What we are trying to explain
Section 53 of the Law of Property Act 1925 provides:
(1)(b) 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;
(1)(c) 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.
(2) This section does not affect the creation or operation of resulting, implied or constructive trusts.
Fuller on formality
In his classic essay ‘Consideration and form’ (1941) 41 Columbia LR 799, Lon Fuller distinguished between three different functions that might be served by formality requirements:
(1) the evidential function, of providing evidence of a transaction that the parties intended to enter into;
(2) the cautionary function, of putting someone on notice that they are entering into a transaction, and encourage him to think about whether he wants to enter into that transaction;
(3) the channelling function, of providing a well-defined means of entering into a particular transaction.
Let’s see whether any of these functions can explain the operation of the formality requirements set out in s 53(1)(b) and s 53(1)(c).
At first sight, s 53(1)(b) seems to perform a cautionary function – the idea being that it saves people from making ill-thought out and hasty declarations of trust over land that they own. However, the language of s 53(1)(b) (‘a declaration of trust respecting any land…must be manifested and proved…’) indicates that it performs an evidential function. But why? Bill Swadling has given us the answer in his essay ‘The nature of the trust in Rochefoucald v Boustead’ in Mitchell (ed), Constructive and Resulting Trusts (Hart, 2010). Section 53(1)(b) originates in the Statute of Frauds, and the requirement in the Statute of Frauds that a declaration of trust over land be evidenced in writing was designed to stop landowners being defrauded of their land by people falsely alleging ‘You said you held your land on trust for me!’ and persuading a court to believe their allegation. The requirement of writing for a declaration of trust put a stop to this practice: unless you could provide some writing in support of your claim that a landowner had declared that he held his land on trust for you, then your claim would fail immediately.
This has a very important implication, which is that s 53(1)(b) should only apply where a landowner is being sued on the basis that he has declared that he held his land on trust for the claimant. Where A conveys Blackacre to B on the basis that B will hold Blackacre on trust for A and then sues B to enforce the trust, the fact that they never put it in writing that B would hold Blackacre on trust for A should provide no obstacle to A’s claim. A’s claim is not that B declared that he would hold Blackacre on trust for A, but that he intended B to hold Blackacre on trust for him when he conveyed it to B. So the mischief at which s 53(1)(b) is targeted is not present here, and so there’s no reason to apply s 53(1)(b) to prevent A making out his claim. The caselaw acknowledges this point, with cases such as Rochefoucald v Boustead (1897) and Bannister v Bannister (1948) holding that in this kind of situation, B cannot rely on s 53(1)(b) to defeat A’s claim. As Bill Swadling points out, academic commentators get it wrong by saying that the trust on which B holds Blackacre for A is constructive. No: it is express, based on the court’s giving effect to A’s intention that B should hold Blackacre on trust for A.
What about the situation where A transfers Blackacre to B and C sues B, alleging that A transferred Blackacre to B on the basis that B would hold the land on trust for C? If C cannot produce any writing in support of his claim, should s 53(1)(b) operate to bar C’s claim? If A is dead, then it probably should – not applying s 53(1)(b) would leave B vulnerable to claims from all and sundry claiming ‘A told you to hold Blackacre on trust for me when he conveyed it to you.’ But if A is still alive and in a position to intervene when C sues B and say, ‘What are you talking about? I never said B should hold Blackacre on trust for you!’ then there seems no reason why B should be able to set up s 53(1)(b) in order to defeat C’s claim.
Section 53(1)(c) is not phrased in a way which indicates that it performs an evidentiary function, but it is hard to see why beneficiaries need to be saved by a formality requirement from making ill-thought out and hasty transfers of their beneficial interests to others. So we should consider seriously the possibility that s 53(1)(c) performs an evidential function.
We have already seen that s 53(1)(b) exists to protect property owners being defrauded of their property, and it might be that s 53(1)(c) performs a similar function. If A holds money on trust for B, B might be vulnerable – in the absence of s 53(1)(c) – to being defrauded of his money by A, with A suddenly holding on trust for C, and when B objects, A says (with vehement support from C), ‘But you told me that you wanted me to hold the money on trust for C!?’
But it may be that s 53(1)(c) exists for the benefit of trustees, as well as beneficiaries. The idea is that if A holds property on trust for B and B orally instructs A to hold on trust for C, then if A follows B’s instructions and starts holding on trust for C, then A is vulnerable to being sued by B, with B arguing, ‘Why are you paying money to C? You hold on trust for me, not C!’ In such a situation, A will find it very difficult to defeat B’s claim – he did originally hold on trust for B, and he won’t have any writing to back up his claim that B told him to hold on trust for C, so a court could well hold him liable for wrongfully paying out money to C. Section 53(1)(c) saves A from any such embarrassment – when B orally instructs A to hold on trust for C, A can say to B, ‘You’ll need to put that writing: until you do, I will continue to hold on trust for you.’
One problem with this explanation of s 53(1)(c) is that if it is right, then it would have been desirable for Vandervell v IRC (1967) to be decided differently. Vandervell said that if A holds money on trust for B, and B orally instructs A to convey legal title to the money to C so that C will become the absolute, unencumbered legal owner of the money, then if A does transfer the money to C, C will become the absolute, unencumbered legal owner of the money. B won’t be able to invoke s 53(1)(c) and argue that because he never put anything in writing, his beneficial interest remains undisposed of, and C holds the money on trust for him. The decision is right in theory: B is attempting here to destroy his beneficial interest in the money, not dispose of it. (Note that when C receives the money she does not acquire a beneficial interest in the money – she just acquires legal title, and she gets to enjoy the money beneficially because no one else has a beneficial interest in the money.) But if our account of the basis of s 53(1)(c) is correct, the decision in Vandervell is objectionable in practice. The two reasons for this are: (1) If A holds money on trust for B, then the decision in Vandervell makes B vulnerable to A’s suddenly transferring the money to C, and then when B objects, A can claim (with C’s vehement support) that, ‘But you told me to transfer the money to C so that he would become the absolute legal owner of it!’ (2) If A holds money on trust for B, and B orally instructs A to transfer the money to C so that C will become the absolute legal owner of it, then A is vulnerable to being successfully sued by B if he follows B’s instructions: B can later turn round and say, ‘Why did you give the money you hold on trust for me to C? I’m suing you for wrongfully disposing of trust assets’ and A won’t be able to produce any writing to back up his argument that he was only doing what B told him to do.
In considering cases on the ambit of s 53(1)(c), you should also keep out your eye for the possibility that the courts in some cases might be interpreting s 53(1)(c) as performing a channelling function – in other words, they interpret s 53(1)(c) as saying that the only way to dispose of a beneficial interest in property to another is to do it in writing, where the written document conveying the beneficial interest can be subjected to stamp duty. On this view, s 53(1)(c) is all about tax raising – if you want to dispose of your beneficial interest in property to someone else, you can: but the only way of doing this is to do it in writing, at which point stamp duty will be payable on the document that has the effect of conveying your beneficial interest to someone else. And attempts to evade the effect of s 53(1)(c) are all about tax avoidance – trying to convey your beneficial interest in property to someone else without putting anything in writing that can then be subject to stamp duty.
What is it?
The cases disclose two versions of the beneficiary principle: the strong version and the weak version.
(1) The strong version of the beneficiary principle says that a non-charitable trust cannot exist unless there are one or more identified individuals who have a beneficial interest in the trust property. Lord Parker endorsed this strong version of the beneficiary principle when he said in Bowman v Secular Society Ltd (1917) that ‘A trust to be valid must be for the benefit of individuals, which this certainly is not, or must be in that class of gifts for the benefit of the public which the courts in this country recognise as charitable…’
(2) The weak version of the beneficiary principle says that a non-charitable trust cannot exist unless there exists someone with the power to enforce the obligations of the trustee. The original formulation of the beneficiary principle in Morice v Bishop of Durham (1804), by Sir William Grant, seems to endorse the weak version of the beneficiary principle: ‘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… Every…trust [other than a trust for charity] must have a definite object. There must be somebody, in whose favour the Court can decree performance.’
Viscount Simonds’ statement of the beneficiary principle in Leahy v Attorney General for New South Wales (1959) seems to straddle both views. In discussing the validity of a gift for the ‘general purposes’ of an association, Viscount Simonds observed, ‘If the words “for the general purposes of the association” were held to import a trust, the question would have to be asked, what is the trust and who are the beneficiaries? A gift can be made to persons…but it cannot be made to a purpose or to an object: so also, a trust may be created for the benefit of persons as cestuis que trust but not for a purpose or object be charitable.’ So far, so compatible with the strong version of the beneficiary principle. But Viscount Simonds then went on to say: ‘For a purpose or object cannot sue, but, if it be charitable, the Attorney-General can sue to enforce it.’ This seems to take the view that the beneficiary principle will be satisfied if there is someone who can sue to enforce the duties of the trustee of a non-charitable trust.
