. In all these cases, there was a breach of duty, that breach gave
rise to a loss quantifiable in money, and the duty holder was liable to pay money
compensation for the loss that resulted. Unfortunately, the peculiar terminology of
equity has obscured the basic simplicity of what is going on.

The trustees’ primary duty is to keep the trust rights separate from their own and
to keep the trust accounts. Therefore, the liability of trustees to pay money into the
trust to restore the value of any losses the trust fund suffered due to their breach is
generally referred to as a liability to account. Even in the case of third parties who are
personally liable to restore the trust – for example because they dishonestly assisted
the trustee in carrying out a breach which caused a loss – their liability is often framed
as a liability to account ‘as if they were trustees’. In both cases, the liability is in reality a
liability to pay money to compensate for loss. Therefore, it would be perfectly sensible
to say that these are cases of equitable compensation.
Equity and Trusts  17  Breach of trust page 183

Historically, however, the term ‘equitable compensation’ has not been given this broad
reading, but refers to cases where a claimant is compensated directly by a money
payment (i.e. the payment is not made to restore the value of a trust fund). This can
happen in the case of a breach of trust. In Target Holdings Ltd v Redferns [1995] UKHL
10, [1996] AC 422, a solicitor held funds obtained from a lender on trust to complete
a purchase of land and obtain a mortgage on the land in the lender’s favour. It was
alleged that the solicitor helped defraud the mortgage lender by entering into a
series of land transactions not sanctioned by the lender. By the time of trial, there
was no purpose to be served in restoring the trust (i.e. requiring the solicitor to pay
his own funds into a new trust to be held for the lender). The lender wanted to be
compensated for its losses under the land transactions carried out in breach of trust
and sued the solicitor for a payment to it directly. In short, the lender claimed equitable
compensation from the solicitor.

In AIB Group (UK) plc v Mark Redler & Co [2014] UKSC 58, [2014] 3 WLR 1367, the Supreme
Court of Appeal followed Target Holdings, in a case involving a similar legal problem.
The defendant solicitors had disbursed £3.3 million in breach of trust, but were not
liable to account for the entire amount. They were liable only for the actual loss of
£300,000 caused by the breach. Lord Toulson said at [76]:

Equitable compensation and common law damages are remedies based on separate
legal obligations. What has to be identified in each case is the content of any relevant
obligation and the consequences of its breach. On the facts of the present case, the cost of
restoring what the bank lost as a result of the solicitors’ breach of trust comes to the same
as the loss caused by the solicitors’ breach of contract and negligence.

Equitable compensation, then, appears to refer to cases where the defendant is liable
in equity to pay an individual directly in order to compensate that person for a loss
caused by the defendant’s breach of an equitable duty. This can occur in cases where
there is no trust, for example, where a fiduciary obligation is breached. Those cases
will be dealt with in Chapter 18.

17.1.4 Personal liability and causation of loss

Trustees will only be liable for a loss to the trust fund or to a beneficiary if the loss has
been caused by their breach of duty. For example, trustees will not be liable if the trust
fund loses value just because there is a general decline in the market value of the trust
assets (Re Chapman [1896] 2 Ch 763). The beneficiaries must show that the loss was
caused by the breach.

There are two sorts of situation in which causation for loss must be considered: (1)
where the account is falsified; and (2) where the account is surcharged. (Losses caused
by a trustee breaching a fiduciary obligation to the beneficiaries will be discussed in
the next chapter.)

Account falsified
When an account is falsified, the beneficiaries claim that a transfer of trust assets was
in breach of trust. The loss caused by the breach in such a case is straightforward. The
trust no longer has an asset it once did, and the trustee is bound either to reverse the
transaction, or to pay money to put the trust in the position it would have been in had
the asset been retained (Target Holdings). So, for example, where the trustees in breach of
trust sold shares for £50,000 which are now worth £80,000 (the date at which the loss
is to be valued is the date of trial (see Nocton v Lord Ashburton [1914] AC 932 and Target
Holdings), the trustees must either purchase shares to replace those that were sold, or
if that is not possible, pay £30,000 into the trust (plus the value of any dividends that
would have been received if the shares had been kept, but minus any interest earned on
the £50,000 actually received from their sale). The loss caused is clearly the decline in
value of the trust rights caused by the falsifiable transaction. The amount of loss is simply
a calculation concerning the value of assets. In certain respects, the valuation of the loss
departs from the principles that would be applicable at common law, in the sense that
the trustees may be required to pay money to the trust even if that would put the trust in
a better position than if the breach had never occurred.
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It should be noted that many of the relevant cases were decided in the 19th century,
and a court today might be more willing to apply by analogy the common law tests
of remoteness of damage and causation, thereby minimising the trustee’s liability for
more or less imaginary values that the trust might have obtained but for the breach
(see Bristol and West Building Society v Mothew [1996] EWCA Civ 533, [1998] Ch 1). In
Target Holdings, Lord Browne-Wilkinson maintained that the test for causation of loss
in a case of equitable compensation remained different from that of the common law
with the former designed: ‘to make good a loss in fact suffered by the beneficiaries,
which using hindsight and common sense, can be seen to have been caused by the
breach.’ It is not clear that this way of putting things distinguishes an approach that
materially differs from what the common law rules of causation aim to achieve, but it
was approved by the Supreme Court in AIB Group (UK) plc v Mark Redler & Co, in which
Lord Reed said at [136]:

It follows that the liability of a trustee for breach of trust, even where the trust arises in
the context of a commercial transaction which is otherwise regulated by contract, is not
generally the same as a liability in damages for tort or breach of contract. Of course, the
aim of equitable compensation is to compensate: that is to say, to provide a monetary
equivalent of what has been lost as a result of a breach of duty. At that level of generality,
it has the same aim as most awards of damages for tort or breach of contract. Equally,
since the concept of loss necessarily involves the concept of causation…there are some
structural similarities between the assessment of equitable compensation and the
assessment of common law damages.

Account surcharged
Where the account is surcharged, issues of causation are somewhat different. Recall
the case of Nestle v National Westminster Bank (Chapter 4, Activity 4.6), where the
plaintiff claimed that the trustees (who were clearly in breach of trust for failing to
seek advice about the scope of the trust’s investment clause and therefore made
investments in breach of trust) caused a loss in the capital value of the trust fund.
The plaintiff therefore surcharged the account, claiming that the trustees would
have produced much greater capital growth in the trust fund if they had made their
investment decisions properly. She lost. While it was clear that the trustees acted
in breach, the plaintiff had not shown that the low capital growth was due to the
trustee’s breach, because even if they had known the true scope of their investment
powers, it was not shown that they would have obtained greater capital growth given
the standards of professional investment prevailing at the time.

Thus, unlike falsification of the account, when the account is surcharged showing
whether a breach caused a loss is not a simple matter of asset valuation. It involves a
genuine requirement to show that the loss flowed from the breach of trust and not
from some other factor, such as in Nestle, the standard investment practices at the
time. In such cases, it has been said that the common law principles of causation,
remoteness of damages, and measure of damages, should be applied by analogy
(Bristol & West Building Society v Mothew [1998] Ch 1, per Millett LJ).

Activities 17.1–17.4
17.1 Explain the difference between cases in which (a) the trust is specifically
enforced and (b) the trustee is personally liable for breach of trust.

17.2 What is the difference between falsifying and surcharging the trust account?

17.3 Give examples of breaches of trust and identify whether this would entitle
the beneficiaries to:

a. falsify the account

b. surcharge the account.

17.4 Read AIB Group (UK) plc v Mark Redler & Co [2014] UKSC 58, [2014] 3 WLR 1367
and explain the decision, in particular the way in which the court applied the
rules of causation which govern the award of equitable compensation.
Equity and Trusts  17  Breach of trust page 185

Summary
A trustee or third party may be liable to restore a loss caused to the trust. This liability
is the counterpart in equity of the liability at common law to pay damages for a
tort or breach of contract. Liability to account is the liability of the trustee or a third
party to compensate the beneficiaries to restore any loss to the trust by making a
money payment into the account. Equitable compensation refers to cases where the
defendant has a liability in equity to pay an individual directly in order to compensate
that person for a loss caused by the defendant’s breach of an equitable duty. This
occurs in more than just breach of trust cases; for example, where the defendant
breaches a fiduciary duty causing loss.

A trustee is only liable for a loss to the trust fund or to a beneficiary if the loss has been
caused by the trustee’s breach of trust. Consequently, this raises the issue of causation.
Two situations must be considered:

1. Where the account is falsified, the trust no longer had a particular asset and the
trustee is bound either to reverse the transaction, or to pay money into the trust
to restore the value of the trust had the asset been retained. Thus, the issue of
causation only concerns fluctuations in the value of specific assets.

2. Where the account is surcharged, the claimant must show that the loss flowed
from the breach and not from some other factor. As a consequence, the common
law principles of causation, remoteness of damages, and measure of damages
should be applied by analogy.

17.2 Liability of trustees inter se

17.2.1 Joint and several liability

Where there is more than one trustee, the question of liability among trustees (inter
se) arises. The background principle is that trustees must carry out the trust together,
and because they will normally hold those rights as joint tenants, must all participate
where a transaction involves dealing with the trust assets. The law does not recognise
the principle of a ‘sleeping trustee’, who does nothing in the administration of the
trust (Bahin v Hughes (1886) 31 Ch D 390). Trustees are jointly and severally liable when
they act together, or ought to have acted together, in doing anything which they
should not have done, or failing to do what they should have done. Nevertheless,
where a breach is committed by a trustee clearly acting alone, where for example one
trustee misappropriates some of the trust rights, their co-trustees will not be liable.

Where trustees are together liable, the court may, under the Civil Liability
(Contribution) Act 1978, apportion liability among them according to their individual
degree of fault. One trustee may also seek an indemnity from another trustee (i.e.
may require the other trustee to pay their share of equitable compensation) when
the latter alone misappropriated trust rights, or when the latter is a solicitor who
exercised a controlling influence over the trust, and thus is essentially responsible for
the breach (Bahin v Hughes).

17.2.2 Consent of beneficiaries

A beneficiary who is sui juris (i.e. of full age and of sound mind) may consent to a trustee
acting in a way that departs from the terms of the trust. If all the beneficiaries are sui
juris, and they all consent to an action which departs from the trust terms, there is no
breach of trust. For genuine consent, the beneficiaries must be fully informed of the
relevant facts, although they need not know the exact nature of their legal rights. The
test, as applied in Re Pauling’s ST [1964] Ch 303 at 339 (CA), is whether it would be just
to allow the beneficiary to ‘turn round and sue the trustees’ over actions in which the
beneficiary participated or to which the beneficiary consented.
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Of course, a beneficiary who is not sui juris cannot consent, and a beneficiary who is
sui juris must consent for themself. If an individual beneficiary consents to the trustees
departing from the trust, they are not able to sue for breach, but the other beneficiaries
can. Where a beneficiary consents to a breach causing loss to the trust fund, her or his
interest under the trust may be ‘impounded’, in particular circumstances (Chillingworth
v Chambers [1896] 1 Ch 685; Trustee Act 1925, s.62); that is to say, as much of the value of
their interest as is needed will go to making up the loss to the trust fund.

17.2.3 Trustee exemption clauses

A trust instrument may contain a clause that exempts trustees from personal liability
for breach of trust. The exemption will not affect the beneficiaries’ property rights to
the trust assets or their traceable proceeds, which the trustees will continue to hold
in trust regardless of any personal liability. The clauses, if effective, will exempt the
trustees from personal liability to restore a trust with money taken from their own
pockets.

The principles defining the valid scope of trustee exemption clauses were discussed
by Millett LJ in Armitage v Nurse [1997] EWCA Civ 1279, [1998] Ch 241. He said that the
trustee’s duties to act loyally, honestly, and in good faith were an ‘irreducible core’ set
of trust obligations, breach of which could not be relieved by any exemption clause. A
trustee exemption clause can validly relieve trustees of liability for a breach evincing
any other kind or degree of fault. No matter how grossly negligent a breach may be,
a properly drawn clause can relieve the trustees of liability for the consequent loss.
According to Millett LJ, trustees may even be relieved of liability for an intentional
breach of trust if it was done with the best interests of the beneficiaries in mind. This
last point was doubted in Walker v Stones [2001] QB 902 (CA). Perhaps a clause should
relieve trustees of a ‘one-off’ breach of this kind, but a consistent intentional disregard
of the trust terms should not be relieved, even if the trustees do so honestly, for this
would allow them to rewrite the trust. If that is desirable, the proper procedures for
varying the trust should be followed (see Chapter 16). Reckless breaches (i.e. where
the trustees knowingly take risks with the beneficiaries’ interests) count as dishonest
or disloyal breaches, and cannot be relieved, and this includes the case where the
trustees undertake a breach advertently relying on the exemption clause to get
themselves off the hook if things go wrong.

Armitage v Nurse is a controversial decision. In response, the Law Commission

published a consultation paper (No. 171, 2003) proposing that any exemption clause
purporting to relieve trustees of liability for negligence or worse (i.e. recklessness,
dishonesty, and so on) would be invalid at law. However, after consultation, they
decided to recommend no legislative change, and leave the various professional
regulatory bodies to ensure that settlors were informed of the effects of trustee
exemption clauses by those offering the services of trustees (Law Com 301, 2006).

17.2.4 Section 61 Trustee Act 1925

Section 61 empowers the court to relieve trustees of all or part of their liability for
breach of trust if they have ‘acted honestly and reasonably, and ought fairly to be
excused for the breach of trust’. Each limb of the test (honesty, reasonableness, and
fairness) must be met. There is little case law on the application of the section. Relief
was denied where the trustee’s breach manifested a conflict of interest (Re Pauling’s
ST) and also in Bartlett v Barclay’s Bank Trust Co Ltd [1980] 1 Ch 515, where a professional
trustee made a risky unauthorised investment, on the ground that the breach was
unreasonable and that the trustee ought not fairly to be excused at the beneficiaries’
expense.

In Santander UK plc v RA Legal Solicitors [2014] EWCA Civ 183, [2014] PNLR 20, relief was
denied to solicitors who had breached a trust during a conveyancing transaction even
though their breach did not cause their client’s loss. They had not acted reasonably
because they had failed to follow the normal conveyancing procedures set out in the
Law Society’s ‘Completion Code’ and thereby created a greater risk of loss. Because
Equity and Trusts  17  Breach of trust page 187

their breach created this risk, they failed to satisfy the onus on them to show that they
had acted reasonably, and the court refused to exercise its discretion to relieve them
from liability even though the client would have suffered the same loss if they had
followed the Code.

Section 61 was successfully pleaded in Evans v Westcombe [1999] 2 All ER 777 to partly
relieve a lay administrator of an estate who distributed rights in the reasonable belief
that one beneficiary of the estate, who later turned up, had died.

Self-assessment questions
1. In what circumstances will trustees all be liable together?

2. In what circumstances will a trustee not be liable for a breach of trust?

3. When can a trustee claim an indemnity from co-trustees?

4. What is necessary for a beneficiary’s consent to a departure from the trust terms
to be valid?

5. What does it mean for a beneficiary’s interest to be impounded?

6. To what limits may a trustee exemption clause go to relieve a trustee of liability

for breach of trust?

7. In what circumstances will the court relieve a trustee under s.61 of the Trustee
Act 1925?

Summary
Where a trust is breached, the trustees may be personally liable to carry out the trust
or pay for the loss out of their own pockets. Claims for breach of trust are traditionally
framed in terms of ‘falsifying’ the trust (where a particular transaction is identified
as a breach of trust) or ‘surcharging’ the trust account (where a general or particular
failing on the part of the trustee means that the value of the trust rights is lower
than it should be). The rules for assessing personal liability for causing losses in these
cases differ from each other and both are traditionally regarded as different from the
common law rules governing causation of loss.

Trustees may all be liable where they acted (or should have acted) together in
circumstances where a breach has occurred, but are solely liable for their own
individual breaches committed without the participation of other trustees.

Sui juris beneficiaries can consent to departures from the trust terms, but the trustees
breach the trust in respect of any departures relating to those beneficiaries who
cannot or do not consent. Beneficiaries who consent to a breach may have their
interests impounded to make up the loss to the trust occasioned by the breach.
Trustees may be relieved of liability under the trust instrument by an exemption
clause, which is valid even if very widely drawn, but dishonest or reckless breaches
may not be relieved. Section 61(1) of the Trustee Act 1925 empowers the court to
relieve a trustee of all or part of the liability for an honest and reasonable breach.

Essential reading
¢¢ Trustee Act 1925, ss.61, 62.

¢¢ AIB Group (UK) plc v Mark Redler & Co [2014] UKSC 58, [2014] 3 WLR 1367; Re
Pauling’s ST [1964] Ch 303 (CA); Armitage v Nurse [1997] EWCA Civ 1279, [1998]
Ch 241.

Further reading
¢¢ Target Holdings Ltd v Redferns [1995] UKHL 10, [1996] AC 421; Libertarian
Investments Ltd v Hall [2013] HKCFA 93, 16 HKCFAR 681 at [167]–[172]; Santander UK
plc v RA Legal Solicitors [2014] EWCA Civ 183, [2014] PNLR 20.

¢¢ Mitchell, C. ‘Stewardship of property and liability to account’ [2014] Conv 215.

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17.3 Liability of third parties

So far, we have outlined the liability of trustees for breach of trust. However,
beneficiaries may also have very important remedies against third parties (i.e. not the
trustees) who are somehow involved in a breach of trust.

Trustees de son tort

The most straightforward case of third party liability for breach of trust arises when
people, although not formally appointed, take it upon themselves to act as trustees.
They are called trustees de son tort (trustees by their own wrong) and are liable for any
breach of trust they commit just as they would be if they had been properly appointed as
trustees (see Mara v Browne [1896] 1 Ch 199). The term ‘constructive trusteeship’ properly
applies in this context because they are, by operation of law, held to be trustees.

Property rights to the trust assets

If the trustees transfer trust rights in breach of trust to someone who is not a bona fide
purchaser (recall 4.1), the beneficiaries may simply call on that person to return the
rights, or their traceable proceeds. Although, as we will see in Chapter 19, the rules
governing tracing are complicated, this liability is essentially straightforward. Where
the beneficiaries can identify an asset that was previously held on trust, or its traceable
substitute, in the hands of a third party, they can claim it as theirs in equity. The court
will require the third party to transfer the right to the beneficiaries in certain cases,
but more usually to their trustees (who may be new trustees appointed to replace the
old ones who committed the breach in the first place).

Personal liability of third parties

Third parties will sometimes be personally liable (i.e. liable to pay money from their
own pockets) to make up the loss to the trust fund caused by a breach of trust. They
may be required to do so in two cases:

1. Where they have dishonestly assisted the trustees to breach the trust; and
2. Where they have received trust assets dissipated in breach of trust.

17.4 Dishonest assistance

A third party (i.e. someone who is neither a trustee nor beneficiary) may participate
or assist in a breach of trust. For example, this might be a solicitor who works
with the trustees to carry out the terms of the trust, but who becomes involved in
assisting them in a transaction which breaches the terms of the trust. Traditionally,
such a person could be held liable for ‘knowing assistance’ in a breach of trust. The
term ‘knowing’ indicates that some sort of knowledge of involvement in a breach
of trust was required before the third party could be held liable. Because assistants
are liable to restore the trust out of their own pockets, it is often said that they are
liable as ‘constructive trustees’, meaning that they are personally liable for the same
amount ‘as if they were trustees’. This terminology of ‘constructive trusteeship’ is
now generally frowned upon because of its potential for confusion. People may be
called ‘constructive trustees’ either because they are being treated like trustees even
though they are not or because they are actual trustees of constructive trusts. It is very
important to distinguish between the two.

The leading cases on accessory liability are the decisions of the Privy Council in
Royal Brunei Airlines Sdn Bhd v Tan [1995] UKPC 4, [1995] 2 AC 378, and Barlow Clowes
International Ltd v Eurotrust International Ltd [2005] UKPC 37, [2006] 1 WLR 1476, and
the decision of the House of Lords in Twinsectra Ltd v Yardley [2002] UKHL 12, [2002] 2
AC 164. They established that an accessory must dishonestly assist a breach of trust in
order to be liable. Mere negligence is not sufficient to found liability. It does not matter
whether the trustee himself was fraudulent or dishonest in committing the breach. A
solicitor who dishonestly advised an innocent trustee to commit a breach would be
liable all the same. All turns on the accessory’s dishonesty.
Equity and Trusts  17  Breach of trust page 189

What then counts as dishonesty? In Royal Brunei (1995), the Privy Council advised
that dishonesty requires that the accessory knows the facts that would indicate
to a reasonable person that they are participating in a breach of trust. This test is
subjective in the sense that it depends on what the assistant actually knows. However,
the test for honesty is objective in that the standard of honesty is determined by the
views of honest and reasonable people. Accessories are not allowed to set their own
standards of honesty, such that if they personally see nothing wrong with breaching
a trust they could claim to be honest. In Twinsectra (2002), the House of Lords either
refined or confused the Royal Brunei test for dishonesty (depending on your point of
view) holding that, although the test of morality was an objective one, it had to be
shown that the defendant subjectively knew that his conduct fell below that objective
standard. That third requirement was removed by the Privy Council in Barlow Clowes v
Eurotrust Ltd (2005). The question then is what an English court, bound by Twinsectra
but not Barlow Clowes, is to do. The Court of Appeal decided that they should follow
the latter: Abou-Rahmah v Abacha [2006] EWCA Civ 1492, [2007] Bus LR 220.

Activity 17.5
Read Royal Brunei Airlines Sdn Bhd v Tan [1995] UKPC 4, [1995] 2 AC 378, and Barlow
Clowes International Ltd v Eurotrust International Ltd [2005] UKPC 37, [2006] 1
WLR 1476. Does a conclusion that someone was dishonest depend solely on the
subjective intentions and beliefs of that person or is it based partly on an objective
test?
Would we be better to return to the language of ‘knowing’ rather than ‘dishonest’
assistance?

17.5 Knowing receipt

One must be very careful here. The beneficiaries’ property rights to the trust assets or
their traceable proceeds is discussed in Chapter 19. What we study here is the personal
liability of third parties for having received or dealt with trust assets or their traceable
proceeds which they received in breach of trust.

Consider the following breaches of trust. Tom, the trustee, in breach of trust withdraws
money from the trust’s bank account to give £1,000 to each of his children, Martha and
Graham, as birthday presents. Martha spends her £1,000 on a holiday. Graham spends
his on a scooter. The beneficiaries have a property right to Graham’s scooter, which
is the traceable proceeds of the £1,000 trust money he received. They can go to him,
point to the scooter, and say, ‘you hold it on trust for us’. A court will require Graham
to transfer it to them or to the new trustees (supposing, as is likely, that Tom has been
replaced).

What can the beneficiaries say to Martha? She has nothing left of what she received,
for she spent it in a way that gave rise to no traceable substitute. Can the beneficiaries
require her to dig into her own pocket and pay £1,000 to restore the value of the trust
fund? In other words, is she personally liable for the value received? Traditionally,
Martha would only be liable if she had some degree of knowledge when she received
the £1,000 in breach of trust (which is why this species of liability is usually called
‘knowing receipt’) or she later acquired some degree of knowledge of the breach
and then dealt with the money as her own anyway instead of returning it to the trust
(hence the term, ‘knowing dealing’). As in the case of ‘knowing assistance’, she was
called a ‘constructive trustee’ because her personal liability to restore the trust was
the same ‘as if’ she were a trustee.

