The Nature of Express Trusts
The Nature of Express Trusts
The Nature of Express Trusts
form in the third edition (published in 2003). The current, shorter version was necessitated by the need to limit the size of Equity & Trusts when 200 pages of new material were added to the fourth edition published in 2005. Its purpose is to draw together some of the key themes in express trusts law.
7.1 CONCLUSIONS ON THE NATURE OF EXPRESS TRUSTS 7.1.1 Giving and time
Moffat suggests, with something of a metaphysical lilt, that a private trust is a gift projected on the plane of time.1 What is meant by this is that the trust constitutes a gift made by the settlor but it is not a gift which is perfected at one moment when possession of absolute title in that property passes to the beneficiary. Rather, an express trust operates over a period of time in transferring title from the settlor, via the stewardship of the trustee, to the beneficiaries of the arrangement. It should be pointed out that Moffat is not intending this remarkable expression to be a definition of the trust. Instead this writer is fixing on it precisely because it is such a powerful image. At one level Moffat is undoubtedly correct and his reminder of the role of time here is very important. A trust is a stylised means of transferring title which has bound up in it the different roles of trustee and beneficiary. However, there are two aspects of the sentiment which would cause me to take issue with this statement as a definitive expression of the private trust. The first issue is with the term gift. Trusts are often concerned with allocations of title in complex commercial situations. In such situations it would not be correct to say that commercial parties are making gifts (or outright transfers) of property in many of these situations. Rather, they are structuring the holding of title in property which is deployed for their common interaction (as considered in Quistclose Investments v Rolls Razor 2 and Clough Mill v Martin3). Alternatively, express trusts are often concerned with the allocation of property rights in circumstances in which the parties are unaware that they are creating trusts.4 In any event, a trust is not a gift, properly so-called, precisely because an intention to make a gift will not be perfected by means of a trust.5 What is true is that there is a general intention to pass title in property which a lay person might well term a gift. The second complaint follows on from the first and takes issue with the suggestion that the express private trust operates on the basis of pre-meditated gift and not as a means of policing the conscience of the legal owner of property. As is clear from the leading speech of Lord Browne-Wilkinson in Westdeutsche Landesbank v Islington 6 the trust is founded on the conscience of the legal owner of property. This statement has an awkward provenance. On the one hand it expresses the reason why, in principle, a trust would be enforced on a defendant. However, in many situations the trust arises as a result of a will drafted by a testator creating a trust, or out of a contract which provides that X shall hold identified property for Y until specified contingencies occur: the creation of a trust usually derives from some other action of the parties which the law of property recognises as vesting equitable title in set of claimants and merely legal title in other people as trustees. It is only in relation to breach of such obligations of property law norms or in situations in which the parties do not understand that a trust is the proper analysis of their interaction that an express trust could be said to arise on the basis of conscience as opposed to being merely explicable ex post facto as a control of conscience.
1 2 3 4 5 6
Moffat, 1999, 92. Quistclose Investments Ltd v Rolls Razor Ltd (In Liquidation) [1970] AC 567. [1984] 3 All ER 982. Paul v Constance [1977] 1 WLR 527. Milroy v Lord (1862) 4 De GF & J 264. [1996] AC 669.
7.1.3 Formality
The principal way in which the law of trusts seeks to impose order on chaos is by means of legal formalities. Most of the formalities relating to the creation and constitution of trusts are based on the 1677 Statute of Frauds which was concerned to prevent fraudulent claims by people asserting rights to property.9 The main problem identified by this legislation was the lack of evidence as to which person owned which rights unless claimants were required to produce written evidence of their entitlement before their claim would even be entertained by the courts. This approach was the basis for formalities as to declaration of trust over land, conveyance of rights in land, dispositions of equitable interests and the proper creation of wills. That thinking has also informed much of the caselaw in this area. The rules as to certainty of intention, of objects and of subject matter are all based on the courts need to be able to understand the settlors intentions and thus to control the trustees actions. Similarly, the beneficiary principle was founded such that the courts would be able to enforce the trust through the claims brought before them by beneficiaries. Indeed, for all the squabbling among the judiciary as to the precise scope of the beneficiary principle,10 the only area on which all of their lordships could agree was the foundation of the principle on the need for there to be some person who could bring the matter before the courts.
