The Three Certainties And The Human Beneficiary Principle

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Constitution of trusts (1)

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A trust must be completely constituted. Can set up a trust in one of two ways: either the settlor can declare himself trustee of certain property for certain persons or purposes; or the settlor can appoint someone else to act as trustee.

First situation- requires that the property is available to the settlor or trustee and that they have made a declaration of trust.

Second- requires that the settlor effectively transfers the property to the trustee and again makes a declaration of trust.

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Declaration of trusts: substantive requirements (2)

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Express trusts- has to be a declaration of trust- can be implied from words or conduct.

Two aspects: substantive requirements- must indicate the substance of the trust- where there is a trust, what property is subject to that trust and who or what the trust is for. Trust will not be valid unless the declaration is clear on these.

Must be certainty of intention/words; subject matter and objects.

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Formalities (3)

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Usually mean some form of writing.

Where the settlor is using the second method of constitution (someone else as trustee) the trust property must be transferred to that trustee and depending on the nature of the trust property it might require certain formalities- i.e. specific documentation.

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The three certainties (4)

a. Certainty of words or intention

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Three certainties must be satisfied in order for there to be a valid express private trust- Knight v Knight.

a. Generally, courts have disregarded a general intention- need to be satisfied the settlor had a particular intention to benefit in a particular way. Settlor must make it clear from their conduct or words that they intended to create a trust- most cases this involves looking at the wording of the trust instrument to see if they can be construed as imposing the required degree of obligation on the trustees.

Do not have to use technical words- trust can be created without using the word 'trust'- Burrough v Philcox

The use of the word trust does not conclusively indicate a trust is being created- i.e. Re Hays- used 'trust' but merely created a POA.

Precatory words are not sufficient to create a trust- Re Adams and Kensington Vestry- BUT a trust will be found on the basis of precatory words if from proper construction of language as a whole it is clear that the testator intended to create a trust.

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The three certainties (4)

a. Certainty of words or intention (2)

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if trust instrument provides for what happens to the property if no selection is made, then creates a mere POA (Re Hays)

Provision for what happens if selection is not made is conclusive that the disposition is a power not a trust. Converse argument does not apply. Just because there is no gift-over in default of selection does not mean that the disposition creates a trust. Court needs further evidence of what the settlor really intended to do (Burrough v Philcox).

What if there is no formal document to look at? Look at all the circumstances- i.e. conduct of parties etc. to establish if the evidence shows that the settlor intended to create a trust.

Paul v Constance- express trust even though C had no idea he was creating a trust- can create an express trust without knowing anything about the legal concept of the trust- court will look at conduct and substance of intention to determine whether or not you can be taken to have intended to create a trust.

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The three certainties (5)

b. Certainty of subject matter

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Don King v Warren: benefit of a non-assignable contract can be the subject matter of a trust.

Only thing that cannot be the subject matter of a trust is non-existent property.

Re Ellenborough: whatever form the property takes it must be specified by the settlor with sufficient certainty as the trustees must know exactly what is and what is not subject to the trust.

Courts have held void purported trusts where the purported property comprises the 'bulk of my estate' or 'all my other houses.'

Sprange v Barnard: 'remaining part of what is left'- court declared the trust void.

'residue of my estate goes to X' - not uncertain as can be calculated by taking the whole estate and deducting specific legacies- so trust not void.

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The three certainties (6)

b. Certainty of subject matter (2)

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Courts managed to resolve apparent uncertainty as to subject matter:

Re Golay's: directed executors to pay the beneficiary a 'reasonable income' - not uncertainty- court could quantify the entitlement.

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The three certainties (7)

b. Certainty of subject matter: part property (3)

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Part property- purported trust property comprises a part of a bulk of property- general- in those circumstances if there has not been any segregation from the purported trust property from the bulk then there can be no trust.

Re London Wine Co: customers could only claim proprietary rights if their particular orders were held on trust- required the particular order to be segregated from the other stock in the cellars- there was no segregation so there was no trust.

Re Goldcorp: three categories of C

(1) could estbalish the exchange had acquired gold that physically matched their order and the order had been segregated- was a trust- client had a proprietary interest in this property

(2) bullion not segregated- could not show the bullion was theirs so no trust or proprietary interest- could only show a contractual entitlement

(3) C had placed an order for maple leaf gold coin which the exchange did not normally carry a large stock- C could not demonstrate the coins which the exchange had actually been bought specifically for him. Coins had not been segregated- not satisfied the requirement of certainty of subject matter so there was no trust.