17.5.1 The standard of knowledge required

Fixing on a standard of knowledge for the personal liability of a recipient of trust
rights has exercised the brains of many judges in many cases. The issues were
complicated by the fact that, because knowing assistants and knowing recipients
were traditionally both treated as ‘constructive’ trustees (i.e. as if they were
trustees), it was often felt that the standard of knowledge for liability in both cases
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was the same. In Royal Brunei, the Privy Council firmly distinguished the two heads
of liability, saying that there was no reason why the standards should be the same,
and this principle was enthusiastically accepted (albeit obiter) by the House of Lords
in Twinsectra. Determining the standard was also complicated by the distinction
between knowledge and notice. You will recall (from 4.1) that a standard of ‘notice’
is used to assess whether a recipient of trust assets is a bona fide purchaser. Notice
generally applies when the purchaser should protect themselves by investigating in
a reasonably diligent fashion the title they intend to buy in order to be free of any
competing claims to it. In many cases of breach of trust, however, the recipients have
no reason to investigate the source of the rights they receive. In our examples, Graham
and Martha do not ask their father, Tom, to prove that the money they receive is his to
give, nor would they be expected to do so.

Thinking in terms of notice, as some judges seem to have done, muddies the waters.
For example, in Papadimitriou v Crédit Agricole Corp and Investment Bank [2015] UKPC
13, [2015] 1 WLR 4265, a bank received the proceeds of the sale of furniture that had
been misappropriated by an art dealer. The Privy Council held that the bank was not
entitled to the defence of bona fide purchase because it had constructive notice of
the fraudulent activities of the art dealer. In a separate, concurring judgment, Lord
Sumption said (at [33]):

Whether a person claims to be a bona fide purchaser of assets without notice of a prior
interest in them, or disputes a claim to make him accountable as a constructive trustee on
the footing of knowing receipt, the question what constitutes notice or knowledge is the
same.

This is obiter dictum and seems to be inconsistent with the law of England on this
point. As discussed below, it is not clear what level of knowledge or notice will make
someone liable for knowing receipt, but something more than constructive notice is
required.

Re Montagu’s Settlement Trusts

Prior to the Court of Appeal decision in Bank of Credit and Commerce International
(Overseas) Ltd v Akindele [2000] EWCA Civ 502, [2001] Ch 437, the leading case was
probably Re Montagu’s ST [1987] Ch 264. In Montagu the trustees gave the defendant
a number of paintings held under a family settlement. This was a breach of trust. The
defendant at one time knew that the paintings were part of the family settlement, but
had forgotten that fact and treated them as his own. He sold the paintings, and after
his death many years later (when there was no longer any possibility of tracing the
proceeds of sale), his son, as the principal beneficiary of the family settlement, claimed
that the defendant’s estate was liable to restore the value that had been lost. Megarry J
denied the claim. He held that in order to found a claim for knowing receipt or dealing,
the defendant had to have actual knowledge that his receipt was in breach of trust,
was ‘wilfully blind’ to that fact (i.e. had shut his eyes to the obvious) or had wilfully and
recklessly failed to make the inquiries that an honest and reasonable person would
make. Furthermore, a person was not liable for knowledge they might have once had,
but had honestly and genuinely forgotten when the breach occurred.

BCCI v Akindele
In Akindele, the defendant entered into an arrangement with the plaintiff bank to buy
shares. The contract was an unusual one, in that the ‘share purchase’ was basically a
sham. The real contract was to provide a loan to the bank for a certain time period
in return for which the bank guaranteed a repayment of the loan at a high rate of
interest. The actual transaction was entered into on behalf of the bank by several of
its employees as part of a fraud on the bank. The bank sued the defendant for the
large amount of interest he received under the transaction, claiming that the sham
nature of the transaction and the high rate of interest would have indicated to a
reasonable and honest person that the transaction was fraudulent, or at least have
caused a reasonable or honest person to make further inquiries before entering into
the transaction. The bank’s claim failed. In essence, the court accepted the defendant’s
Equity and Trusts  17  Breach of trust page 191

explanation that he believed the transaction and the high rate of interest under it
were legitimate investments offered to him as one of the bank’s ‘high net worth’
clients. He did not concern himself with the details of the contract, and so did not
regard the odd aspects of the transaction to be a matter of concern.

While the outcome in Akindele was consistent with Re Montagu, it was not decided
in accordance with the law as stated in Re Montagu. Nourse LJ decided that just as
Royal Brunei had cleared away the tangled case law of the past to establish from first
principles the basis upon which a person could be liable for assisting a breach of trust,
the court should do the same for the law on recipient liability. He said that a defendant
would be personally liable only if it would be ‘unconscionable’ for him to retain the
benefit of the receipt of trust property: [2001] Ch 437 at 455. Ironically, this is the one
word that was rejected by the Privy Council in Royal Brunei as devoid of meaning and
therefore completely unworkable. It will come as no surprise to learn that Nourse
LJ did not provide any clear guidance about the factors that would go to make the
retention of benefit unconscionable, and the law is now more uncertain than ever. This
is an area of the law that calls for an extensive review by the Supreme Court.

It is to be noted that the recipient in Re Montagu was a volunteer (i.e. a donee who
gave no consideration for the transfers) and so could not claim to be a bona fide
purchaser. If the paintings had still been in his possession (or in his estate), they would
have belonged in equity to the beneficiaries, but the paintings had been sold long
ago and the proceeds dissipated so as to be untraceable. In Akindele, by contrast, the
defendant had given consideration under a valid contract for the assets he received
(he had given the bank the use of his money for two years under a contract). In Re
Montagu, the recipient got to keep the value of property he received and had not paid
for in any way, whereas in Akindele, if he had been liable, he would have lost value for
which he had paid. Given the differences in these two situations, should the standard
of knowledge be lower in the case of a donee recipient? Should it be ‘unconscionable’
for a donee ever to retain the benefit of their receipt, being one who, to repeat, paid
nothing for what they received in breach of trust?

Charles Mitchell and Stephen Watterson have argued convincingly that liability of
knowing receipt is actually liability for breach of trust, which arises when the recipient
dissipates the trust assets with knowledge of the existence of the bare trust (to restore
the trust assets to the proper trustees) which arose when the assets were received:
‘Remedies for knowing receipt’ in Mitchell, C. (ed) 2010, p.115.

There is also a strong argument that cases like Akindele really have nothing to do
with knowing receipt. Akindele concerned a breach of fiduciary duties by company
directors. There was no breach of trust. The directors acted as agents for the company
to make a contract with the defendant. Clearly, they did not have actual authority to
commit a fraud on the company, so the essential question was whether the defendant
relied on their ostensible (i.e. apparent) authority to make the contract. He did and
so the contract was binding. If not, the contract would have been void and the money
recoverable at common law. Knowing receipt was irrelevant. See R. Stevens ‘The
proper scope of knowing receipt’ [2004] 4 LMCLQ 421; Criterion Properties plc v Stratford
UK Properties LLC [2004] UKHL 28, [2004] 1 WLR 1846. Perhaps the main difficulty in
this area of law is that most of the modern cases of knowing receipt are company law
cases. Re Montagu stands out because it is a case dealing with breach of trust.

17.5.2 An unjust enrichment approach

The Court of Appeal in Akindele briefly referred to a new approach to the personal
Go to your study pack and
liability of a recipient, an unjust enrichment approach. The court felt itself bound to
read ‘Knowing receipt: the
work within the constraints of previous case law and unable to consider this approach,
need for a new landmark’ by
but as it has been mooted extra-judicially by some of the most senior members of
Lord Nicholls of Birkenhead.
the bench (Lord Nicholls, whose views are quoted in Akindele on this issue, and Lord
Millett), and since this area of law is ripe for review by the Supreme Court, it should be
considered. From an unjust enrichment perspective, the recipient of rights transferred
in breach of trust should be strictly liable to repay its value to the trust, for otherwise
they would be unjustly enriched at the expense of the beneficiaries. Their liability
page 192 University of London  International Programmes

should not turn on their knowledge, but purely on the fact that they were enriched,
at the beneficiaries’ expense, in circumstances where they ought never to have
received that enrichment. In these terms, the case is similar to if you paid your gas
bill a second time by mistake, forgetting that you had already sent a cheque. The gas
company is strictly liable to return the second payment because they would otherwise
be unjustly enriched at your expense. Your mistake means that your intention to
enrich the company was vitiated and so should not count against you. The same goes,
on this reasoning, for the recipient of trust rights dissipated in breach of trust. The
beneficiaries give no consent whatsoever to the transfer, so the case is even stronger
than mistake.

The ‘change of position’ defence

The strict liability of the unjust enrichment defendant is modulated by the defences
of bona fide purchase and change of position. Innocent recipients who give value in
return will normally be fully protected as bona fide purchasers. The change of position
defence can protect innocent donees who rely upon the apparent security of the
receipt without knowledge of the breach of trust. It can apply if they use the value
received in a way which they would not have done but for having received them. By
doing so, they change their position so that it would be unjust to make them pay it all
back, and to that extent, they can be relieved of liability.

The defence is best explained by an example. Consider Martha, above, who spent her
birthday gift on a holiday. Assume she was innocent of the fact that Tom gave her the
money in breach of trust. If she can show that she would not have gone on holiday
but for the £1,000 gift, and that she went only because the £1,000 gift made her rich
enough to afford it, then she can claim that her position has changed. She innocently
spent money in a way she would not have done out of her own pocket given her
previous finances, and it would be unjust now to make her pay it back because that
would put her in a worse position than if she had never received the money at all.

Unlike bona fide purchase, which is an ‘all or nothing’ defence, change of position
can be a partial defence, reducing liability only to the extent that the defendant
has changed their position. So, for example, if Martha had spent only £600 on the
holiday in reliance on her receipt of the £1,000, she might have her liability in unjust
enrichment reduced to £400.

It is important to note that while the unjust enrichment approach has both academic
and practitioner supporters, there is no case which adopts this approach to recipient
liability. Until such time, this approach to the personal liability of the recipient must be
speculative.

Activity 17.6
Go to your study pack and
Ted is the trustee of the Davis family trust. He takes home two paintings which read ‘Receipt’ by P. Birks.
are held on the family trust, puts one on his wall and he sells the other for £2,000.
Ted then makes an unauthorised investment which causes a loss to the trust of
£20,000. Alex, his solicitor, who advised him on the investment, read the trust
terms incorrectly and concluded the investment was authorised. Ted then decided
to transfer £50,000 to Barbara, a non-beneficiary; Alex carried out the transaction.
Ted gives the trust painting on his wall to Fred, another non-beneficiary, who sells it
for £10,000 and spends the money on a lavish birthday party for his wife.
List the possible proprietary and personal claims the beneficiaries have against (a)
Ted, (b) Alex, (c) Barbara, and (d) Fred in the following situation, and state what the
appropriate test for liability is in each case.

Essential reading
¢¢ Royal Brunei Airlines Sdn Bhd v Tan [1995] UKPC 4, [1995] 2 AC 378; Barlow Clowes
Int Ltd v Eurotrust Int Ltd [2005] UKPC 37, [2006] 1 WLR 1476; Re Montagu’s ST [1987]
Ch 264; Bank of Credit and Commerce Int (Overseas) Ltd v Akindele [2000] EWCA Civ
502, [2001] Ch 437.
Equity and Trusts  17  Breach of trust page 193

Further reading
¢¢ Twinsectra Ltd v Yardley [2002] UKHL 12, [2002] 2 AC 164; Abou-Rahmah v Abacha
[2006] EWCA Civ 1492; El Ajou v Dollar Land Holdings plc [1993] EWCA Civ 4, [1994] 2
All ER 685; Arthur v A-G Turks & Caicos Islands [2012] UKPC 30.

¢¢ Birks, P. ‘Receipt’ in P. Birks and A. Pretto (eds) Breach of trust. (Oxford: Hart
Publishing, 2002) [ISBN 9781841131740] p.213.

¢¢ Chambers, R. ‘The end of knowing receipt’ (2016) 2 Canadian J Comparative

Contemporary L 1.

¢¢ Gardner, S. ‘Knowing assistance and knowing receipt: taking stock’ (1996)

112 LQR 56.

¢¢ Gardner, S. ‘Moment of Truth for Knowing Receipt?’ (2009) 125 LQR 20

¢¢ Mitchell, C. and S. Watterson ‘Remedies for knowing receipt’ in C. Mitchell

Constructive and resulting trusts. (Oxford: Hart Publishing, 2010)
[ISBN 9781841139272] p.115.

¢¢ Nicholls, Lord, ‘Knowing receipt: the need for a new landmark’ in W.R. Cornish
et al. (eds) Restitution past, present and future: essays in honour of Gareth Jones.
(Oxford: Hart Publishing, 1998) [ISBN 9781901362428] p.231.

¢¢ Smith, L.D. ‘Unjust enrichment, property, and the structure of trusts’ (2000) 116
LQR 412.

¢¢ Stevens, R. ‘The proper scope of knowing receipt’ (2004) 4 LMCLQ 421.

Activity 17.7
Read Re Montagu’s ST and BCCI v Akindele.
Which approach to personal recipient liability is more persuasive? Does the unjust
enrichment approach seem preferable to both?

Self-assessment questions
1. Who or what is a trustee de son tort?

2. What is ‘knowing dealing’?

3. What is ‘accessory liability’?

4. What are the essential duties of trustees, according to Millett LJ in Armitage v

Nurse?

5. Why is the decision in Armitage v Nurse considered controversial?

6. What is ‘falsifying the trust account’?

7. What is liability for ‘equitable compensation’? How does it differ from a

trustee’s ‘liability to account’?

Summary
Third parties may participate in a breach of trust, either by assisting the trustees to
commit the breach or by receiving trust assets transferred in breach. Traditionally,
they would be personally liable as ‘constructive trustees’ (i.e. as if they were trustees)
to restore the value of the trust from their own pockets. To be liable for assistance, the
third party must ‘dishonestly assist’ the trustees. Mere negligence is not enough. The
test for dishonesty has now arguably returned to one of knowledge.

If a third party receives assets dissipated in breach of trust and they are retained or
substituted for other assets, the beneficiaries can force the third party to hand them
back to the trust. However, if the assets are dissipated and there is no exchange
product, the extent of the third party’s degree of knowledge determines whether they
will be personally liable to restore their value. The standard of knowledge required has
been debated over the years in many judicial decisions.
page 194 University of London  International Programmes

The standard of knowledge may differ between ‘knowing assistance’ and ‘knowing
receipt’. The law is currently unclear. According to Re Montagu, recipient liability
requires actual knowledge that the receipt was in breach of trust, wilfully blind to
the obvious, or failing to make inquiries that an honest and reasonable person would
make. According to Akindele, liability arises where it would be ‘unconscionable’ for the
defendant to retain the benefit of the receipt of the trust property.

An unjust enrichment approach to recipient liability has recently been proposed,

although no case has actually adopted it. On this approach, a recipient of rights
dissipated in breach of trust would be strictly liable to repay its value to the trust,
for otherwise they would be unjustly enriched at the expense of the beneficiaries.
However, this liability is subject to the defences of bona fide purchase and change of
position. If innocent recipients rely upon the legitimacy of their receipt and thereby
change their position, making it unfair for them to pay all or some of it back, their
liability will be reduced accordingly.

Activity 17.8

Core comprehension – dishonest assistance and knowing receipt

Using your online library resources, research the following journal article:
uu Watterson, S. ‘Limitation of actions, dishonest assistance and knowing receipt’
(2014) 73(2) CLJ 253–56.
a. In Williams how did the claimant’s arguments attempt to extend the definition
of trustees?

b. Why did the Supreme Court reject this argument?

c. How did the claimant’s arguments attempt to extend the definition of

‘constructive trustees’?

d. Why did the Supreme Court reject this argument?

e. Which premise of the Supreme Court is questioned by Watterson?

f. Which similarities does Watterson highlight between constructive trustees and

expressed trustees?

g. How does the Arthur v A-G Turks & Caicos Islands [2012] UKPC 30 support
Watterson’s analysis?

Activity 17.9

Applied comprehension – professional duties and breach of trust

Using your online library resources research the following case:
uu AIB Group (UK) Plc v Mark Redler & Co Solicitors [2014] UKSC 58.
a. Outline the breach and the relief which the Bank alleged against the solicitors.

b. How did the solicitors breach the terms of the Council of Mortgage Lenders’
Handbook?

c. Identify (i) the numerical difference between the Bank’s calculation of liability
and the solicitor’s calculation and (ii) the important fact which explains the
source of the gap.

d. Which broad principle of equitable compensation was identified by Lord

Browne-Wilkinson in the Target Holdings case?

e. Identify the two principles fundamental to an award of damages at common

law.

f. Identify the basic rule to an award for breach of trust in equity.

Equity and Trusts  17  Breach of trust page 195

Sample examination questions

Question 1 To what extent is a third-party defendant’s state of knowledge relevant
in claims for personal liability to restore the trust?
Question 2 Stanley was a solicitor who often advised Tom, the chief trust officer
of a large trust company. In 2004, he advised him to invest a large portion of the
value of the Adams family trusts in investments prohibited by the trust instrument
to enhance the returns on the trust fund. Tom agreed with the idea, and did so. The
strategy was unsuccessful and the trust fund is now worth only half of what it was.
In 2005, Stanley negligently prepared a tax-saving scheme for the Bryson family
trust, which Tom implemented, and which resulted in an unnecessary £30,000 tax
liability. In 2006, Tom asked Stanley to prepare the documentation for the transfer
of a house from the Carling family trust to the widow of the family. Stanley was
sceptical about whether the transfer was permitted by the terms of the trust, but
in response to his query on this point, Tom said, ‘I think it’s okay, and the widow
needs the house, and in any event I’m covered by the exemption clause. Get to it.’
Stanley carried out the transfer as instructed. All three trust instruments contain
exemption clauses relieving trustees of liability for any loss to the trust except
when caused ‘by his own actual fraud’. Advise the beneficiaries of each of the trusts.
Question 3 Tamara, a trustee, breaches the trust she manages by (a) failing to
invest the trust rights with due care so that the fund is worth much less than it
should be; (b) by selling a title to a parcel of land held by the trust, a transaction
prohibited by the trust terms; (c) by making an unauthorised payment to Barney,
one of the beneficiaries who realises it is a breach of trust but consents to it.
Advise Tamara.

Advice on answering the questions

Question 1 The question concerns personal liability both for ‘intermeddling with’ the
trust rights so as to become a trustee de son tort, assistance in a breach of trust, and for
receipt of trust rights dissipated in breach of trust. Regarding the first, knowledge is in
a certain sense irrelevant, for the trustee de son tort by their actions makes plain that
they are acting as if they were a trustee of the trust. One cannot do that unknowingly,
although whether the intermeddler realises their potential liability is irrelevant. As
to assistance, the question requires an analysis of the test of dishonesty now set
in place by the Privy Council in Barlow Clowes, purporting to follow the majority in
Twinsectra, themselves purporting to follow Royal Brunei Airlines. Finally, recipient
liability must be discussed, first examining the law defining the standard of knowledge
for knowing receipt prior to Akindele, and then considering how knowledge might
figure in the Akindele ‘unconscionability’ test. The unjust enrichment approach should
be considered as a possible way forward regarding recipient liability, and it should be
pointed out that on this approach the issue of the defendant’s knowledge comes into
play only when the change of position defence is invoked.

Question 2 The investment is clearly in breach of trust. The account can be falsified
against Tom in respect of this transaction. The issues are whether Tom can be relieved
by the exemption clause, and whether Stanley may be liable as an accessory. As to the
former, Millett LJ in Armitage stated that an intentional breach carried out honestly
for the benefit of the beneficiaries would not count as wilful fraud. As for Stanley,
he is not protected by the exemption clause, and having intentionally breached the
trust, he may be regarded as dishonest, although Millett LJ’s reasoning regarding the
trustee might by analogy be applied to Stanley, so that he could not be treated as
dishonest under the test laid down in Royal Brunei, Twinsectra or Barlow Clowes. The
test should be discussed in detail and applied as well as it can be to Stanley. Tom is
not liable for the loss caused by the negligently prepared tax-saving scheme unless he
was negligent in his appointment or monitoring of Stanley, and there is no evidence
of this. Stanley is liable for his professional negligence. Tom, on behalf of the trust,
should pursue a claim for damages for professional negligence against Stanley. The
trust account can clearly be falsified in respect of the final transaction. Tom will be
personally liable unless relieved by the exemption clause, but this is doubtful, for
page 196 University of London  International Programmes

as Millett LJ said in Armitage, a trustee who intentionally relies on an exemption

clause to carry out a possible breach of trust is wilfully reckless and thus dishonest,
so the exemption clause will not operate in their favour. Stanley may be liable here
for assistance, depending upon whether you would characterise his state of mind
as sufficiently dishonest under the test in Royal Brunei, Twinsectra or Barlow Clowes;
that is, did he act in a wilfully blind fashion, failing to make enquiries? The widow will
be subject to a proprietary claim for the title to the house. As a donee, she is not a
bona fide purchaser. If she has managed to dispose of the title, the beneficiaries can
trace into the proceeds. If those have been dissipated, the widow may be subject
to a personal claim, in respect of which a discussion of Montagu, Akindele and unjust
enrichment is required.

Question 3 Tamara must be advised that she will be personally liable for each of the
three breaches of trust. Regarding (a), the beneficiaries can surcharge the account,
and the amount of compensation she will have to pay to restore the trust will be
such as to place the trust in the position it would have been in had she invested
with care. The rules of causation in this respect are likely to be analogous to those of
the common law (Millett LJ in Mothew), although the rule from Target Holdings is the
‘common sense causation with the full benefit of hindsight’ test. In Nestle v National
Westminster Bank (recall Chapter 4, Activity 4.6), the court held that if the trustee had
been liable, compensation would have been awarded to bring the fund up to the
level it would have had, had a proper investment policy been followed, not merely
the minimum level the trustee might have achieved without being subject to a legal
challenge. Regarding (b), the sale can be falsified on the trust account. Tamara should,
if she can, restore the trust by re-purchasing the title to land for it. If she cannot, the
compensation she will pay will be determined as the value of the title at the time of
trial (Nocton v Lord Ashburton; Target Holdings) minus, of course, the amount received
by the trustees in payment for it. Regarding (c), Tamara will again be liable to restore
the trust for the loss caused by this falsifiable appointment. She may, however, be
relieved in whole or in part as Barney’s interest may be impounded (Chillingworth v
Chambers; Trustee Act 1925, s.62). Tamara should also be advised that the beneficiaries
may well apply to the court to have her replaced.
Equity and Trusts  17  Breach of trust page 197

Reflect and review

Look through the points listed below.

Are you ready to move on to the next chapter?

Ready to move on = I am satisfied that I have sufficient understanding of the principles

outlined in this chapter to enable me to go on to the next chapter.

Need to revise first = There are one or two areas I am unsure about and need to revise
before I go on to the next chapter.

Need to study again = I found many or all of the principles outlined in this chapter very
difficult and need to go over them again before I move on.

Tick a box for each topic.

Ready to Need to Need to
move on revise first study again

I can describe the various ways in which a trust can

be breached.   

I can explain the various personal and proprietary

rights that the beneficiaries may have against
trustees and third parties when a trust is breached.   

I can explain how the beneficiaries may claim that

a trustee has breached the trust by ‘surcharging’ or
‘falsifying’ the trust accounts.   

I can explain the liability of trustees for breach of

trust between themselves, and the consequences of
a beneficiary’s consent to a breach of trust.   

I can explain and apply s.61 of the Trustee Act 1925

and the law governing trustee exemption clauses.   

I can explain and apply the tests which govern third

party liability for assisting in a breach of trust and
receiving trust property.   

