Conditional lending, while perhaps overlooked during commercial and personal loans, forms the bedrock of such delicate transactions, and so should the borrower find themselves unable to apply the funds as expected, the nature of the agreement remains lawfully intact in favour of the lender. In this matter, an insolvent debtor’s bank attempted to convert such monies into company assets at the expense of the lender, at which point the reassurance of equity intervened.
In 1964, the shareholders of a relatively successful enterprise took steps to issue dividends of around £210,000, however upon inspection, they discovered that without adequate liquidity, the payment would be impossible. With that in mind, the company owner secured a conditional loan from the respondents, on the express condition that the funds were to be used for dividend issue only.
Once received, the owner wrote to the company bank, giving instruction to open a standalone account for the retention of the funds, while stipulating that:
“We would like to confirm the agreement reached with you this morning that this amount will only be used to meet the dividend due on July 24, 1964.”
Unfortunately, on July 17 1964, the company entered into voluntary liquidation, whereupon the monies held remained unused, as per the instructions given at the point of receipt. Some time later, the respondents demanded repayment of the money loaned, after which the appellant bank argued that it had since become a corporate asset, and was therefore subject to the priorities of all associated creditors involved in the bankruptcy process.
At the point of litigation, the respondents held that the money loaned was subject to a resulting trust, and that the bank by virtue of their position, were now under a fiduciary liability as constructive trustees for the amount loaned. In the first hearing, the judge awarded in favour of the appellants, on grounds that equitable principles did not apply when arms-length dealings fail, whereupon the respondents appealed and the Court held that in matters involving third parties to a failed transaction, recovery under equity was a principle long enjoyed, and routinely evidenced through a number of judgments across hundreds of years.
Presented again to the House of Lords, the House examined the complexity of the transaction, and noted that in Toovey v Milne, Abbot CJ had ruled that failure to apply the money loaned in the way originally intended, allowed for recovery of the funds during insolvency, under the principle that:
“[T]his money was advanced for a special purpose, and that being so clothed with a specific trust, no property in it passed to the assignee of the bankrupt. Then the purpose having failed, there is an implied stipulation that the money shall be repaid.”
Here again, reference was made to the express conditions applied to the loan, as well as the statement made in the letter at the time the money was passed to the appellant bank. It was further noted that while in circumstances where the lender agrees to loan on non-specific terms, there is an implied assumption that such funds become part of the corporate estate (albeit not entirely free of equity), however on this occasion there was ample testimony that the respondents had bargained with the borrowers on clear conditions, therefore the House uniformly and unreservedly held that the Appeal Court decision was to remain untouched and the bank’s appeal dismissed.
Matters of contract and the fiduciary elements of a working partnership, become at odds in a case involving opportunism with little regard to the details of the agreement signed when two former business partners acrimoniously part ways.
In 1979, two doctors agreed to set up a joint practice in an enviable part of Adelaide, and upon doing so, drafted a partnership agreement that established express terms around honourable working practices, and an ethical approach to the future of the enterprise. Sadly, as often happens in commercial relationships, the two men found working together intolerable, and so agreed to dissolve the practice.
One of the attractive features of the property was that of its location and the option to renew the lease for another two years, on the proviso that both partners were complicit in its execution. However, at the point of litigation, the appellant had shown clear reluctance to renew the lease, thus leaving the respondent no choice but to circumnavigate the matter as best as possible.
While the two parties had terminated the business, there was still a portion of the existing lease remaining, of which an equal share was held by both men, and yet in a strange turn of events, the landlord agreed to extend the lease to the appellant, and accordingly wrote to confirm this to the respondent. This prompted action by the respondent on grounds that the appellant had breached his fiduciary duty in accepting the new lease while inheriting the value of the interest of the existing lease, and that by doing so, he held the new lease as a constructive trustee on the equitable principle that the lease was an asset of the former partnership and therefore under a right of claim.