Both cases involve tangible property. Does the same orthodox principle apply to intangible property? In principle, there is no reason why it shouldn't.

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The three certainties (8)

b. Certainty of subject matter (4)

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MacJordan v Brookmount: court applied orthodox principle to money in a bank account. No segregation so money was not held on trust.

Hunter v Moss: judge said there was a valid trust for the shares and declined to follow London Wine for 2 reasons

(1) by finding a trust he was enforcing the contractual rights of the employer under the employment contract between the parties

(2) made no difference which of the shares was subject to a trust- given that all of the shares were ordinary shares of the same class there was no difference between one share and the other

Seemed to say it was not necessary to segregate the property if the bulk and the trust property is intangible and where each unit is indistinguishable from any other unit.

Re Harvard Securities: distinguished London Wine and Goldcorp as they concerned tangible property and applied Hunter as that concerned intangible property.

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The three certainties (9)

b. Certainty of subject matter (5)

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HOL refused leave to appeal Hunter.

Re Lehman Brothers: not segregated but still held on trust. Outcome was clearly coloured by existence of FSA regulations but shows that the orthodox approach is not absolute.

Parkinson article: debate about trusts of part property is in part misconceived. Obligations of trustees must attach to identifiable property but argues that this is satisfied if two conditions are met:

(1) bulk must be identifiable property

(2) trust obligation must be defined with sufficient clarity so that in the event of a dispute the court can determine how much if any of the bulk is subject to the trust.

Lack of segregation from the bulk reflects the fact that the intended relationship between the company and C was that of debtor and creditor rather than trustee and beneficiary.

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The three certainties (10)

c. Certainty of objects

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Distinguish between trusts for individuals and trusts for purposes. First looking at trusts for individuals.

Emery: objects must be sufficiently certain to enable the trustees, or court, to execute the court in accordance with the settlor's intention- 'the cardinal principle'. Accepted in McPhail v Doulton.

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The three certainties (11)

d. Certainty of objects (2)

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When the trustees come to execute the DT a number of different questions may arise:

(1) What is the meaning of the term relative or dependent?

Problem of conceptual certainty: raises questions about the precision of language used by the settlor.

Conceptual certainty requires that the terms used by the settlor to define the class of beneficiaries must have precise meaning so it is possible to state the criteria which is necessary and sufficient for a person to fulfil in order to be a member of the class. Must be sufficiently precise so it is possible for any given person to say that he/she is or is not a member of the class.

(2) Suppose A, B and C assert they were employed by the company 30 years ago but neither they nor the company have any documentary evidence of this- question- are A, B and C ex-employees of the company?

Problem- evidential certainty- fulfilled when ther eis evidence to prove that a member does fulfil the criteria to be in this class.

(3) X, Y and Z are ex-employees- but cannot be found or may have died- do the trustees have to concern themselves with X, Y and Z?

Problem: ascertainability- uncertainty relates to whereabouts or continued existence of the individuals

(4) definition of beneficiaries is so wide as not to form anything like a class so the trust is unworkable

Problem: administrative unworkability- Re Hay- A DT for all the world except a few may fail on these grounds. Some commentators suggest a trust may be AW where the settlor had given the trustees an impossible tax.

Ex parte West Yorkshire MCC: struck down a trust for AW: class was too larger- 2.5 million people.

Other possible substance of AW- trust is struck down if the cost of administrating it will absorb a disproportionate amount of the funds.

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The three certainties (12)

d. Certainty of objects: relevant or not? (3)

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The three certainties (13)

d. Certainty of objects: fixed trust (4)

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Conceptual certainty: need to be able to draw up a complete list of all the members of the class because if the trust confers a benefit on each and every member of a class the trust is not carried out unless each member has received/been allocated his share.

Complete list? class must be defined in terms precise enough for the trustees to be able to say that for any particular person he/she is or is not in the class.

Re Sayer- conceptual certainty is required for both trusts and POAs and means the same thing.

Re Gulbenkian: courts have shown some flexibility in finding conceptual certainty out of apparent uncertainty.

Fixed trust- each member of the class must be identified.

Fixed trusts need evidential certainty- in order for a complete list to be compiled there needs to be sufficient evidence- if there is evidential uncertainty it is fatal to a fixed trust.

Ascertainability- provided you can draw up a complete list of the persons within the class then the trust will be valid.