If you ticked ‘need to revise first’, which sections of the chapter are you going to
revise?
Must Revision
revise done

17.1 Liability of a trustees for breach of trust  

17.2 Liability of trustees inter se  

17.3 Liability of third parties  

17.4 ‘Dishonest assistance’  

17.5 Knowing receipt  

page 198 University of London  International Programmes

Notes
18 Breach of fiduciary duty

Contents
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 200

18.1 Fiduciary relationships . . . . . . . . . . . . . . . . . . . . . . . . . 201

18.2 Breach of trust v breach of fiduciary duty . . . . . . . . . . . . . . . . 201

18.3 The ‘no conflict’ rule . . . . . . . . . . . . . . . . . . . . . . . . . . 202

18.4 The ‘no profit’ rule . . . . . . . . . . . . . . . . . . . . . . . . . . . 202

18.5 The ‘self dealing’ rule . . . . . . . . . . . . . . . . . . . . . . . . . . 203

18.6 The ‘fair dealing’ rule . . . . . . . . . . . . . . . . . . . . . . . . . . 204

18.7 Equitable compensation . . . . . . . . . . . . . . . . . . . . . . . . 204

18.8 Trustee exemption clauses . . . . . . . . . . . . . . . . . . . . . . . 206

Reflect and review . . . . . . . . . . . . . . . . . . . . . . . . . . . 209

page 200 University of London  International Programmes

Introduction
As discussed in Chapter 4, the trustees’ primary duties are to keep accurate trust
accounts, obey the terms of the trust, and take care of the trust assets. A breach of any
of those duties is a breach of trust, which is discussed in Chapter 17. Express trustees
also owe fiduciary duties to exercise their powers only for the purposes for which
they were granted and not to benefit themselves or for any other improper purpose.
Trustees are not the only fiduciaries. There are many others, like company directors
and officers, who also have discretionary powers to manage assets on behalf of others
and are subject to fiduciary duties with respect to the exercise of their powers.

The law provides rules that are designed to make it more likely that fiduciaries
will exercise their powers properly. Fiduciaries are not allowed to have personal
interests or duties that conflict with their duties as fiduciaries, unless that conflict
is authorised. They are also not allowed to make unauthorised profits from their
positions as fiduciaries. These rules are often called the ‘no conflict’ and ‘no profit’
rules, respectively, and they function to reduce the temptations that fiduciaries might
have to use their powers improperly. There are also rules, called the ‘self dealing’ and
‘fair dealing’ rules that regulate the powers of fiduciaries to acquire the assets they
manage for their own personal use.

Essential reading
¢¢ Chapter 4 of this module guide, 4.2.

¢¢ Penner, Chapter 2: ‘The nature of the express trust’, Sections ‘How beneficiaries
receive their entitlements under a trust’, ‘Bare trusts, special trusts, and
nomineeships’ and ‘The features of the express trust’, Subsection ‘The position
of the settlor’.

¢¢ Penner, Chapter 12: ‘The law governing fiduciaries’.

Learning outcomes
By the end of this chapter, and having completed the Essential readings and
activities, you should be able to:
uu explain what fiduciary duties are, and distinguish them from the other duties
that a trustee might have
uu describe the consequences that attach to the receipt by a fiduciary of an
unauthorised profit
uu explain what happens when a trustee purchases trust assets for their own use or
sells assets to the trust
uu describe the circumstances in which a trustee may safely purchase the interests
of their beneficiaries
uu explain and apply the law governing equitable compensation for breach of
fiduciary duty
uu explain the uncertainty regarding the application of trustee exemption clauses
to a breach of a trustee’s fiduciary duty.
Equity and Trusts  18  Breach of fiduciary duty page 201

18.1 Fiduciary relationships

A fiduciary is someone who manages assets or activities on behalf of others. An express
trustee is often regarded as the paradigm fiduciary. Trustees are required by the
rules of equity to use the trust assets only according to the terms of the trust for the
benefit of the beneficiaries, or for the public benefit in the case of charitable purpose
trusts. There are many other fiduciaries, including agents, business partners, company
directors and officers, senior employees, guardians, personal representatives (i.e.
executors and administrators), and solicitors. The list is not closed.

The essence of a fiduciary relationship is that the fiduciary is in a position to exercise

discretion in carrying out the duties for their principal. So, for example:

uu trustees exercise discretion when investing the trust rights

uu agents exercise discretion when making contracts for their principals

uu company directors exercise discretion in the way they run the company.

It is commonly said that fiduciaries must act in the best interests of their principals.
Care must be taken not to be misled by the use of the term ‘principal’ in this context.
It does not indicate that there is an agency relationship, but is used in the literature on
fiduciaries as a convenient term to describe any person to whom fiduciary duties are
owed, including trust or estate beneficiaries, clients, companies, employers, partners,
or actual principals.

Also, it can be misleading to say that fiduciaries must act in the best interests of their
principals. Charitable purpose trusts do not have beneficiaries and, although they
are enforced by the Charity Commission, there is no-one who could be regarded as
a principal whose interests must be served. Express trustees owe the same fiduciary
duties whether the trust has beneficiaries or not, and it does not make sense to say
that trustees must act in the best interests of a purpose.

18.2 Breach of trust v breach of fiduciary duty

It has been argued that every breach of trust is also a breach of fiduciary duty: P. Birks
‘The content of fiduciary obligations’ (2002) 16 Trust Law International 34. However,
the Court of Appeal held that a breach of a duty of care by trustees is not a breach of
their fiduciary duties: Bristol & West Building Society v Mothew [1988] Ch 1. The typical
case of breach of trust, where trustees make an unauthorised investment or pay a
non-beneficiary, is not a breach of fiduciary duty unless the trustees did so because
of a conflict of interest or duty. In the same way, agents who breach their contracts of
agency are not at the same time always in breach of their fiduciary duties. A breach of
fiduciary duty generally occurs when fiduciaries do something they are entitled to do,
but in a way that shows that they are not acting for proper purposes.

Suppose, for example, that trustees decide to invest trust assets by purchasing shares
in a mining company. If that investment is unauthorised by the terms of the trust, it
would be a breach of trust, but not necessarily a breach of fiduciary duty. If instead
the investment is authorised, then normally the trustees would be perfectly entitled
to make it. However, if they or their loved ones had an interest in the company or sold
their own shares to the trust, this otherwise valid investment would reveal a clear
conflict of interest. By investing in this way, the trustees do not breach the terms of the
trust, but they will be in breach of fiduciary duty unless they have the beneficiaries’
fully informed consent to the transaction.

Activity 18.1
Why specifically is there a conflict of interest in the above example?
page 202 University of London  International Programmes

18.3 The ‘no conflict’ rule

This is the general rule governing the behaviour of fiduciaries: they must not place
themselves in a position where their own interests (or their duties to others) may
come into conflict with their duties to carry out their functions as trustees, agents,
directors, etc. In other words, fiduciaries must avoid conflicts between their duties to
their principals and their own interests or other duties. The leading case is Boardman v
Phipps [1966] UKHL 2, [1967] 2 AC 46.

Activity 18.2
Read Boardman v Phipps and:
a. explain the views of the majority and the minority in the case;

b. state which view(s) you prefer, giving your reasons.

You should take care to note that fiduciaries can breach their fiduciary duties entirely
honestly, as in Boardman. Although traditionally a breach of fiduciary duty was
sometimes called equitable or constructive fraud (see Nocton v Lord Ashburton [1914]
AC 932; Armitage v Nurse [1997] EWCA Civ 1279, [1998] Ch 241), no fraudulent intentions
are required. The breach does not depend on whether or not the fiduciaries realise
that they are acting in a situation of conflict but on whether there is in fact a conflict of
interest.

Boardman was a case that involved a trust, but most of the situations in which
the ‘no conflict’ rule has been applied concern company directors and agents
(Regal (Hastings) Ltd v Gulliver [1942] UKHL 1, [1967] 2 AC 134; Industrial Development
Consultants Ltd v Cooley [1972] 1 WLR 443). Because these fiduciary duties often arise
in commercial circumstances, it has been argued that the ‘no conflict’ rule must be
applied realistically and contextually. For conflicts of interest in such situations are
endemic, and typically the subject of contractual negotiation between fiduciaries and
their principals. For example, contractual provisions may allow company directors to
determine their own levels of pay or also hold directorships in competing companies.

Unless the principal consents, a fiduciary may not operate a competing business (Re
Thomson [1930] 1 Ch 203), but the scope of that prohibition is not entirely clear. It has
been said that a stringent application of the rule to business opportunities may be
economically inefficient, reducing incentives to generate wealth, and anti-competitive
in certain circumstances. (See Peso Silver Mines Ltd v Cropper [1966] SCR 673, 58 DLR (2d)
1 (Canada); Canadian Aero Services Ltd v O’Malley [1974] SCR 592, 40 DLR (3d) 371 (Canada);
Guth v Loft Inc (1939) 5 A 2d 503 (Delaware); Broz v Cellular Information Systems Inc (1996)
673 A 2d 148 (Delaware); Queensland Mines Ltd v Hudson (1978) 18 ALR 1 (PC); Island Export
Finance v Umunna [1986] BCLC 460; Balston Ltd v Headline Filters Ltd [1987] FSR 330.)

18.4 The ‘no profit’ rule

The ‘no profit’ rule is a sub-rule of the no conflict rule. Principals may remunerate
their fiduciaries or expressly allow them to retain any incidental profits acquired in
the course of carrying out their fiduciary duties. However, if fiduciaries were allowed
to retain unauthorised or ‘secret’ profits, their own interests would be to seek out
and obtain those profits and this would be in conflict with their interests to perform
their duties to their principals properly: Bray v Ford [1896] 2 AC 46. Most fiduciaries
are, of course, authorised to receive some payments in connection with their work.
Directors and agents are typically paid for their services. Most trust instruments
contain charging clauses entitling the trustees to be paid for their services on an
ongoing basis out of the trust funds. See Duke of Norfolk’s Settlement Trusts [1982] Ch
61 for a discussion of the circumstances in which a trustee can apply for increased
remuneration beyond that provided for in the trust instrument.

A fiduciary will be stripped of any unauthorised profit made in breach of fiduciary duty
and required to surrender it to the principal, either as a personal liability to account
for its value or as a constructive trust of the asset obtained as a profit (or its traceable
Equity and Trusts  18  Breach of fiduciary duty page 203

proceeds). As discussed in Chapter 13, there had been a long-running debate about
which of these responses is appropriate, which was resolved in FHR European Ventures
LLP v Cedar Capital Partners LLC [2014] UKSC 45, [2015] AC 250.

The sorts of cases in which incidental profits may arise are numerous. Where a trust has a
majority shareholding in a company, and the trustees use their voting power to become
appointed as directors, they may not keep for themselves any fees earned as directors,
unless they are authorised to do so: Re Macadam [1946] Ch 73. In Williams v Barton
[1927] 2 Ch 9, the trustee received a commission from a brokerage firm for introducing
new clients to them, and he was liable to the trust for the commission he received for
bringing in the trust business. A trustee will be stripped of any profits earned by engaging
in business in competition with that of the trust: Re Thomson’s Settlement [1986] Ch 99.
For obvious reasons, a fiduciary will be stripped of any bribe accepted to exercise their
fiduciary powers for the advantage of the persons paying the bribes: A-G for Hong Kong v
Reid [1993] UKPC 2, [1994] 1 AC 324, [1994] 1 NZLR 1; Islamic Republic of Iran Shipping Lines v
Denby [1987] 1 Lloyd’s Rep 367.

Self-assessment question
1. To which of the following profits does the ‘no profits’ rule apply?

a. Director’s fees earned by a trustee elected to represent the trust’s

share-holding.

b. A company agent’s year-end performance bonus.

c. A bribe paid to a solicitor to settle a case on favourable terms.

d. A secret commission paid by a vendor to a purchasor’s agent.

18.5 The ‘self dealing’ rule

Self dealing occurs when a fiduciary transacts with the principal and the fiduciary is
involved in both sides of the transaction. For example, suppose that a trustee buys
company shares from ‘the trust’. Since the trust is not a legal person and the trustee
is already the owner of the shares, this transaction is really just entries in the trust
account and a transfer of money from the trustee’s personal bank account to the
trust bank account. Clearly, the trustee’s personal interests are in conflict with her or
his duties as trustee. Unless the beneficiaries have been fully informed and properly
consented to the transaction, they will be entitled to set it aside regardless of whether
it was fair or not. The ‘self dealing’ rule applies not only where fiduciaries enter into
transactions in their own name, but also where they are involved in the other side of
the transaction through a nominee, partnership, or company of which the trustee is a
director.

The remedies available to the beneficiaries depend on whether the contract of sale is
still executory (i.e. not yet performed) or performed, and if performed, whether the
asset has been sold on to a bona fide purchaser or not. If the contract has not yet been
performed, the fiduciary is not allowed to perform it. Where the contract has been
performed and the fiduciary still has the asset, or it is in the hands of a third party
who is not a bona fide purchaser for value, the fiduciary or third party must reverse
the transaction and restore the prior situation. If the transaction cannot be reversed,
perhaps because the fiduciary has sold the assets on to a bona fide purchaser, the
fiduciary will be liable for any profits made from the sale. If it can be shown that the
asset was sold on at an undervalue, the fiduciary will be liable for the profit that should
have been earned. In short, where a transaction cannot be reversed, the trustee will
be required to pay to the principal an amount calculated to ensure that the principal
receives the full market value of the right in question.

Activity 18.3
Read Holder v Holder [1968] Ch 353, and explain why the self-dealing rule was not
applied in that case.
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18.6 The ‘fair dealing’ rule

The fair-dealing rule applies to transactions in which the fiduciary purchases from the
principal assets over which the fiduciary has some control. The classic example is a
trustee who purchases the interest under the trust of one of the beneficiaries. A non-
trustee example is where a manager of a block of flats offers to buy the freehold title
from the landlord. Notice that in these cases, unlike the cases to which the self-dealing
rule applies, there really are two parties to the transaction: the fiduciary cannot act
as both vendor and purchaser, but must deal with the principal to complete the
transaction. Thus the danger is less.

The rationale behind the rule is that having dealt with the assets in question in the
past, the fiduciary is probably in a better position to negotiate, knowing more about
their value, and so on. Of course, in entering into such a transaction, the fiduciary’s
own interests are in conflict with those of the principal. Notice that the rule applies
only to transactions concerning assets that are the subject-matter of a trust or
business in which the fiduciary acts for the principal.

Under the fair-dealing rule the fiduciary has the burden of proof (Re Thompson’s
Settlement [1986] Ch 99) to show that:

uu the fiduciary did not take advantage of their position

uu the fiduciary disclosed all relevant information to the principal

uu the beneficiary did not rely solely on the fiduciary’s advice to enter into the
transaction, and

uu the price was fair.

Where the fair-dealing rule applies to impeach a transaction, the remedies are the
same as in the self-dealing case. The transaction can be set aside if possible, and if not
(typically because the asset has been sold on to a bona fide purchaser for value), then
the fiduciary will be liable to pay an amount to ensure that the principal receives its
full market value.

Activity 18.4
State whether the self-dealing rule, the fair-dealing rule, or neither, applies to the
following transactions:
a. A trustee sells her shares in XYZ plc to the trust.

b. An agent for an antiques dealer offers to buy the latter’s antiques business.

c. A trustee pays an income beneficiary £10,000 to purchase the beneficiary’s right

to income under the trust for the next 10 years.

d. A solicitor buys a painting from Jonah, for whom he acted in divorce

proceedings.

e. A director of ABC Ltd enters into a contract on its behalf for the purchase of raw
materials from XYZ Ltd, a private company she owns.

18.7 Equitable compensation

As we have seen, the normal responses to a breach of fiduciary obligation are
rescission of the breaching transaction, an account of profits, or a constructive trust. In
certain circumstances, that is not possible. If, for example, in breach of fiduciary duty,
a solicitor advised a client to enter into a transaction that turned out to be financially
disastrous, the transaction is not reversible by the solicitor, because the solicitor did
not enter into it. All the client can do is seek compensation for the loss caused by
following the solicitor’s tainted advice. This is a claim for equitable compensation
(i.e. the equivalent to damages at common law for a tort or breach of contract, as
discussed in the previous chapter).
Equity and Trusts  18  Breach of fiduciary duty page 205

The leading case is Nocton v Ashburton [1914] AC 932. A solicitor advised his client to
release a security interest, which he did. The transaction was in furtherance of a land
development scheme, and the solicitor’s advice was given in conflict of interest: the
release of the security would increase the possibility of the solicitor realising his own
investment in the scheme, whereas in doing so the risk that the plaintiff’s personal
liability if the scheme went awry (which it did) was increased. The House of Lords held
that the solicitor must compensate the client for his loss.

As we have seen (17.1.4), the principles regarding causation of loss in equity are
different from common law principles. The equitable principles are designed ‘to make
good a loss in fact suffered by the beneficiaries, which using hindsight and common
sense, can be seen to have been caused by the breach’ (Target Holdings Ltd v Redferns
[1995] UKHL 10, [1996] AC 421, per Lord Browne-Wilkinson). Two cases where these
principles were applied to a breach of fiduciary obligation are Canson Enterprises Ltd
v Boughton & Co [1991] 3 SCR 534, 85 DLR (4th) 129, a Canadian case discussed in Target
Holdings, and Swindle v Harrison [1997] 4 All ER 705 (CA).

In Canson, a solicitor breached his fiduciary duty to his client, whom he advised in a land
title purchase, by failing to inform it that the vendors had made an improper profit. It
was established that, had the client known about this, it would have withdrawn from
the purchase. The client went on to build a warehouse on the land, and because of the
negligence of its builders and engineers, the warehouse was defective, leading to a large
financial loss. The client sued the solicitor for the loss, arguing that, if the solicitor had
complied with his duty, the client would not have purchased the land and then gone on
to develop it with such disastrous results. The Supreme Court of Canada held that the
solicitor’s breach of duty did not cause the client’s loss.

In Swindle v Harrison, a solicitor (the unfortunately named Mr Swindle) arranged bridging

finance for a client to purchase land, but breached his fiduciary duty to her by failing to
tell her that he received a commission for so doing. The bridging finance permitted her
to purchase the land, on which she briefly ran a hotel and restaurant business that failed,
causing her loss. She sued the solicitor, claiming that his breach of duty had caused the
loss on the basis that had he not arranged the bridging finance (in the course of doing
which he breached his fiduciary duty to her), she would not have been able to purchase
the property, start the business, and suffer the loss. Not surprisingly, this claim also failed.
Although the loss for which compensation was sought might not have happened ‘but for’
the defendant’s breach, it did not flow from the breach in the sense of being caused by it.

In Canson, the cause of the loss was the negligence of the plaintiff’s builders and
engineers, and in Swindle, it was caused by the plaintiff’s decision to run the business
and failure to run it properly.

It would appear that the reason why these plaintiffs thought it possible to claim for
these losses was that the principles of causation that apply to the award of equitable
compensation were thought to be more flexible and generous to claimants than
common law principles.

Summary
The fair-dealing rule applies to transactions in which the fiduciary has some control
over the principal’s assets in their fiduciary role and purchases them from the
principal. Since there are two parties to the transactions, the danger here is less than
in the self-dealing rule. The rule only arises concerning assets that are the subject of a
trust or a business in which the fiduciary acts for the principal. The transaction will be
a breach of the ‘fair dealing’ rule unless the fiduciary can prove that:

uu the fiduciary did not take advantage of her or his position

uu the fiduciary has disclosed all the relevant information to the principal

uu the principal did not solely rely on the fiduciary’s advice to enter into the
transaction, and

uu the price was fair.

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In certain circumstances the breaching transaction cannot be reversed and so a

different remedy is required. If the fiduciary made a profit from the transaction, the
fiduciary will claim an account of profits or constructive trust. If the principal suffered
a loss, the principal will make a claim for equitable compensation. Although the
rules for causation of loss are thought to be more generous than the common law
rules, Canson Enterprises Ltd v Boughton & Co and Swindle v Harrison appear to show
otherwise. In both cases, the principal’s claims failed even though the losses for
which compensation was claimed would not have happened ‘but for’ the defendant’s
breach, but they still did not flow from the breach in the sense of being caused by it.

18.8 Trustee exemption clauses

Recall Armitage v Nurse [1997] EWCA Civ 1279, [1998] Ch 241 (17.2.3), which explains the
valid scope of trustee exemption clauses. Unfortunately, the case is unclear about
the application of such clauses to breaches of fiduciary duties. Millett LJ regarded the
core duties of trustees as including a duty of loyalty, which suggests that fiduciary
obligations are core duties that cannot be covered by an exemption clause. However,
the judgment does not actually say that. In particular, it focuses on the trustee’s
actual state of mind, holding that a clause cannot exempt liability for intentionally
fraudulent or reckless acts. As we have seen in 18.3, breaches of fiduciary obligation
do not necessarily involve dishonesty or recklessness. The defendant in Boardman was
liable even though his intentions were wholly honest. Millett LJ specifically declined
to discuss the application of such clauses to different sorts of breach of fiduciary
obligation in detail, as no such conduct was pleaded by the plaintiff. As a consequence,
the limits of trustee exemption clauses remain uncertain.

Self-assessment questions
1. In a trust, who is the fiduciary?

2. State the ‘no conflict’ rule as simply as you can.

3. What is the ‘no profit’ rule?

4. What was the breach of fiduciary duty in Swindle v Harrison?

5. What duties, if any, are breached if (a) a trustee buys a second-hand car from the
trust, or (b) a trustee buys a second-hand car from one of the beneficiaries of the
trust?

Essential reading
¢¢ Keech v Sandford (1726) Sel Cas T King 61, 25 ER 223; Boardman v Phipps [1966]
UKHL 2, [1967] 2 AC 46; Holder v Holder [1968] Ch 353; Re Thompson’s Settlement
[1986] Ch 99.

Further reading
¢¢ Birks, P. ‘The content of fiduciary obligations’ (2002) 16 Trust Law Int 34.

¢¢ Conaglen, M. ‘A Re-appraisal of the fiduciary self-dealing and fair-dealing rules’

(2006) 65 CLJ 366.

¢¢ Lee, R. ‘Rethinking the content of the fiduciary obligation’ (2009) 73 Conv 236.

¢¢ Penner, J. ‘Distinguishing fiduciary, trust, and accounting relationships’ (2014) 8 J

Equity 202.

¢¢ Smith, L. ‘Fiduciary relationships: ensuring the loyal exercise of judgement on

behalf of another’ (2014) 130 LQR 608.

¢¢ Worthington, S. ‘Four questions on fiduciaries’ (2016) 2 Canadian J Comparative

and Contemporary L 723.

¢¢ Regal (Hastings) Ltd v Gulliver [1942] UKHL 1, [1967] 2 AC 134.

Equity and Trusts  18  Breach of fiduciary duty page 207

Sample examination questions

Question 1 Richard managed Paul’s pub. In January, he fired the regular Friday
night disc jockey in order to hire his brother, Quentin, for the job. Even though
Quentin is inexperienced, Richard paid him twice what he paid the old disc jockey.
In February, Richard changed the beer supplier, accepting a £2,000 ‘signing bonus’
from the new supplier, which he invested in shares now worth £3,000. In March,
Richard persuaded Paul to sell the pub to him. Richard’s accounts for the pub
business were in disarray, so it was difficult to value the business, but Paul accepted
Richard’s estimate as to the pub’s profitability and on that basis sold the pub to him
for £150,000. In April, Richard sold the pub to a large brewer for £300,000. Advise
Paul.
Question 2 ‘A fiduciary duty is difficult to define, but a breach of fiduciary duty
is easy to spot, which is why the content of fiduciary duties is best understood by
looking at the various cases in which they are breached.’ Discuss.
Question 3 Fred was recruited by Massive Music Ltd (MML) to scout for new talent.
He was told by his friend, Susan, an employee of Rage Records plc (RRP), that a
new band in Scotland, Pot of Gold (POG), was worth investigating. Paying for his
flight on his MML expense account, Fred listened to and interviewed the band with
a view to signing them with MML. The band members adamantly refused to sign
with MML because of its English origins, but indicated they would sign with RRP, a
global American company. Fred arranged to sign them with RRP instead, collecting
a £50,000 fee from RRP, which he used to pay off his mortgage. POG has since
made £2.5 million in profits for RRP. Fred did, however, sign his brother, Liam, to
a lucrative contract with MML, which was unaware that Liam was Fred’s brother.
MML lost £500,000 recording and promoting Liam, whose contract was terminated.
Advise MML.