The trust in Re Denley
The decision in Re Denley and its subsequent reception illustrates the difference between the strong and weak versions of the beneficiary principle. The facts of the case are complicated, but for our purposes we can take it that the question Goff J had to decide was whether a company had created a valid trust when it settled land on trustees to be used as a sports ground ‘mainly for the benefit of employees of the company’. Goff J observed that:
‘I think there may be a purpose or object trust, the carrying out of which would benefit an individual or individuals, where that benefit is so indirect or intangible or which is otherwise so framed as not to give those persons any locus standi to apply to the court to enforce the trust, in which case the beneficiary principle would, as it seems to me, apply to invalidate the trust…the beneficiary principle is [directed at] purpose or object trusts which are abstract or impersonal.’
This seems to endorse the weak version of the beneficiary principle, and open the door to recognising that a non-charitable purpose trust is valid if there exists someone who has enough of an interest in the purpose of the trust being fulfilled that they could be given standing to enforce the trust, and could be trusted to exercise their powers to enforce that trust. And Goff J could be said to have walked through that door when he upheld the trust in Re Denley as valid on the basis that ‘the employees [were to] be entitled to the use and enjoyment of the land.’ As such, Goff J held, the trust in Re Denley was ‘directly or indirectly for the benefit of an individual or indviduals’ and as such it ‘fell outside the mischief of the beneficiary principle.’
However, later cases have not adopted this interpretation of Goff J’s decision in Re Denley. Instead, they have read Goff J as holding that the trust in Re Denley did not offend against the strong version of the beneficiary principle. In other words, Re Denley has been interpreted as holding that the land in Re Denley was held on trust for the employees for the duration of the trust. On this reading, Goff J found in Re Denley that the land was held on trust for the employees, who had a beneficial interest in the land. In other words, the Re Denley trust was a persons trust, not a purpose trust. Vinelott J interpreted Re Denley in this way in Re Grant’s Will Trusts (1980), holding that in Re Denley Goff J ‘held that the trust deed created a valid trust for the benefit of the employees, the benefit being the right to use the land subject to and in accordance with the rules made by the trustees.’ Vinelott J did not see anything at all unorthodox about such a trust: ‘I can see no distinction in principle between a trust to permit a class defined by reference to employment to use and enjoy land in accordance with rules to be made at the discretion of trustees on the one hand, and, on the other hand, a trust to distribute income at the discretion of trustees amongst a class, defined by reference to, for example, relationship to a settlor.’ Of course, under a discretionary trust, the class of potential beneficiaries is regarded as collectively having a beneficial interest in the trust property, and similarly, the employees in Re Denley could be regarded – on this analysis – as having collectively a beneficial interest in the land in Re Denley. A similar view of Re Denley was adopted by Lawrence Collins J in Re Horley Town Football Club (2006), holding (at ) that the land in Re Denley was held on ‘trust for the benefit of individuals’.
The anomalous exceptions
Whichever version of the beneficiary principle we endorse – and whatever view we take of Goff J’s judgment in Re Denley – there are some trusts that stand as exceptions to the beneficiary principle. These were listed in Re Endacott (1960) as ‘(1) trusts for the erection or maintenance of [funerary] monuments or graves; (2) trusts for the saying of masses…; (3) trusts for the maintenance of particular animals…’ These non-charitable trusts will be valid despite the fact that no one will have a beneficial interest in the trust property and it is not obvious who will be able to enforce these trusts.
So why do these exceptions to the beneficiary principle exist? The cases reveal two explanations. The first is that the courts simply screwed up when they recognised these trusts as being valid. This view was put forward most strongly by Harman LJ in Re Endacott, holding that these exceptions owe their existence to ‘occasions when Homer has nodded’ (i.e. the courts have gone to sleep and stopped thinking straight) and that they are ‘troublesome, anomalous and aberrant cases.’ The second view was put forward by Roxburgh J in Re Astor (1952) – that if you look at the cases where these anomalous trusts were recognised as being valid, in most of those cases, the trust under examination did not in fact violate the weak version of the beneficiary principle, in that there did exist someone who had the power to go to court to ensure that the trustee of the trust was not misappropriating the trust property.
In fact, there is a much more satisfying explanation of these exceptions, which focusses on the fact that they are often referred to as ‘concessions to human weakness or sentiment’. These exceptions to the beneficiary principle owe their existence to the fact that people cannot be stopped from trying to create these kinds of trusts in their wills. If you are making a will, you will want to set some money aside for the maintenance of your grave and the erection of a headstone (assuming that you can’t count on anyone else to do this, and you don’t want your name to disappear into oblivion once you die); and you will want to set aside some money for the care of your pets; and if you believe in Heaven and Hell and you aren’t certain where you are going to end up after you die, you will most definitely want to set aside some money for masses to be said for your soul. Now the courts could react to the fact that are going to put such trusts in their wills by taking a hard line and saying ‘These trusts are invalid.’ But that would be futile – people will simply not be deterred from inserting these kinds of provisions into their wills by a warning that these provisions will not be given effect to by a court. So what? they might think – I might as well make these stipulations, and just hope that they are put into effect. Recognising this, the courts have bowed to consumer demand and held that these kinds of purpose trusts – but (as was held in Re Endacott) only these kinds of purpose trusts – will be held to be valid despite the fact that they are not charitable in nature and violate the beneficiary principle.
Which version of the beneficiary principle should we prefer?
No one is in favour of abolishing the weak version of the beneficiary principle. The idea of upholding a trust when there is no effective means of ensuring that the trust property is not misapplied is not one that anyone favours. So the only issue relating to the beneficiary principle is whether we should give effect to the strong version of the beneficiary principle, in preference to the weak version. This depends on how we answer the Validity of Non-Charitable Purpose Trusts Question: Should we hold that a non-charitable purpose trust is valid provided that there exists an ‘enforcer’ who has standing to compel the trustee to apply the trust property for the purpose for which it was transferred to him? If our answer is ‘no’ then we are effectively in favour of the strong version of the beneficiary principle: the only sort of non-charitable trust we are willing to find is valid is a trust for persons, not a trust for purposes. If our answer is ‘yes’ then we have effectively rejected the strong version of the beneficiary principle and accepted the weak version of the beneficiary principle.
English law – Re Denley notwithstanding – has effectively said ‘no’ to the Validity of Non-Charitable Purpose Trusts Question. English law will not recognise a non-charitable purpose trust as being valid, even if there exists a queue of people ready and willing to acts as ‘enforcers’ to compel the trustee of the trust to apply the property for the purpose for which he has been given it. A number of jurisdictions elsewhere in the world have taken a different view: notably the Cayman Islands (with its Special Trusts (Alternative Regime) Law 1997 – non-charitable purpose trusts that are recognised as valid under the 1997 Law are usually referred to as ‘STAR’ trusts); but also Bermuda, the British Virgin Islands, the Isle of Man, Guernsey, Mauritius, and Brunei.
Academic opinion on how the Validity of Non-Charitable Purpose Trusts Question should be answered is also divided. David Hayton (‘Developing the obligation characteristic of the trust’ (2001) 117 Law Quarterly Review 96) and Jonathan Hilliard (‘On the irreducible core content of trusteeship – a reply to Professors Matthews and Parkinson’ (2003) 17 Trust Law International 144) say ‘yes’; while Paul Matthews (‘The new trust: obligations without rights’ in Oakley (ed), Trends in Contemporary Trusts Law (1996), and ‘From obligation to property and back again? The future of the non-charitable purpose trust’ in Hayton (ed), Extending the Boundaries of Trusts and Similar Ring-Fenced Trusts (2002)) and Patrick Parkinson (‘Reconceptualising the express trust’ (2002) 61 Cambridge Law Journal 657) say ‘no’.
Here are three arguments in favour of responding ‘no’ to the Validity of Non-Charitable Purpose Trusts Question that you should consider in making up your own mind as to how you would answer this question:
(1) The capriciousness argument. In Brown v Burdett (1882), a testatrix provided in her will that her house should be bricked up and people generally prevented from entering it for twenty years after the death. During the twenty years, the house was only to be occupied by ‘some respectable married couple’ who would occupy ‘the kitchen, back-kitchen, middle attic and hall’ and who would look after the house and generally make sure that no one else could enter it. After the twenty years were up, the house would be inherited by various heirs, so long as they made sure that the house was kept empty of visitors for the twenty years immediately after the testatrix’s death. The trust to keep the house in Brown empty satisfied the weak version of the beneficiary principle, insofar as her ultimate heirs had an incentive to ensure that the trustees of the testatrix’s will had ample incentive to ensure that the trustees complied with her instructions to keep the house empty of visitors. Despite this, the trust was declared invalid. Bacon V-C held that ‘I think I must “unseal” this useless, undisposed of property’ and gave a declaration that the house was ‘undisposed of by the will, for the term of twenty years from the testatrix’s death.’ (That is literally all he said.) The case of Brown v Burdett illustrates one of the dangers involved in declaring non-charitable purpose trusts to be valid, so long as the weak version of the beneficiary principle is satisfied. You could end up requiring that valuable property be used for purposes that are completely capricious (which, in this context, means ‘useless’ – for another meaning, see the essay on the creation of express trusts, elsewhere on this website). (Many thanks to W.S. for referring me to the case of Brown v Burdett.)
