The Effective Creation Of A Trust Law Equity Essay

Published Date: 02 Nov 2017

Regarding the first aspect of the effective creation of a trust, there must be certainty; Sophie must have intended to impose a binding obligation on her chosen trustees [11] . Secondly, the subject matter, of ‘the property must be clearly defined, or capable of ascertainment’ [12] , and a trust only exists if the legal and equitable ownership of the property is separated [13] . The certainty of objects is only valid if the trust exists for the benefit of identified legal persons ‘who possess the locus standi to enforce the trust obligations and for whom the property is held’ [14] .

Referring to the cottage in Dorset, Sophie has validly declared a trust, as she has avowed her intention to create a trust [15] , there is certainty of subject matter [16] and objects [17] ; being Phillip for life and remainder for Anna and Ben. However, Sophie has not complied with the statutory formalities regarding land [18] ; a purported oral declaration of a trust of land is not void but unenforceable [19] ; and will be classified as an incompletely constituted trust [20] . In the present scenario, Philip is a volunteer, as he has not provided valuable consideration in return for Sophie’s promise to create a trust [21] ; equity will not be compelled to constitute the trust [22] . This limitation prevented the enforcement of a trust in Re Cook’s Settlement Trusts [23] and Re Plumptre’s Marriage Settlement [24] .

In limited circumstances, where a transferor has failed to vest legal title in the beneficiary, ‘equity is prepared to assist a volunteer’ [25] , however Philip’s situation does not classify under a donatio mortis causa [26] , or the rule in Strong v. Bird [27] . Phillip is thus advised to seek common law remedies and recover damages for the failure to constitute the trust [28] . Under the general principles of the law of contract [29] , Philip has not provided consideration [30] thus will not be entitled to such remedy. At common law, if the promise to create a trust was contained in the form of a covenant [31] , it will be enforceable [32] . However, Phillip’s situation is precarious as he has no privity of contract to sue the beneficiary having not been a party to Sophie’s covenant [33] ; therefore the ruling under Cannon v. Hartley will not apply [34] .

Following the decisions of Re Pryce [35] and Re Kay’s Settlement Trusts [36] , with the exception of Re Cavendish Browne [37] it has been established that ‘a trustee who is party to the settlor’s covenant will not be directed to take proceedings to enforce the covenant’ [38] .The rationale for these decisions is to prevent trustees to indirectly assist volunteers who are not entitled to the assistance of equity [39] . In addition, a covenantee is only entitled to recover damages for loss incurred personally [40] , as the trustee obtains no personal gain from a trust, the loss suffered is minimal thus only nominal damages will be recovered from the settlor [41] . Lee maintains that if a trustee is entitled to substantial damages, he would be holding them on a resulting trust for the settlor [42] .

It is however possible for Tebbs and Tomlin to show to hold the benefit of the covenant on trust for Phillip, whereupon they will sue in their own right as the beneficiaries of a completely constituted trust of the covenant [43] , ‘and the trustees can either join their action as co-plaintiffs or be joined as co-defendants’ [44] . The covenant, as a chose in action, will form the subject matter of the trust, and will be held to constitute a complete trust, as no particular formalities are required to vest title to a chose in action in the trustees or beneficiaries [45] . However, the recent cases of Vandepitte v. Preferred Accident Insurance [46] and Re Schebsman [47] show that such a situation will not be implied merely from the fact that a promise has been made between two parties for the benefit of a third.

Alternatively Philip is advised to argue under statutory law of The Contracts (Rights of Third Parties) Act 1999. A third party can enforce a term of a contract if it expressly provides that he may, or if it purports to confer a benefit on him [48] , such as in the present scenario [49] . Although Section 5 states that ‘there shall be available to the third party any remedy’, Andrews maintains that this does not allow a beneficiary to obtain specific performance, as the rule that equity will not assist a volunteer has not been abrogated [50] . It follows that since the volunteer-non covenantee is now treated as though he is a party to the covenant, his status remains a volunteer and as such he will not gain any equitable assistance [51] .

The damages recovered will be compensation for the fact that no trust was created; it is not a means by which a trust can be constituted [52] .