Advice on answering the questions

Question 1 This is a straightforward question involving several breaches of fiduciary
duties. In making the decision to fire the former DJ and hire his brother at twice the
salary, Richard favoured the interests of a third party (his brother) over the interests
of Paul. The transaction cannot be ‘reversed’ in the typical sense, since the transaction
did not involve a transfer of rights. Paul can claim that Richard compensate him for
any losses caused by the decision, in particular the cost of Quentin’s salary in excess
of what an inexperienced DJ’s services are worth. If Quentin’s hiring can be shown to
have led to a decline in business, that loss can also be claimed. Quentin will only be
personally liable as a third-party accessory to a breach of Richard’s fiduciary duty or
as a recipient of payments made in breach of fiduciary duty if it can be established
that he accepted the job dishonestly in the knowledge that Richard ought not to have
hired him. The ‘signing bonus’ is clearly an unauthorised profit. If the money is held
under a constructive trust (see Chapter 13) its value can be traced into the shares. The
purchase of the pub clearly breaches the fair-dealing rule, and Richard will be liable to
compensate Paul in the amount of £150,000 so that Paul receives the full market value
of the pub. The transaction is unlikely to be reversible because it is very unlikely that
the large brewer is not a bona fide purchaser.

Question 2 A good answer to this question will explore the different rules indicating
the way in which fiduciary duties can be breached (i.e. ‘no-conflict’, ‘no profit’, ‘self
dealing’, and ‘fair dealing’ rules). These should be discussed with the aim of explaining
how they shape a fiduciary’s duties to their principal. A very good answer will tackle
the quotation more directly by proposing a more general explanation or theory of
fiduciary duties which tries to show the common basis for the various rules.

Question 3 The question concerns the no-conflict rule in the context of a business
opportunity. It is clear that the opportunity to recruit POG came Fred’s way when he
was acting in the capacity of fiduciary to MML. As the decisions in Keech v Sandford
(1726) and Industrial Development Consultants Ltd v Cooley (1972) make clear, the fact
that POG will not sign with MML under any circumstances does not allow Fred to
pursue the opportunity in another way to his own advantage. In such a circumstance,
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Fred could only proceed by fully informing MML of the situation and gaining their
consent to act on his own behalf. As he did not do so, he may be stripped of any profits
he acquires from realising the opportunity. Thus he will be required to account for
the £50,000 signing fee from RRP, which can be traced into the mortgage payment if
held by him on constructive trust (see Chapter 13). It is unlikely that RRP will be liable
to MML, as it is difficult to see how they could be shown to have acted dishonestly. The
signing of Liam was in breach of the no-conflict rule, as with Quentin in Question 1, and
Fred will be liable for all of the losses to his principal flowing from this breach, which in
this case appears to be £500,000.
Equity and Trusts  18  Breach of fiduciary duty page 209

Reflect and review

Look through the points listed below.

Are you ready to move on to the next chapter?

Ready to move on = I am satisfied that I have sufficient understanding of the principles

outlined in this chapter to enable me to go on to the next chapter.

Need to revise first = There are one or two areas I am unsure about and need to revise
before I go on to the next chapter.

Need to study again = I found many or all of the principles outlined in this chapter very
difficult and need to go over them again before I move on.

Tick a box for each topic.

Ready to Need to Need to
move on revise first study again

I can explain what fiduciary duties are, and

distinguish them from other duties a trustee might
have.   

I can describe the consequences which attach to the

receipt by a fiduciary of an unauthorised profit.   

I can explain what happens when a trustee

purchases trust assets or sells assets to the trust.   

I can describe the circumstances in which a trustee

may safely purchase the interest of a beneficiary.   

I can explain and apply the law governing equitable

compensation for breach of fiduciary duties.   

I can explain the uncertainty regarding the

application of trustee exemption clauses to a breach
of a trustee’s fiduciary duties.   

If you ticked ‘need to revise first’, which sections of the chapter are you going to
revise?
Must Revision
revise done

18.1 Fiduciary relationships  

18.2 Breach of trust v breach of fiduciary duty  

18.3 The ‘no conflict’ rule  

18.4 The ‘no profit’ rule  

18.5 The ‘self dealing’ rule  

18.6 The ‘fair dealing’ rule  

18.7 Equitable compensation  

18.8 Trustee exemption clauses  

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Notes
19 Claims based on tracing

Contents
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 212

19.1 Tracing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 213

19.2 Claiming . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 217

Reflect and review . . . . . . . . . . . . . . . . . . . . . . . . . . . 222

page 212 University of London  International Programmes

Introduction
This chapter is concerned primarily with the recovery of assets that have been
misappropriated from a trust. In many cases, those assets have been sold on to a
bona fide purchaser and so it is no longer possible to recover them. However, the
beneficiaries may have a claim to the proceeds of sale. This raises two main questions.
First, how do the beneficiaries identify the relevant proceeds of sale? That is an
evidential process called ‘tracing’. Secondly, what sort of claims can the beneficiaries
make to those proceeds? Both issues are discussed in this chapter.

This chapter is concerned not only with proprietary claims, but also with personal
claims that may depend on tracing. As discussed in Chapter 17, if assets are transferred
in breach of trust, someone may be personally liable for dishonest assistance if they
help transfer those assets, while the person who receives them may be personally
liable for knowing receipt. It may be necessary to use tracing to show that the assets
handled by the assistant and received by the recipient were the traceable proceeds of
the assets misappropriated from a trust.

Essential reading
¢¢ Penner, Chapter 11: ‘Breach of trust’, Sections ‘Proprietary remedies for the
misapplication of trust property’, ‘Tracing’, ‘Proprietary claims to traceable
proceeds: charges and equitable ownership’, ‘Subrogation claims reliant on
tracing’ and ‘Tracing at common law and the quest for a fiduciary relationship’.

Learning outcomes
By the end of this chapter, after completing the Essential readings and activities,
you should be able to:
uu define the difference between following, tracing and claiming
uu explain why the law of tracing often falls into the law of trusts
uu explain when the common law does not allow a title holder to trace
uu understand and apply the rules governing tracing through mixtures
uu explain what backwards tracing is and why the law regarding it is unsettled
uu outline the proprietary and personal claims that can arise following the tracing
process
uu show how rights to subrogation can arise following the tracing process.
Equity and Trusts  19  Claims based on tracing page 213

19.1 Tracing
Tracing is something of a mystery. It is a process by which a claim to an asset held
by a defendant can be transferred to another asset that the defendant acquired in
exchange for the original asset. An example will help. If your trustee, in breach of
trust, gives £10,000 of the trust money to Sally, you can, of course, claim against Sally
for the return of that money. Having received the money as a gift, Sally is a donee
(i.e. volunteer) and thus not a bona fide purchaser for value without notice (see 4.1).
If Sally spends the money on a car, then you can ‘trace’ from the original £10,000 to
the car. Having traced in this way, you can then claim that the car is held on trust for
you. Although the rules of tracing are fairly well settled, controversy still surrounds its
juridical basis. Since virtually all cases involve torts or breaches of trust, some see it
as a response to wrongdoing. Others, especially Birks, Burrows, Chambers and Lionel
Smith, see it instead as a response to unjust enrichment. In The law of tracing (1997)
p.357, Smith observed that trust claims based on tracing are ‘functionally identical to
purchase-money resulting trusts’. Others still see it as existing beyond the territory of
these nominate heads.

19.1.1 Following, tracing, and claiming

It is helpful to distinguish between following, tracing and claiming. We follow assets, Go to your study pack
trace through exchanges and claim rights. This terminology was used by Smith in and read ‘Property,
The law of tracing (1997) and adopted by Millett LJ in Boscawen v Bajwa [1995] EWCA unjust enrichment, and
Civ 15, [1996] 1 WLR 328. One follows an asset when it is transferred from one person tracing’ by P. Birks.
to another. One traces from one asset to another when the former is exchanged for
the latter. One claims rights to the assets that are identified by following or tracing.
For example, if, in breach of trust, the trustee gave a painting held on trust to John,
the beneficiaries could follow it into John’s hands and make a proprietary claim to it.
If John sold the painting for £1,000, they could trace through the exchange from the
painting to that money, and claim that the money is held for them on trust. If John paid
the money into a bank account, they could trace from the money to the bank account
(i.e. the bank’s debt to John) and say that it is held on trust for them.

It has been argued by Smith and others that when tracing through an exchange, one
is tracing the value of the original asset into the new asset. However, if one asset is
exchanged for another, enabling the beneficiaries to claim a trust of the substitute,
the values of those assets are not relevant to the claim. For example, if £1,000 of trust
money is used to buy a painting, the beneficiaries can claim the painting regardless of
its value, even if it turns out to be worth millions: Foskett v McKeown [2000] UKHL 29,
[2001] 1 AC 102.

Self-assessment question
In breach of trust, Tom paid £1,000 to Eric which he used to buy a television. Eric
then gave the television to his girlfriend, Padma, who then traded it for a sofa. The
beneficiaries sued Padma for the sofa.
Describe the basis of the beneficiaries’ action, using the terms ‘following’, ‘tracing’
and ‘claiming’.

19.1.2 Tracing at common law

Taylor v Plumer (1815) 3 M&S 562, 105 ER 721 is supposed to provide the foundational
authority for the common law right to trace (i.e. for the legal owner of an asset to trace
to an asset acquired in exchange and assert legal title to the new asset), but it does no
such thing. It is now generally recognised that the case was decided upon equitable
principles: see L. Smith ‘Tracing in Taylor v Plumer: equity in the King’s Court’ [1995] 2
LMCLQ 240. Nevertheless, it appears that the common law can provide the legal owner
with a power to assert title in the traceable proceeds (Lipkin Gorman v Karpnale Ltd
[1988] UKHL 12, [1991] 2 AC 548). This requires an act on the part of the legal owner, who
does not automatically, by operation of law, acquire ownership of traceable proceeds
in the way the beneficiary does in equity in respect of the traceable proceeds of trust
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rights. To the extent that this power to assert title counts as tracing at common law. It
also appears that the rules governing tracing through mixtures (discussed below) are
less developed at common law than they are in equity.

In FC Jones & Sons v Jones [1996] EWCA Civ 1324, [1997] Ch 159, a trustee in bankruptcy
was allowed to trace at common law from cheques drawn on the account of the
bankrupt firm and paid into a brokerage account in the name of the wife of one of
the partners. Millett LJ said (at [28]) that equitable tracing rules should be available in
support of the common law claim:

There is no merit in having distinct and differing tracing rules at law and in equity, given
that tracing is neither a right nor a remedy but merely the process by which the plaintiff
establishes what has happened to his property and makes good his claim that the assets
which he claims can properly be regarded as representing his property. The fact that there
are different tracing rules at law and in equity is unfortunate although probably inevitable,
but unnecessary differences should not be created where they are not required by the
different nature of legal and equitable doctrines and remedies. There is, in my view, even
less merit in the present rule which precludes the invocation of the equitable tracing rules
to support a common law claim; until that rule is swept away unnecessary obstacles to
the development of a rational and coherent law of restitution will remain.

Summary
Where assets have been transferred in breach of trust, equity allows beneficiaries
not only to follow those assets into the hands of third parties (not being bona fide
purchasers for value without notice) but to trace to assets received through an
unauthorised exchange. After the exercise of tracing, beneficiaries may claim against
the persons who hold or held the traceable proceeds of trust assets. The common law
has no exact equivalent to tracing, although it does allow title holders to assert a title
in the traceable proceeds of rights held at common law in certain circumstances. It is
orthodoxy that the common law power to assert title cannot be exercised following
the mixing of the assets in question with other assets.

19.1.3 The rules of tracing

The requirement of a fiduciary relationship

In order for an individual to have the advantage of the equitable rules of tracing, they
must normally have an interest under a trust, for it is the value of that right which is
traced into proceeds. However, equity is also willing to allow claimants to trace where
other fiduciaries breach their duty (Re Diplock [1948] Ch 465 (CA), affirmed [1951]
AC 251). So, for example, if company directors use their power to transfer the
company’s assets in breach of their fiduciary duties, say by transferring company
money to their own bank accounts, the company will have the advantage of the
equitable rules of tracing to trace into any proceeds acquired with that money. Courts
have shown themselves willing to find the existence of a fiduciary relationship in order
for plaintiffs to apply the tracing rules (El Ajou v Dollar Land Holdings [1993] 3 All ER 717),
even where none really existed (Chase Manhattan v Israel-British Bank [1981] Ch 105).

Whole and part ownership

These rules are straightforward. If the trustee takes £500 of trust money and spends it
all to buy a rare book, then the beneficiaries can claim that the book is held for them
absolutely. If the trustee uses £250 of trust money and £250 of their own money to buy
the book, it will be held by the trustee for the trustee and beneficiaries in equal shares:
see Foskett v McKeown [2000] UKHL 29, [2001] 1 AC 102.

Tracing through mixtures

What happens when the trustee or a third-party recipient of trust assets mixes them
with their own so that the original assets cannot be identified? The rules have largely
developed in the case of a trustee or recipient mixing trust money or its traceable
proceeds with their own by depositing it at a bank so as to add to the balance of their
Equity and Trusts  19  Claims based on tracing page 215

bank account; for example, depositing £500 of trust money in their bank account,
which has a balance of £250, raising the balance to £750. The first thing to note is that
equity does not regard this mixing as giving rise to co-ownership of the chose in action
against the bank, as it does in the example of the last section where trust money and
the trustee’s money went to purchase a new asset, the rare book. The trust does not
have a 2/3 share in the chose in action, the trustee a 1/3 share. Equity seems to hold
that the trust money and the trustee’s money remain separately held, although which
money belongs to whom is not distinguishable. Because of this, if £300 is withdrawn
from the bank account by the trustee and spent on an armchair, it is not regarded as
co-owned by them in 2/3 and 1/3 shares. Rather, equity employs rules to determine
whose money was withdrawn and spent to acquire the title. The rules are different
when the person who mixes the trust money is a wrongdoer, for example, a trustee
in breach or a third-party recipient who takes trust rights in the knowledge that they
receive it in breach of trust, from those that apply to an innocent mixer, such as a third-
party recipient who does not know that the money was wrongfully taken from a trust.

The rules governing wrongdoers

The rules are wrongly seen as a set of evidentiary presumptions. The first presumption
Go to your study pack and
is that wrongdoers who mix trust money or its traceable proceeds with their own, and
read ‘Tracing, “swollen assets”
then take money out of the mixture and spend it, are presumed to spend their own
and the lowest intermediate
money first, so that anything which remains can be claimed by the beneficiaries: Re
balance rule’ by L.D. Smith.
Hallett’s Estate (1880) 13 Ch D 696 (CA). However, equity very soon afterward admitted
the opposite presumption in Re Oatway [1903] 2 Ch 356 where a beneficiary was able to
make a claim to shares bought with money first taken from the mixture and where the
rest was then dissipated with no traceable product. The explanation traditionally
given is that there is a presumption that the trustee always acts in the best interests of
the trust beneficiaries. However, that presumption is constrained by another rule, the
lowest intermediate balance rule. Say, for example, following the purchase of a
worthless armchair, the trustee spends the rest of the money in the account on
worthless shares, reducing the balance to zero. The trustee then adds £500 of their
own money. The courts have held that the beneficiary cannot claim that the new
balance of £500 is theirs. If the trustee spends all the trust money and later replenishes
the account, as in this example, it will not be presumed that they were paying back the
trust money they took, despite the fact that that is exactly what a trustee who was
acting in the best interests of their beneficiaries would do: James Roscoe (Bolton) Ltd v
Winder [1915] 1 Ch 62 (affirmed in Bishopsgate Investment Management Ltd v Homan Ltd
[1994] EWCA Civ 33, [1995] Ch 211).

A presumption of honesty does not therefore work. In any case, it is difficult to see
why we should be presuming someone to be honest when all the evidence shows the
exact opposite. In truth, the only way to reconcile these three cases is not to think of
presumptions at all, but in terms of the resolution of evidential difficulties. In both
Hallett and Oatway such difficulties existed. Somebody’s money was left in the account
in Hallett, while somebody’s money bought the shares in Oatway. The difficulty was
that the trustee’s wrongful act of mixing made it impossible to tell whose it was. It
might have been the trustee’s own money, it might have been the trust money, or it
might have been a combination of both. That evidential difficulty having been caused
by the trustee’s wrongful act, the benefit of the doubt was given to the innocent party,
the beneficiaries. Thus, if it suited the beneficiaries to say that trust money had been
spent first, as in Oatway, then they could do so. On the other hand, if it suited them to
say that the trustee’s own money had been spent first, as in Hallett, they could do that
as well. But when we get to a case like Roscoe v Winder [1915] 1 Ch 62, there is no doubt
to resolve beyond the lowest intermediate balance, for we know where the money
came from which later increased the balance: from the trustee’s own funds.

The rules governing innocent persons

The beneficiary does not get the benefit of any doubt against an innocent person
who mixes trust money with their own. The rules attempt to be neutral as between
them. However, the traditional rule tended to lead to haphazard results. That rule,
drawn from Clayton’s case (1816) 8 LJ Ch 256, is the ‘first in first out’ (FIFO) rule, which
page 216 University of London  International Programmes

works exactly as it sounds. Thus, if an innocent recipient added £500 of trust money
to their bank account already containing £250, then their money will be spent first.
So the innocent recipient will acquire a 5/6 share of a title to an armchair bought for
£300, since all of their £250 was used up in the purchase, and the beneficiary gets a 1/6
share, since to make up the £300 purchase price the innocent had to draw upon £50
of the trust money. The remaining £450 in the account is all the beneficiary’s, and so if
it is spent on worthless shares, they are the beneficiary’s alone. The Court of Appeal in
Barlow Clowes International Ltd v Vaughan [1991] EWCA Civ 11, [1992] 4 All ER 22 affirmed
the general applicability of the FIFO rule, but it also acknowledged that it can work
unfairly, and indeed in that case the claimants were treated as having shares in the
entire fund proportionate to their contributions, so that they shared pro rata in the
traceable proceeds available.

Activities 19.1 and 19.2

19.1 In breach of trust, Thomas transferred £10,000 to Victor, telling him that the
money is a birthday present. Victor paid the money into his bank account,
raising the balance to £13,000. He then withdrew £5,000 and used it to buy a
painting, now worth £7,000. He next withdrew £4,000, which he spent on a
round-the-world cruise. He was then informed of the fact that the £10,000 he
received was transferred in breach of trust. He then spent a further £3,000
from the account to buy a car, which has since decreased in value, leaving a
balance of £1,000. Advise the beneficiaries of the trust.

19.2 Tara, a trustee of the Adams family trust and also the Khan family trust,
improperly withdrew £20,000 from the Adams trust and deposited it in her
bank account, raising the balance to £30,000. She then withdrew £15,000
from the account to buy shares which have since doubled in value. She
then, in breach of trust, added to the same account £40,000 from the Khan
family trust, raising the balance to £55,000. She then spent £10,000 on
shares which have also doubled in value, then £25,000 on a car now worth
half that amount, and later £15,000 on her general living expenses. She then
added £20,000 of her own money, raising the balance to £25,000. Advise the
beneficiaries of the two trusts.

Backwards tracing
Backwards tracing is the notion that beneficiaries can trace into an asset that was
purchased on credit when the provider of that credit is paid off with trust money. Thus,
if a trustee or recipient of trust funds buys a car for £10,000 with money borrowed
from a bank or with their credit card and then pays off the loan or credit card bill with
trust money, can the beneficiaries trace backwards and claim the car as the traceable
proceeds of the trust money? Without saying so, English law seems to have allowed
backwards tracing in a few cases: Agip (Africa) Ltd v Jackson [1990] Ch 265; affirmed
[1990] EWCA Civ 2, [1991] Ch 547 (backwards tracing through the bank clearing system);
El Ajou v Dollar Land Holdings plc [1993] 3 All ER 717 (Ch D); reversed [1993] EWCA Civ 4,
[1994] 2 All ER 685 (tracing through credit facilities); Foskett v McKeown [2000] UKHL 29,
[2001] 1 AC 102 (tracing into payments made on an asset, a life insurance policy that had
already been acquired). In the only English case that has addressed the issue explicitly,
Bishopsgate Investment Management Ltd v Homan [1994] EWCA Civ 33, [1995] Ch 211, the
Court of Appeal denied that backwards tracing was recognised in English law.

The Privy Council, on appeal from the Court of Appeal of Jersey, allowed backwards
tracing in Federal Republic of Brazil v Durant International Corp [2015] UKPC 35, [2015] 3
WLR 599. A total of US$10.5 million in bribes had been paid into a bank account and, at
roughly the same time, a total of US$13.5 million had been paid out of that account to
the defendants. However, only US$7.7 million in bribes had been paid into the account
before the money had been paid out to the defendants. The remaining US$2.8 million
in bribes had been paid into the account after the defendants had been paid. The Privy
Council held that all the bribes could be traced to the defendants. Lord Toulson said:
Equity and Trusts  19  Claims based on tracing page 217

33. … the plaintiffs submit, as Professor Smith argues, that money used to pay a debt can in
principle be traced into whatever was acquired in return for the debt. That is a very broad
proposition and it would take the doctrine of tracing far beyond its limits in the case law
to date. As a statement of general application, the Board would reject it. The courts should
be very cautious before expanding equitable proprietary remedies in a way which may
have an adverse effect on other innocent parties. If a trustee on the verge of bankruptcy
uses trust funds to pay off an unsecured creditor to whom he is personally indebted, in the
absence of special circumstances it is hard to see why the beneficiaries’ claim should take
precedence over those of the general body of unsecured creditors.

34. However there may be cases where there is a close causal and transactional link
between the incurring of a debt and the use of trust funds to discharge it…

38. The development of increasingly sophisticated and elaborate methods of money

laundering, often involving a web of credits and debits between intermediaries, makes
it particularly important that a court should not allow a camouflage of interconnected
transactions to obscure its vision of their true overall purpose and effect. If the court is
satisfied that the various steps are part of a co-ordinated scheme, it should not matter
that, either as a deliberate part of the choreography or possibly because of the incidents
of the banking system, a debit appears in the bank account of an intermediary before a
reciprocal credit entry…

39. … An account may be used as a conduit for the transfer of funds, whether the account
holder is operating the account in credit or within an overdraft facility.

40. The Board therefore rejects the argument that there can never be backward tracing,
or that the court can never trace the value of an asset whose proceeds are paid into
an overdrawn account. But the claimant has to establish a co-ordination between the
depletion of the trust fund and the acquisition of the asset which is the subject of the
tracing claim, looking at the whole transaction, such as to warrant the court attributing
the value of the interest acquired to the misuse of the trust fund.

While this is the law of Jersey, it may be adopted by English courts in the future.

Activity 19.3
Read Federal Republic of Brazil v Durant International Corp and explain what it
decides, assessing whether the reasoning is persuasive.