(2) The economic argument. Even if the purpose for which property has been left on trust is not capricious, and is intelligibly valuable, requiring that the property be applied for that purpose is potentially inefficient in that it could tie up property so that it can only be used for a particular purpose for the perpetuity period (in this context, 21 years) when its being used for some other purpose would be much more productive. For example, there are no guarantees that the most beneficial use of the land in Re Denley was that it be used as a sports ground for a company’s employees. Maybe converting the land into a housing estate would have been more beneficial. A free market economy seeks to ensure that property ends up being used for the most beneficial purpose by allowing property to gravitate into the hands of those who are ready and willing to pay the most for the property. (The idea being that those who can make the most socially productive use of property are those who will be and ready and willing to pay the most for that property; a very questionable assumption, but no better yardstick for measuring the social worth of the way someone proposes to uses a particular piece of property has even been arrived at.) Non-charitable purpose trusts get in the way of the free market distributing property into the hands of those who are ready and willing to pay the most for that property by requiring that that property be used for a particular purpose, and only for that purpose, during the perpetuity period. It is for this reason, I believe, that law requires that a purpose trust be for the ‘public benefit’ before it will declare that the trust is valid as a charitable trust. Before the courts will tie up the property to be used for a particular purpose (for perpetuity), they will require it to be established that using that property for that purpose will be of some proven benefit to the public benefit that will outweigh the possible detriment to the public resulting from the property being tied up so that it cannot be used for any other benefit.
(3) The tax avoidance argument. It seems to be no accident that all of the jurisdictions that allow settlors to create non-charitable purpose trusts are notorious tax havens: countries that make it easy for rich people who are willing to deposit their money in the country’s banks to structure their affairs so as to minimise the amount of tax they have to pay on that money. Non-charitable purpose trusts are a wonderful device for avoiding tax. In a jurisdiction that recognises the validity of non-charitable purpose trusts, S can settle money and shares on T to be used for the non-charitable purpose of ‘looking after the needs of S, his family and close relatives’. As S etc. (and T) do not have a beneficial interest in the money and shares that are held on this non-charitable purpose trust, they cannot be taxed on the income earned by the money and shares. And any disbursements they receive from the trust fund will count as gifts from the trust fund, and so will not be taxable on receipt. Companies can also use non-charitable purpose trusts to minimise their taxes. For example (an example drawn from Alexander Bove, ‘The purpose of purpose trusts’ (2004) 18 Real Property, Probate and Trust Law Journal 34), in a jurisdiction that recognised non-charitable purpose trusts as being generally valid, a company could set up a non-charitable purpose trust, the purpose of which trust would be to lease the company equipment. (The company would then act as ‘enforcer’ of the trust to ensure that the weak version of the beneficiary principle is observed.) The trustees of the trust then purchase a piece of machinery which the company needs. The company leases the machinery from the trustees of the trust fund, thereby repaying the trust fund for the money it has spent on the piece of machinery. But the machinery – being leased – does not appear on the company’s balance sheet, and the lease payments count as a loss on the company’s accounts, thereby diminishing the profits it has to declare, and the amount of tax it has to pay on those profits. (For those interested in exploring issues relating to tax avoidance, Nicholas Shaxson’s website is as good a starting point as any. Nicholas Shaxson wrote Treasure Islands: Tax Havens and the Men Who Stole the World (2012) – an eye-opening look at the history and reality of countries’ setting themselves up as tax havens for rich people from around the world.)
In this essay, I’m going to talk some of the requirements that have to be fulfilled if someone wants to create a trust. (As that trust has been deliberately created, it will of necessity be an express trust.) These requirements can be simply summarised.
First of all, you can’t unintentionally create a trust so the most basic requirement is that you manifest an intention to create a trust. (This is known as the ‘certainty of intention’ requirement.)
Secondly, you can’t create a trust over property that you don’t currently own so you have to own the trust property before you can create a trust over it.
Thirdly, you have to identify the property which is to be the subject matter of the trust – otherwise the courts won’t know what item of property is to be held on trust. (This is known as the ‘certainty of subject matter’ requirement.)
Fourthly, the trustees of the trust and, more importantly, the courts have to know enough about who you intend to be benefited by the trust and how for them to give effect to your intentions. (This is known as the ‘certainty of objects’ requirement.)
Fifthly, in the case where you intend to create a trust not by declaration (i.e. by taking an item of property that belongs to you and declaring that you hold it on trust for someone else) but by transferring property belonging to you to someone else to be held on trust for a third party, title to the putative trust property must be transferred to the intended trustee or trustees before the trust will come into existence.
Sixthly, if you want to create a trust over a piece of land, you must express your intention to create the trust in writing, otherwise the trust will be unenforceable: Law of Property Act 1925, section 53(1)(a),(b).
This essay focusses on the second, third and fourth requirements.
Suppose that I know my aunt is going to leave me a very valuable silver coffee pot after she dies, in her will. I say to you, ‘I declare that when my aunt dies and I get the coffee pot, I will hold it on trust for you’. This declaration is of absolutely zero effect – if my aunt dies and I get the coffee pot, I’ll be free to do what I like with it. More tricky is the following situation. Suppose that my aunt has died but her executors have yet to give effect to her will and so I have yet to receive the coffee pot which she left me in her will. At that point I say to you, ‘I declare that I will hold the coffee pot on trust for you’. Whether or not my declaration will have had the effect of imposing a trust over the coffee pot for your benefit depends crucially on whether I had an interest in the coffee pot at the time I made that declaration. The decision of the Privy Council in Commissioner of Stamp Duties v Livingston (1965)indicates that at the time I make my declaration, I do not have any kind of interest in the coffee pot – I merely have a right to sue the executors to get them to perform their duty to give effect to the will. So, again, my declaration will be of zero effect and when I do eventually get the coffee pot, I will be free to do what I like with it.
Certainty of subject matter
Suppose I own 1000 bottles of wine and I’ve stored them in a large wine cellar. One day, I declare that I hold 500 of them on trust for you without making it clear which 500 bottles I’m talking about. My declaration will be of zero effect because the courts simply won’t know which of my bottles of wine are to be held on trust for you. It’s necessary for them to know this because – what if 20 of the bottles of wine are destroyed in an earthquake which hits the wine cellar? The courts need to know whether the bottles of wine which have been destroyed were held on trust for you or not – and they will not if I haven’t already made it clear exactly which of my 1000 bottles of wine are held on trust for you. Notice that the same point holds true if the 1000 bottles are identical in every respect – if 20 of them were destroyed in a storm and we had to determine whose bottles of wine had been destroyed, it would be of no comfort to know that the 20 destroyed bottles were identical in every respect to the surviving 980.
In Hunter v Moss (1994) the requirement that there be certainty of subject matter before a trust can come into existence was weakened somewhat. In that case A owned 950 shares in Company X and declared that he held 50 of them on trust for B without specifying which of the 950 shares were to be held on trust for B. The trust was upheld as valid. The decision can be criticised.
What if A, after making his declaration of trust, had sold 500 of his shares in Company X and used the proceeds of the sale to acquire shares in Company Y. We will need to know whether in doing this A sold the shares in Company X that he held on trust for B and invested the proceeds in Company Y. (If A loses his investment in Company Y he might well want to claim that he did sell B’s shares and invest the proceeds in Company Y; on the other hand, if A makes a lot of money in investing in Company Y, B might well want to claim that his shares contributed to that investment.) But because A didn’t make it clear which of his 950 shares were held on trust for B, we can’t tell whether B’s shares were sold and the proceeds invested in Company Y. In order to avoid this difficulty, the Court of Appeal should have held in Hunter v Moss that the declaration of trust was invalid for lack of certainty of subject matter.
One of the reasons the Court of Appeal gave for finding that the trust was valid in Hunter v Moss was that if A had left B 50 of his 950 shares in Company X in his will, the bequest would have been perfectly valid – why should it matter that A chose not to give B the shares in his will but instead chose to allow B to enjoy them in his lifetime by declaring that he held them on trust for B? But the crucial difference is that if A had left B 50 of his 950 shares in Company X in his will, the executors of A’s estate would have taken 50 of the 950 shares and handed them over to B, thus separating B’s shares from the other shares in Company X. In Hunter v Moss nothing was done to separate out the shares in Company X that were to be held on trust for B and the shares which A remained absolute legal owner of.
Similarly, if A had 1000 identical bottles in his wine cellar and left 50 of them to B in his will without identifying which 50 should go to B, there would be no problem with the bequest – the executors of A’s estate would simply go into the wine cellar, take 50 bottles out and give them to B, thus separating B’s bottles from the other wine bottles. Where there might be a problem is if A had 1000 bottles in his wine cellar – all of different types and quality – and he left 50 bottles from his wine cellar to B in his will. The bequest here would probably be invalid because the executors would not be able to tell which wine bottles they were supposed to give to B. A would not have told them enough about his intentions for them to give effect to them.
Certainty of objects
This takes on to our next point which is that for a valid trust to be created, the person creating the trust (who is known as the settlor) must give the courts enough information about who he intends to be benefited under the trust, and how, for the courts to give effect to that intention. The crucial question in applying this requirement is – do we know enough about the settlor’s intentions to give effect to them? If we do, then we have no problem. If we don’t, then the courts can’t uphold the trust which was sought to be created. To see this approach in action, let’s look at some bequests in a will made by A which raise ‘certainty of objects’ issues:
(1) ‘£100 to be given to each of my friends.’