Regarding the matter of the shares, Sophie has avowed her intention to create a trust for Anna; however the property may not be sufficiently identifiable [53] . Following the orthodox approach of Re London Wine [54] , this would require separate appropriation of the intangible property [55] , as this has not presently occurred; the transfer will be rendered void [56] . However, if the Court were to follow Hunter v. Moss [57] , ordinary shares may constitute sufficient subject matter as their properties are not qualitatively different [58] . Hayton maintains the approach of Hunter v. Moss ensures ‘equity goes out of its way to assist a volunteer to perfect an imperfect gift of intangibles’ [59] . Traditionally, it was held possible to assign shares to the subjects as tenants in common, as it precisely identifies which identical shares each individual holds [60] . Under the principle of Hunter, Hayton argues the settlor would not have divested himself of any beneficial interest, because the specified quantity has not been appropriated [61] . Despite this, the methodology of Hunter was followed in Re Harvard Securities [62] , following such approach would ensure Sophie has validly declared a trust [63] .

In order to transfer the shares to Tebbs and Tomlin, a trust of personalty need not be in writing [64] , and Sophie has successfully transferred the legal title in the shares to the transferee, and registered with the company [65] . Having failed to initially declare the beneficiary, it follows that as equity abhors a vaccum, the property reverts automatically to the previous owner on resulting trust [66] . This is illustrated by Re Keen [67] , and follows in line with the beneficiary principle [68] . Therefore, the disposition must adhere to the statutory formalities [69] . Green provides reasoning to the formality requirements [70] . The scope of the term ‘disposition’ was given its natural meaning in Grey v. IRC [71] , the oral direction is a disposition and was void to transfer the equitable interests in the shares; subsequently liable for ad valorem [72] stamp duty. Thus following this presumption the property will vest in Julian.

However, Sophie may have effectively validated a trust following the reasoning of Vandervell v. IRC (No 2) [73] ; Lord Denning held that a resulting trust is created for the settlor ‘and dies without any writing’; as soon as the gap is filled by a valid trust the resulting trust comes to an end [74] . He also based the decision on estoppel, ‘even if they had not been declared, the executors would have been estopped from asserting their interest in the shares’ [75] . Lawton LJ took the view that the declaration of the trust of the shares in favour of the children had the effect of extinguishing Vandervell’s interest under the resulting trust of the option; extinction is not a disposition, therefore no writing is required [76] . Battersby notes that this principle is limited to a case where the extinction of the equitable interest arises under a resulting trust where the act is done by a third party, not the person who enjoys the interest [77] . Anna will therefore be entitled to the shares under this approach. However, Hudson maintains, regarding estoppel, ‘Lord Denning was eager to find a ‘just’ solution to the practical problems of ending the Vandervell litigation’ [78] .

The formality requirements of s.53(1) have no application to resulting or constructive trusts [79] . Such can be seen with Oughtred v. IRC [80] and Neville v. Wilson [81] ; however this only applies to oral contracts which are specifically enforceable, where the subject matter of the contract is unique because no market substitutes exist [82] . In Oughtred, the contract was specifically enforceable because the shares were in a private company and were not freely available in the market [83] .

Regarding the cheque, it is argued that Sophie has provided sufficient intention to create a trust [84] , there is valid subject matter [85] and objects; being Ben [86] . As this is a declaration of a new trust and personalty, it need not be in writing [87] . However, the cheque has not been endorsed to Ben [88] . A mere physical delivery to the intended trustee will not constitute the trust [89] . In addition, following the principle of Milroy v. Lord [90] , and Re Rose [91] , Sophie has not sufficiently transferred the legal title to Tebbs and Tomlin; therefore the cheque will be incompletely constituted [92] .

It may however be possible for Ben to enforce the cheque using the principle of Strong v. Bird [93] . Although the case concerned debt, the developed rule extends the principle to gifts, and establishes that the gift is perfect because the done receives legal title to the entire donor’s property in his capacity as executor [94] . This option, however, can only be exercised if there is both immediate [95] and continuing intention [96] to make an inter vivos gift [97] ; which has arguably occurred in the present scenario. It is noted that the rule is extended to administrators following Re James [98] , which has subsequently been criticised by Walton J in Re Gonin [99] ; as administrators are not appointed by the deceased but qualify by ‘pure chance’ [100] . However, it follows that a cheque is a ‘revocable order to the bank to pay the person in whose favour the cheque is drawn’ [101] . On the death of the donor, the mandate is automatically terminated [102] , and it follows that ‘a cheque which remains uncashed at the date of death of the drawer will be incapable of passing title to the money instructed to be transferred’ [103] . Such can be seen in Re Gonin [104] . If the bank has not been notified of Sophie’s death Ben is advised to immediately hand in the cheque and the transfer becomes complete [105] .