19.2 Claiming

19.2.1 Personal claims

Recall the description throughout Chapter 17 of the various claims that can be made
against trustees and third parties in cases of breach of trust. In many cases, such claims will
depend upon tracing, because it is only after the process of tracing has been undertaken
that it will be known whether certain claims arise. So, for example, if the trustee transfers
money in breach of trust to a third party, Sam, who adds it to his bank account, any
proprietary claim against Sam will involve tracing through exchanges from the trust
money to the bank account or to assets purchased from withdrawals from that account.
Similarly, a personal claim can be reliant upon the tracing process. Let us say that Sam
now draws a cheque for £1,000 on the account in favour of his cousin, Madeleine, telling
her that it is a birthday present, and let us further assume that one can trace some of the
trust money into that payment. Now assume that Madeleine finds out that the money
was wrongly taken from the trust, but decides to spend the money on a holiday to Italy
regardless. Madeleine may be personally liable for ‘knowing receipt’, as she dishonestly
dealt with a trust right, or rather the traceable proceeds of a trust right. That is, although
no proprietary claim can arise against Madeleine, for she has spent the trust money, she
may be personally liable to restore its value to the trust. Unless we had followed and traced
the trust rights from the trustee to Sam, and then traced through his bank account into an
asset (the cheque) which we followed into Madeleine’s hands, this personal claim could
not arise. So remember that although tracing is a process of dealing with rights, it can be
an essential feature in establishing personal, not just proprietary, claims.
page 218 University of London  International Programmes

Armstrong DLW GmbH v Winnington Networks Ltd [2012] EWHC 10 (Ch), [2012] 3 WLR 835
[2012] 3 All ER 425 is an interesting case involving tracing and claiming with respect
to European Union Allowances (created by the EU Emissions Trading Scheme) which
were misappropriated from the claimant’s carbon emissions account at the German
Greenhouse Gas Emissions Trading Scheme Registry and transferred to the defendant’s
carbon emissions account at the UK Greenhouse Gas Emissions Trading Scheme
Registry. The case discusses the various personal and proprietary claims potentially
available at common law and in equity.

19.2.2 Proprietary claims

There are two standard proprietary claims that can be made in respect of traceable
assets. Where the traceable proceeds is an asset that has risen in value, the beneficiary
will claim that it is held for them in trust, because they will then have the advantage of
the rise in the asset’s value. Where the asset has declined in value, the beneficiary can
decline ownership of the asset, and instead demand repayment of the trust money,
with that debt secured by an equitable lien over the asset. An equitable lien is an
entitlement to have an asset sold to pay off a debt, if the debt in question is not paid
off by the debtor.

A lien will be most convenient for the beneficiary in the case where an asset is
purchased with money from both the beneficiary and the wrongdoer and it later
declines in value. For example, if £5,000 of the trustee’s own money were used to
purchase a car for £10,000 which is now worth only £7,000. If the beneficiaries claim
an ownership share, they will have a half-interest in the car worth only £3,500. They
would be better to forego that right, and demand that the trustee repay them £5,000
from their own pocket (a personal claim against the trustee to restore the trust) and
claim a lien on the car to secure that obligation. Thus if the trustee does not pay back
the £5,000, the beneficiaries can have the car sold, for £7,000, of which they have the
right to £5,000. Thus by foregoing the ownership share they get all their money back.

19.2.3 Subrogation
Subrogation occurs when A acquires B’s rights against C by operation of law. The
insurance context provides an illustration: assume that an insurer, A, insures B against
negligent injuries by a third party. If C, a third party, negligently injures B, B will have a
right to sue C for damages to compensate B for B’s injury. However, when A the insurer
pays B an insurance award to cover B’s loss, A acquires by subrogation B’s right of
action against C. A is said to be subrogated to B’s claim against C. Similarly, in certain
circumstances, if A pays off a debt that B owes to C, then A will be subrogated to C’s
claim against B, which A paid off. In other words, A can now bring an action against B
for the amount that B previously owed to C.

The right to be subrogated in such a circumstance can be acquired by a beneficiary if

trust money is used to discharge a debt. The trust will be subrogated to the creditor’s
right of action against the debtor whose debt was discharged with trust money. This
will be particularly useful if trust money was used to discharge a secured debt, such
as a mortgage, for there will be subrogation both to the debt and the security for
that debt. If, for example, trust money is used to pay off the trustee’s mortgage, the
trust will be subrogated to the rights of the mortgage lender, including the right to
sell the property and use the proceeds of sale to satisfy the debt if it is not repaid. See
Boscawen v Bajwa [1995] EWCA Civ 15, [1996] 1 WLR 328. This may be especially valuable
if the trustee is bankrupt, since the charge on the trustee’s house will ensure that the
proceeds from the sale of the trustee’s house will go first to paying off the debt owed
to the trust.

Activities 19.4 and 19.5

19.4 Go back to the fact situations in Activities 19.1 and 19.2 and state the claims
that might be made following the tracing process.

19.5 Read Boscawen v Bajwa and explain the decision.

Equity and Trusts  19  Claims based on tracing page 219

Summary
Equity has developed various rules which allow beneficiaries to trace through
mixtures of trust assets with others. Where wrongdoers mix trust assets with their
own, the beneficiaries are essentially entitled to control the book-keeping. As between
mixtures in bank accounts of money belonging to innocent people, the FIFO rule is the
authoritative starting point, although a proportionate share rule may be applied if the
FIFO rule would generate unfair results.

Backwards tracing is the concept of tracing into an asset purchased on credit where the
trust money is later used to pay off that debt. It has not been authoritatively recognised
in English law, and the Court of Appeal decision in Bishopsgate was against it, but certain
cases can be more easily explained on the basis that the claimant was allowed to
backwards trace.

Tracing can be a basis for both proprietary and personal claims. In certain
circumstances it may be to the advantage of beneficiaries to claim a charge over the
traceable proceeds rather than an ownership share.

Rights to subrogation can arise at the end of a tracing process, and are advantageous
where trust assets are used to discharge a secured debt.

Essential reading
¢¢ Re Hallett’s Estate (1880) 13 Ch D 696 (CA); Re Oatway [1903] 2 Ch 356; Boscawen v
Bajwa [1995] EWCA Civ 15, [1996] 1 WLR 328; Armstrong DLW GmbH v Winnington
Networks Ltd [2012] EWHC 10 (Ch), [2012] 3 WLR 835.

Further reading
¢¢ Lipkin Gorman v Karpnale Ltd [1988] UKHL 12, [1991] 2 AC 548; Barlow Clowes
International Ltd v Vaughan [1991] EWCA Civ 11, [1992] 4 All ER 22; Bishopsgate
Investment Management Ltd v Homan [1994] EWCA Civ 33, [1995] Ch 211; FC Jones &
Sons v Jones [1996] EWCA Civ 1324, [1997] Ch 159; Foskett v McKeown [2000] UKHL
29, [2001] 1 AC 102; Armstrong DLW GmbH v Winnington Networks Ltd [2012] EWHC
10 (Ch), [2012] 3 WLR 835, [2012] 3 All ER 425.

¢¢ Birks, P. ‘Property, unjust enrichment, and tracing’ (2001) 54 Current Legal Problems 231.

¢¢ Burrows, A. The law of restitution. (Oxford: Oxford University Press, 2010) third
edition [ISBN 9780199296521], Chapter 6 (‘Tracing’), Chapter 7 (‘Subrogation’)
and Chapter 8 (‘Proprietary restitution’).

¢¢ Chambers, R. ‘Tracing and unjust enrichment’ in Neyers, J., M. McInnes and

S. Pitel Understanding unjust enrichment. (Oxford: Hart Publishing, 2004)
[ISBN 9781841134239] p.263.

¢¢ Conaglen, M. ‘Difficulties with tracing backwards’ (2011) 127 LQR 432.

¢¢ Matthews, P. ‘The legal and moral limits of common law tracing’ in Birks, P. (ed)
Laundering and tracing. (Oxford: Clarendon Press, 1995) [ISBN 9780198261018] p.23.

¢¢ Penner, J.E. ‘Value, property, and unjust enrichment: trusts of traceable

proceeds’ in Chambers, R., C. Mitchell and J. Penner (eds) Philosophical
foundations of the law of unjust enrichment. (Oxford: Oxford University Press,
2009) [ISBN 9780199567751] p.306.

¢¢ Smith, L.D. ‘Tracing, “swollen assets” and the lowest intermediate balance rule’
(1994) 8 Trust Law International 102.

¢¢ Smith, L.D. ‘Tracing into the payment of a debt’ (1995) 54 CLJ 290.

¢¢ Smith, L.D. The law of tracing. (Oxford: Clarendon Press, 1997) [ISBN 9780198260707].

¢¢ Swadling, W.J. ‘Orthodoxy’ in Swadling, W.J. (ed.) The Quistclose trust – critical
essays. (Oxford: Hart Publishing, 2004) [ISBN 9781841134123] (in your study pack).

¢¢ Swadling, W.J. ‘The vendor-purchaser constructive trust’ in Degeling, S. and J.

Edelman (eds) Equity in commercial law. (Sydney: Law Book Co of Australasia,
2006) [ISBN 9780455222080] (in your study pack).
page 220 University of London  International Programmes

Activity 19.6

Core comprehension – tracing swollen assets and the lowest intermediate balance
Read the following article in your study pack:
uu Smith, L. ‘Tracing, “swollen assets” and the lowest intermediate balance:
Bishopsgate Investment Management Ltd v Homan’ (1994) 8 TLI 102.
The business activities of Robert Maxwell can be briefly researched online, if you
wish to understand the context to the case.
a. Which impropriety occurred in the management of the funds belonging to the
Bishopsgate Investment Management Ltd (BIM)?

b. Following the death of Maxwell, which further situation complicated the

impropriety?

c. Why did the liquidators of BIM seek to prevent the administrators of MCC from
distributing assets to creditors?

d. On which grounds did the Companies Court refuse BIM application?

e. Outline the main points of the ‘swollen assets theory’.

f. Outline the main points of the ‘lowest intermediate balance rule’.

g. What are the implications of the lowest intermediate balance approach

on tracing funds to an account which at some point has less funds than the
improperly transferred amount but at a later point has more funds than the
improper transfer amount?

h. What are the implications of the lowest intermediate balance approach on

tracing funds in an account which at a later point has become overdrawn?

i. Why is intention irrelevant to the tracing rules?

j. How do the tracing rules assist the victim if an intention to reimburse can be
proven?

Activity 19.7

Applied comprehension – tracing and subrogation

Using your online resources research the following judgment:
uu Boscawen v Bajwa [1996] 1 WLR 328.
a. Explain what is meant by ‘subrogation’.

b. What do the expressions ‘the tracing claim’ and ‘the tracing remedy’ describe?

c. Why is it more accurate to describe tracing as a process rather than a claim or

remedy?

d. Why does the success of the claimant’s case depend on the process of tracing?

e. Identify how subrogation can function as a proprietary remedy when the

claimant’s money is used to discharge a mortgage on the defendant’s land.

Sample examination questions

Because questions raising tracing issues usually concern breach of trust or breach
of fiduciary duty, the questions will usually require you to deal with the law
governing liability for those breaches, as the following questions do. Concentrate
on the tracing issues for now, but realise that a full exploration of all the relevant
issues raised by the question will be required in the examination:
Question 1 Flick is a trustee of two settlements, Settlement No 1 and Settlement No
2. In January of this year, he received a cheque for £10,000, representing dividends
from investments in Settlement No 1. He deposited this cheque in his personal
bank account, which at the time had a credit balance of £5,000. In February, he sold
Equity and Trusts  19  Claims based on tracing page 221

investments forming part of the trust fund of Settlement No 2 for £12,000 and paid
this into the same account. In March, he withdrew £15,000 from the account and
bought shares in his own name in X Co Ltd. In April, he won £10,000 on the football
pools and paid this into the same account. In May, he withdrew £12,000 from the
account and gambled it away. He has now been adjudicated a bankrupt. The shares
in X Co Ltd are currently worth £30,000.
Advise the beneficiaries under each settlement as to their respective claims.
Question 2 Tammy, a trustee, made the following payments in breach of trust:
a. £5,000 to her niece, Ethel, as a graduation present. Ethel used the whole of the
£5,000 to buy a second-hand car which she could otherwise not have afforded.
She then crashed the car. She received £4,500 under her insurance policy, the
premiums for which she had paid out of her own savings.

b. £10,000 to her accountant Richard to buy shares. Knowing Tammy’s financial

circumstances, Richard wondered where the money came from, but did not ask,
and bought the shares which have since fallen in value to £4,000.

c. £20,000 to pay off the mortgage on Tammy’s house.

d. £5,000 to pay off a credit card bill which Tammy had incurred by buying an
antique wardrobe. She still has the wardrobe.

Tammy is now bankrupt. Advise the beneficiaries concerning the liability of Tammy,
Ethel, and Richard.

Advice on answering the questions

Question 1 Flick has mixed money of two different trusts with his own, so that both
the rules governing wrongdoers and the rules governing innocent people apply.
Before the withdrawal in March, the account contained £5,000 of his own money,
£10,000 of No 1 money, and £12,000 of No 2 money. The shares in X Co Ltd have
doubled in value, so as against Flick, No 1 and No 2 will claim their money made up all
of the purchase price. As between No 1 and No 2, they will have shares in the shares
either 2/3 for No 1, 1/3 for No 2 on the FIFO basis and 5/11 No 1 and 6/11 No 2 on the
proportionate share basis. The £10,000 in pool winnings is Flick’s money, raising his
money in the account to £15,000. The beneficiaries will insist that the entire £12,000
dissipated gambling represents Flick’s money, reducing the amount he has in the
account to £3,000, out of a total balance of £10,000. The £7,000 will represent money
entirely of No 2 if the FIFO rule applies, or a sum shared by them proportionately in 5/11
and 6/11 shares, respectively, if the proportionate share approach is taken.

Question 2

a. On orthodox tracing principles, the beneficiaries can trace into the crashed car,
which is worthless, but not into the insurance proceeds. True, she would not have
purchased the insurance or received the insurance award but for the purchase
of the title to the car with trust money, but no trust money was actually used to
purchase the insurance policy.

b. The beneficiaries should be advised to claim a charge over the shares for the re-
payment of the trust’s £10,000, which will provide a better result than claiming a
half-interest in shares now worth only £14,000.

c. Following Boscawen v Bajwa, the beneficiaries should be advised to claim to be

subrogated to the rights of Tammy’s mortgagee to secure repayment of the
£20,000.

d. This part requires a discussion of the possibility of backwards tracing in English law,
for if it is available, the beneficiaries can claim that the wardrobe is held for them
by Tammy on constructive trust.
page 222 University of London  International Programmes

Reflect and review

Look through the points listed below.

Are you ready to move on to the next chapter?

Ready to move on = I am satisfied that I have sufficient understanding of the principles

outlined in this chapter to enable me to go on to the next chapter.

Need to revise first = There are one or two areas I am unsure about and need to revise
before I go on to the next chapter.

Need to study again = I found many or all of the principles outlined in this chapter very
difficult and need to go over them again before I move on.

Tick a box for each topic.

Ready to Need to Need to
move on revise first study again

I can define the difference between following,

tracing and claiming.   

I can explain why the law of tracing often falls into

the law of constructive trusts.   

I can explain when the common law does not allow

a title holder to trace.   

I understand and can apply the rules governing

tracing through mixtures.   

I can explain what backwards tracing is and why the

law regarding it is unsettled.   

I can outline the proprietary and personal claims

that can arise following the tracing process.   

I can show how rights to subrogation can arise

following the tracing process.   

If you ticked ‘need to revise first’, which sections of the chapter are you going to
revise?
Must Revision
revise done

19.1 Tracing  

19.2 Claiming  
 Feedback to activities

Contents
Chapter 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 225

Chapter 2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 226

Chapter 3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 226

Chapter 4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 227

Chapter 5 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 230

Chapter 6 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 233

Chapter 7 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 233

Chapter 8 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 234

Chapter 9 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 235

Chapter 10 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 240

Chapter 11 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 241

Chapter 12 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 241

Chapter 13 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 242

Chapter 14 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 242

Chapter 15 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 243

Chapter 16 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 244

Chapter 17 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 244

Chapter 18 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 248

Chapter 19 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 249
page 224 University of London  International Programmes

Notes
Equity and Trusts  Feedback to activities page 225

Chapter 1

Activity 1.1
a. ‘… the “common law” encompasses all the laws of a common law jurisdiction,
whether created by the judges or by legislation. Thus, we can speak of common
law systems…’ (p.263)

b. ‘… A lesser meaning is that the ‘common law’ is the law created only by the judges
rather than by legislation.’ (p.263)

c. ‘In its narrowest meaning the “common law” is used to distinguish between
“Common Law” and “Equity”, two judge-made bodies of law…’ (p.263)

d. ‘… Equity is merely a gloss upon, or a supplement to, the common law. If Equity
were suddenly to be abolished by statute there would still be the common law to
enable society to be regulated, although only in a rather rudimentary fashion. If the
common law were to be abolished there would be anarchy.’

‘…The common law laid down general rules but occasionally Equity intervened to
provide a liberal and just modification of the law in exceptional cases.’ (p.264)
(emphasis added)

e. The King’s Court.

f. ‘…The Chancellor was a senior ecclesiastic having some knowledge of canon law
and civil law, and, perhaps, some common law. He dealt with the petitions as
reason and good conscience demanded. He was ready, in what developed into his
Court of Chancery, to provide relief where the Common Law was unsatisfactory, as
where relief could not be obtained because the petitioner’s circumstances were
not covered by the restricted number of writs available at common law.’

g. (i) ‘…Because land was the major source of wealth, Equity primarily intervened so
as to develop land law to meet the needs of society.’

(ii) ‘…Equity follows the law in recognising T as the owner at law but insists that T
must use that ownership for the benefit of the beneficiaries.’ (p.265)

Activity 1.2
a. ‘The expression “common law” is used to describe judge-made law in contrast to
statute law, and not in the narrower sense.’ (p.601)

b. ‘…That body of rules administered by our English courts of justice which, were it
not for the operation of the Judicature Acts, would be administered only by those
courts which would be known as Courts of Equity.’ (p.601)

c. ‘…“equity” refers to the doctrines and remedies that originated in the English Court
of Chancery in contrast to the “common law” which is the body of rules developed
by the King’s courts.’ (p.601)

d. ‘…Apart from England itself, Australia, Canada and New Zealand are prominent
examples.’

e. Contract, property and restitution law.

f. ‘…equity is “doctrinally distinct from the law”’.

‘…is “motivated by different policies.’

‘…it relies on broadly based standards whereas the common law is rule based and
relatively unyielding to cases of individual hardship.’

‘…equity is flexible whereas the common law favours certainty’.

‘…Equity’s concern is with individual justice, whereas the common law delivers
universal justice’.
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g. ‘…Direct reform of the common law is difficult, because much of it is too well
settled. However, reform can be achieved indirectly by using equity doctrines to
modify or prevent the application of common law rules in cases where the concern
is to give effect to values other than efficiency.’ (p.602)

h. ‘…an important function of equity is to impose fairness standards on commercial

and other behaviour.’ (p.603)

Chapter 2

Activity 2.1
a. The parties were husband and wife, who both contributed to the purchase of a
fee simple title to a family home. The issue was whether there was any basis for
altering the co-ownership shares each spouse would normally receive based upon
the proportions each contributed to its purchase. The court held that there was
not.

b. Briefly, Bagnall J insisted that justice must be determined according to law, which
can be attained by mortals who apply rules and principles acquired over time,
not on the basis of general considerations of fairness, in particular in respect of
property rights, otherwise no lawyer could safely advise their client. It might be
unfair, all things considered, for Mrs Cowcher to receive a smaller share of the title
than her husband given all she had done for him, but there was no basis in the law
of trusts to grant her a larger share for that reason alone.

Activity 2.2
The main point to grasp here is that a trust is not the same thing as an agency,
contract, or debt, but that the trust can be used in combination with many of these
other legal devices (in particular trust and contract, trust and agency, and trust and
debt), to generate different legal arrangements.

Chapter 3

Activity 3.1
No feedback provided.

Activity 3.2
A typical family trust contains successive and discretionary elements. A successive
interest is one taking effect after a prior interest ends. If you are married, then you
might typically provide for your spouse for the rest of their life after your death, and
leave the remaining funds for your children on your death. So you might put funds on
trust for ‘your spouse for life, remainder to your children in equal shares’. Under those
terms your spouse will get the income from the trust investments as long as they live,
and upon their death, your children, who have the ‘capital’ interest, will be entitled to
the transfer of equal shares in the trust rights. So far, we have a fixed trust. You might,
however, give your trustees a discretion over the income while your spouse is alive, to
give the income to your spouse and/or your brothers and sisters in such shares as your
trustee ‘shall in his absolute discretion see fit’. That way, your trustee can give money
to any of these people according to their current needs. Or you might make the shares
of capital discretionary too, allowing the trustee to appoint the capital on the death of
your spouse in whatever shares the trustee decides. Drafting trusts so as to properly
take into account all future possibilities is a difficult business, and centuries of effort
have gone into refining the structure of trusts to do so. Nowadays, trust instruments
tend to avoid the use of contingent interests, but instead give the trustees very
expansive discretions to add or delete beneficiaries, to vary shares, and so on, so that
the trust can be adapted to changing circumstances.
Equity and Trusts  Feedback to activities page 227

Activity 3.3
a. Obviously a discretionary, testamentary trust with a defeating provision
(establishing a residence outside the UK); clearly a special trust. The gift of capital is
a public purpose, or charitable, trust.

b. An express, inter vivos, trust, which is also invalid for being a private purpose trust.

c. An express trust, which fails for uncertainty of objects – an automatic resulting

trust of the £10,000 to his estate on death.

d. The question is whether there is a resulting trust here.

e. The express trust formed by Fred and Bill with the solicitor is breached by the
latter. The nephew, who is not a bona fide purchaser, holds the £10,000 on trust for
Fred and Bill, under a constructive trust arising by operation of law.

Chapter 4

Activity 4.1
The main points of difference are:

a. The relations between the agent and principal here are personal and contractual,
not proprietary. Thus when the agent collects the rent for P, the agent generally
receives the money outright – he merely owes P a sum of like amount. If the rent
money is stolen from the agent, it is the agent’s loss. He still owes P the same
amount. If the agent held the rent he collected on trust for P, then if the rent
money was stolen then it would be P’s loss: Morley v Morley (1678) 2 Cas Ch 2.

On the other hand, if the agent became bankrupt before paying P what he owed,
P would be an ordinary creditor of the agent, whereas if the agent held collected
rents on trust for P, P would be able to claim the rent money as held on trust for
him, so avoiding the effects A’s bankruptcy has on mere creditors.

b. The relationship between trustee and beneficiaries is not one of debtor and
creditor. The benefit of a debt can, however, form the subject-matter of a trust.

Activity 4.2
No feedback provided.

Activity 4.3
A fraud on a power occurs whenever a power, usually a power of appointment, is
used to achieve a purpose outside the intended use of that power, typically to benefit
some person by a power of appointment who is not a proper object of the power.
For example, if a trustee makes a deal with a proper object of a power to exercise the
power in that object’s favour, granting him £10,000, if the object agrees to then give
£5,000 to the trustee, this is clearly a fraud on a power. Vatcher v Paull establishes that
making the exercise of a power conditional or defeasible on what the proper objects
may do does not automatically make the exercise a fraudulent one.

Activity 4.4
How does the standard apply in dealing with agents in the general course of business,
and what phrases does the court use to describe the standard? (Speight v Gaunt; Re
Whiteley) Does it require the trustee to outperform the market (Re Chapman)?

Activity 4.5
Having the power to elect the board of directors, must the trustee elect himself to the
board? Insist on minutes of board meetings? Actively direct the company’s affairs?
page 228 University of London  International Programmes

Activity 4.6
The trustees were in breach of trust for failing to understand the investment clause of
the trust instrument, and therefore they invested in a smaller range of securities than
they might have done, and yet Miss Nestle’s claim that the 80 per cent fall in the real
value of the trust capital failed – was it because the breach did not lead to the loss?
Or because the trustees properly favoured the interests of the life tenants (income
beneficiaries) or both?