Now the concept ‘friend’ is pretty fuzzy, but if we know of at least one person who was A’s friend then we know enough to give effect to A’s intention in making this bequest. Say we know for sure that however fuzzy the concept ‘friend’ is, B was definitely one of A’s friends. So we know that A, in making this bequest, intended that B should get £100. So we give effect to that intention and give B £100. Okay – now there may be other people who we’re not really sure about, as we don’t know whether they were A’s friends or not. These people won’t get anything under this bequest – we don’t know enough about them to know whether or not A intended them to get £100. But this won’t affect the validity of the gift to B. This was the result reached in Re Barlow (1979), where the testatrix specified that her ‘family and friends’ should be allowed to buy paintings from her estate at a special discount. The gift was held to be valid: those who could clearly establish that they were ‘family’ or ‘friends’ and who wanted to buy a painting should get a discount. The fact that there would be others who could not clearly establish that they were ‘family’ or ‘friends’ and who could not therefore get a discount was neither here nor there. Note that you certainly should not read Re Barlow as saying that any gift for ‘friends’ will be valid. As the next example shows, it all depends on the terms of the gift.
(2) ‘£10,000 to be distributed equally among my friends.’
(Notice that this isn’t an example of a discretionary trust – the executors have no discretion as to how to distribute the £10,000 among A’s friends; they are told to distribute the amounts in equal shares.)
Now here we don’t know enough to give effect to A’s intentions in making this bequest. To know how much each friend should get, we would have to know how many friends A had – and the fuzziness of the concept ‘friend’ makes it impossible for us to put a figure on how many friends A had. So our basic problem here is one of uncertainty of subject matter – we don’t know enough here to know how much each person should get under the bequest. The bequest will therefore be invalid.
(3) ‘£10,000 to be distributed equally among my ten best friends.’
Here the problem we had in (2) is solved for us. We know how much each of the ten best friends are to get – they are to get £1,000 each. So this bequest is identical to a bequest which goes ‘£1,000 to be distributed to each of my ten best friends’, which looks pretty similar to the bequest in (1). Now – if we know of one person who was definitely one of A’s ten best friends, then we know enough to give effect to A’s intentions in setting up the bequest. Say B was definitely one of A’s ten best friends. In that case, we have no problem – we simply give B £1,000. Now, we may not know who were the other nine people A was referring to when he made his bequest, but that shouldn’t affect the validity of the gift to B.
(4) ‘£10,000 to be distributed as my executors see fit among the inhabitants of my hometown.’
Applying our yardstick – do we know enough to give effect to A’s intentions? – A clearly didn’t intend here either that the executors should give out the £10,000 in equal shares to all the inhabitants of his hometown or that the executors should consider the merits of each and every inhabitant of his hometown in deciding how to distribute the £10,000. So we don’t need to know – in order to give effect to A’s intentions – how many people live in A’s hometown and we don’t need to have – in order to give effect to A’s intentions – a complete list of all the inhabitants of A’s hometown. So the fact that we don’t know how many people live in A’s hometown and the fact that we can’t draw up (because it would take too long) a complete list of all the inhabitants of A’s hometown should not invalidate this discretionary trust. And indeed the House of Lords took the same view in McPhail v Doulton (1971)
Instead, the House of Lords said that a discretionary trust for a given class of people will be invalid if you can’t tell of any given individual in the world whether they fall within or without that class. So – according to McPhail v Doulton – the discretionary trust here will fail if there exist some people in the world of whom we can’t say whether or not they are inhabitants of A’s hometown. For example, suppose B owns a holiday home in A’s hometown – is B to be counted as an inhabitant if he only spends a month a year there? If you are in doubt – you don’t know whether B should be counted as being inside or outside the class to be considered – then, according to McPhail v Doulton, the discretionary trust will be invalid.
This seems too strict. If we just ignored B and decided to give out the money to those who are clearly inhabitants of A’s hometown, that would be consistent with A’s intentions. If so, then giving effect to A’s intentions doesn’t require us to know of any given person in the world whether they do or do not fall within the class ‘inhabitants of my hometown’. We simply need there to be a good number of people who clearly fall within that class so that giving the money out among those people would be consistent with A’s intentions. (The question of what counts as a ‘good’ number of people must be judged against A’s intentions. Suppose I set up a discretionary trust: ‘£100,000 to my trustees to be distributed as they see fit among those I taught while I was at Pembroke College, Cambridge.’ The records of who I taught have been irretrievably lost but about ten people can prove that I taught them while I was at Pembroke. And suppose that we know I must have taught about 1,000 people in my time at Pembroke. Giving my money out among the ten people who can prove I taught them while I was at Pembroke wouldn’t really be consistent with my intentions when I set up the discretionary trust – I intended that my trustees would distribute the money across a much wider range of people. But if 500 people could prove that I taught them while I was at Pembroke, that might be constitute a good number of people.)
At the moment, the law occupies a halfway house between the strict position taken in McPhail v Doulton – for a discretionary trust to be valid, you’ve got to be able to tell of anyone in the world whether or not they fall within the class to be considered – and the position I’d like it to take, under which a discretionary trust will be valid if a sufficiently large number of people clearly fall within the class to be considered.
If the reason why you can’t tell of any given individual in the world whether or not they fall within the class to be considered is because the class is defined in vague or uncertain terms – in other words, is conceptually uncertain – then the strict position taken by the House of Lords in McPhail v Doulton will prevail and the discretionary trust will be automatically held to be invalid. So a discretionary trust for ‘my friends’ will be invalid because the definition of the class is such that there will be some people of whom we will not be able to say whether or not they count as being ‘my friends’ (they are not clearly my friends, but they are not clearly not my friends either). And this is so even if there is a good number of people who clearly are my friends. In such a case, as I have said, holding that the discretionary trust is invalid seems overly strict – the trustees of the trust would be able perfectly well to give effect to my intentions by just considering those who are clearly ‘my friends’.
But if the reason why you can’t tell of any given individual whether or not they fall within a particular class is that while the class is clearly defined, there are evidential difficulties that prevent us saying of some people whether or not they fall within the class, the Court of Appeal has held – in Re Baden’s Will Trusts (No 2) (1972)– that the strict approach adopted in McPhail v Doulton should not be followed.
In that case, the Court of Appeal considered whether a discretionary trust for ‘relatives of employees’ of the testator’s company was valid or not. Stamp LJ defined relatives as meaning ‘next of kin’ and found that it was perfectly possible to tell of any given individual whether or not they were a ‘relative’ of an employee of the testator’s company. So he held that the trust was valid according to the test for validity laid down in McPhail v Doulton.
In contrast, the majority – Megaw and Sachs LJJ – defined ‘relatives’ much more widely. They held that A will be a ‘relative’ of an employee B if A and B are descended from a common ancestor. On this definition, the class to be considered in Re Baden’s Will Trusts (No 2) was conceptually certain. The definition of the class didn’t create any problem with telling whether a given individual fell within the class or not. With perfect family trees, one could easily tell whether someone was a ‘relative’ of an employee. But the problem was that we don’t have perfect family trees. So the class ‘relatives of employees’ was conceptually certain but evidentially uncertain. Evidential difficulties meant that it was impossible to tell of large numbers of individuals whether or not they were ‘relatives of employees’. Despite this, both Megaw and Sachs LJJ held that the discretionary trust should be declared valid: evidential uncertainty should not, they held, defeat the trust. In so ruling, they departed from the strict test laid down in McPhail v Doulton. However, they argued – contrary to the position taken by Stamp LJ – that the strict test in McPhail v Doulton was not intended to apply in cases of evidential uncertainty, only in cases of conceptual uncertainty where vagueness or uncertainty in the definition of the class made it difficult to tell of any given individual whether they fell within or without the class. However, Megaw and Sachs LJJ disagreed over when evidential uncertainty would render a discretionary trust invalid. Sachs LJ took the very liberal position that so long as the evidential uncertainty didn’t prevent us being able to tell of at least one person that they fell within the class to be considered, then the trust should be declared valid. Megaw LJ was more cautious, holding that evidential uncertainty would not render a discretionary trust invalid so long as we could still tell of a sufficiently large number of people that they fell within the class to be considered.
I prefer Megaw LJ’s position; indeed, as I have already said, I think that the same test should be applied to determine whether a discretionary trust that is afflicted by conceptual uncertainty is valid. Stamp LJ’s approach – holding that a discretionary trust will only be valid if the class to be considered is both conceptually and evidentially certain – is too strict: we don’t need to tell of everyone in the world whether or not they fall within the class to give effect to the settlor’s intentions. And Sachs LJ’s position is too liberal: it opens the door to our holding that a discretionary trust is valid even when evidential difficulties mean that there are only two or three people who clearly fall within the class to be considered when the settlor might have intended the trustees of the trust to select from a much bigger class.
Having said all that, it doesn’t seem that there is anything in Re Baden’s Will Trusts that will save the legacy we are considering here. The class ‘inhabitants of my hometown’ seems to be conceptually, rather than evidentially, uncertain. The definition of the class is what makes it difficult for us to tell whether or not a given individual falls within the class to be considered, not any lack of knowledge of the facts on the ground. (One useful way of testing whether we are dealing with a situation of conceptual uncertainty, as opposed to evidential uncertainty, is to ask yourself: ‘If we had perfect information, would we be able say of any given individual whether or not they fall within the class to be considered?’ If the answer is ‘no’ then the class is conceptually uncertain.)