This contention was duly supported by the Supreme Court, at which point the appellant sought the wisdom of the High Court. Here, s.38 of the Partnership Act 1891 (SA) noted that:
“After the dissolution of a partnership the authority of each partner to bind the firm, and the other rights and obligations of the partners, continue, notwithstanding the dissolution, so far as may be necessary to wind up the affairs of the partnership, and to complete transactions begun but unfinished at the time of the dissolution, but not otherwise.”
While s.39 also stated how:
“On the dissolution of a partnership every partner is entitled, as against the other partners in the firm, and all persons claiming through them in respect of their interests as partners, to have the property of the partnership applied in payment of the debts and liabilities of the firm, and to have the surplus assets after such payment applied in payment of what may be due to the partners respectively after deducting what may be due from them as partners to the firm; and for that purpose any partner or his or her representatives may on the termination of the partnership apply to the Court to wind up the business and affairs of the firm.”
However, clause 26 of the partnership agreement clearly expressed that any surplus assets remaining after payment of debts, liabilities, expenses and amounts due to the partners, was to be divided equally through the execution of observation of all legal instruments and Acts, and the provisions contained therein.
This was the position adopted in Hugh Stevenson & Sons Ltd v Aktiengesellschaft Fur Cartonnagen-Industrie, where Romer LJ remarked:
“[W]herever the legal estate may be, whether it is in the partners jointly or in one partner or in a stranger it does not matter, the beneficial interest…belongs to the partnership, with an implied trust for sale for the purpose of realising the assets and for the purpose of giving to the two partners their interests when the partnership is wound up and an account taken…”
A fact that was equally present in clause 19 of the partnership agreement, which required each partner to:
“[D]evote his whole time (subject to annual leave) to the medical practice, to act in all things according to the highest standards of professional conduct and be just and faithful to the other partner in all transactions relating to the partnership…”
And so it was for these undeniable reasons, that the Court held (by majority) that when agreeing to and pursuing the opportunity to secure an extension of the lease after refusing to cooperate with his former partner, the appellant did, by virtue of his selfishness, breach what remained of his fiduciary capacity, and in doing so, became a constructive trustee for the value of the lease, and thus owed account to the respondent in kind.
As can often result from mutual wills, the overlapping fields of contract law and equity become central to the resolution of this property dispute, after a claimant intervenes in the immoral acquisition of sole title to the matrimonial home of a son’s parents.
The drafting of mutual individual wills reflected that upon death, the surviving spouse became under law, the sole beneficiary of that person’s equitable and legal interest in the property occupied at the time of death. Where neither party were survivable, the individual wills stated that the wife’s niece was to become the beneficiary of the equally held share of the leasehold, and that the father’s son would inherit the remainder of the estate.
Following the death of the wife, the husband took the liberty of transferring his now sole title to that of a shared (or joint) title to the property with his son; an act that in and of itself, contravened the earlier agreement within their final (and irrevocable by declaration) wills. This transgression had remained unaddressed until the death of the father, preceding a naturally vehement claim by the niece that the transfer of title constituted fraud, and that under those circumstances, the son now held both parents’ share of the property upon trust for her, and that despite any contractual arrangements made between the father and son, the binding nature of the mutual wills superseded any administrative effects constructed under the laws of property.
Despite drawing argument against mutual testation under the property doctrine of survivorship, it remained evident that the father was acting within a fiduciary capacity when surviving his wife’s death, and so by avoiding the duties prescribed him, he breached that obligation in favour of his son’s expectation to benefit.
Again, as with the rules of equity and proscription of contract law, there appeared to be a lack of clarity surrounding the written intentions of the testator and testatrix, while the basis for this opposition relied upon s.2 of the Law Reform (Miscellaneous Provisions) Act 1989, where the disposition of land requires a single co-signed document containing the terms of the arrangement (or at the very least an exchange of those documents) as proof of intention; yet as the mutual wills were never signed by their respective partners, any desire to enforce their bequests became invalid under the Act itself. This essentially meant that:
“No disposition of land can be challenged unless done so with a written and signed document contrary to the one drafted by the person charged.”
