Blackwell v Blackwell

English Equity & Trust Law

Blackwell v Blackwell
Image: ‘The Artist’s Mistress’ by Charles Sims

Verbal instructions that are then attested and complied with by the named trustees before the death of a testator fall neatly between the rules of wills and probate and the equitable field of trust law. On this occasion the wish of a dying man was such that a large sum of money was to be held upon trust for a party outside of his marriage and unknown to his widow.

Having long agonised over his duty to make provisions for a mother and a child borne out of wedlock, it was decided by the testator to set aside several thousand pounds in the wish that five of his closest friends would act as trustees with the express purpose of investing the funds for the benefit of the two named parties until such time that the trustees elected to provide them with two thirds of the initial sum before placing the remaining third back into the residuary estate of his final will.

Upon his death his widow discovered the bequest and looked to dismiss its validity upon grounds of fraud and contradiction to the terms of the will where his widow and their son were to benefit from his entire estate. As was common to domestic legislation s.9 of the Wills Act 1837 read that no will (or codicil) shall be valid unless set in writing and signed by the testator in accordance with statute. On this occasion the instructions given by the deceased were initially verbal and only put to writing by means of a memorandum drafted by his solicitor who himself signed as a trustee and submitted it in support of the codicil. Using the terms contained within the 1837 Act it was argued that while the trust memorandum was written, the execution of the codicil was oral and therefore fell outside the powers granted beneficiaries, unless it was in effect, designed to stand for the sole benefit of the widow through the residual estate; in which case the trustees would be acting in fraud should they look to enforce the terms of the codicil.

While decided twice in favour of the trustees it was put before the House of Lords where the rules of equity were scrutinised in conjunction with proven case law. Having examined the principle that ‘equity will not permit statute to be used as a cloak for fraud’ it was found that where a testator propounds a desire to execute a trust and then proceeds to provide explicit instruction as to its use, any argument that seeks to undermine the intentions of that person through the use of legislation must then find themselves party to fraud if they would instead stand to benefit from the funds expressly requested for the enjoyment of another.

In circumstances such as these it was historically preferred that equity imputes the same responsibility as that agreed to by the original trustee so that they would then act under the same instructions as to permit the objective of the deceased to be realised. This transference effectively circumvents the fraud and makes right that which is prima facie claimed wrong.

Resting upon this proven application of jurisprudence the presiding Lords established that far from looking to dissect the flaws proposed by the appellants, it was clear that any conflict arising from a lack of signatory validation was insufficient when looking to overrule the will of the testator against a trust that by all accounts left no illusions as to its purpose and means of delivery.

Key Citations

“There can be no reasonable doubt about the accuracy of the memorandum, and none about its efficacy if it can be admitted in evidence.”

“The necessary elements, on which the question turns, are intention, communication, and acquiescence. The testator intends his absolute gift to be employed as he and not as the donee desires…”

“For the prevention of fraud equity fastens on the conscience of the legatee a trust, a trust, that is, which otherwise would be inoperative ; in other words it makes him do what the will in itself has nothing to do with…”

“Why should equity forbid an honest trustee to give effect to his promise, made to a deceased testator, and compel him to pay another legatee, about whom it is quite certain that the testator did not mean to make him the object of this bounty?”

“…equity would not set up the statute for itself to prevent the devisee from doing what it would have itself compelled him to do…”

“The frame of s. 9 of the Wills Act seems to me to carry on its face, that the legislation did not purport to interfere with the exercise of a general equitable jurisdiction, even in connection with secret dispositions of a testator, except in so far as reinforcement of the formalities required for a valid will might indirectly limit it.”

“It is communication of the purpose to the legatee, coupled with acquiescence or promise on his part, that removes the matter from the provision of the Wills Act and brings it within the law of trusts…”

“…what is enforced is not a trust imposed by the will, but one arising from the acceptance by the legatee of a trust, communicated to him by the testator, on the faith of which acceptance the will was made or left unrevoked, as the case might be.”

“It is the fact of the acceptance of the personal obligation which is the essential feature, and the rest of the evidence is merely for the purpose of ascertaining the nature of that obligation.”

“….if it would be a fraud on the part of the legatees to refuse to carry out the trust, the residuary legatees cannot take advantage of and thus make themselves parties to such fraud.”