7 8 9 10
Griffiths, 2003.
Leahy v Attorney-General for New South Wales [1959] AC 457; Re Denley [1969] 1 Ch 373; Re Lipinski [1976] Ch 235.
The cases making up the Vandervell11 litigation together with Oughtred 12 and Grey13 all demonstrate the way in which the law of trusts deals with innovative thinking to manipulate trusts law concepts. While the courts remain wedded to principles of certainty, the use of trusts law principle highlights the inherent flexibility in the core ideas. For each potential for tax liability, or for each argument that a trust might be invalid, there are a range of ways and means of avoiding those pitfalls. So, in relation to the void purpose trust, it is possible to validate a trust intended in truth for abstract purposes by making gifts for the benefit of identified individuals,14 by passing control of capital,15 by making a transfer to an unincorporated association as an accretion to its funds16 and so forth. Similarly a disposition of an equitable interest can be avoided by transferring that interest together with the legal title, or by terminating the trust and declaring a new trust, or by passing that interest under a specifically enforceable contract, or by varying the terms of the trust.17 What is interesting is the strict adherence to formality and the spirit of the legislation in decisions by Viscount Simonds in Leahy18 and in Grey v IRC ,19 when compared with more purposive approaches taken by other judges in later cases. What this illustrates is a movement away from perceiving the law of trusts as being something to do with the strict observance of ageold rules and a shift towards enabling citizens to make use of trusts law techniques to achieve socially-desirable goals. It would be wrong to try to think of the distinctions between these various cases as being capable of reconciliation one with another. The approach taken by Goff J in Re Denley and by Oliver J in Re Lipinski is simply different from that taken by Viscount Simonds in Leahy . Two different generations of judges had different attitudes to the role of the law in exactly the same way that two generations of ordinary people would have different tastes in music. Viscount Simonds is concerned to see observance of the law for the laws sake; the younger judges prefer to permit people to use trusts provided that they do not transgress certain mandatory rules about the possibility of some beneficiary being able to enforce the trust in court. The law of trusts as it develops should be seen as a developing literature in exactly the same way that one would study developments in the novel, fashion or film. As time passes new ideas come to the fore and replace old ideas. Many of the core decisions in this subject were settled in the mid-19th century. Consider how many pivotal cases were decided in the reign of Queen Victoria between 1837 and 1901: Milroy v Lord (1862), Saunders v Vautier (1841), Fletcher v Fletcher (1844), Knight v Knight (1840); MFadden v Jenkyns (1842), and in relation to company law Saloman v Saloman (1897) which held that companies were separate legal persons and not trusts at all. That timing is no surprise in itself. During the Victorian era it is a commonplace to suggest that the commercial success of the British Empire in taking trade to the furthest corners of the globe had a profound effect on the opinions of the educated classes in England and Wales. As Norman Davies put it in his monumental history of The Isles,20 during this period The centralised British Empire was still the largest economic unit on the world map, holding astronomic potential for further growth and development. It would be churlish to suppose that the great developments in the formalisation of the express trust through certainties and perpetuities rules (which established the trust as a more useful commercial tool and which also identified the company as a distinct legal person better suited to raising capital for entrepreneurs) happened coincidentally during the same period as the British Empire was establishing itself as the worlds leading economic power and as English law was establishing itself as the commercial worlds lingua franca.
11 12 13 14 15 16 17 18 19 20
[1967] 2 AC 291. [1960] AC 206. [1960] AC 1. Re Denley [1969] 1 Ch 373. Re Lipinski [1976] Ch 235. Re Rechers WT [1972] Ch 526. As discussed in chapter 5. [1959] AC 457. [1960] AC 1. Davies, 1999, 642.
In the pre-Victorian era the trust had become an ever more important vehicle for the distribution of wealth between members of families on death or during life. In the late 20th century the trust became an increasingly important means of avoiding liability to tax by obfuscating the true ownership of property for tax purposes or for the purposes of insolvency law. The decisions in Grey v IRC21 and possibly even that in Leahy 22 were caught in that gap between social change towards tax avoidance and so forth and a judicial reluctance to validate such arrangements through the agency of trusts law. Moffat examines the interaction between inheritance tax, trusts and the distribution of wealth in the UK in detail.23 The real difficulty in attempting to establish a picture of wealth distribution and the extent to which it is tied up in trusts is that express trusts are private and information is available only through the tax system. Similarly, it is not always possible to know whether trusts are created for tax avoidance, for the maintenance of property, for the use of a succession of individuals, or for the maintenance of particular individuals. What is clear is that, even given the rules on perpetuities, trusts do permit those sections of the population sufficiently well informed to organise their affairs both so as to minimise their liability to tax and so as to benefit future generations of their own relations.