Activity 4.7
Against social investing, one should emphasise that Scargill’s claim was that a trustee
should be able to advance the trustee’s ethical commitments via their investment of
the trust assets, even against the beneficiaries’ wishes or best interests. In favour, one
might say that given the vast amounts held in trust, especially by pension funds, this
would provide a means for ethical and moral views to improve business practices in
the world of investment banking and finance; secondly, it is not clear that all ethical
investment strategies result in reduced returns.

Activity 4.8
Clearly the decision to delegate investment powers turns most importantly on the
trustee’s own expertise. To the extent the trustee is not an expert, they must seek
expert advice, and for reasons of efficiency in both time and the expenditure of fees,
which will depend in part on the size of the trust and the sort of duties the trust
imposes (for example, to pay regular income, or rather to accumulate income for a
long period) it may be sensible to delegate the power of investment. Of course, before
doing so, the qualifications of any proposed agent must be investigated.

Activity 4.9
a. ‘…The new duty will bring certainty and consistency to the standard of
competence and behaviour expected of trustees. It will be a safeguard for
beneficiaries and thereby balance the wider powers given to trustees elsewhere in
the Act. The duty will take effect in addition to the existing fundamental duties of
trustees (for example, to act in the best interests of the beneficiaries and to comply
with the terms of the trust) but will exclude any common law duty of care which
might otherwise have applied.’ [Part 1. The Duty of Care at 11]

b. ‘…To comply with the new duty a trustee must show such skill and care as is
reasonable in the circumstances of the case making allowance for his or her special
knowledge, experience or professional status (section 1(1)(a) and (b)). Thus, in
relation to the purchase of stocks and shares, a higher standard may be expected
of a trustee who is an investment banker, specialising in equities, than of a trustee
who is a beekeeper, particularly if the investment banker is acting as a trustee in
the course of his or her investment banking business.’ [Part 1, Section 1 at 13]

c. ‘…In determining what constitutes reasonable care consideration would also be

given to the nature, composition and purposes of the trust being administered.’
[Part 1, Section 1 at 13]

d. ‘…Section 2 introduces Schedule 1 to the Act, which defines when the new duty
will apply. In general terms the new duty will apply to any exercise by a trustee of a
power to invest trust property or to acquire land; to appoint agents, nominees and
custodians; or to insure trust property.’

Activity 4.10
a. Trustees must select investments strictly on financial grounds.

b. ‘…The beneficiaries might well consider that it was far better to receive less than
to receive more money from what they consider to be evil and tainted sources.
“Benefit” is a word with a very wide meaning, and there are circumstances in which
arrangements which work to the financial disadvantage of a beneficiary may yet be
for his benefit.’
Equity and Trusts  Feedback to activities page 229

c. Example: Evans concerned a limited form of ‘social’ or community investment

and was particular to the structure of the cooperative society whereby a certain
interdependency existed between investment and employment. The loan
arrangement was made not on any broad social or ethical ground but in the
interests of the beneficiaries’ economic wellbeing. (53 words)

d. ‘…when the objects of the charity are such that investments of a particular type
would conflict with the aims of the charity.’

Examples:

‘…cancer charities refusing to invest in tobacco shares, trustees of temperance

societies ruling out investment in breweries or distilleries and Quaker charities
deciding not to invest in the arms trade.’

e. ‘…if the investment in fact made is equally beneficial to the beneficiaries, then
criticism would be difficult to sustain in practice, whatever the position in theory’.

f. Example: Thornton emphasises the impracticalities of measuring what is ‘equally

beneficial’, given the unpredictable variances in the investment markets. She
suggests that the occurrence of the choice suggested is a practical impossibility.
(31 words)

g. ‘…declarations to the effect that the Commissioners were obliged to have regard
to Christian principles when making investment decisions, and that a policy which
still attached overriding importance to financial considerations was erroneous in
law.’

h. ‘…The contention of the Church Commissioners, with which the Vice-Chancellor

implicitly concurred, was that their existing policy, although it narrowed the range
of potential investments they might make, did not unduly restrict their ability
to pursue a financially viable investment strategy. Most crucially, it did not do
so “because there…remained open to the Commissioners an adequate width of
alternative investments.”’

i. ‘…The concept of excluding any sector of the market and yet retaining a
“sufficient” range of investment selection is flawed, flying as it does in the face
both of portfolio theory and of the guiding principle of the beneficiaries’ best (as
opposed to “good enough”) financial interests.’

Activity 4.11
a. ‘…ethical investment industry’.

‘SRI’ or socially responsible investment.

b. Market statistics collected and analysed by EIRIS (Ethical Investment Research

Services): see [Link]

c. The total fund value of ethical retail funds is £6.1 billion. The total fund value of SRI
assets is £221 billion.

d. ‘…they are no doubt affected by the same personal moral, social and political
promptings…’

e. ‘…The starting point is the duty of trustees to exercise their powers in the best
interests of the present and future beneficiaries of the trust…When the purpose of
the trust is to provide financial benefits for the beneficiaries, as is usually the case,
the best interests of the beneficiaries are normally their best financial interests. In
the case of a power of investment…the power must be exercised so as to yield the
best return for the beneficiaries, judged in relation to the risks of the investments
in question…’

f. ‘…he must “none the less do his best to exercise fair and impartial judgment” in
the best interests of the beneficiaries.’

g. Example: Trustees can select a range of investment products to spread the risk of
investment and thus achieve good financial returns for the particular trust. (24
words)
page 230 University of London  International Programmes

Chapter 5

Activity 5.1
a. The plaintiff, Mrs Paul, who had lived with Mr Constance in the last years of his life,
claimed against Mr Constance’s widow, who was administering Mr Constance’s
estate on his death, that Mr Constance had declared that he held a bank account in
his name on trust for himself and Mrs Paul in equal shares, the declaration taking
the form of his telling Mrs Paul on several occasions that the money in the bank
‘was as much yours as mine’.

b. The defendant argued that the proper interpretation of the facts indicated that
although Mr Constance might have attempted to make a gift of a share of the
money to Mrs Paul, he had failed to do so properly, as in Jones v Lock; the court
had no power to treat this failed intention to make a gift as a declaration of trust;
further, from this principle, the defendant argued that there needed to be a clear
intent by the purported settlor to confer rights on a purported beneficiary to count
as a declaration of express trust, and here there was none.

c. The Court of Appeal held (1), that there was no question of a direct gift in this case
which had failed, as in Jones v Lock, and that, given the unsophisticated nature of
the parties, Mr Constance’s expression that the money was as much the plaintiff’s
as his own on numerous occasions was sufficient as a declaration of trust. An
express trust was therefore found to have been created.

Activity 5.2
No feedback provided.

Activity 5.3
After reading and noting the Court of Appeal’s decision, the difference in approach
taken by Megaw LJ and Sachs LJ towards certainty of objects should become clear.
Sachs LJ makes a clear distinction between conceptual uncertainty and evidential
uncertainty; the ‘is or is not’ test applies only to the former, and ‘the court is never
defeated by evidential uncertainty’. Therefore it is a question of fact whether ‘any
individual postulant has on inquiry been proved to be within (the class); if he is not
so proved then he is not in it’. However, Megaw LJ introduces a factor of substantial
numbers into the ‘is or is not test’. If it could be said with certainty that a substantial
number of beneficiaries fell within a class, the class is certain and therefore the trust is
valid. However, it gives no guidance to the trustee as to the extent of any survey they
must make of the class before distributing (i.e. the extent of the consideration they
must give to distributing to those not within the ‘substantial numbers’ yet who may
fall within the class intended by the settlor). What is not clear, given that there was
conceptual certainty on the facts, is whether Megaw LJ would require this too.

A trust to distribute monies to adherents of the Anglican church might serve as an

example of a trust which would fail Sachs LJ’s test but possibly pass Megaw LJ’s – it is
not clear that it could be said with certainty of every person whether or not they were
within the class (e.g. those who only attend services sporadically) and this is a matter
of conceptual, not evidential, uncertainty. However, it is clear that on any definition
of ‘adherent’, substantial numbers would fall within the class (e.g. all those who are
members of the clergy, regular atttenders, etc.) and so this trust may pass Megaw LJ’s
test. We should note again, however, that Megaw LJ’s comments were made in the
context of a conceptually certain trust.

Activity 5.4
‘Conceptual uncertainty’ arises from the settlor’s use of imprecise or vague language
in expressing their intentions. Vagueness can be understood as the problem of the
uncertain boundaries which arise when we try to apply words to things in the world.
For example, the word ‘tall’ appears to have very uncertain boundaries; ‘tall’ is not
a synonym for ‘5'10" and over’; it is not that precise. As a consequence, the use of
the word ‘tall’ in a trust would result in the declaration of the trust being void for
Equity and Trusts  Feedback to activities page 231

conceptual uncertainty. ‘Evidential uncertainty’ arises when there is insufficient

evidence to conclude that an object is within the specified class of objects. The terms
of a trust may be conceptually clear, but actually providing evidence to meet them
may be impossible.

Activity 5.5
Evidential uncertainty defeats a fixed trust entirely. The reason is straightforward: if
the settlor expresses their gift in such a way that evidence must be adduced to identify
the rights or person and that evidence is not available, the trust cannot be executed
according to its terms.

Evidential uncertainty as regards any particular object will not invalidate a

discretionary trust, nor a power of appointment. As long as there are objects who
can provide sufficient evidence to prove that they are within the class, there will be
valid objects under the trust, and it will not fail. If, however, there is no possibility of
adducing evidence to prove that anyone falls within the class, then the trust will fail
just as in the case of a fixed trust, even if perfectly conceptually certain. Examples of
this sort of trust are likely to be fanciful (e.g. a trust for all those persons who had male
ancestors in the 16th century with an extra Y chromosome).

Activity 5.6
a. When a power is held by a fiduciary, typically the trustee(s) of the trust, the
fiduciary cannot release it. Moreover, they will have duties in relationship to it, to
consider exercising it from time to time, and so to survey the class and determine
whether an appointment should be made, and to respond to requests by particular
objects that they be considered; they must exercise the power in a responsible
manner for the purposes for which it was given, and in particular must not act
capriciously in determining whether and how to exercise it.

b. While Megarry J held that intermediate powers are valid when held by fiduciaries,
not being subject to the administrative workability test, which he held applied
only to discretionary trusts, nor being capricious, he said that he would probably
hold an intermediate trust invalid, on the basis that the duties of a discretionary
trustee are more stringent than a fiduciary powerholder and that the beneficiaries
of a discretionary trust have more rights of enforcement than objects of fiduciary
powers. It is not clear how these differences lead to the invalidity of intermediate
trusts, for the enhanced duties of the discretionary trustee are clearly a matter of
degree, following McPhail v Doulton, and the object’s rights of enforcement do not
seem to have anything to do with whether a trustee or donee of a power can carry
out a sensible survey of objects and distribute rights responsibly.

Activity 5.7
a. ‘…This is wrong. The House of Lords, on the contrary, merely returned the state of
the law to what it had always been before the wayward decision of the Court of
Appeal in I.R.C. v Broadway Cottages Trust.’ (p.22)

b. ‘…if trust property is to be divided among a class of beneficiaries in equal (or any
other fixed), shares, the trust cannot, in the nature of things, be administered
unless the number and identity of beneficiaries are known.’ (p.22–23)

c. ‘The problem was simply, did the court know what the settlor meant by his use of
such words as “family” or “relations”?’ (p.24)

d. ‘…The beneficiaries conceded “that it would be impossible at any given time to

achieve a complete and exhaustive enumeration of all persons then qualified for
inclusion in the class of ‘beneficiaries’ under the terms of the schedule.” In other
words, the class was evidentially uncertain.’

‘On the other hand, it is conceded on the part of the Crown that the qualifications
for inclusion in the class of “beneficiaries” prescribed by the schedule are
sufficiently precise to make it possible to determine with certainty whether any
particular individual is or is not a member of the class.’ (p.24)
page 232 University of London  International Programmes

e. Example: As the beneficiaries conceded the aspect of conceptual uncertainty,

the Crown successfully advanced the argument that evidential uncertainty also
existed, i.e. there was not sufficient evidence of identities of all the beneficiaries.

f. ‘…There can be no division in equal shares among a class of persons unless all the
members of the class are known.’ (p.27)

g. ‘… A class including as yet unborn or unascertained beneficiaries is perfectly valid

ab initio… What matters is not that the whole class must be ascertained, but that if
and when members came into existence they can be ascertained.’ (p.27)

Activity 5.8
a. Banking and Investment – trading of securities.

Bankruptcy

‘…application by the Administrators of Lehman Brothers International (Europe)

(“LBIE”) seeks the court’s directions as to the principles governing the beneficial
ownership, as between LBIE and a number of its affiliates within the Lehman group,
of securities which LBIE had, prior to the onset of its administration, acquired from
third parties (“the street”) for the account of those affiliates and which, vis-à-vis the
rest of the world, still remain vested in LBIE.’ [1]

b. ‘…a study of the legal question whether the recognition in English law in Hunter
v Moss [1994] 1 WLR 452 that there can be a trust of part of an un-segregated mass
of fungibles is sufficiently flexible to be capable of being applied to the constantly
fluctuating mass of security interests appearing in LBIE’s un-segregated house
depot accounts with its depositories.’

c. ‘…(iii) A trust of part of a fungible mass without the appropriation of any specific
part of it for the beneficiary does not fail for uncertainty of subject matter,
provided that the mass itself is sufficiently identified and provided also that the
beneficiary’s proportionate share of it is not itself uncertain.’ [225]

Relevant extract: [227]

d. Example: Because the shares were fungible, i.e. they were identical and
interchangeable.

e. ‘…because the dealer had never appropriated specific quantities of matching wine
to each of its customers from stocks held in bulk in its warehouses.’ [229]

f. ‘…a developer’s failure to carve from its general assets a retention fund for its
builder pursuant to an obligation in the building contract, before becoming
insolvent, was held to preclude the identification of the necessary subject matter
of an enforceable trust of the retention monies.’ [230]

g. ‘…The difficulty with applying the Court of Appeal’s judgment in Hunter v Moss to
any case not on almost identical facts lies in the absence of any clearly expressed
rationale as to how such a trust works in practice.’ [232]

h. ‘… such a trust works by creating a beneficial co-ownership share in the identified

fund, rather than in the conceptually much more difficult notion of seeking to
identify a particular part of that fund which the beneficiary owns outright.’ [232]

i. ‘…The law does not lightly allow contracting parties’ purposes and intentions to be
defeated by supposed uncertainty, and there is in my judgment no reason why the
law should do so any more readily than normal merely because the issue is as to
the validity of an intended trust. On the contrary, the law commonly recognises the
creation of a trust as a necessary consequence of an intention that parties should
share property beneficially, in circumstances where the parties themselves have
given no thought at all to the terms of the consequential trust, if indeed they even
recognised its existence. In all such cases the law fills the consequential gaps by
implication, and by importation of generally applicable principles.’ [245]
Equity and Trusts  Feedback to activities page 233

j. ‘…By parity of reasoning, and on the assumption that LBIE and its affiliates intended
that the affiliates should enjoy proprietary interests in securities acquired by LBIE
for their account, the fact that the mode of LBIE’s operation of its house depot
accounts to which they all consented may throw up difficulties of analysis as to
their proportionate shares in the securities which remain after the collapse is not
a basis for concluding that the trust which the law necessarily recognises so as to
give effect to their intended proprietary interests should fail for want of certainty,
whether as to terms, or as to the amount of those beneficial interests.’ [247]

Chapter 6

Activity 6.1
No feedback provided.

Activity 6.2
No feedback provided.

Activity 6.3
No feedback provided.

Chapter 7

Activity 7.1
The first point to note is that Milroy v Lord establishes the general rule that ‘equity will
not assist a volunteer to perfect an imperfect trust’. Consequently the limit placed on
the settlor is that, if the settlor attempts to create a trust with a third party as trustee
but that trust is imperfectly constituted, the settlor will not by that fact alone become
the trustee. The general principle is that the court will not construe a failed attempt
to make a gift in one way as an effective attempt in another way, and typically this will
mean that the court will not treat a failed gift or a failed attempt to constitute a trust
as a self-declaration of trust.

Regarding the limits on the court, you should remember that if the court intervened
and imposed a trust on the settlor, it would result in a trust coming into existence
which was not one intended by the settlor; it would, in other words, be a constructive
trust. However, as you read on you will see that the court has departed from the rule in
Milroy v Lord in six specific situations.

Activity 7.2
a. There are three principal methods by which a gift of the shares and the title to the
painting can be made:

1. A transfer of the shares (as choses in action) must be made in the proper
manner and the title to the painting by delivery or deed.

2. By you declaring yourself a trustee of the shares and your title to the painting
in favour of your friend.

3. Finally, you can transfer the shares and the title to the painting to a third
person to hold on trust for your friend. It is these three modes of transfer
which the court in Milroy v Lord held were mutually exclusive, and, in particular,
would not treat failed attempts to transfer the right by modes (1) and (3)
above as cases of (2) (i.e. as self-declarations of trust, regarding which you will
notice that no transfer of any right is necessary, and is therefore the simplest to
effect).
page 234 University of London  International Programmes

b. Turner LJ in Milroy v Lord said that ‘equity will not assist a volunteer to perfect an
imperfect trust’. Re Rose presents one of six departures from this general rule. But
does this departure represent a conflict with the Court of Appeal’s decision in
the earlier case? In his leading judgment, Evershed MR certainly did not think it
did. He said that Turner LJ’s judgment was only meant to apply where the transfer
in question had not been carried out in the appropriate way. This, however,
is nowhere stated in Milroy v Lord itself. Nor is there any logical reason why it
should make a difference. Indeed, it could be said that Milroy v Lord tells us that
any intervention by the court would result in a trust being created that was not
intended by the settlor/donor. Furthermore in both cases the donor had told the
donee that the gift was perfect, so this cannot be a distinguishing factor. Thus,
despite Lord Evershed MR’s words, there does appear to be a conflict with the
previous case.

c. The term ‘unconscionable’, like ‘unfair’ or ‘unjust’ gives little guidance to a court
trying properly to characterise the sorts of facts which should cause it to perfect
an imperfect gift, for it is a conclusion only. What it fails to tell us is what particular
facts lead to this conclusion. Perhaps the most obvious cases occur when the
parties have acted on the basis that a gift was valid, and so have detrimentally
relied upon it. But it is not clear that the only way to deal with such an occurrence
is to perfect the gift, rather than compensating the relying party for their loss,
or stripping the donor of any extra advantage they would receive if the gift
were now treated as invalid, for example, strip the donor of the value of a house
the intending donee built on land which was not properly transferred. Cases
such as Re Rose and Pennington do not, however, present compelling cases of
‘unconscionability’, whatever that word might mean.

Chapter 8

Activity 8.1
Some commentators say that the judges blindly followed Eve J’s decision, although it
arguably went beyond the bounds of the rule that equity will not assist a volunteer.
The opposing view is that trustees cannot have any option whether or not to sue to
enforce a covenant: either they have the duty to sue to constitute the trust, or no
right to do so because equity will not assist volunteers to enforce promises without
consideration (whether oral or within a deed) to constitute a trust, and equity will
not make a distinction between volunteer trustees and volunteer beneficiaries: a
promise to a volunteer is equally unenforceable whether made to a donee directly
or to a trustee in a beneficiary’s favour. The fact that the promise is contained in a
deed which the law would enforce is immaterial from this perspective: to allow the
enforcement of covenants to settle by the trustee would allow the law to determine
the constitution of trusts, which is the province of equity.

Activity 8.2
In Re Basham, the plaintiff who, with her husband, had helped her mother and
stepfather for a considerable period of her life in expectation of receiving the
survivor’s property, was able to claim that this detrimental reliance entitled her to
the property. Notice that the expectation was of a future gift of property, not the
expectation that a past gift was valid and acted upon.

In Eves, the detrimental reliance consisted in exceptional work in contributing to

extensive improvements to the land in question – the plaintiff had been (untruthfully)
told by her partner that her name would have been put on the title to the land but for
her age, and therefore her reliance contributed to the Court’s holding that there had
been a common intention or understanding that her partner held the property for
them both, and this entitled her to a share.
Equity and Trusts  Feedback to activities page 235

Chapter 9

Activity 9.1
No feedback provided.

Activity 9.2
a. Tax relief to charities is generally based upon the idea that charities provide public
benefits; since they are not for the private benefit of individuals or corporations,
they should not be subject to the rules of taxation which are meant to raise
revenue from private individuals for the running of the state. It is also sometimes
claimed that charitable works would have to be provided by the state if charities
did not carry them out, so they save the state money. As you will see, however,
not all charities provide the same kind of public benefits, and it is arguable that
blanket tax relief for them all is not warranted. Finally, countries like the UK have
a large charitable sector, which forms a substantial part of the economy, and it is
sometimes argued that this economic activity should be taxed in some way, even if
not in the same way as the ‘for profit’ sector.

b. The point here is that the forum for determining charitable status should be more
democratic; judges might appropriately determine rights under the law, but they
have no expertise in drawing fine distinctions between activities that are truly for
the public benefit and those which might only appear to be so. Should there be
some public body other than the courts which should do so?

c. The point here is that in view of the fiscal privileges, courts tend to be conservative
about what counts as charitable, in order to prevent giving charitable tax status to
activities which are not clearly for the public benefit – if tax consequences did not
follow, then the courts might allow many more ‘not for profit’ purposes to count as
charitable.

Activity 9.3
The trust was for a working men’s hostel in Cyprus where there was a severe housing
shortage. But working men are not all poor, and so it was not clear the trust genuinely
relieved poverty. But given the housing shortage, the trust was allowed as charitable
under the category of trusts to relieve poverty.

Activity 9.4
It is very difficult to distinguish these research cases, since it is not clear that Shaw’s
purpose was less beneficial to the public than research to show that Bacon was the
author of Shakespeare’s plays.

Activity 9.5
No feedback provided.

Activity 9.6
No feedback provided.

Activity 9.7
No feedback provided.

Activity 9.8
No feedback provided.
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Activity 9.9
a. The question here is whether a general charitable intent is disclosed – Re Harwood
suggests that it is easier to find a general charitable intent when the named charity
never existed than when it once did but is now defunct, on the basis that in the
former case the testator’s intention is more general, the specific location not
mattering so much to him (otherwise he would have taken more care in naming an
actual charitable institution). Do you find this reasoning persuasive?

b. This is not a case of cy-près. If one charitable institution’s work is continued by

another, the gift goes to the continuing institution as a fulfilment of the testator’s
intention, unless there is some indication that the testator would not have
favoured this.

c. This might not be a case of cy-près. According to Re Vernon WT, a gift to a charitable
company ought normally to be construed as a gift to the company directly, to carry
out whatever charitable activities it does. This reasoning does not seem entirely
persuasive, and in appropriate cases one might construe the gift as being for the
named charitable purpose, treating it as having failed, and then assessing whether
there was a general charitable intent to allow the gift to be applied cy-près.

Activity 9.10
a. Not charitable – clearly political.

b. Probably not charitable, for failing the public benefit test because of the
restrictions to children of the corporation – the preference may possibly save it –
see IRC v Educational Grants Association Ltd.

c. Almost certainly not charitable as actually being against religion, and perhaps
political as well, despite the fact that the research, if it could be carried out, would
be enormously significant.

d. The actual educational purpose is charitable, but is almost certainly tainted by the
association with a political party; the court would probably rightly fear that this
amounted to propaganda masquerading as education.

e. If restricted to students, this would almost certainly be charitable, but see IRC v City
of Glasgow Police Athletic Association.

f. This is charitable.

g. May perhaps be charitable – the restriction to relatives does not violate the public
benefit test (Re Scarisbrick); the question is whether ‘lacking ordinary comforts’
amounts to poverty.

h. Not charitable, for being a political purpose; see A-G v McGovern.