Sadly, the nature of the wills were such that neither party co-signed the others wills prior to their deaths, which thereby prevented a contract of sorts to exist, so on this occasion the judges decided that instead of the property now becoming the sole title to the claimant, as was the design of the mutually drafted wills, the home was now held in equal shares for both parties to enjoy, albeit through the framework of a constructive trust.
Originating from the latin phrase ad opus, the purpose of a trust is to provide the safe containment of assets (whether those of property or money) on condition that they will be of benefit to another party or parties. There are many instances in which a trust can be created, and it is the intention of this article that we have a look at the more common trusts used today, before explaining their application through suitable case law propositions.
Subject to the same qualifying criteria as that of a will bequest, the terms of a valid trust require that three certainties must be readily ascertainable:
(i) The intention of the settlor
(ii) The subject matter of the trust
(iii) The identity(s) of the beneficiary(s)
The inherent problem with purpose trusts is that they are by nature, constructed so as to benefit an unlimited number of people, although often under a charitable intention. An excellent example of a purpose trust is the one described in Re Denley, where the use of recreational ground was exclusively reserved for the current and future employees of an aircraft manufacturer, and that despite presupposition of its failure, the judge upheld its validity on grounds that an approximation of the staff was, in the immediate sense, obtainable. This allowance was expressed by Goff J who remarked:
“[T]here 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, quite apart from any question of uncertainty or perpetuity. Such cases can be considered if and when they arise.The present is not, in my judgment, of that character…”
Ironically, resulting trusts are express trusts that have, by their lack of specificity, wound up benefiting the settlor, despite the very wish to relinquish title or interest. As with the third element of a successful trust, where the identities of the beneficiaries are either remitted or withheld, the principles of equity would defer the construction of the trust to that of the settlor’s gain. While in some instances the outcome causes little damage, there are equally those where a resulting trust inflicts financial loss, as was seen in Vandervell v IRC. Appreciably, there is rarely if ever, any intention to create a resulting trust, and so the instances where they do emerge rely upon clear conditions, as explained by Lord Millet in Air Jamaica v Charlton when he remarked that:
“Like a constructive trust, resulting trust arises by operation of law, though unlike a constructive trust it gives effect to intention. But it arises whether or not the transferor intended to retain a beneficial interest – he almost always does not – since it responds to the absence of any intention on his part to pass beneficial interest to the recipient. It may arise even where the transferor positively wished to be part with the beneficial interest…”
One of the advantages of a charitable trust is that it enjoys exemption from the otherwise exactness of both beneficiary and subject, although in many cases the charity of choice is typically named so as to avoid confusion within the court, or a need to invoke the cy-pres doctrine. Another is the avoidance of taxation, as charities are free from the burden of inheritance tax, capital gains tax and occupancy rates (where circumstances allow). As also outlined in s.1(1) of the Charities Act 2006, the trust beneficiaries must fall within the scope of legislation in order for the trust to succeed, and as can be found under s.2(2) of the 2006 Act, the possible forms such charities might take are reasonably extensive.
Sharing a close relevance to the strictness of fiduciary duties, constructive trusts are a means of remedy where a trustee has immorally profited from another’s property through the dysfunction of their relationship. Where evidence is found to support wrongful gain, a constructive trust is created that serves to hold the assets on trust for the now slighted settlor. An example of this is Attorney-General of Hong Kong v Reid where Lord Templeman stressed that:
“As soon as the bribe was received it should have been paid or transferred instanter to the person who suffered from the breach of duty. 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.”
As with purpose trusts, an express trust is the standard form of trust, whereby the settlor (i) makes a clear expression of his wish to create a trust (ii) deliberately illustrates what form the trust takes (property or funds) (iii) who the beneficiaries are (iv) takes the correct steps to transfer the property in accordance with statute and where necessary makes it known who the acting trustees will be. The reason for this is to facilitate court intervention in the event of contention, particularly where the settlor has since died, leaving instructions within their final will or codicil. Failure to demonstrate evidence of those key elements will result in a void trust, and in death, eventual lapse into the residual estate of the deceased.