21 22 23
[1960] AC 1. Leahy v Attorney-General for New South Wales [1959] AC 457. Moffat, 1999, 76 et seq.
24 25 26 27 28 29 30 31 32 33 34 35 36
Re Basham [1986] 1 WLR 1498; Yaxley v Gotts [2000] 1 All ER 711. Crabb v Arun DC [1976] Ch 179; Yaxley v Gotts [2000] 1 All ER 711. Pascoe v Turner [1979] 2 All ER 945. Baker v Baker [1993] 25 HLR 408. Lim v Ang [1992] 1 WLR 113. Milroy v Lord (1862) 4 De GF & J 264. Ibid. Re Rose [1952] Ch 499. Milroy v Lord (1862) 4 De GF & J 264. See perhaps Grey v IRC [1960] AC 1. (1841) 4 Beav 115. (1882) 20 Ch D 742. [1964] 2 WLR 144.
The law of trusts has developed a range of doctrines which validate trusts even though these general principles have not been obeyed: for example constructive trusts, secret trusts, and the rule in Strong v Bird. 37 The doctrines of constructive trusts and secret trusts were developed to prevent unconscionable conduct and fraud. Their intention is distinct from that in estoppel. Estoppel prevents the claimant suffering detriment precisely as a result of the non-performance of some assurance given by the defendant, whereas the constructive and secret trusts doctrines protect the claimant against the defendants unconscionable behaviour. There is clearly potential for overlap between these doctrines (as considered in Yaxley v Gotts).38 The distinction, as considered in chapter 14 below, is that the constructive trust imposes a retrospective, institutional trust over property whereas the estoppel claim grants either personal or proprietary claims prospectively on a discretionary basis from the date of the court order. Similarly, express trusts are concerned narrowly with property rights over identified property39 whereas estoppel is concerned more generally with the avoidance of detriment. Within the canon of equity, then, the doctrine of equitable estoppel is considerably more broadly based than the law relating to express trusts.
37 38 39 40 41 42
Law of Property Act 1925, s 53(2). See Chambers, 1997 Penner, 1999; below at chapter 27. 43 Re Scarisbrick [1951] 1 All ER 822 in relation to trusts for the relief of poverty, the most contentious category in relation to the possibility of a nexus between the settlor and the objects of the charitable purpose; and Re Compton [1945] Ch 123 and Dingle v Turner [1972] AC 601 asserting the need for an absence of a personal nexus and the need for a genuine charitable intent respectively in either case refusing to accord charitable status to de facto private trusts. 44 Para 27.1.