Re Gulbenkian: even if cannot locate 2 of the people you can still give an equal share to the other people you can locate and the remaining money would be paid into court- they would keep this money allowing time for the missing people to appear and make the claim- if they do not turn up they can divide the remaining money to the other members of the class.

Administrative workability- seems to have no application here- OT Computers.

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The three certainties (14)

d. Certainty of objects: Burrough DT (5)

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Likely to be a family trust.

Conceptual certainty- If trustees fail to perform their duties then the court will execute such a trust by dividing the trust property amongst all the potential beneficiaries so need a complete list. On the basis of the cardinal principle it would appear that this DT is void if we cannot draw up a complete list.

Seems to be equated with a FT- so conclusions for FT with respect to the 4 aspects will be equally applicable to a Burrough DT.

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The three certainties (15)

d. Certianty of objects: Baden DT (6)

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Broadway Cottages: DT is void for uncertainty unless the whole range of objects capable of selection is ascertainable or ascertained.

Re Gulbenkian: for a DT the trustees have to know the whole class.

HOL decided Broadway Cottages should be overruled- trust is valid if it can be said with certainty that any given individual is or is not a member of the class.

Provided conceptual certainty is satisfied this will usually be sufficient to ensure the validity of such a trust.

Re Gestetner: giving something to everyone or dividing equally is not what the settlor contemplated therefore a complete list is not needed.

New test? requires conceptual and evidential certainty- must be able to say in principle of any given person that he is/is not within the potential class of persons. Evidential questions are answered by reference to usual principles= do not affect validity of a Baden type DT.

Ascertainability- Gulbenkian- HOL seemed to say that problems of ascertainability did not defeat a trust or power.

AW- can invalidate a Baden type DT.

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The three certainties (16)

d. Certainty of objects: POA (7)

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Requires conceptual certainty- same that is required in all types of trust.

Re Gulbenkian- evidential certainty not relevant to Baden type DT so is not relevant to a POA- do not need a complete list.

Megarry in Re Hay: duty to survey cannot be more stringent in the case of a POA than in the case of a trust.

Evidential certainty- irrelevant to validity of a POA.

Baden (no 2): if donee of power invites Cs to make a case then C must establish that they are within the class by producing evidence that they satisfy the relevant criteria.

Ascertainability: Re Gulbenkian: problems of ascertainability will not defeat a POA.

AW- Baden DT may be struck down for AW.

Re Manistry and R Hay: AW was not applicable to POA.

Re Manistry: POA could be held void on the ground that it was capricious- not clear that this is different from AW- essence seems to be that the settlor has attempted to impose on his trustees duties which cannot be exercised sensibly.

Also said that capriciousness had nothing to do with numbers but in the West Yorkshire case this was the precise reason why the court said the trust was unworkable- was too large.

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The three certainties (17)

Summary

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"Cardinal principle" - duties imposed on trustees must be capable of being executed by the trustees, or by default the court. Same degree of conceptual certainty is required in case of all trusts and POA.

Evidential certainty: FT and Burrough type DT- trust will fail unless a complete list can be compiled. Baden type DT and POA- does not affect validity of trust or power- do not need a complete list.

Ascertainability- only applies where the beneficiaries have an entitlement fixed by the settlor- does not render a trust void as the presumptive share o the person whose existence is in doubt can be paid into the court and dealt with at a later date.

AW- only arises where there are difficulties of execution which do not stem from problems of definition or evidence- can only validate a Baden DT although POA may be rendered void by the not dissimilar concept of capriciousness.

What about where the settlor adds some provision to the trust instrument to enable the trustees to resolve any uncertainty by referring the uncertainty to experts or other individuals?

Re Tuck: decision of Chief Rabbi in London was conclusive in the event of a dispute. Settlor is saying that his definition is the same as the Chief Rabbi's- the CR's opinion is not determining the meaning of the settlor's words but merely providing evidence of the settlor's opinion.

Re Tepper: followed Tuck: evidence could be admitted to establish the meaning of terms like the Jewish faith.

Uncertainty as to whether you can specify a third party who can resolve issues of both evidential and conceptual uncertainty.

Contrast with:

Re Leek: "trust for such persons as X may consider to have a moral claim upon me." Description of the class is those people who X believes has a moral claim on me- so X's involvement is pat of the generic description and therefore involves no conceptual uncertainty.

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Purpose trusts and the human beneficiary principle (18)

a. Unenforceablity- the orthodoxy

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Orthodox position- non-charitable purpose trusts (NCPT) are void- Leahy.