(5) ‘£10,000 to be distributed as my executors see fit among the people in this photograph, taken of Cambridge Market Square on October 16 2012 (names and addresses of everyone in the photograph attached to the photograph).’
Again we are dealing here with a discretionary trust, but this time there is no problem with certainty of objects as the information we have allows us to tell of any given individual whether or not they fall within the class to be considered. But there is still a big problem with giving effect to A’s intentions here. The class is capricious in the sense that the executors will have no idea what they are supposed to considered in deciding how to give out the £10,000 allocated for distribution among the members of this class. They have no idea what criteria A wanted them to have in mind when choosing that this one should get some money and this one shouldn’t get anything. Even splitting the money equally among all the members of the class would be capricious as the executors have no assurance that equal distribution would have been consistent with A’s intentions. So the fact that the executors have no idea how to go about giving effect to A’s intentions in giving out the £10,000 will render this trust invalid, for capriciousness. Of course, the problem of capriciousness could be solved if A had separately supplied the executors with a letter of wishes as to how they should go about exercising that discretion. This may account for why so-called ‘intermediate’ or ‘hybrid’ trusts (under which money is held on trust to be distributed to ‘anyone in the world’ except for the settlor and his family) have been upheld by the courts even though they look capricious (see Re Manisty (1974) and Re Hay (1981)). The courts know very well that the trustees of these trusts know exactly what they are supposed to do under these trusts; and that these trusts have been very deliberately set up as a tax planning device to allow the settlor to determine through his trustees how the money that he has settled on them on trust is used while making it clear to the tax authorities that the settlor and his family have absolutely no taxable interest in that money.
(6) ‘£1 million to be distributed among everyone in the world sharing the same surname as me.’
Again we are dealing with a discretionary trust here, and there is again no problem with certainty: we can tell of any given individual whether or not they fall within the class to be considered by simply looking at their surname. This trust looks at first sight like it might be invalid for capriciousness. But appearances deceive: this trust is not actually capricious. This is because there is one distribution that will be consistent with A’s intentions in making this provision, and that is equal distribution among everyone with the same surname as him. An unequal distribution – where some in the class get something and others get nothing – would be capricious as the executors would have no assurance that such a distribution would be consistent with A’s intentions. However, the executors could be confident that an equal distribution would be consistent with A’s intentions, as he must have felt some affinity for everyone who shared the same surname as him in making this provision. However, an equal distribution would be impossible here as it is impossible to determine how many people share the same surname as A. Given this, the discretionary trust here will be declared to be invalid for administrative unworkability.
This is, in my view, the problem that Lord Wilberforce intended to address when he suggested in McPhail v Doulton that a discretionary trust would be invalid on the ground that it was ‘administratively unworkable’ if the class to be considered was ‘so hopelessly wide as not to form “anything like a class”’. Textbooks and later decisions (in particular, R v District Auditor, ex parte West Yorkshire MCC (1986)) have focussed on the word ‘wide’ as suggesting that a discretionary trust would be invalid for administrative unworkability where the trust was for a really huge class of people. But a discretionary trust will be perfectly workable for even really huge classes of people if the trustees know well enough what they should be looking for in selecting among those classes.
No – the following analysis seems more sensible. In McPhail v Doulton, the House of Lords moved away from the ‘complete list’ test for determining whether a discretionary trust was valid, according to which a discretionary trust would be invalid if you could not draw up a complete list of all the members of the class to be considered under the trust. They did this because they did not think the trustees of a discretionary trust needed a complete list of members of the class to be considered to give effect to the intentions of the settlor setting up the trust. (As I have observed above, the test for validity that the House of Lords adopted instead – the ‘is or is not’ test: can you tell of any given individual whether they are or are not within the class to be considered? – can be criticised on exactly the same ground.) In so ruling, they opened up the possibility of discretionary trusts for very large classes of people being declared valid for the very first time. However, the House of Lords must have been aware of the possibility that their ruling could give rise to a problem where: (1) a settlor S creates a discretionary trust for a very large, but certain, class of people; and (2) the only way of giving effect to S’s intentions in creating that trust is to distribute the trust funds equally among the members of the class to be benefited under that trust. In such a case, the trustees of the trust fund would be trapped. The discretionary trust would be valid and therefore have to be given effect to. But in order to give effect to the trust, the trustees would need to compile a complete list of the members of the class to be benefited under the trust, when the size of the class makes compiling such a list impossible. It was in order to give the trustees of such a trust an escape route, that Lord Wilberforce suggested that a discretionary trust might be invalid for ‘administrative unworkability’.
So, for me, ‘administrative unworkability’ does not target the problem (such as it is) of giving effect to a discretionary trust for a very large class of people. It is intended instead to deal with the problem created by settlements such as that in our situation (6) – where the only way of giving effect to the settlor’s intention to benefit a very large class of people is to distribute the trust monies equally among all the members of that class.
Two meanings of the word ‘constructive’
In English law, the word ‘constructive’ can mean one of two things. (For further exploration of this point, see Lionel Smith, ‘Constructive trusts and constructive trustees’ (1999) 58 Cambridge Law Journal 294.)
(1) ‘Imposed’ rather than ‘assumed’. The word ‘constructive’ is used in this way to indicate that something has been imposed by the law, rather than being deliberately created by someone. So we might (though we don’t) talk of someone having a ‘constructive obligation’ if they have an obligation that was imposed on them by the law rather than deliberately assumed by them through entering into a contract.
(2) ‘Fictional’ rather than ‘real’. The word ‘constructive’ is used in this way to indicate that we are going to act as though X is true, even though we all know that X is not true. So, for example, there is a story told by Peter Birks in his Introduction to the Law of Restitution (1989) about an Oxford college: ‘The college’s rules forbid the keeping of dogs. The Dean keeps a dog. Reflecting on the action to be taken, the governing body of the college decides that the labrador is a cat and moves on to next business.’ As Peter Birks observes, ‘That dog is a constructive cat.’ Obviously, everyone knows that the Dean’s labrador is not a cat, but the college has decided, for the sake of its rules, to act as though the labrador is a cat.
Let’s call something that is constructive in sense (1), ‘real, and imposed by law’; and something that is constructive in sense (2), ‘fictional’.
Are constructive trusts imposed, or fictional? To answer this question, let’s look at various different situations in which a constructive trust will arise.
(1) Specifically enforceable contract
If A enters into a contract to sell land to B, then he will hold that land on a constructive trust for B. Is that trust imposed, or fictional? It looks real enough: if A goes bankrupt after having entered into a contract to sell Blackacre to B, B will be entitled to say to A’s creditors: ‘Blackacre is held on trust for me, and so can’t be used to help pay off the debts A owed you.’
However, Bill Swadling (in ‘The fiction of the constructive trust’ (2011) Current Legal Problems 1) argues that the constructive trust over Blackacre that arises out of A’s contracting to sell it to B is (like all other constructive trusts, in his view) fictional. When we say that A holds Blackacre on trust for B, we don’t really mean that A holds on a real trust for B; all we mean is that A is liable to be ordered to convey his rights in Blackacre to B. However, this argument does not seem to work. It’s true that the only reason why A is held to hold on trust for B is that his contract to sell Blackacre to B is specifically enforceable, and A is therefore liable to be ordered to hand over Blackacre (or, more technically, the rights he has over Blackacre) to B. However, this shows that Swadling’s thesis does not work in this context. The trust arises out of the fact that A is liable to be ordered to hand over Blackacre to B; A’s liability to be ordered to hand over Blackacre to B does not arise out of the fact that are willing to say that A holds on trust for B. A would still be liable to be ordered to hand over Blackacre whether or not we said that he held Blackacre on trust for B.
(2) The stolen bag of coins
In Westdeutsche Landesbank v Islington LBC (1996), Lord Browne-Wilkinson considered the situation where a thief steals a bag of coins. If the coins are mixed with other identical coins and then withdrawals are made from the mixture, the legal owner of the coins will be unable – under the common law rules on tracing – to find out where his coins have gone, and who has got them. The rules on tracing used by the Courts of Equity to find out where trust money has gone were more flexible and allowed the beneficial owner of the money to trace his money even when the money was mixed with other money and withdrawals were made from the mixture. But those rules could only be taken advantage where the money was held on trust. Lord Browne-Wilkinson held that the legal owner of the bag of stolen coins could take advantage of the equitable tracing rules to find out where his money had gone: ‘stolen monies are traceable in equity’. The reason why is that he held that once the money was stolen it would be held on a constructive trust for the legal owner.
This constructive trust looks fictional. The reason why was identified by Rimer J in Shalson v Russo (2005) at : ‘a thief ordinarily acquires no property in what he steals… If the thief has no title in the property, I cannot see how he can become a trustee of it for the true owner: the owner retains the legal and beneficial title.’ So if a constructive trust does arisen when a thief steals a bag of coins, that trust can’t be a real trust as the thief doesn’t have anything that he can hold on trust for the owner. We must be just saying that he holds the bag of coins on trust for its owner in order to allow the owner to take advantage of the equitable tracing rules to find out where his coins have gone when they have been mixed. But even if we accept that the constructive trust that arises when a thief steals a bag of coins is fictional, not real – and is intended to allow the owner of the coins to overcome the procedural limits on who can take advantage of the equitable tracing rules – Rimer J was still unhappy in Shalson v Russo at finding that the thief holds the bag of coins on trust for its owner:
‘The fact that, traditionally, equity can only trace into a mixed bank account [if the money being traced is trust money] provides an unsatisfactory justification for any conclusion that the stolen money must necessarily be trust money so as to enable [it to be traced]. It is either trust money or it is not. If it is not, it is not legitimate artificially to change its character so as to bring it within the supposed limits of equity’s powers to trace: the answer is to develop those powers so as to meet the special problems raised by stolen money.’