Sophie’s intention of giving Jane the diamond bracelet constitutes a donation causa mortis [106] , providing a ‘genuine exception to the principle that equity will not assist a volunteer’ [107] . In order to attain the diamond bracelet, Jane must satisfy the formalities found in Cain v. Moon [108] and Re Craven [109] . Regarding the first criteria, ‘there will be no valid donatio unless the donor only intended the gift to take effect in the event of his death’ [110] . There must be a clear contemplation of death [111] , within the immediate future [112] . A valid donatio will exist even if the precise cause of death is different [113] . The donor must have ‘delivered to the donee either the subject matter of the gift or the means or part of the means by which the subject matter can be obtained’ [114] , formalities are not needed [115] . Sophie’s donatio is argued to procure through symbolic delivery, provided she disposes of her retention to the ‘power of dealing with the property’ [116] ; such can be seen in Re Lillingston [117] and Woodard v. Woodard [118] . An additional criteria is argued to exist regarding the subject matter constituting the gift [119] , following the decision of Sen v. Headley [120] it is suggested that all types of property including land and shares are capable of being subject matter of a death bed gift [121] . Upon the death of Jane, the gift becomes unconditional, despite the donor’s failure to make an effective transfer, because ‘equity will act to compel the executors or administrators to perfect the donee’s imperfect title’ [122] . The consequence is that the donee under a donatio causa mortis ‘takes the asset in preference to beneficiaries under the will or intestacy [123] .

Blibliography

Table of Cases

Cain v. Moon [1896] 2 QB 283

Cannon v. Hartley [1949] Ch 213, HC

Donaldson v. Donaldson (1854) Kay 711

Fletcher v. Fletcher (1844) 4 Hare 67

Gardner v. Rowe (1828) 5 Russ 258;

Gissing v. Gissing [1969] 2 Ch 85

Grey v. IRC [1960] AC 1

Hunter v Moss [1994] 1 W.L.R. 452

Jones v Lock (1865) 1 Ch App 25

Knight v. Knight (1840) 3 Beav. 148

Mac-Jordan Construction Ltd v. Brookmount. Erostin Ltd (in receivership) [1992] BCLC 350 (CA)

Milroy v. Lord (1862) 31 LJ Ch 798

Morice v. Bishop of Durham (1805) 9 Ves Jun 401

Neville v. Wilson [1997] Ch 144

Oughtred v. IRC [1960] AC 206, HL

Palmer v. Simmonds [1854] 2 Drew 221

Re Cavendish Browne [1916]

Re Cheadle [1900] 2 Ch 620

Re Clifford [1912] 1 Ch 29

Re Cook's Settlement Trust [1965] Ch 902, HC

Re Craven's Estate (No 1) [1937] Ch 423

Re D’Angibau (1880) LR 15 Ch D 228

Re Denly [1969] 1 Ch 373

Re Freeland [1952] Ch. 110

Re Gonin [1979] Ch. 16

Re Harvard Securities [1997] 2 BCLC 369

Re James [1935] 1 Ch 449

Re Kay’s Settlement Trusts [1939] Ch 329

Re Keen [1937] 1 All ER 452

Re London Wine Co [1986] PCC 121

Re Lillingston [1980] 2 All ER 184,

Re Plumptre’s Marriage Settlement [1910] 1 Ch 609

Re Pryce [1917] 1 Ch 234,

Re Rose [1952] EWCA Civ 4

Re Schebsman [1944] Ch 83

Re Wale [1956] 1 W.L.R. 1346

Richards v Delbridge (1874) LR 18 Eq 11

Smallacombe v.Elder’s Trustee & Executor Co Ltd [1963]WAR 3

Sen v. Headley [1991] Ch 425

Strong v. Bird (1874) LR 18 Eq 315

Thompson v. Mechan [1958] OR 357

Vandepitte v. Preferred Accident Insurance [1933] AC 70

Vandervell v. IRC (No 2) [1974] Ch 269

Westdeutsche Landesbank Girozentrale v. Islington London Borough Council [1996] 2 All ER 961, HL