An example of the exactness required for an express trust is found in Milroy v Lord where despite having made verbal declarations as to his wish for his company shares to benefit his niece, his associate had failed to officiate the trust through the legal channels; resulting in the shares remaining on trust for himself (as would be the case in a purpose trust). This was elaborated by Lord Justice Turner, who remarked:
“[I]n 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.”
Cestuis Que Trusts
Cestui que is an abbreviated version of ‘cestui a que use le foeffment suit fait’, which means ‘the person for whose use the foeffment was made.’ Further simplified, ‘foeffment’ represents any grant of freehold property, therefore a cestui que trust would be those holding property upon trust for the benefit of another named individual who retains legal title; although any beneficial interest remains in the hands of the cestui quetrust (or person assigned the interest).
This translates that unlike other forms of trust, the legal owner acts as a trustee, while the actual beneficiary serves as operator of the trust, much like a reversal of roles. The result of this is that should the trustee decide to convey the property, the cestui que trust can sue for breach of duty where no permission has been granted and no profits enjoyed. This was explained by Austin Wakeman Scott in his Columbia Law Review article ‘The Nature of the Rights of the Cestui Que Trust’ (1917), when he wrote:
“If a trustee should destroy the trust res, or should sell it to a purchaser without notice of the trust and dissipate the purchase money, the cestui que trust may maintain a suit in equity against the trustee for breach of trust, and recover a sum of money, either the value of the trust res, or the amount of profits which should have accrued if no breach had been committed.”
These are typically used where multiple beneficiaries exist, while the nature of the fixed trust is to state exact figures or quantities of benefit to each party, so as to avoid inequitable profit by those in receipt or miscalculation by the appointed trustees. The criteria for this form of trust was established by Jenkins LJ in Inland Revenue Commissioners v Broadway Cottages Trust, where having examined the specificity of the trust, there was insufficient evidence to obtain certainty of the beneficiaries, thus the trust failed with the reasons given that:
“[T]he trust of the capital of the settled fund for all the beneficiaries living or existing at the termination of the appointed period, and if more than one in equal shares, must be void for uncertainty, inasmuch as there can be no division in equal shares amongst a class of persons unless all the members of the class are known.”
Undoubtedly designed to protect the identity and interest of the beneficiary(s), the settlor is able to draft and execute a secret trust that can be both observed during life, and inserted into a will under the pretence that a named beneficiary will inherit absolutely, when in fact they will act as trustees for those with the intended benefit (similar arrangements can fall under intestacy provided prior agreement was arranged by the deceased). Similarly, there are half-secret trusts that operate beyond the terms of a will but under the duties of a trustee, this translates that the dispositions of the trustee remain unknown, although there is no uncertainty as to where the trust property resides. The framework of secret trusts was outlined by Peter Gibson LJ in Kasperbauer v Griffith, when he said:
“[T]he authorities make plain that what is needed is: (i) an intention by the testator to create a trust, satisfying the traditional requirements of three certainties (that is it say certain language in imperative form, certain subject matter and certain objects or beneficiaries); (ii) the communication of the trust to the legatees, and (iii) acceptance of the trust by the legatee, which acceptance can take the form of acquiescence…it is an essential element that the testator must intend to subject the legatee to an obligation in favour of the intended beneficiary. That will be evidenced by appropriately imperative, as distinct form precatory language.”
While operating much like a typical trust, the discretionary trust allows the trustee(s) to regulate and thus self-determine, the extent of the distribution to assigned beneficiaries. With two differing types, the exhaustive discretionary trust provides full and complete distribution of trust assets; whereas the non-exhaustive trust allows the trustee(s) to decide how much is awarded, and to specify what, within the trust, is granted to the beneficiaries.