Milroy v Lord

English Equity & Trust Law

Milroy v Lord
Image: ‘Louisiana Bayou’ by Joseph Rusling Meeker

When a man of standing sought to create a trust for the purposes of a relative’s benefit he was careful enough to provide specific instructions to his trustee but unfortunately erred in putting them into action. A number of years after his death the beneficiary challenged the assigned executor on grounds that his written desire for her to gain lawful receipt was sufficient enough to constitute an enforceable covenant and that the courts were inter alia wrong to deny it.

In 1852 the settlor drafted a deed-poll that enabled fifty shares of his stock held in the Louisiana Bank to be transferred to his associate, who had become his appointed trustee on the proviso that under a number of specific conditions he was to hold the shares upon trust for the benefit of his beloved niece. During the time between his grant and the date of her marriage or his death, the trustee was to manage the trust and pay any profits arising from the dividend interest to the beneficiary.

During this period the settlor also granted the trustee power of attorney over all of his financial matters and so while it was possible for the trustee to complete the request, he never managed to fully execute transferral under the banking practice policy which required the participation of either the settlor himself or a qualified solicitor, and where neither was found, that the power of attorney rested not with the trustee but the bank instead.

When her contest was heard in the first trial the presiding judge awarded that by virtue of the deed construction a valid trust had existed and that the fifty shares were to be reissued by the executor to the existing trustee where they would be again held upon trust for the niece as had been the case before the settlor’s death.

When appealed the court took the equitable view that a legally incomplete gesture cannot be enforced (equity will not perfect an imperfect gift) and that it was impossible for the settlor to become a self-appointed trustee for the shares discussed. Rather it was declared that the funds were to be held upon trust by the executor until amendments could be made to the deed that provided for redistribution in the manner first intended or until the trustee and beneficiary chose to take individual action against him.

Key Citations

“I am of the opinion that according to our law the instrument of the 2d April 1852 was not sufficient to constitute and did not constitute Mr. Medley a trustee of the bank shares.”

“…in order to render a voluntary settlement valid and effectual, the settlor must have done everything which, according to the nature of the property comprised in the settlement, was necessary to be done in order to transfer the property and render the settlement binding upon him

“…in order to render the settlement binding, one or other of these modes must, as I understand the law of this Court, be resorted to, for there is no equity in this Court to perfect an imperfect gift.”

“If it is intended to take effect by transfer, the Court will not hold the intended transfer to operate as a declaration of trust, for then every imperfect instrument would be made effectual by being converted into a perfect trust.”

“…there does not appear to me to be any sufficient ground to warrant us in holding that the settlor himself became a trustee of these bank shares for the purposes of this settlement.”

“A Court of Equity could not, I think, decree the agent of the settlor to make the transfer, unless it could decree the settlor himself to do so, and it is plain that no such decree could have been made against the settlor.”

“The certificates for the shares would follow the legal title, and as to the fifty bank shares would therefore belong to the Defendant…”

“There is no express covenant in the settlement, and whatever might be done as to implying a covenant to do no act in derogation of the settlement, it would, I think, be going too far to imply a covenant to perfect it.”

Rochefoucauld v Boustead

English Equity & Trust Law

Rochefoucauld v Boustead
Image: ‘Japanese Labourers on Sprecklesville Plantation’ by Joseph Dwight Strong

Does the creation of a trust rely upon written acknowledgement, or can the verbal promises of another to act in many respects as a fiduciary, provide evidence enough of an intention to serve as a trustee? In this instance an unusual arrangement between a lady of nobility and business associate, the latter was asked to purchase an estate that she might otherwise lose through the rigours of her recent divorce.

While once a thriving coffee plantation, the land in question was by all accounts operational but subject to increased crop damage, yet without the revenue historically provided there was little chance that the appellant could continue to live within the means accustomed to. This led to her asking her colleague to secure a conveyance of the property from the mortgagees on the proviso that she would over time, reimburse him for (a) the cost of the purchase (b) any additional costs incurred during the management and administration of the business.

Although not expressly stated in any official correspondence at the time, this verbal arrangement served to create a settlor and trustee relationship that benefitted both parties, albeit with overall beneficial interest remaining in the hands of the appellant.

After a number of years the company deteriorated into insolvency whereupon the appellant made claim for her beneficial title so as to avoid any loss to creditors. It was then argued that the mortgage had enabled the respondent full title to the land (upon which he had previously mortgaged out portions of for personal profit to the ignorance of the appellant) and that this deed protected any claim to the contrary, in addition to the twelve years during which no legal proceedings were instigated by the appellant; a delay which fell subject to denial within the statute of limitations and the estoppel of laches.