Activity 9.11
a. The Statute of Charitable Uses 1601 (in particular the Preamble).

The Charities Act 2006.

The Charities Act 2011.

b. ‘… trusts for the relief of poverty; trusts for the advancement of education; trusts
for the advancement of religion; and trusts for other purposes beneficial to the
community, not falling under any of the preceding heads.’ [6]

c. Example: The provision of housing benefits the community in general, however, it

is necessary to demonstrate that it is specifically for the relief of charitable need to
meet the requirement of a charitable trust. (33 words)

d. ‘the term “charity” is defined by section 1 of the Charities Act 2011 as: “an institution
which (a) is established for charitable purposes only, and (b) falls to be subject
to the control of the High Court in the exercise of its jurisdiction with respect to
charities”.’ [13]

‘The term “charitable purpose” is defined by section 2 (1) as: “a purpose which (a)
falls within section 3 (1), and (b) is for the public benefit”.’ [14]
Equity and Trusts  Feedback to activities page 237

‘Section 3 (3) … and section 4 (3) … make clear that decisions of the courts on the
law of charity prior to the coming into force of Part 1 of the Charities Act 2006
continue to be relevant to the interpretation of the statutory definition of charity.’
[23] and [24]

e. (1) A purpose falls within this subsection if it falls within any of the following
descriptions of purposes—

(a) the prevention or relief of poverty;

(b) the advancement of education;

(c) the advancement of religion;

(d) the advancement of health or the saving of lives;

(e) the advancement of citizenship or community development;

(f) the advancement of the arts, culture, heritage or science;

(g) the advancement of amateur sport;

(h) the advancement of human rights, conflict resolution or reconciliation or

the promotion of religious or racial harmony or equality and diversity;

(i) the advancement of environmental protection or improvement;

(j) the relief of those in need because of youth, age, ill-health, disability,
financial hardship or other disadvantage;

(k) the advancement of animal welfare;

(l) the promotion of the efficiency of the armed forces of the Crown or of the
efficiency of the police, fire and rescue services or ambulance services;

(m) any other purposes—

(i) that are not within paragraphs (a) to (l) but are recognised as charitable
purposes by virtue of section 5 (recreational and similar trusts, etc.) or
under the old law,

(ii) that may reasonably be regarded as analogous to, or within the spirit of,
any purposes falling within any of paragraphs (a) to (l) or sub-paragraph (i), or

(iii) that may reasonably be regarded as analogous to, or within the spirit
of, any purposes which have been recognised, under the law relating to
charities in England and Wales, as falling within sub-paragraph (ii) or this
sub-paragraph.

f. Example: The non-presumption of public benefit places the burden on the charity
to demonstrate how it meets the public benefit requirement and objective. (22
words)

Relevant extracts:

‘… it is not to be presumed that a purpose of a particular description is for the

public benefit.’ [25]

‘… what the law now requires by way of the provision of benefit and to whom
it must be provided.’ [26]

g. The benefit aspect.

The public aspect.

h. ‘In the modern law, the concept of public benefit as integral to a charitable
purpose is regarded as having two principal aspects, namely that, for a purpose to
be charitable:

a. it must be beneficial, and any detriment or harm that results from the
purpose must not outweigh the benefit (‘the benefit aspect’); and

b. it must benefit the public in general, or a sufficient section of the public

(‘the public aspect’).’ [39]
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Activity 9.12
a. ‘In order to be a charity, an institution must be established exclusively for certain
purposes which are “for the public benefit”. “Public benefit” has the meaning
attributed to it in case law and is not to be presumed.’ [1]

b. ‘…within the spirit of the preamble to the Statute of Elizabeth or, post-2006, within
the list of charitable purposes in section 2(2) of the Act.’ (p.626)

c. ‘…the class must be neither numerically negligible nor defined by a common

attribute which is based on a personal relationship or common employment.’
(p.627)

d. ‘…The Tribunal, however, uses the term “sufficiently wide” in this context. To the
extent that this suggests a width in terms of the beneficiaries’ wealth or class, it
appears to differ from case law, where the term’s infrequent use has indicated
sufficiency of numbers.’ (p.626)

e. ‘…For example, with regard to the University College of North Wales case, the
Tribunal suggests that the Court of Appeal rejected only the proposition that
all beneficiaries should be poor, whereas, it is submitted, the court rejected
the broader proposition that the means of the beneficiary should be taken into
account in education cases.’ (p.627)

f. ‘…The Tribunal defines the “rich” as those who can afford the fees charged,
including people who make “considerable sacrifices” in order to do so. The “poor”
are defined as those who cannot reasonably do so, but there is no indication of
how reasonableness is to be measured in this context’. (p.628)

‘…Elsewhere, however, the Tribunal engages in a different, and more complex,

formulation of “rich” and “poor”, which is based on descriptions of wealth rather
than the affordability of the fees charged’. (p.629)

g. Example: The Tribunal considered the ability to pay the fees of £12,000 – therefore
a sub-group of people who may not be poor in the ordinary meaning of the word
may be considered poor if the level of the fees proves unaffordable. (39 words).

h. Example: As poverty is relative to affordability, it is easier to identify the degree

of public benefit by considering the accessibility of the institution to the public.
An explicit exclusion of the poor is easy to identify (no public benefit), an explicit
inclusion of the poor likewise (public benefit). An implicit inclusion is more
ambiguous and the individual circumstances would require further scrutiny (62
words).

i. ‘In the same way that allowing only Methodists to cross a bridge in a public place
restricts eligibility according to a criterion with no rational link to the purpose and
might be regarded as capricious: IRC v Baddeley [1955] AC 572, 592.’ [FN37]

Activity 9.13
a. ‘… 2. The objects of the company are for the public benefit:

2.1 to promote and protect human rights (as set out in the Universal
Declaration of Human Rights and subsequent United Nations conventions
and declarations) throughout the world, and in particular (but without
limitation):

2.1.1 the rights to human dignity and to be free from cruel, inhuman or
degrading treatment or punishment;

2.1.2 the right to privacy and to personal and social development; and

2.1.3 to promote the sound administration of the law.’ [6]

b. ‘The Charity Commission’s reasons for refusing to register HDT were, in summary,
that its objects were too vague and uncertain for the Commission to be certain
that it was established for charitable purposes only and further that it has a
political purpose, namely that of seeking to change the law of foreign states, which
precludes charitable status.’ [3]
Equity and Trusts  Feedback to activities page 239

c. ‘…HDT’s grounds of appeal, in summary, were that its objects were not vague and
uncertain and further that the Charity Commission’s decision demonstrated a
fundamental misunderstanding of the nature of a constitutional human rights
challenge, because litigation aimed at upholding a citizen’s constitutional rights
does not seek to change the law of the relevant jurisdiction but rather enforces
and upholds the superior rights guaranteed by that country’s constitution.’ [3]

d. Example: HDT worked collaboratively with reputable human rights law firms to
conduct litigation in support of people whose human rights had been breached by
the criminalisation of private, adult, consensual homosexual conduct. (31 words)

Relevant extracts: [8]–[9]

e. ‘…We accept HDT’s submission that the term “human rights” is to be given
its ordinary natural meaning and that there is no authority for the Charity
Commission’s view that it is to be understood only as referring to those human
rights accepted by the law of England and Wales.’ [43]

‘…We accept Professor Van Bueren’s evidence (see paragraph 39 above) that
“human rights” is a broad and rapidly evolving concept, and necessarily so in order
to take account of developments in law, society and science. We conclude that
Parliament must have had the “living instrument” approach in mind in leaving the
term “human rights” undefined in the Act. It follows that the scope of the rights
falling within the description of charitable purposes in the Act may evolve and
change from time to time.’ [44]

‘…We are satisfied on the basis of the evidence of Professor Chinkin (see paragraph
41 above) that the term “human rights” used in the description of charitable
purposes in the Act extends to the rights set out in the UDHR, the ICCPR and the
ECHR.’ [45]

f. ‘…that a political purpose is one which (i) furthers the interests of a political
party; (ii) seeks to procure changes in the laws of this country; (iii) seeks to
procure changes in the law of a foreign country; (iv) seeks to procure a reversal of
government policy or of particular decisions of governmental authorities in this
country; or (v) seeks to procure a reversal of government policy or of particular
decisions of governmental authorities in a foreign country.’ [80]

g. ‘…that its work involved upholding human rights law and that it does not seek to
change the law. It submitted that the activity of upholding human rights law had
been recognised by the Privy Council as one which respected the different roles of
the legislature and the courts’. [84]

‘…if the main objects of an institution were exclusively charitable, the fact that the
trustees had the power to employ political means for their furtherance would not
deprive the institution of its charitable status.’ [85]

h. ‘…Slade J was concerned with an association which (as he found) sought to change
valid, but arguably unjust, domestic laws. We find on the evidence before us that
HDT is concerned with the promotion of human rights by establishing whether
particular laws are valid, through a process of constitutional interpretation. We
find that this process falls entirely outside the categories of activity considered by
Slade J in McGovern.’ [95]

‘… In conclusion, for the reasons above we are satisfied that the promotion and
protection of human rights (a) by means which include the support or conduct of
litigation which is (b) aimed at securing the interpretation and/or enforcement of
superior constitutional rights (c) in a foreign country which has given effect to the
relevant treaty obligation so as to enable that process – is not a political purpose,
and neither is it in our view a political activity.’ [101]

i. ‘…were all concerned with different descriptions of charitable purposes than those
for which HDT is established.’ [107]
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j. ‘…whether HDT’s litigation activities in furtherance of its purposes may be found to

be beneficial and, secondly, whether any benefit accrues to the public as a whole
or to a sufficient section of it.’

k. ‘…there is a public benefit in seeking to interpret, clarify and protect superior

constitutional rights.’

‘…a particular benefit to those individuals whose human rights are promoted and
protected by this means and also a wider benefit to the community at large from
having such rights interpreted, clarified and enforced in a process to which their
country has assented.’ [109]

‘…It was not in dispute before us that the benefit accrues to the whole community
or a sufficiently appreciable section of it and we find that this is the case.’ [110]

Chapter 10

Activity 10.1
No feedback provided.

Activity 10.2
As possible non-charitable purpose trusts, you might consider certain political
activities, such as campaigning against the building of a motorway through a
woodland; or activities such as providing buildings and continuing maintenance
thereof for a private association such as a cricket club. Parts (a), (b) and (c) all concern
how you ought to regard the factual beneficiaries of your trust purpose: would they
necessarily have the time or interest in enforcing the trust against the trustee, and
should they have any equivalent to Saunders v Vautier rights (Section 4.6.4) to vary the
trust, or collapse it, distributing the property among themselves?

Activity 10.3
No feedback provided.

Activity 10.4
a. Traditional purposes were the education, maintenance (providing for the housing
and feeding) or advancement (providing for a position in life, a church living or an
army commission) of the settlor’s children.

b. The difficulty is distinguishing a true Sanderson-type limitation on the amount

the beneficiary is to receive from the case where the settlor merely expresses a
motive for the gift of an entire fund. The practical difference is important, for if all
of the funds are not required to meet the cost of the named expense, then in a Re
Sanderson trust these funds will not belong to the beneficiary, but to a person who
receives a gift of the remaining funds, or on resulting trust.

Activity 10.5
This requires an overview of the various reasons in favour of and against the law’s
upholding private purpose trusts. As we have seen, the main difficulty is in ensuring
that there are persons who can enforce the trust against the trustee. Does it matter, in
your opinion, that those who can enforce the trust need not do so if they do not want
to? For example, would it have mattered if the employees in Re Denley had not wanted
a recreation ground, and left the trustees to use the title to land in other ways? Does
legislation creating enforcers with a duty to enforce the trust which is itself enforced
by the criminal law (as in the Cayman Islands) appeal to you? Should the state be
concerned to enforce purposes which are not ‘public’ (i.e. charitable) purposes?
Equity and Trusts  Feedback to activities page 241

Chapter 11

Activity 11.1
Given the fact that the gift was expressed to be ‘in memory of his late wife’ and to
be used ‘solely in the work of constructing new buildings for the Association and/or
improvements to the said buildings’, it is difficult not to conclude that the testator’s
intentions, as expressed, indicated that he wished his money to be devoted to a
particular purpose and no other, a purpose (especially considering the ‘improvements’
provision) that might clearly extend beyond any valid perpetuity period.

Activity 11.2
Oliver J reasoned that (a) as a valid gift may be made to an unincorporated body as a
simple accretion to the funds, so (b) why should a gift specifying a purpose be invalid?

The members could, exercising their contractual rights, either enforce the purpose
or not as they chose. In this respect, he appeared to adopt the bare trust/contractual
mandate construction. However, Oliver J also considered that the expressed purpose
could be treated merely as a motive for the gift, not as a trust obligation. Finally, he
felt that Re Denley was ‘directly in point’, and that the gift could be held valid on the
authority of that case.

Activity 11.3
Goff J in Re West Sussex clearly followed the earlier line of cases and not the contract-
holding theory. He regarded the purpose trust as at an end when the association
was dissolved, and so the members had no rights to the funds. This approach was
somewhat contradicted by his apparent admission that had the members chosen to
distribute the funds to themselves, defeating the purposes for which the money was
held, before the association was dissolved, they might have done so. But this makes
little sense, for if the funds were beneficially theirs to deal with prior to the dissolution,
then they remained theirs afterwards, for the dissolution of their contractual relations
forming the association could do nothing to alter their rights to the fund. In Re Bucks
Constabulary Fund, a case with almost identical facts, Walton J found himself ‘wholly
unable to square’ the decision of Goff J in West Sussex ‘with the relevant principles
of law applicable’. He applied the modern contract-holding analysis. There being no
contrary provision in the contract of membership, the members of the Bucks fund
were entitled to it in equal shares.

Chapter 12

Activity 12.1
The case concerned the presumption of advancement and the evidence required to
rebut it. It was proved by evidence that a father and son had both contributed to the
purchase price of a title to land which was taken in the son’s name. The presumption of
advancement was rebutted and a trust in favour of the father was established because,
in the court’s view, putting the house in the son’s name alone could be explained
because it made mortgage financing easier, and in addition, at one point the father’s
solicitor drew up a declaration of trust which formally declared that each held a share
in proportion to their contributions, although it was never executed. Furthermore, as
the father was only 63 and in good health, there was no obvious reason to make a gift
to his son of a large share in the house in which the father intended to live.

Activity 12.2
The Court of Appeal addressed the argument that, if a resulting trust arises because the
transferor intended to create a trust for herself, then s.53(1)(b) of the LPA 1925 should
apply and the trust should be unenforceable if that intention was not evidenced in
writing. The court said that the transferor’s intention to create a trust for herself meant
that she did not intend to make a gift to the transferee, and the resulting trust responded
to that lack of intention to give rather than the intention to create a trust.
page 242 University of London  International Programmes

Activity 12.3
The Court of Appeal approached the case as one of a gratuitous transfer resulting trust
(the first situation as described in Section 12.1.1), and held that Mr Vandervell had not
adduced sufficient evidence to rebut the presumption of resulting trust. This approach
was disapproved in the House of Lords, where their Lordships treated it as a case of
Situation 3, an automatic resulting trust arising on failure to specify any objects. The
House saw no need or room to invoke any presumption, for there was no gap in the
evidence.

Activity 12.4
In Westdeutsche Landesbank, Lord Browne-Wilkinson said that automatic resulting
trusts arise on the basis that the settlor is presumed to intend that the trust assets
will come back to them if their intended gifts for some reason fail (e.g. uncertainty of
objects) and that in certain cases a settlor might wish instead for the rights to go to
the Crown as bona vacantia (goods without an owner) if their intended gift fails. The
obvious problem with this view is that it is not true that settlors regularly entertain
any such intentions, and the automatic resulting trust is applied regardless. Lord
Millett might say in reply that we can ‘presume’ that this is what settlors would have
wanted had they addressed their minds to the issue, but the courts on a number of
occasions, most especially in Gissing v Gissing, have said that it is not legitimate for the
courts to create trusts in this way.

Chapter 13

Activity 13.1
No feedback provided.

Chapter 14

Activity 14.1
The admissibility hurdle in s.9 Wills Act is far higher than that of s.53(1)(b), requiring in
addition to the testator’s signature, the witnessing of the signature by two witnesses
before the evidence is admissible. The reasons are not far to seek. When the will
comes into operation, the testator is dead and can no longer give evidence that the
signature was genuinely made in the full knowledge of what they were doing, etc. and
so a higher standard of formality to prevent fraud is imposed. Section 15, by avoiding
‘beneficial devises’ to attesting witnesses, ensures that the testimony of witnesses
to a will in court, if the will is challenged, is not tainted in favour of the document’s
admissibility.

Activity 14.2
Secret trusts are in direct conflict with s.9 because by them, evidence which the
legislature has said is not admissible to prove a testator’s will is regularly admitted.

Activity 14.3
This case reveals a clear disparity in the reasoning of their Lordships, some relying on
the dehors the will theory, some relying upon a modified fraud theory by which the
operative fraud, if evidence of the declaration of trust was not admitted, would be a
fraud on the intended beneficiaries. It is obviously a matter of judgment whether the
rationales are convincing.

Activity 14.4
As regards the original fraud theory, the disqualifying factors should be judged on the
basis of whether deciding the case one way or the other would give rise to a fraud by
the trustee. For example, where the secret trustee predeceases the testator, there can
Equity and Trusts  Feedback to activities page 243

be no fraud, so there is no reason to admit the non-conforming evidence. Of course,

under the broader fraud theory given voice to in Blackwell, by which the operative
fraud is denying the secret beneficiaries the gift the testator intended, any time the
evidence is not admitted there is a fraud. Then the court should admit the evidence
in any circumstance it can, but of course this theory is circular. On the dehors the will
theory, problems can arise with the consistent application of the rules. For example,
by that theory one might save a half-secret trust from the application of s.15 where
either the secret beneficiary witnesses the will or the half-secret trustee does, but one
cannot do so in both cases.

Chapter 15

Activity 15.1
a. as regards replacing a trustee, s.36(1)

b. as regards adding and additional trustee, s.36(6)

c. as regards retiring from the trust, s.39(1).

Activity 15.2
The essence of the decision lies in the nature of the rule in Saunders v Vautier:
beneficiaries can collapse the trust, but cannot ‘micro-manage’ the trust by directing
the trustee as to how they should use their powers. If the power to appoint new
trustees is given to the trustee, the beneficiaries cannot insist that the trustee make
the appointment the beneficiaries favour; that would defeat the point of there being a
trust at all. Of course, the beneficiaries can if they wish bring the entire trust to an end,
and set up a new trust with a trustee that they prefer, but the beneficiaries cannot
make a trustee who is properly exercising trustee’s judgment adopt the beneficiaries’
views over their own as to the proper administration of the trust.

Activity 15.3
a. This is clearly a breach of fiduciary duty, as the choice of trustee is in Stella’s
interest, and perhaps indirectly in the trustees’ interests, not in the interests of the
beneficiaries.

b. Although a difficult situation, if Simon believes that he cannot effectively act in the
beneficiaries’ best interests, he should retire.

c. Another difficult situation. If Sam is acting in the best interests of the beneficiaries,
his use of the power is not an abuse of his fiduciary position; however, if he
removes the trustee in order to preserve or enhance his own position in the
company, it would amount to a breach.

d. The question here is whether Arthur is properly exercising his discretion; ‘because
the beneficiaries asked me to’ is not a valid reason. If, however, the beneficiaries’
request reflects good reasons for his retiring, then his retirement may be
acceptable.

Activity 15.4
As the beneficiaries can be expected to look out for their own interests in exercising
the power, and there is no one else’s interests they ought to consider, this would not
appear to be a fiduciary power.

Activity 15.5
The court will look to the wishes of the settlor, if ascertainable, will not make
appointments which favour some beneficiaries over others, and will in general make
an appointment which will further the proper execution of the trust.
page 244 University of London  International Programmes

Activity 15.6
The scope of the court’s jurisdiction to intervene is broad – it can remove or replace
trustees if the proper execution of the trust is threatened. The main criterion must
always be the welfare of the beneficiaries, although mere friction between the trustee
and the beneficiaries is not by itself a ground for replacing the trustee.

Chapter 16

Activity 16.1
No feedback provided.

Activity 16.2
Try to articulate in summary form Denning LJ’s sense that the court’s inherent
jurisdiction is actively facilitative (a kind of approach you may recognise having
studied other of his lordship’s decisions in other modules). Does Denning LJ set
any reasonable bounds to what he thinks the court ought to be able to do when
considering whether to allow a variation? Lord Simonds LC is clearly more concerned
that the court does not take it upon itself to re-write settlements just because it
might be beneficial so to do. He is also much more concerned that the law develop
piecemeal over time, rather than founding the scope of the court’s inherent
jurisdiction on a broad, abstract principle of ‘doing good’ for the beneficiaries. In
answering the final question, it is worth putting yourself in the position of a settlor,
and asking yourself whether you would fear a broad inherent jurisdiction, worrying
that a court might, for reasons you would not appreciate, depart from the structure
of the trust and frustrate what you had tried to do, or whether you might welcome a
broad inherent jurisdiction, putting your mind at rest, for any unforeseen difficulties
could be properly sorted out.

Activity 16.3
The court’s inherent jurisdiction with regard to the variation of administrative powers
is restricted to emergency situations, and the Trustees of the British Museum could
not argue that an extension of their investment powers was necessary to prevent an
emergency. But as it was sensible and expedient, the court could allow the variation
under s.57.

Activity 16.4
The Act requires any ascertainable contingent beneficiary who is sui juris to consent to
a variation even if the likelihood of their becoming entitled to a benefit under the trust
is slight; as a result, many individuals who have no real interest under the trust must
be found and properly advised in order for a variation to proceed, which can cause
substantial cost and inconvenience. The situation is no different than it would be
under the general law principle in Saunders v Vautier, but the possibility of such cases
suggests that the Variation of Trusts Act 1958 should have allowed courts to consent on
behalf of such beneficiaries.

Chapter 17

Activity 17.1
a. A trust is specifically enforced when the trustee has failed to administer the trust or
pay income or transfer capital to the respective income and capital beneficiaries.
Here the beneficiaries will apply to the court and the court will order the trustee to
carry out the trustee’s duties or replace the trustee with a trustee willing to do so.
In doing this, the court has ordered specific performance of the trust.

b. A trustee is personally liable to the beneficiaries when the trustee has to pay
money out of their own pocket to compensate for a loss to the trust.
Equity and Trusts  Feedback to activities page 245

Activity 17.2
The account is falsified if the trustee has entered into a particular unauthorised and
identifiable transaction. Consequently the beneficiaries will apply to the court and
call for the trustee to account for this transaction. The beneficiaries will ‘falsify’ the
account in respect of that transaction and the trustee will either have to reverse
the particular transaction or be personally liable to pay the equivalent sum, plus
interest, from their own pocket to the trust. By contrast, the beneficiaries surcharge
the account when the trust has less value than it should, but not because the trustee
has entered into a particular identifiable transaction. This generally occurs when the
trustee has negligently invested trust funds or when the trustee has failed to insure
the trust rights and a loss has occurred.

Activity 17.3
a. The account would be falsified when the trustee has used trust rights to purchase
some rights for themself, for example, a title to a car. The beneficiaries would apply
to the court and the trustee may either reverse the transaction or pay the money
back into the trust fund out of their own pocket.

b. The account would be surcharged when a trustee has failed to invest in stocks and
shares with sufficient care and consequently a loss has occurred. Another example
would be failing to insure the trust rights and later a loss of the subject-matter of
those rights occurs.