Brought about through the disposition of land under co-ownership and the rules of intestacy, these trusts are designed to protect the interests of those in title. First introduced through s.34-36 of the Law of Property Act 1925 the intervention, or at least creation of such trusts, was also enforced through s.33 of the Law of Administration Act 1925, before consolidation of both Acts came through the Trusts of Land and Appointment of Trustees Act 1996. In the former instance, there is an automatic trust power to sell and retain under co-ownership, and in the latter, a power to sell through personal representative where no will was executed.
There is little to explain here other than that unlike a private trust, a public trust is created by the settlor with the express intention of benefitting certain members (or sections) of the general public. This is often achieved through the use of a charitable trust, as deemed valid through the requirements of rules required by the Charities Act 2006.
Bare (or Simple) Trusts
Perhaps the most basic of trusts, the bare or ‘simple’ trust serves only to hold property or funds in favour of a beneficiary, yet with no trustee duties attached. In this instance, the trustee is replaced with the title of nominee until transfer is required.
Unlike the previous trusts, these are created with prerequisite trustee instructions, albeit divided into two categories, namely ministerial and (as above) discretionary trusts. In the former, those duties may include rent collection and administrative functions, whereas the latter affords the trustee with powers to decide how best go about his or her role.
Running parallel to laws of contract, the quistclose trust was brought about in Barclays Bank v Quistclose Investments Ltd, in which the lender took steps to clarify that the money loaned was on condition of use, and held within the bank until the borrower chose to redeem the funds. When the borrower lapsed into liquidation, the lender asserted property rights against the bank under the principle that the funds were held on trust, and that the bank was now acting as a trustee; thus circumventing the rights of other creditors, while holding the funds in safe reserve for the lender as acting settlor. This unique approach was supported by the House of Lords, and explained well when Lord Wilberforce remarked:
“In the present case the intention to create a secondary trust for the benefit of the lender, to arise if the primary trust, to pay the dividend, could not be carried out, is clear and I can find no reason why the law should not give effect to it.”
While of a strictly familial nature, this case relies upon elements of land law and principles of equity for its proximation of fact. After a decade-spanning relationship of trust and obligation observed by the appellant, it falls to the House of Lords to lay to rest the true meaning behind the time shared between two cousins.
The core of this dispute rests within the subjective disparity of those seeking claim to the estate of a private farmer, and the man who knew him probably better than anybody. After growing up and working on his father’s farm, the appellant found himself extending his energies to his older cousin, after witnessing him suffering loss both through death and divorce. Having no children of his own, the cousin had continued to toil the land left him, and in turn looked to the appellant to help manage the considerably extensive freehold.
For one reason or another, the arrangement required no payment exchange, and so it was that until the death of the landowner, the two men worked the farm and developed it further, through an intimate relationship based upon the appellant’s unique ability to understand the emotion and intentions of a man renowned for his narrow vocabulary and deep introspection.
When upon his death, the appellant followed up on his understanding that the farm had been bequeathed him, the claim of succession was contested on grounds of proprietary estoppel, and the ambiguity of true intention displayed by the deceased. There were principally two events that triggered the assumption of his entitlement, namely (i) a gesture that indirectly disclosed the plans of the elder cousin in relation to deaths duties, and (ii) the inherent nature of their close friendship, and the disappearance and subsequent implied revocation of a will drawn up eight years prior to his passing.
Needless to say, the appellant had over the passage of time, made numerous adjustments to his own circumstances, in order that the relationship could sustain the changes discussed and alterations incorporated into the estate; and there were a number of other minor events that further supported his interpretation that he would be the sole successor of his cousin’s farm. Unfortunately for the respondents, the principle of proprietary estoppel relies upon the inability to identify the land discussed, therefore the challenge brought against the appellant was fundamentally flawed, while it was more importantly noted by one of the presiding judges that by all accounts, a constructive trust had by definition, been created through the dealings and partnering of the two individuals during the lifetime of their relationship.