When first heard the judge awarded in favour of the defendant with little investigation of the collected evidence and so when taken to appeal, the court was more diligent when reaching a verdict. Having looked closely at the correspondence both before and after the initial conveyance, it became clear that while nothing had been set to paper there was never any indication that anything less than a trust/trustee arrangement had been effected and that the appellants beneficial interest was never held in question. Adding to the fact that the respondent had acted in a clandestine manner when selling land for gain and destroying the business accounts, there was little upon which he could rely upon when claiming reasonable behaviour.

With collective agreement that the appellant did have a right to claim title upon grounds of an express trust, the only stumbling block was the length of time in which it took her to seek remedy. Having then explained that financial difficulties, faith in the defendant’s honesty and conflicting legal advice had dissuaded her from pursuing it in the courts; the judges concluded that there was nothing justiciable to prevent her from recovery of the estate and so reversed the previous judgment and awarded in her favour.

Key Citations

“…it is a fraud on the part of a person to whom land is conveyed as a trustee, and who knows it was so conveyed, to deny the trust and claim the land himself.”

“…it is competent for a person claiming land conveyed to another to prove by parol evidence that it was so conveyed upon trust for the claimant, and that the grantee, knowing the facts, is denying the trust and relying upon the form of conveyance and the statute, in order to keep the land himself.”

“The Bankruptcy Act then in force the Act of 1869, and by s. 49 of that Act bankrupt trustees were not discharged from the claims of their cestuis que trust.”

“…the plaintiff has done nothing actively to lead the defendant to suppose that she abandoned any claim she might have against him as her trustee.”

“It must be declared that the defendant purchased the Delmar estates as a trustee for the plaintiff, but subject to a charge for the amount paid to the Dutch company.”

Attorney-General for Hong Kong v Reid

English Equity & Trust Law

Attorney-General for Hong Kong v Reid
Image: ‘Hong Kong Skyline’ by Bri Buckley

The phrase ‘two wrongs do not make a right’ is virtuous to the truth that misdeeds can never amount to anything more than loss, yet when adopted for equitable purposes the exact opposite can be found.

After rising through the ranks of Hong Kong administration, a solicitor turned Director of Public Prosecutions positioned himself whereby he was able to accept sporadic bribes in exchange for his obstruction of justice through the failed convictions of known criminals. Having taken over HK $12m in payments, the respondent in this matter invested the funds into three properties, two of which were in title to himself and his wife and the third to his solicitor.

The discovery of his fraudulent behaviour and subsequent criminal prosecution raised the question of whether by his breach of fiduciary duty as a servant of the crown, the sums paid were now held upon constructive trust for his former employers and that any monetary gain following the purchase of the homes was composite to that trust.

Common law principles surrounding fiduciary breach and profit from such breaches have been long held to apply in favour of the trust beneficiary despite the illegality on the part of the fiduciary when in receipt of bribes from third parties. This is because when acting beyond the remit of the trustee and in a manner that is dishonest, the action itself becomes legitimate if only for the benefit of those the fiduciary/trustee was appointed to serve.

This translates that although the respondent allowed himself to selfishly receive bribes in exchange for personal profit, equity would ascribe that his deceit was immediately converted into a positive gesture that conferred direct gain to his employers, as no fiduciary can be seen to profit from his breach as previously mentioned. This by virtue of the fact of those principles, altered the manner in which the respondent not only executed his plans but provided the crown privilege to acquire beneficial interest in the properties purchased, along with any increase their value since initial conveyance.

When considered by the Privy Council it was quickly agreed that any conditions imputed by the respondents upon the entitlement of his employers to seek recovery of the debts through the homes, failed to override the fundamental obligations owed to him while serving and acting under fiduciary capacity, despite any notion of separateness or mixed investment on his part.

Key Citations

“A fiduciary is not always accountable for a secret benefit but he is undoubtedly accountable for a secret benefit which consists of a bribe. In addition a person who provides the bribe and the fiduciary who accepts the bribe may each be guilty of a criminal offence. In the present ” case the first respondent was clearly guilty of a criminal offence.”

“…it is unconscionable for a fiduciary to obtain and retain a benefit in breach of duty.The provider of a bribe cannot recover it because he committed a criminal offence when he paid the bribe. The false fiduciary who received the bribe in breach of duty must pay and account for the bribe to the person to whom that duty was owed.”