Recently, courts have shown they are willing to be more indulgent to NCPTs.

a. Morice: concepts of benevolence and liberality were wider than the legal concept of charity. NCPT did not have similar enforcement agencies as charitable trusts so must be invalid as they lack the only other possible enforcement agent- a human beneficiary.

Cannot have a private trust unless there is a human beneficiary under the trust who will enforce it if the trustees fail to uphold the trust- 'the human beneficiary principle'

Re Astor: cannot have a trust for non-charitable purposes.

Argument against NCPT:

- trustee by definition has duties in respect of the trust property

- in order to ensure the trustee does not neglect these duties or misapply trust proerpty then they must be controlled

only available instrument of control is a beneficiary who may be relied upon to complain to the court if the trustee acts contrary to his/her duties.

- if no human beneficiary but only a purpose then the trustee cannot be controlled and the trust must therefore be void

Flaw in this reasoning- assumption that there must be a beneficiary with a current entitlement to a property interest in the trust property- suggested there may be other ways of controlling the trustee. But no one has come up with a clear definition of what the other form of control may be.

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Purpose trusts and the human beneficiary principle (19)

b. Unenforceability- challenging the orthodoxy

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b. Re Denley: supports the proposition that the beneficiary principle might be satisfied by other beneficiaries. Trust was valid although it was a purpose trust- fell outside the mischief of the beneficiary principle.

Leahy: literal interpretation- trust for abstract purposes rather than the benefit of any individual and was therefore void.

Denley: provides a means for which an NCPT could be validated.

Re Grant: Denley was not a purpose trust- was a trust for persons and so does not provide a means for validating purpose trusts beyond the means it was enforced before.

Re Lipinski: in effect it was a gift to the members rather than a trust so beneficiary principle had no application (does not apply to gifts).

Hayton and Parkinson: don't need a beneficiary as long as you have an enforcer of the trust then this will suffice to control the trustee. Hayton- anybody. Parkinson- someone in a position of potential tension with the trustees.

Harris: concept of a duty does not inevitably involve co-relative rights. Some situations where X has to act because a rule requires him to do so- rule based duties. The duty is there whether or not it can be enforced. Trust= rule based duty.

These seek to undermine the requirement of a beneficiary with a current interest in the trust property.

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Purpose trusts and the human beneficiary principle (20)

c. Uncertainty

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NCPT is only valid if the purposes are defined with sufficient certainty to enable the court to control the execution of the trust.

Re Denley: Goff identified 2 potential problems which are certainty related:

(1) centred on the requirement that the individuals for whose benefit the trust is defined could not be ascertained or capable of ascertainment. Goff treated the trust as analogous to a DT and applied the test to DTs (the complete list test). Was happy that it was possible to draw up a complete list of all potential beneficiaries of the trust.m

(2) when have an impasse between the parties of how the property will be used- seems this could be resolved by what was said in McPhail.

McPhail v Doulton: in the case of a trust for individuals the court does have means whereby the trust can be carried out; the individuals can be identified so the court has the means at its disposal in the case of purpose trusts too.

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Purpose trusts and the human beneficiary principle (21)

d. Perpetuity

e. Capriciousness

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d. Situation where property is held by trustees to be applied by them for certain purposes and no limit is placed on the duration of the trust.

Rule against excessive duration reflects the policy that capital should not be tied up in this way for an excessive period.

Does NOT apply to charitable trusts- property is being applied for a worthy purpose so can continue forever.

NCPT- there is a perpetuity period- 21 years after the death of the last survivor of nominated persons who were alive when the gift took effect.

e. Brown v Burdett: purpose trust was struck down for being useless/capricious.

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Purpose trusts and the human beneficiary principle (22)

f. Summary: NCPT:

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f. 4 objections to the validity of an existence of a NCPT:

- uncertainty

- unenforceability

- excessive duration

- uselessness/capriciousness

Gravells- last one doesn't arise very often- disregard it.

Problem of excessive duration can normally be circumvented by appropriate drafting of the trust deed to ensure the trust does not go on longer than the perpetuity period- Re Denley

Uncertainty- should also be avoidable- problem is greater where the settlor is seeking to pursue objectives of a rather more general nature. May be possible to take advantage of the solution in McPhail.

Beneficiary principle remains the principle for NCPT- in strictest form it is not satisfied in a NCPT.

Some authority for the view that it is satisfied by certain categories of residuary beneficiary or quasi-beneficiaries or factual beneficiaries- Re Denley.