However, Rimer J’s unwillingness to find that stolen money is held on a fictional trust for its owner is hard to reconcile with his later willingness in the same case to find that money will be held on constructive trust in the situation where:
(3) Money is paid under a contract that is later rescinded for fraudulent misrepresentation
If A and B enter into a contract as a result of A’s having made various misrepresentations to B, then B will be entitled to rescind that contract – to make it null and void, as though it had never existed. Until B rescinds the contract, it will be perfectly valid. So if B pays money to A under the contract, A will acquire title to that money. But his title will be voidable: if B rescinds the contract before the money passes into the hands of a bona fide purchaser, legal title to the money will revest in B. In Shalson v Russo, Rimer J agreed (at -) that if B rescinds the contract, and A’s misrepresentations were fraudulent, then A will hold any money that B has paid him under the contract (and which is still in A’s hands) on a constructive trust for B. This constructive trust also looks fictional. Once the contract is rescinded, legal title to the money that A has paid to B will revest in B, so there is nothing A can hold on trust for B if the trust is supposed to really exist. It must be that in this case we are just saying that A holds on trust for B in order to allow B to take advantage of the equitable tracing rules to find out where in A’s holdings his money is now. Etherton J confirmed in London Allied Holdings Ltd v Lee (2007) (at -) that money paid under a contract induced by fraud that was later rescinded would be held on a constructive trust for the payor. But if we are willing to find a fictional trust in such a case, it is hard to understand why we wouldn’t in Lord Browne-Wilkinson’s stolen bag of coins case.
(4) Unconscionable receipt/retention of money paid under a mistake
Where A pays money to B by mistake, unless the mistake is sufficiently fundamental, B will acquire title to the money that A has paid over to B. So in such a case it is possible for B to hold that money for A on a real trust. But will B ever hold that money on trust for A, and if so, under what circumstances? The answer to this question is still very unclear.
In Chase Manhattan v Israel-British Bank (1981) (where money was mistakenly paid over twice by one bank to another), Goulding J found that money that had been paid over by mistake was held on trust for the payor, thereby allowing the payor to trace and recover that money even though the payee was by then insolvent. In Westdeutsche Landesbank v Islington LBC (1996), Lord Browne-Wilkinson said two things:
(1) That the only way Chase Manhattan could have been correct is if we suppose (as was actually established in the case) that when the payee bank received the money that was mistakenly paid over to it, it was aware at the time it received the money, or shortly afterwards, that the money had been paid over by mistake: ‘Although the mere receipt of monies, in ignorance of the mistake, gives rise to no trust, the retention of the moneys after the recipient bank learned of the mistake may well have given rise to a constructive trust.’ (Note the ‘may’ in that sentence.)
(2) That if the courts are going to find that people who have been paid money by mistake hold it on trust for the people from whom they received that money, then they should do it via a remedial constructive trust, so that if A has paid money to B by mistake, then A has to go to court and ask the court to create and impose a trust over the money paid to B, thereby enabling him to get it back from B. Such a remedial constructive trust, Lord Browne-Wilkinson thought, would only be available ‘where a defendant knowingly retains property of which the plaintiff has been unjustly deprived’ and in deciding whether or not to create and impose a trust over the property, the courts would tailor the trust ‘to the circumstances of the individual case, [so that] innocent third parties would not be prejudiced and restitutionary defences, such as change of position, [would be] given effect.’
Since Westdeutsche Landesbank was decided, the courts have rejected suggestion (2), holding that they have no jurisdiction to create and impose a trust over property, as opposed to recognising that property is already held on trust (either under an express trust, or what is known as an institutional constructive trust): see Re Polly Peck International (No 2) (1998). That leaves suggestion (1). If A pays money to B under a mistake, and while the money is still in B’s hands, B becomes aware that the money was paid under a mistake, will B hold that money on a constructive trust for A?
This question has divided the courts since Westdeutsche Landesbank was decided. Box v Barclays Bank (1998, Ferris J) and Shalson v Russo (2005, Rimer J at ) say ‘no’. On the other side, in Re Farepak (2006), Mann J – after hastily reviewing the authorities (the case was decided under severe time pressure) – ruled (at ) that:
‘If and in so far as it could be established that moneys were paid to Farepak by customers at a time when Farepak had decided that it had ceased trading, and indeed at a time when it had indicated that payments should not be received, then there is a strong argument for saying that those moneys would be held by the company as constructive trustee from the moment they were received.’
The reference to the company holding the money as ‘constructive trustee’ is unfortunate (as we will see, we shouldn’t equate the concepts of holding money on a constructive trust for someone with being a constructive trustee) but there is no doubt that Mann J meant here that the moneys were held on a constructive trust, and that that constructive trust was a real trust, giving the customers who had paid over money after the company had decided to cease trading a proprietary interest in that money which allowed them to recover that money in priority to the company’s huge number of unsecured creditors.
In the subsequent case of London Allied Holdings Ltd v Lee (2007), Etherton J noted (at ) that there had not been a chance for proper argument in Re Farepak over whether money paid by mistake to someone who was aware (at the time or subsequently) of the mistake should be held on constructive trust for the payor, and he declined to express an opinion on the issue.
For what is worth, the Australian courts have been more enthusiastic about finding that a constructive trust arises in this kind of case. So, for example, in Wambo Coal Pty Ltd v Ariff (2007), the New South Wales Court of Appeal held that monies that had been paid by the plaintiff to the defendant in the mistaken belief that the plaintiff owed the defendant money were held on trust by the defendant for the plaintiff when the defendant became aware (or would have become aware had the defendant not refused to inquire whether the money was really owed for fear of finding out that it was not) that they had been paid by mistake. White J held at  that ‘once the recipient is aware that, by a mistake, he has got something for nothing, a proprietary remedy is appropriate. The fact that the company is insolvent does not affect this conclusion. It would be an unwarranted windfall for the company’s creditors to share in the payment…’ The fact that the trust found in this case allowed the plaintiff company to recover the money they had paid in priority to the defendant’s other creditors shows that the trust in Wambo was real, not fictional.
(5) Reliance on an assurance of having an interest in land
It is well-established that if A, who owns Blackacre, assures B that he holds Blackacre on trust for her in some proportion, and B relies on that express assurance, then B will be able to argue that A holds some proportion of Blackacre on trust for her. That trust is a real trust: it is capable of binding third party purchasers of Blackacre, and allows B priority in the event that A goes bankrupt. That trust is also conventionally classified as ‘constructive’: as arising not because anyone intended that it should arise, because the law seeks to protect B’s reliance on A’s assurance by giving her an interest in Blackacre. However, Bill Swadling has interestingly argued that this trust is not constructive at all. Rather, it is express. It arises to give effect to the declaration of trust that A made when he assured B that he held Blackacre on trust for her. The fact that A’s declaration of trust might have been made orally is not a problem. While s 53(1)(b) of the Law of Property Act 1925 says that declarations of trust over land must be evidenced in writing if they are to be admissible in court, a defendant will not be allowed to rely on his provision to prevent the claimant entering into court evidence of an oral declaration of trust if doing so would allow the defendant to defraud the claimant in some way. Swadling’s argument is, on the whole, convincing though one slight weakness in it is that a claimant who has relied on assurances that land is held on trust for her may end up, depending on the extent of her reliance, getting less of an interest in the land than she was told she had. See, for example, Eves v Eves (1975), where the claimant moved in with her boyfriend and he told her the house he owned was as much hers as his; but the Court of Appeal ended up holding that the boyfriend only held one quarter of the house on trust for her.
Let’s now look at the situations in which the law will hold someone liable as a ‘constructive trustee’ and try to make sense of what the courts mean when they use that phrase.
We can begin by making it clear that we should not equate holding property on a constructive trust for someone else with being a constructive trustee. The two concepts are entirely distinct. The question of what the duties are of someone who does hold property on a constructive trust for someone – assuming that by ‘constructive’ we mean ‘real, and imposed by law’ and not ‘fictional’ – is a very difficult one. For example, if A contracts to sell his house to B, it is clear that he does not owe B all of the duties that a trustee would normally owe his beneficiary (such as a duty carefully to invest it, or a duty not to make a gain for himself from the way he manages the trust property): see Englewood Properties Ltd v Patel (2005). Saying that someone who holds property on a constructive trust for someone else is a constructive trustee will just obscure that point.