“Equity considers as done that which ought to have been done. As soon as the bribe was received, whether in cash or in kind, the false fiduciary held the bribe on a constructive trust for the person injured.”

“…there is no reason why equity should not provide two remedies, so long as they do not result in double recovery. If the property representing the bribe exceeds the original bribe in value, the fiduciary cannot retain the benefit of the increase in value which he obtained solely as a result of his breach of duty.”

“Property acquired by a trustee as a result of a criminal breach of trust and the property from time to time representing the same must also belong in equity to his cestui que trust and not to the trustee whether he is solvent or insolvent.”

“…property which a trustee obtains by use of knowledge acquired as trustee becomes trust property. The rule must, a fortiori, apply to a bribe accepted by a trustee for a guilty criminal purpose which injures the cestui que trust.”

“If in law a trustee, who in breach of trust invests trust moneys in his own name, holds the investment as trust property, it is difficult to see why a trustee who in breach of trust receives and invests a bribe in his own name does not hold those investments also as trust property.”

“…a fiduciary acting dishonestly and criminally who accepts a bribe and thereby causes loss and damage to his principal must also be a constructive trustee and must not be allowed by any means to make any profit from his wrongdoing.”

Denley’s Trust Deed, Re

English Equity & Trust Law

Denley's Trust Deed, Re
Image: ‘Air Pavillon’ by Sonia Delaunay

Purpose trusts and those with intended beneficiaries can be hard to distinguish and so it can often fall to the courts to reexamine the intention of the settlor so as to avoid failure where none need exist. In a case involving a company trust deed, appointed trustees, valued employees and a forfeiture clause, the terms contained within it were challenged when the company itself looked to sell some of the land granted for use as was expressly prescribed in the trust.

In 1917 aircraft manufacturing companies Airco (A) and H.H Martyn (H) merged to become Gloster Aircraft Co Ltd; and in 1936 a trust deed was constructed between H and a number of trustees which provided that a plot of land and a right of way had been conveyed to the trustees to be held on trust for H and that the trustees were to allow H to take out a mortgage on the land in order to pay A.

In another part of the deed it was agreed that the trustees were empowered to manage the land and grant use of it to the employees (and others by agreement) for sports and recreational purposes by way of weekly subscriptions. The caveat to this arrangement was that when the subscription percentage dropped below seventy-five percent of the male workforce, or the company fell into insolvency, the land reserved was to be sold to Cheltenham General Hospital and the proceeds used to settle the mortgage owed to A.

Roughly thirty years later H decided to sell a portion of the land to pay for maintenance work and at this point the question arose as to (a) liability to pay any excess funds to the Hospital (b) whether the trust allowed the trustees to sell any part of the land (c) the integrity of the trust as to the exactness of the beneficiaries which were deemed to be undeterminable.

When the details of the deed were scrutinised it was argued that as the nature of the trust was one of purpose and not benefit it could not be enforced as the purpose was not one of charity but general enjoyment. For this reason it was contended that the trust must fail and that H was now free to use the land as it wished; however the court took a different view and explained that while governance of the trust did include the use of the land by parties beyond the employees, it was at the discretion of the trustees and therefore a power rather than a specific point of benefit.

This interpretation changed the nature of the trust from purpose into one of direct benefit as the names and identities of the employees (including those unsubscribing) were readily ascertainable. This translated that the trust was in every sense valid and that to the knowledge of the court the subscription levels had remained above that of the percentage set when reference to s.61 of the Law of Property Act 1924 outlined how “the masculine included the feminine”.

Key Citations

“…clause 2 (d) of the trust deed expressly states that, subject to any rules and regulations made by the trustees, the employees of the company shall be entitled to the use and enjoyment of the land.”

“Where, then, the trust, though expressed as a purpose, is directly or indirectly for the benefit of an individual or individuals, it seems to me that it is in general outside the mischief of the beneficiary principle.”

“…the provision as to “other persons” is not a trust but a power operating in partial defeasance of the trust in favour of the employees which it does not therefore make uncertain.”

“The court can, as it seems to me, execute the trust both negatively by restraining any improper disposition or use of the land, and positively by ordering the trustees to allow the employees and such other persons (if any) as they may admit to use the land for the purpose of a recreation or sports ground.”