Then there is the further situation in which the settlor is not aware that she is acting a settlor. A good example would be Paul v Constance45 in which a couple, described as not sophisticated people, created a bank account in which they deposited joint moneys with the intention that the money be as much yours as mine. The bank account was created in the sole name of Mr Constance. It was clear that neither person had any understanding of the concept of the trust when they created this arrangement. However, the court was prepared to hold that their true intention was to create an express trust. This form of trust I would dub the unconscious express trust because the settlor does not understand (or is unconscious of) the legal nature of her actions. Nevertheless, the court attaches the label of express trust to them because the substance of the parties intentions equates to the legal category of trust as understood by equity. It is important to understand that these two categories of express trust exist. Between the two clear cases considered above will fall a range of deliberate acts in which the protagonists may or may not have intended to create a trust. That they are both express trusts is significant because the formalities and certainties attaching to an express trust will have to be observed.46 However, it is also important to know that these trusts are distinct from constructive trusts, even though there is clearly a narrow dividing line between the unconscious express trust and the constructive trust in many cases because both trusts are being imposed by the court, in truth, in recognition of a factor affecting the conscience of the common law owner of the property.47 Similarly, there may be contexts in which A seeks to dispose of her rights in property which she had previously held absolutely in circumstances in which a resulting trust might arise, perhaps if not all of the equitable title has passed:48 in such a situation the dividing line between a resulting trust and an unconscious intention to create an express trust may be similarly difficult to distinguish. One form of trust which will be significant in this discussion is the complex commercial trust which combines ordinary investment contracts (frequently similar to partnerships being used for business purposes in the sharing of losses and profits) with an express trust. The unit trust, a form of mutual investment fund considered in chapter 24, combines an investment contract between the investor (or participant) and the investment manager. However, the unit trust is required to vest equitable interest in the scheme property in the participants49 and therefore necessarily constitute express trusts. In consequence, these forms of trust are not formed on the basis of conscience in the manner set out in Westdeutsche Landesbank v Islington50 but rather arise out of commercial convenience or regulatory requirement. The trust device in such contexts is being used to achieve a commercially desirable goal. 7.2.3 The new landscape
The upshot of the foregoing is either that the legal usage of the term trust should be restricted to those institutions which are currently recognised by the law as constituting trusts, or that a new category of fiduciary duties must be encompassed by the jurisprudence to deal with new forms of trust. Once it is understood that within the category of express trusts there is room for sub-division, then the way is open for a broader redefinition. For example, in relation to unconscious express trusts and to constructive trusts, it is not clear at what point the general fiduciary duties to act fairly or the duties to generate an investment return for the beneficiary ought to bite given that the trustee will typically be unaware of her fiduciary office until the date of the court order. Similarly, it is not clear whether or not such obligations ought to apply at all. In consequence, I would suggest that such redefinition is both important and timely. That redefinition should be, in my view, along the following lines. There should be a fourfold division between express private trusts, public charitable trusts, public interest trusts, and trusts implied by law. Private trusts are trusts as ordinarily understood in chapter 3 of this book. The two forms of public trusts are as considered above and in chapter 29. The final form of trust is that imposed by general principles of equity to police or regulate the conscience of the legal owner of property, being trusts imposed by law in the form of constructive trusts or resulting trusts.51 This category should also encompass the various equitable doctrines of estoppel, set-off, waiver and tracing, as well as the equitable remedies of subrogation, rescission, specific performance and so forth. It is suggested that this form of trust can be imposed on any person regardless of their relationship to any claimant if the circumstances coincide with those general principles. 52
45 46 47 48 49 50 51 52
[1977] 1 WLR 527. In particular the beneficiary principle and the formal requirements in Law of Property Act 1925, s 53(1). Westdeutsche Landesbank v Islington LBC [1996] AC 669. Vandervell v IRC [1967] 2 WLR 87; Westdeutsche Landesbank v Islington LBC [1996] AC 669. Financial Services and Markets Act 2000, s 237(1). [1996] AC 669. Westdeutsche Landesbank v Islington LBC [1996] AC 669, HL. A theme pursued in chapter 36.
One form of trust considered only in outline above is the Quistclose trust.53 This form of trust, in the authors opinion, is explicable as a form of commercial trust relating specifically to loan contracts under which the loan is made for an identified purpose.54 The separation of this form of trust into a distinct form of trust relating to commercial situations may require an expanded category of commercial trusts which relate specifically to situations relating to title in assets used as part of a transaction between commercial people. The sentiments of many of their lordships in Westdeutsche Landesbank v Islington55 indicate a similar understanding of a need for distinct principles to deal with non-family situations. The utility of the development of the public interest trust as a form of trust incorporating those applicable fiduciary duties is to develop that facet of the law on which this book places much reliance:56 its ability to generate models which can be used by policymakers and by ordinary citizens to facilitate their social interaction.57 In this way, social welfare initiatives like housing action trusts and NHS trusts58 can enable effective service provision and also enable users of their services to effect some control over them.
53 54 55 56 57 58 59 60 61
Quistclose Investments Ltd v Rolls Razor Ltd (In Liquidation) [1970] AC 567. On which see Worthington, 1996. [1996] AC 669. As considered in chapter 29. Possibly akin to those in Bromley v GLC [1983] AC 768. Whether you approve of them politically or not: a larger question deferred until chapter 36. Cooke and Hayton, 2000, 442. Ibid. Hayton, 1999; Hayton, Kortmann and Verhagen, 1999.