There are two basic situations where someone will be held liable as a ‘constructive trustee’:
(1) Dishonest assistance
If A dishonestly assists B to commit a breach of trust, A will be held liable for the losses arising from the breach of that trust as a ‘constructive trustee’. It is clear that the word ‘constructive’ is being used here in its fictional sense. A is not being held liable because he really was a trustee, who has committed a breach of trust. He is being held liable as though he were a trustee of the trust of which B was a trustee, and is accordingly held liable for the losses suffered by the trust as a result of B’s breach of trust. It is for this reason that Lord Millett said in Dubai Aluminium Ltd v Salaam (2003) (at -) that someone who is held liable for dishonestly assisting a breach of trust:
‘is traditionally (and…unfortunately) described as a “constructive trustee” and is said to be “liable to account as a constructive trustee”. But he is not in fact a trustee at all, even though he may be liable to account as if he were. He never claims to assume the position of trustee on behalf of others, and he may be liable without ever receiving or handling the trust property… I think that we should now discard the words “accountable as constructive trustee” in this context and substitute the words “accountable in equity”.’
(2) Unconscionable/knowing receipt of trust property disposed of in breach of trust
While Lord Millett’s words undoubtedly apply to the first case – of dishonest assistance – where someone will be held liable ‘as a constructive trustee’ there is no doubt that he also meant his words also to apply to the situation where A receives £1,000 in trust funds that have been given to him in breach of trust, and A acts unconscionably in accepting those funds or retaining them while they are still in his hands. This is the second situation – that of ‘unconscionable receipt’ (previously known as ‘knowing receipt’) – where someone will be held liable as a ‘constructive trustee’.
To sharpen up our consideration of this situation, let’s make it more concrete. C holds £100,000 on trust for B. C then gives his girlfriend, A, £1,000 out of those trust funds as a birthday present. A has no idea that the money she is receiving is held on trust, and subsequently spends £250 of that £1,000 on dinner with her best friend in a quality restaurant. At that point, she learns that the money she received was held on trust for B. She doesn’t care: she goes on to spend the rest of the money on a luxury spa weekend at a hotel. In this situation, A will be held liable for £750 as a ‘constructive trustee’ on the basis that she was in ‘unconscionable’ or ‘knowing’ receipt of trust funds disposed of in breach of trust.
Now – Lord Millett and many other commentators would argue that A is not being held liable because she is really a trustee. Instead, they see liability for ‘unconscionable’ or ‘knowing’ receipt as being a bastard cousin of liability in unjust enrichment. The idea is that when A receives the £1,000 that was held on trust for B, she is unjustly enriched at B’s expense. As such, she should be held strictly liable to hand over the value of that money to B, though if she innocently dissipates some or all of the value represented by that money she will be entitled to a defence of change of position that will cut down her liability to the value that remained in her hands at the time she was no longer innocently in receipt of that value. Equity reaches the same result, but by a different route. Instead of making A strictly liable for the value of B’s money, subject to a defence of change of position, A is not held liable at all until she becomes aware that the money in her hands is B’s money, at which point she is held liable for the value of the remaining money in her hands.
One problem with this explanation of liability for unconscionable/knowing receipt is this: How can we say that A is unjustly enriched simply because she has got B’s money in her hands? We don’t say that someone who holds money on trust for someone else is enriched as a result – in fact being a trustee can be a real downer. And we don’t say that a thief who has stolen a bag of coins is enriched as a result, because he is liable to have those coins taken away if he is tracked down by the owner. So why should we say that a recipient of trust funds is enriched?
A more satisfying explanation of A’s liability for unconscionable/knowing receipt is suggested by Charles Mitchell and Stephen Watterson in their paper ‘Remedies for knowing receipt’ (in Mitchell (ed), Constructive and Resulting Trusts (2010)). (See also Peter Jaffey’s earlier paper, ‘The nature of knowing receipt’ (2001) 3 Trusts Law International 151.) They argue that when A is held liable as a ‘constructive trustee’, A is held liable because: (1) she really was a trustee of the £1,000 that she received from C; (2) after she had spent £250 of that £1,000, she knew enough about where the trust funds remaining in her hands to make it fair for the law to impose on her all the duties of a normal trustee, including a duty to preserve the trust funds in her hands; (3) she breached that duty when she spent the remaining £750 on a spa weekend; therefore (4) she is held liable for the loss suffered by B as a result of A’s breach of duty – that is, £750.
Seen in this way, liability for unconscionable/knowing receipt is not restitutionary at all, but compensatory. And someone who is held liable for unconscionable/knowing receipt is not held liable as though they were a trustee, but is held liable because they really were a trustee (albeit a trustee who has had all the duties of a normal trustee imposed on them, rather than having agreed to assume those duties).
But does the argument stand up? None of the steps in the argument seem to be flawed. On (1), A was obviously held the £1,000 that C gave her on trust for B, because she was not a bona fide purchaser of that money. But at the time she received the money, it would have been unfair to impose on her all the duties of someone who has agreed to be a trustee as those duties are very onerous. That changed when, after she spent £250 of the money she received from C, she discovered that that money was held on trust for B. At that point, she had a choice. She could have given the money back to B. But instead she chose to retain it. As a result, she became what is known as a trustee de son tort (or what Lord Millett in Dubai Aluminium Co Ltd v Salaam (2003) would prefer to call (at  a ‘de facto’ trustee ) and was, in Lord Millett’s words, ‘treated in every respect as if [she] had been duly appointed.’ So (2) is made out. Once (2) is made out, steps (3) and (4) in the argument inevitably follow.
Against this, Bill Swadling sniffs (in his essay on ‘The fiction of the constructive trust’ at n 79) that: ‘there is little in the way of authority cited for [Mitchell and Watterson’s argument], just a few Australian cases and unchallenged assumptions in some English cases. No case is cited in which the point was argued and decided in favour of their view.’ This does not seem to be a very strong objection to Mitchell and Watterson’s view: legal argument would not progress very far or very fast if a lack of express authority in favour of an argument counted against its being accepted.
Our survey of the law on constructive trusts and constructive trustees indicates that not all constructive trusts are the same, and not all liabilities to account as a constructive trustee are the same. Some constructive trusts are real and imposed by the law. But others don’t really exist – we just say that property is held on a constructive trust to allow the owner of that property to take advantage of the equitable tracing rules. Someone who dishonestly assists someone else to commit a breach of trust is not really a trustee, but is held liable as though he were. Someone who is held liable for being in unconscionable or knowing receipt of trust assets is held liable because she really was a trustee, and her state of knowledge meant that the law imposed on her all the duties of a trustee, including a duty to preserve the trust assets in her hands.
What is it?
In Twinsectra v Yardley (2002), Lord Millett said:
‘Money advanced by way of loan normally becomes the property of the borrower. He is free to apply the money as he chooses, and…the lender takes the risk of the borrower’s insolvency. But it is well established that a loan to a borrower for a specific purpose where the borrower is not free to apply the money for any other purpose gives rise to fiduciary obligations on the part of the borrower which a court of equity will enforce… Such arrangements are commonly described as creating “a Quistclose trust”, after the well known decision of the House [of Lords] in [Barclays Bank Ltd v Quistclose Investments Ltd (1970)]…’
So when we talk about a ‘Quistclose trust’ we are primarily talking about the trust that arises when A lends money to B making it clear that that money is only to be used for a specific purpose. B will then hold that money on trust – a Quistclose trust. There are two points of dispute about this type of trust:
What sort of trust is it?
As the money handed over to B is only to be used for a particular purpose, we might naturally think that the trust that B holds the money on is a non-charitable purpose trust, under which B is required to use the money for the purpose for which he was given it. Early on in the development of the Quistclose trust, there were a couple of factors that would have weighed in favour of this analysis being the correct one:
(1) In Barclays Bank Ltd v Quistclose Investments Ltd (1970) itself, A lent money to B for the express purpose of paying a dividend to B’s shareholders. The money was paid into a bank account with C, B’s bank. Before the dividend was paid, B went bust, and C (to whom B owed a lot of money) sought to use the money in the bank account to pay off B’s debts to it. A argued that C was not entitled to do that; and the money in the bank account was held on trust for it. The House of Lords agreed. But they held that the money in the bank account had in fact been subject to two trusts. The first trust – which is the trust we commonly talk about when we talk about a ‘Quistclose trust’ – had arisen when A lent the money to B. The second trust – under which B held the money in its bank account on trust for A – arose when B went bust. So we have here a situation where money is handed over to B, is held on a valid trust, and then something happens to collapse that trust, and in its place arises a trust back to the person from whom the money was received. If the first trust that B held the money on was a non-charitable purpose trust, then this sequence of events would make sense. B gets the money, holds it on a non-charitable purpose trust, B’s going bust make the purpose of the trust impossible to fulfil, so that trust collapses, and in its place we have a resulting trust back to the person who set up the trust in the first place. If the first trust that B held the money on was a fixed trust for a particular beneficiary, then this first trust could only have collapsed if it was made clear at the time B accepted the money from A that, ‘You are to hold this money on trust for [whoever], but if you go bust you are then to hold on trust for us.’ But that was never made clear in Barclays Bank v Quistclose Investments; if it had been, the case would probably never have gone to court.