Activity 17.4
The main point to explain is that the breach (wrongly paying away the trust money
before the conditions were met for its release) did not cause all the loss suffered
by AIB. While certainly a breach, it alone did not generate the loss, most of which
was called by AIB’s own decision to make a loan of that size to a couple in financial
difficulties. If the defendant solicitors had performed the trust properly, AIB would
have suffered the same loss except for the £300,000 the solicitors wrongly paid to the
couple and for which they already admitted liability.

Activity 17.5
In Twinsectra Ltd v Yardley [2002] UKHL 12, [2002] 2 AC 164, Lord Hutton laid out three
possible tests for dishonesty which might apply to the case of a third party dishonestly
assisting in a breach of trust:

1. a purely subjective test, sometimes called the ‘Robin Hood’ test, whereby a
person will only be dishonest if they transgresses their own personal standard
of dishonesty, irrespective of the views of honest and reasonable people; this
standard has not been adopted by the courts

2. a purely objective test, whereby a person is dishonest if they fail to act to the
standard expected by honest and reasonable people, irrespective of whether they
themselves do or do not appreciate they are acting dishonestly

3. a combined test, whereby a person is found to be dishonest if they transgressed

the standard of honesty as determined by the views of honest and reasonable
people, and the person realises that they have breached that standard.

The combined test clearly sets an additional element to be proved by the claimant
– while on the facts one might properly infer the self-conscious dishonesty of the
defendant, merely showing that the objective standard of honesty was breached is not
sufficient – there must be some basis for showing the defendant appreciated he was
acting dishonestly, and furthermore, the defendant may lead evidence to show that he
did not fully appreciate that he was acting dishonestly. Lord Millett is harshly critical
of applying the combined test in civil cases; while that test might be appropriate for
criminal liability, where arguably mens rea is of the essence of liability, it is not justified
in cases of civil liability in which victims of breaches of trust ought to be able to expect
that those people who act dishonestly on an objective standard should compensate
their victims. Lord Hutton and Lord Millett interpreted Lord Nicholl’s speech in Royal
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Brunei Airlines to very different effect, each arguing that the test they favour truly
represents the test outlined by Lord Nicholls. Lord Hutton’s approach was not applied
by the Privy Council in Barlow Clowes, the question then being whether we have
returned to the dissenting opinion of Lord Millett in Twinsectra. For a recent discussion
of this issue in the Court of Appeal, and an examination of the problems English courts
face from the point of view of precedent, see Abou-Rahmah v Abacha [2006] EWCA Civ
1492; [2007] Bus LR 220.

Activity 17.6
Although the first painting was placed on Ted’s wall, Ted of course continued to hold
the title to it in trust. As to the second, Ted is personally liable. By selling the title, he
has caused a loss to the trust and so he must pay its value plus interest back into the
trust. The facts do not indicate what Ted did with the £2,000 he received for selling
the title to the second painting, but if he retains it, the beneficiaries have a proprietary
claim to it, and if he purchased any traceable rights with the money, they have a
proprietary claim to those. Regarding Ted’s unauthorised investment, Ted is strictly
personally liable for this breach of trust. He is not relieved of this liability because he
sought the advice of a solicitor, unless (recall Section 4.5) he is regarded as having
properly delegated the investment of the funds to Alex. If Ted is not regarded as having
delegated the decision to Alex, he can bring an action for damages for negligence
against Alex (making Alex personally liable to him, that is to say, Ted, for his loss (Ted’s
own liability to the trust fund)). If he is regarded as having properly delegated the
decision to Alex, then Ted will not himself be personally liable to restore the trust, for
the loss was not caused by any breach he committed, but he will have a right of action
on behalf of the trust against Alex to pay damages for his negligence, and the damages
he receives he will hold on trust for the beneficiaries. Ted must pursue this claim
against Alex, and if he fails to do so the beneficiaries can apply to the court for an order
of specific performance to make Ted bring the action against Alex. Alex was negligent
but not dishonest in misconstruing the trust terms, so he is not personally liable to
the beneficiaries, although as we have seen he is liable for his negligence as outlined
above.

With regard to the transfer of £50,000, Ted is clearly personally liable. There is nothing
on the facts to indicate that Alex was either negligent in carrying out this transaction,
or did so knowing or suspecting it was in breach of trust, so he is not personally liable
for dishonest assistance. Alex would not be liable to the trustees, but instead is liable
to Ted for his professional negligence. With regard to Alex’s assistance in the transfer
of monies to Barbara, much would turn on his level of involvement in the transaction.
If Alex dishonestly assisted in the breach of trust he would be personally liable to the
beneficiaries to restore the trust to the value it was before this transaction. However, if
he was simply negligent, then the beneficiaries will have no claim against him. Barbara
is a volunteer recipient of the £50,000. If she retains any of the money or its traceable
proceeds, the beneficiaries will have a proprietary claim against her. As to her personal
liability, she will only be liable, following Re Montagu, if she had some degree of
knowledge that the money was given to her in breach of trust, or following Akindele,
it would be unconscionable not to pay back its value (whatever ‘unconscionable’
means). Finally, one might consider whether she should be personally liable on an
unjust enrichment basis to repay an equivalent sum to the trust in order to reverse her
unjust enrichment at the beneficiaries’ expense.

With regard to the receipt of title to the first painting, there can be no proprietary claim
against Fred, because, having dissipated the proceeds of sale, there are no traceable
proceeds. Fred, like Barbara, is another volunteer recipient and so Re Montagu, Akindele,
or the unjust enrichment approach would apply to determine his personal liability. Fred
may be able to advance the ‘change of position’ defence as he relied on the validity of the
gift to sell it and spend the money on a ‘lavish’ birthday party for his wife, which he might
well not have done had he not received the title in the first place.

Activity 17.7
This is perhaps the biggest issue in the law of trusts at present. Until the House of Lords
establishes in a clear fashion the principles of personal recipient liability, controversy
Equity and Trusts  Feedback to activities page 247
will remain. The unconscionability test set down by Nourse LJ is the weakest
contender, for it seems positively to embrace uncertainty. ‘Unconscionable’ does
not mean anything specifically, as ‘dishonest’ does, and for that reason was rejected
as a touchstone of liability in Royal Brunei. The remedy appears largely discretionary
on this test. While imperfect, the Montagu test does give some guidance as to the
requirements of knowledge. The challenge posed by the unjust enrichment approach
lies in the intuition that the recipient should not be enriched at the beneficiaries’
expense. Between those two, the obvious result at first glance is that the recipient
should pay back the value to the trust. Notice that the unjust enrichment approach
does not disregard the defendant’s knowledge entirely – rather it restricts the issue
of dishonesty to the application of the change of position defence. Only an innocent
recipient can claim change of position.

While the unjust enrichment approach clearly has its attractions, not all are convinced.
Smith (‘Unjust enrichment, property, and the structure of trusts’ (2000) 116 LQR 412)
points out that cases of recipient liability are not really two-party situations where
value is transferred from the beneficiaries to the third party, as when you pay your gas
company twice by mistake, in which two-party case the unjust enrichment principles
developed and are most clear; they are three-party situations – the trustee, who as
a conceptual feature of the trust is interposed between the beneficiaries and the
recipient, makes this a three-party situation.

Do the unjust enrichment rules straightforwardly apply where the settlor by creating
the structure of the trust also creates the possibility that the trustee may breach the
trust? In other words, do the beneficiaries deserve the same sympathy as the person
who mistakenly makes a payment? Furthermore, the law provides the beneficiaries
under a trust with better remedial rights than the mistaken payer in certain respects:
they, but not the mistaken payer, can both follow and trace the trust rights so as to
make proprietary claims against the recipient. Perhaps equity has struck a proper
remedial balance, giving the beneficiaries extensive proprietary rights against
recipients, but limiting them, when those rights run out, to a more limited personal
liability which depends on the recipient’s knowledge.

Activity 17.8
a. ‘…that s. 21(1) might apply, so that no statutory limitation period would govern his
claims. First, if a breach of trust was fraudulent, s. 21(1)(a) disapplied the statutory
limitation period both (i) to an action against the trustee who was party to the
fraud and (ii) to actions against third parties who incurred ancillary liabilities as
dishonest assistants or knowing recipients.’

b. ‘…A majority (Lords Mance and Clarke dissenting) held that s. 21(1)(a) was confined
to actions against a trustee who was party to a fraudulent breach of trust. It did not
cover third parties, who were implicated in the frauds, as dishonest assistants or
otherwise.’

c. ‘…dishonest assistants or knowing recipients, who were sometimes said to owe

personal liabilities to account “as constructive trustees”, were “trustees” within the
meaning of s. 21(1)(a) (or s. 21(1)(b)).’ (p.253)

d. ‘…Section 38(1) required “trust” and “trustee” to bear the same meanings as in
s. 68(1)(17) of the Trustee Act 1925. Although this definition expressly includes
“constructive trusts” and “trustees”, the majority held (i) that neither dishonest
assistants nor knowing recipients, whilst said to be liable to account “as
constructive trustees”, were “true” trustees – not even constructive trustees; and
(ii) they were also not “constructive trustees” within the statutory definition.’
(p.254)

e. ‘…In particular, their decision that a knowing recipient is not a “trustee” for the
purposes of the Limitation Act 1980 relied heavily on a wider premise that a
knowing recipient is not a “trustee” – and not even a constructive trustee – under
the general law. With respect, that is questionable.’ (p.255)
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f. ‘…The knowing recipient is fixed with custodial duties that are of the same nature
as those voluntarily assumed by express trustees.’ (p.255)

‘…the accounting mechanisms through which the knowing recipient can be made
liable for performance of his duties, or their breach, are the same as those through
which trust beneficiaries can take action against express trustees.’ (p.255)

g. ‘…Citing Mitchell and Watterson’s article, it said: “The recipient’s personal liability
as a constructive trustee by virtue of knowing receipt means that the recipient
is subject to custodial duties which are the same as those voluntarily assumed
by express trustees … The recipient’s core duty is to restore the misapplied trust
property…”’ (at [37])

Activity 17.9
a. ‘…The bank alleged that the solicitors acted in breach of trust, breach of fiduciary
duty, breach of contract and negligence. It claimed relief in the forms of (i)
reconstitution of the fund paid away in breach of trust and in breach of fiduciary
duty, (ii) equitable compensation for breach of trust and breach of fiduciary duty,
and (iii) damages for breach of contract and negligence, in each case with interest.’
[9]

b. ‘…Due to a misunderstanding [at 5] the solicitors only partly paid the outstanding
amount on the existing Barclay’s mortgage [at 5] and released the remainder to the
borrowers.[see para. 5]. This is in breach of the the CML instruction: “You must hold
the loan on trust for us until completion. If completion is delayed, you must return
it to us when and how we tell you”.’ [4]

c. (i) ‘…The difference, leaving interest aside, is between £2.5m and £275,000 in
round figures.’ [8]

(ii) The house did not reach its valuation of £4.5 million.

‘…Subsequently the borrowers defaulted, and the property was repossessed and
sold by Barclays in February 2011 for £1.2m, of which the bank received £867,697.’ [8]

d. ‘…“Equitable compensation for breach of trust is designed to achieve exactly

what the word compensation suggests: to make good a loss in fact suffered by the
beneficiaries and which, using hindsight and common sense, can be seen to have
been caused by the breach.”’ [19]

e. ‘…First, the defendant’s wrongful act must cause the damage of which complaint
is made. Second, the plaintiff is to be put “in the same position as he would
have been in if he had not suffered the wrong for which he is now getting his
compensation or reparation” (Livingstone v Rawyards Coal Co (1880) 5 App Cas 25,
39, per Lord Blackburn).’ [26]

f. ‘…the basic rule is that a trustee in breach of trust must either restore to the trust
the assets which have been lost by reason of the breach of trust or pay monetary
compensation to the trust estate. In so doing, courts of equity did not award
“damages” but would make an in personam order for the payment of equitable
compensation: Nocton v Lord Ashburton [1914] AC 932, at paras 952, 958, per
Viscount Haldane LC.’ [30]

Chapter 18

Activity 18.1
At a simple level, the fiduciary (the trustees) should not use the trust funds in such a
way as to further their own interests. More specifically, there is a conflict because the
buyer of the shares, the trust, would like to buy the shares at the lowest possible price,
whereas as seller of the shares, the trustee wants the highest price he or she can get
for them.
Equity and Trusts  Feedback to activities page 249

Activity 18.2
First you should explain as clearly as you can the facts, and in particular the various
different ways in which Boardman acted in consultation with the trustees – was it
right to say that Boardman was a fiduciary to the beneficiaries in the first place? Then
you should turn to the views of the individual judges. Lords Guest and Hodson said
that Boardman placed himself in a fiduciary position by his close association with the
trustees in respect of their carrying out the trust, and relying on the foundational case
for the rule, Keech v Sandford (1726) Sel Cas 1 King 61, held he was liable to disgorge any
profits made in the course of acting as a fiduciary. Lord Cohen’s view was more subtle:
he said that Boardman was in a position of conflict of interest because, having become
interested in purchasing shares of the company himself, could not have disinterestedly
advised the trustees about purchasing more shares for the trust. Lord Upjohn’s dissent
focuses on the harshness of the result, stating that the rule about a fiduciary’s placing
themself in a position where their interests may conflict with those of their principal
must be reasonably applied, and the conflict was really only fanciful on these facts. A
stringent application of the rule can be justified on the basis that fiduciaries must be
kept to the highest standards of loyalty, and that if the rule is applied more sensitively
or ‘contextually’, it would lose its prophylactic force – it would require judges to make
difficult judgments in every case in trying to measure whether the conflict of interests,
based upon the parties’ expectations and so on, was substantial. The reality of many
situations, where minor conflicts of interest are common, weighs in favour of a more
sensitive application of the rule – the decision in Boardman does seem harsh.

Activity 18.3
The self-dealing rule is one of the most stringently enforced of all the rules that apply
to a fiduciary (see Re Thompson’s Settlement), and the relaxation of this rule in Holder v
Holder should be seen as exceptional, based on the special facts of the case: the court
treated the defendant as if he were not, in substance, a trustee. Furthermore, Harman
LJ in particular pointed out that the purpose of the rule, to prevent the fiduciary from
acting as both vendor and purchaser, would not be fulfilled by applying the rule in this
case, for the sale of the property was entirely arranged by two executors who proved
the will, the defendant taking no part on the vendor’s side of the transaction.

Activity 18.4
a. The self-dealing rule applies to this transaction as the trustee has sold her own
rights, the shares in XYZ plc, to the trust.

b. The fair-dealing rule applies to this transaction because the agent has attempted to
purchase his principal’s rights, the antiques business.

c. Here the trustee is buying the beneficiary’s future trust income, which is an
interest, and consequently the fair-dealing rule applies to this transaction.

d. Clearly in this situation neither rule applies as the purchase of the title to the
painting is completely separate from the divorce proceedings in which the solicitor
was a fiduciary to Jonah.

e. The director is a fiduciary of the company; although the director is selling her own
rights to ABC Ltd it is clearly a self-dealing transaction.

Chapter 19

Activity 19.1
This question involves tracing between innocents, the beneficiary and Victor, to begin
with, and then, if the proportionate share rule is applied to tracing among innocents,
between a wrongdoer and an innocent, after Victor finds out the money was trust
money. On the ‘first in, first out’ rule, Victor spends the £3,000 of his own money that
was in the account at the beginning plus £2,000 of trust money to buy the title to the
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painting. The rest of the money is trust money, going on the cruise, which provides
no proceeds, and into the traceable proceeds of the car. The remaining money in the
account is the trust’s. If a proportionate share rule is adopted between innocents,
10/13ths of the value of the title to the painting is the trust’s, as is 10/13ths of the
remaining £8,000, and then of the £4,000 that remains after the cruise expenditure.
Victor is now no longer innocent, and so the beneficiary has the advantage of the
Re Hallett’s and Re Oatway rules; consequently, the beneficiary can claim that all
of Victor’s money (3/13 x £4,000 = £923) went to buy the title to the car, which has
decreased in value, although the remainder of the £3,000 purchase price must be
trust money, but the beneficiary can claim the entire £1,000 balance that remains in
the account.

Activity 19.2
This is a question involving tracing between a wrongdoer and two innocents. As
between the innocents themselves, the rules governing tracing between innocents
apply, and as between the innocents, whether singly or together, and the trustee,
the rules dealing with wrongdoers apply. The first transaction following mixing is the
purchase of the shares; here only the Adams trust and the trustee are involved, and
the trust will choose to say that the entire purchase was funded with trust money,
for the shares have doubled in value. The Khan money is now added, so the account
stands £10,000 to the trustee, £5,000 to the Adams trust, £40,000 to the Khan trust.
First, assume the ‘first in, first out’ rule for innocents is applied.

The innocents will want to claim the value of the second share purchase, as, like the
first, it has risen in value. The £5,000 Adams trust money is spent first under the rule,
plus £5,000 of the Khan money to make up the purchase price. The account now
stands £10,000 to the trustee, £35,000 to the Khan trust. There is no more mixing of
the innocents’ monies. The car has declined in value, some money has been expended
on traceable proceeds, and £5,000 of money which might represent trust money
remains in the account; under the lowest intermediate balance rule the Khan trust
cannot benefit from Tara’s addition of her own £20,000 at the end, unless there is
evidence she did so to restore the trust, and there is no such evidence. The Khan trust
will require all of the £5,000 in the balance to represent trust money, £25,000 of the
money spent on the car to have been trust money (although it has declined in value,
the only other alternative is the money spent on living expenses which generated no
traceable proceeds) and £5,000 of the trust money to have been dissipated on general
living expenses. All of Tara’s £10,000 is treated as having been dissipated. If we apply
the proportionate share rule, the Adams trust will have a 1/9 share, the Khan trust an
8/9 share in the £45,000 of trust money in the account immediately after mixing. They
will then apply the rules together against Tara, taking proportionate shares in the
entire value of the second share purchase, in the £5,000 balance in the account, in the
entire value of the car, and £5,000 of the money dissipated.

Activity 19.3
The Privy Council held that backwards tracing is not available as a general rule, but
only ‘where there is a close causal and transactional link’ between two transactions.
That link can exist even if the traceable proceeds are generated before the receipt of
the money that generates those proceeds. This is consistent with an example used
by Lionel Smith in his book on tracing. If trust money is misappropriated and used to
pay for a car, then the car is the traceable proceeds of the trust money and it cannot
matter whether the purchase price for the car was paid the day before legal ownership
of the car passed to the buyer or the day after. The order of events do not alter the
conclusion that money was exchanged for a car. Brazil v Durant International Corp does
not tell us how far backwards tracing can be pushed. For example, if the purchaser
obtained a bank loan to buy the car and then used misappropriated trust money to
repay the loan one year later, could that money be traced to the car. Smith suggested
that this should be possible, but the Privy Council suggested otherwise.
Equity and Trusts  Feedback to activities page 251

Activity 19.4
In the first situation involving Victor, the beneficiary will claim a share under a
constructive trust of the title to the painting, as it has risen in value. If ‘first in, first
out’ rules are applied, then the beneficiary will claim that the title to the car is held
for him on constructive trust absolutely and the balance of £1,000. There is no point
in merely charging the car, for the beneficiary has the full interest in it anyway. For the
money lost through the decline in value of the car and that dissipated, the beneficiary
can bring a personal action against Victor to restore the trust, as he made those
expenditures dishonestly. If the proportionate share rules apply, the only difference
will be that the beneficiaries will charge the title to the car with the repayment of their
money, rather than taking a proportionate constructive trust interest.

In the second situation involving Tara, the Adams trust will claim that the shares are
held for them on constructive trust, as they have risen in value. Tracing between
innocents under the ‘first in, first out’ rules, the two trusts will claim interests under
constructive trusts of the second lot of shares, as they too have risen in value. The
Khan trust will claim an interest under a constructive trust of the title to the car, as
although it has declined in value it was purchased entirely with trust money so there
is no advantage in foregoing the trust interest and charging the car instead. The value
lost on the decline in the value of the car and through dissipation can be claimed
against the trustee personally. On the proportionate share analysis, the trusts will
claim a shared entitlement under a constructive trust in the second lot of shares,
and in the car – there is no advantage in charging the car, for as innocents they must
act together, and one cannot have the advantage of a charge as against the other
innocent. The advantage of a charge only operates where the wrongdoer contributes
to the purchase price, such that a charge will operate to their disadvantage. Again, the
beneficiaries can claim personally against Tara for the trust value which has been lost
and cannot be recovered by claiming ownership shares in the purchased assets.

Activity 19.5
The defendant Bajwa intended to sell his mortgaged title to land, and immediately
following the sale Bajwa would normally have been required to use the sale money to
discharge the outstanding amount of the mortgage debt. The purchase money was
raised by the intending purchasers from a different, second, lender who, of course,
required that a mortgage on the land was obtained in its favour when the purchase
went through. The purchase money was transferred into a solicitor’s client account
(which is a trust account) in advance of the purchase. By mistake, and in breach of
trust, the money was advanced before the title to the house was transferred, Bajwa
using the money to pay off the mortgage. As a result, Bajwa ended up with a clear title
to his house, without a mortgage, and the second lender had advanced its funds and
received no mortgage in return. The Court of Appeal held that the second mortgage
lender was entitled to be subrogated to Bajwa’s lender’s mortgage on the land which
its money had been used to discharge.

Activity 19.6
a. ‘…Bishopsgate Investment Management Ltd (BIM) was the trustee of certain
pension schemes. During Maxwell’s lifetime, funds belonging to BIM as trustee
were improperly transferred to bank accounts of companies controlled by
Maxwell.’

b. The insolvency of both MCC and BIM.

c. ‘…on the ground that BIM was entitled to make an equitable charge over all the
assets of MCC, in priority to all secured creditors.’

d. In that Court, Vinelott J held that the administrators could make the distribution.
He said that unless the liquidators of BIM could trace BIM funds into specific assets
of MCC, no charge could be established over assets of MCC.

e. ‘…the claimant need only show the assets of the recipient were woollen by the
receipt; nothing further need be shown.’
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f. ‘…Where value is traced into a bank account, the amount of that value which
traceably remains in the account at a later time is limited to the lowest balance
which has existed in the interim.’

g. ‘…The plaintiff can only assert the difference between the improperly transferred
amount and the lowest intermediate balance. For example, if the lowest
intermediate balance is only half the improperly transferred amount, the plaintiff
can only assert 50 per cent of the improperly transferred amount, even if the
balance increases later.’ (See also the arithmetical example in the article.)

h. ‘…Where, as in Bishopsgate, there is an intervening time at which the account was

over­drawn, the earlier deposits do not traceably survive in any positive balance
which might exist later.’

i. ‘…Tracing is an inquiry into what was acquired as a matter of fact, with the
plaintiff’s value.’

j. ‘…In that case, her inability to trace is totally irrelevant, since rights derived
through tracing are distinct from rights derived through intentional transfer.’

Activity 19.7
a. Subrogation is concerned with the assignment by operation of law of a third
party’s rights (which may or may not be proprietary rights). It is based on intention,
actual or inferred.

b. ‘…the proprietary claim and the proprietary remedy which equity makes available
to the beneficial owner who seeks to recover his property in specie from those into
whose hands it has come.’ (p.9)

c. ‘…It is the process by which the plaintiff traces what has happened to his property,
identifies the persons who have handled or received it, and justifies his claim
that the money which they handled or received (and, if necessary, which they still
retain) can properly be regarded as representing his property.’ (p.9)

d. ‘…He needs to do this because his claim is based on the retention by him of a
beneficial interest in the property which the defendant handled or received.’ (p.9)

e. ‘…the court may achieve a similar result by treating the land as subject to a charge
by way of subrogation in favour of the plaintiff.’ (p.9)