Wilkes v Allington [1931] 2 Ch 104

Woodar Investment Developments Ltd v. Wimpey Construction UK Ltd [1980] 1 WLR 277

Woodard v. Woodard [1991] Fam Law 470

Textbooks

Burn ‘Trusts & Trustees’ (7th edn, Oxford University Press 2008) p.85

Clements ‘Equity and Trusts’ (2nd edn, Oxford University Press,2011)

Hepburn, ‘Principles of Equity and Trusts’ (2nd edn, Cavendish Publishing Limited, 2001) p.70

Hudson ‘Equity and Trusts’ (6th edn, Routledge-Cavendish, 2009)

Hudson ‘Understanding Equity and Trusts’ (4th edn, Routledge-Cavendish, 2012)

McKendrick ‘Contract Law’ (9th edn, Palgrave Macmillan, 2011) p.2

Oakley, ‘The Modern Law of Trusts’ (9th edn, Sweet & Maxwell Ltd, 2008)

Panesar, ‘Exploring Equity and Trusts’ (2nd edn, Pearson Education Limited, 2012)

Pearce ‘The Law of Trusts and Equitable Obligations’ (5th edn, Oxford University Press, 2010)

Penner, ‘Law of Trusts’ (8th edn, Oxford University Press, 2012)

Ramjohn ‘Text, Cases and Materials on Equity and Trusts’ (4th edn, Routledge-Cavendish, 2008)

Underhill, ‘Law of Trusts and Trustees’ (14th edn, London:Butterworths, 1987)

Statutes

Companies Act 2006

Contract (Rights of Third Parties) Act 1999

Finance Act 1910

Law of Property Act 1925

Law of Property (Miscellaneous Provisions) Act 1989

Stock Transfer Act 1963

Wills Act 1837

List of Journals

Andrews, ‘Strangers of Justice No Longer: The Reversal of the Privity Rule under the Contracts (Rights of Third Parties) Act 1999’ (2001) 60 CLJ 353-381

Green, ‘Grey, Oughtred and Vandervell: A Contextual Reappraisal’ (1984) 47 MLR 385-421

Goode, ‘Ownership and Obligation in Commercial Transactions’, (1987) 103, LQR 433-460, 451-2

Hayton, ‘Uncertainty of Subject-Matter of Trusts’ (1994) 7 LQR 335-339

Lee, ‘Public Policy of Re Cook’s Settlement Trusts’ (1969) 85 LQR 213-219

children’s settlement should exercise the option with its own

monies. But even if V.’s encouragement of V.T.’s actions for and on

behalf of the children’s settlement was theoretically ’capable of

grounding an estoppel despite V.’s lack of knowledge of his true

rights at all material times, it is impossible to see how the comparatively

trivial estoppel thereby entailed could conceivably justify the

children’s settlement’s retention of over ff million. Under normal

conditions it would require deeply unconscientious behaviour by a

representor, which had induced an extremely substantial (if not

wholly proportionate) irreversible act of detriment on the part of a

representee to raise an equity of that extent.

Yet when one searches for the villain in V., one finds an innocent.

As for substantial detriment, there was no evidence whatsoever that

the children’s settlement had changed its position at all in the face

of V.’s encouragement, beyond expending f5,000 in exercise of the

option in the first place. The f770,000 dividends had simply been

credited to the children’s settlement’s account, none of it had been

distributed, let alone dissipated, on an assumption that V.T. was

entitled to deal with it as part of the children’s fund.’65 Nor does it

even appear that the mechanism of estoppel was, on the facts,

necessary to do justice to the objects of the children’s settlement at

all. The f5,OOO could easily have been ordered to be repaid (with

interest) by V.’s executors as a condition of the payment over of the

dividends (with interest) to them.’66

The only party to the second phase transactions who had actually\

p.420 B.Green