(2) In Carreras Rothman v Freeman Matthews Treasure (1985) – a case where A paid money to B to be used solely for the purpose of paying off debts that A owed to C, various newspapers and periodicals that had carried advertisements for A’s products – Peter Gibson J held that the money paid by A to B was held on a Quistclose trust, and that: (i) the beneficial interest in the trust money was ‘in suspense’; and (ii) C was entitled, under this trust, to compel B to use the trust money to pay off the debts that A owed C. The only way we can make legal sense of this is if Peter Gibson J thought that the money paid by A to B was held on a non-charitable purpose trust to pay off A’s debts to B. If the money paid by A to B were held on trust for C, then C would have a beneficial interest in the money: but Peter Gibson J said that the beneficial interest was ‘in suspense’. The only kind of trust which allows us to say that no one has a beneficial interest in the trust property is a purpose trust.
However, there are formidable difficulties in the way of saying that the Quistclose trust is a non-charitable purpose trust:
(1) There is, first, the authority of Re Endacott (1960), which expressly ruled out the possibility of creating any more exceptions to the rule against non-charitable purpose trusts other than the anomalous exceptions of trusts for the saying of masses for one’s soul, funerary monuments, and identifiable animals. (All these non-charitable purpose trusts owe their validity to the fact that people would not stop making provision for these purposes in their wills, even if they were told that the provisions were invalid. After all, if you think you are going to die, you will want to leave some money aside for masses to be said for your soul (if you believe in Heaven, and more importantly, Hell), for a gravestone so you won’t be forgotten, and for your pets to be looked after, after you die. This accounts for why these anomalous exceptions to the rule against non-charitable purpose trusts are explained away as ‘concessions to human nature’.)
(2) Even if we concede that there may have been some moves at the end of the 1960s to relax the rule against non-charitable purpose trusts (cf. Goff J’s judgment in Re Denley (1969), and Lord Cross of Chelsea’s judgment in Dingle v Turner (1972)), if in Barclays Bank v Quistclose Investments the House of Lords had meant to recognise a new category of non-charitable purpose trust, it would have gone way beyond anything that has been suggested before or since by way of relaxing the rule against non-charitable purpose trusts. As B’s going bust brought the primary trust in Quistclose to an end, if that primary trust was a non-charitable purpose trust, we would have to suppose that the purpose of the trust was to keep B solvent, or to give people the impression that B was solvent. It is very hard to imagine that the House of Lords was intending in Quistclose to say that a trust for such a purpose could be valid.
But if the Quistclose trust is not a non-charitable purpose trust then what is it? Lord Millett’s analysis, advanced in Twinsectra v Yardley, is that when A lends money to B making it clear that the money is only to be used for a specific purpose, then B holds that money on trust for A, subject to a power or permission to use that money for the purpose for which he has been lent it by A. On this view, the House of Lords was wrong to think that the money in Barclays Bank v Quistclose Investments was held on two successive trusts. There was only one trust all along – a trust back to A, subject to a power in B to use that money to pay a dividend to its shareholders.
Lord Millett’s analysis gives rise to a further point of dispute:
How does it arise?
In his judgment in Twinsectra, Lord Millett seemed to be undecided as to whether a Quistclose trust arises because that is what the parties intended (that is, B holds on trust for A subject to a power to use the money for the purpose for which it was lent because A and B agreed that B should hold the money on trust for A) or because such a trust arises as a matter of law when A lends money to B but specifies that the money is only to be used for a specific purpose. At one point he said:
‘the Quistclose trust is a simple commercial arrangement akin…to a retention of title clause (though with a different object) which enables the borrower to have recourse to the lender’s money for a particular purpose without entrenching on the lender’s property rights more than necessary to enable the purpose to be achieved. The money remains the property of the lender unless and until it is applied in accordance with his directions, and insofar as it is not applied it must be returned to him.’
This seems to suggest that the Quistclose trust is something that arises because it was intended to arise by A and B when A lent B the money. However, later on his judgment, Lord Millett said:
‘a resulting trust arises whenever there is a transfer of property in circumstances in which the transferor…did not intend to benefit the recipient. It responds to the absence of an intention on the part of the transferor to pass the entire beneficial interest, not to a positive intention to retain it… An analysis of the Quistclose trust as a resulting trust for the transferor with a mandate to the transferee to apply the money for the stated purpose sits comfortably with [this] thesis…’
This seems to suggest that the Quistclose trust arises as a matter of law: when A lent B money specifying that it could only be used for a particular purpose, it is is clear that he did not intend that money to benefit B, and given this, the money must have been held on resulting trust for A (subject to permission to apply the money for the purpose for which it was lent).
Let us consider both possibilities:
(1) Express trust. The possibility of analysing the Quistclose trust as arising because it is intended to arise by A and B when A lends money to B to be used for a specific purpose is criticised by Bill Swadling in his essay ‘Orthodoxy’ (in Swadling (ed), The Quistclose Trust: Critical Essays (2004)). He points out that in Barclays Bank v Quistclose Investments Ltd itself there was no real evidence that A and B intended that the money lent by A to B should be held on trust for A. Moreover, the facts that: (i) the relationship between A and B was one of creditor-debtor; (ii) B was under no duty to keep the money lent by A to B separate from his other assets; and (iii) B was under no duty to act loyally in A’s best interests in dealing with the money lent to him by B, would all normally count against our finding that A and B intended that the money lent by A to B was to be held on trust for A.
(2) Trust arising as matter of law. The difficulty with analysing the Quistclose trust as arising under a rule of law that if A transfers property to B and does not intend that property to be enjoyed beneficially by B, then B will hold that property on a resulting trust for A is that it is questionable whether such a rule exists in English law. (For further discussion of this issue, see the post on ‘Resulting Trusts’ elsewhere on this website.) Proponents of such a rule argue that finding that B holds on resulting trust for A is necessary to prevent B being unjustly enriched. It’s doubtful whether this is true, but as Bill Swadling points out in his ‘Orthodoxy’ essay it is certain that this argument cannot work to justify a resulting trust arising in a Quistclose situation as B is in any case under a liability to repay the money he has received from A.
So neither of Lord Millett’s suggestions as to how the Quistclose trust (if analysed as a resulting trust, whereby B holds on trust for A subject to a power or permission to apply the money received from A for the purpose for which it was lent) might be explained as arising seem to work. My Suggestion is that we can explain the Quistclose trust as arising in the following way. When A lends B the money, he intends that B should hold that money on a purpose trust, to apply the money for the purpose for which A lent it to B. This purpose trust – not being charitable in nature – is invalid. So the money which A has lent B is intended to be held on a trust that fails ab initio (from the start, from the moment the money is handed over). As a result, B holds the money on trust for A, in the same way as happens all the time when someone transfers money to another to be held on a trust that fails. So when A lends B the money, intending that B hold the money on a purpose trust, B ends up immediately holding that money on trust for A. But as A is (for the time being) happy for B to use the money for the purpose for which he lent it to B, B will be allowed to use that money for that purpose even though he technically holds the money on trust for A. So we end up with agreeing with Lord Millett that when A lends B money to be used for a specific purpose, B will hold that money on trust for A subject to a power (or permission) to use that money for that purpose. But that trust does not arise because it was intended to arise, or because there is some rule that a resulting trust will arise whenever A transfers money to B and does not intend that B should enjoy that money beneficially. Instead, the trust arises because when A transferred the money to B he intended that it be held on a purpose trust that was invalid because non-charitable and it is the invalidity of that trust that gives rise to the resulting trust.
My Suggestion allows us to provide a satisfactory analysis of a situation that Peter Birks made very heavy weather of in his essay on ‘Retrieving tied money’ in the Swadling volume on the Quistclose trust. This is the situation:
‘An announcement is made that a new road has been approved. The map shows the line running straight through a thriving neighbourhood. A local councillor assumes the leadership of the campaign to prevent this disaster. All the residents give generously in response to his appeal for funds “to fight the road”. Six months later, when only one tenth of the fund has been spent, two things happen. First, the proposal for the road is withdrawn. Second, the councillor’s family business collapses, leaving many unpaid creditors. £300,000 at the moment stands in the account which he had opened to hold the campaign funds. He accepts that he owes that £300,000 to the subscribers… He is anxious to repay. His unsecured creditors maintain that the subscribers must stand in the queue waiting to receive, pari passu with themselves, whatever is left when the secured creditors have been paid off.’
Birks wants to argue that the money in the account is held on trust for the subscribers, but finds it difficult to distinguish the case from one where A pays B for goods that aren’t supplied, and the money that A paid B is still traceably in B’s hands. My Suggestion makes it easy.
When the subscribers donate money to fight the proposed new road, they intend that the councillor will hold the money on a purpose trust, under which he will be required to use the money for fighting the road proposal. However, this purpose trust is invalid. It cannot be charitable as it is political. And it obviously does not fall within any of the anomalous exceptions to the rule against non-charitable purpose trusts. So as soon as a subscriber donated money to the campaign, it was held on a resulting trust for him by the councillor. But the subscribers were happy for the councillor to use the money for the purpose of fighting the road, and so the councillor had a power (or permission) to use the money that he held on trust for the subscribers for that purpose. Now that the threat to build the road has gone away, that power has vanished, and the councillor simply holds the money on resulting trust for the subscribers.
There is no comparison with the case where A pays B money for goods that are never supplied. When A pays the money he has no intention that B hold the money on a purpose trust, and so My Suggestion does not apply. The only basis for finding that B holds the money on a resulting trust for A here would be if A and B positively intended that B should hold that money on trust for A until A got his goods, as in Re Kayford (1975).