Equity Take in Notes 1 - practical summary for open book exam PDF

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Equity and Trusts Take in Notes 2017 Ben Hardisty 1 Trusts Flowchart Intro paragraph: Trusts can be used for a large number of purposes: to manage wealth, property, protect assets, avoid taxation and for charitable purposes. Underhill defines trusts as equitable obligation, binding a person (trustee...

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Equity and Trusts Take in Notes 2017

Ben Hardisty

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Trusts Flowchart Intro paragraph: Trusts can be used for a large number of purposes: to manage wealth, property, protect assets, avoid taxation and for charitable purposes. Underhill defines trusts as “an equitable obligation, binding a person (trustee) to deal with property over which he has control (the trust property) for the benefit of persons (beneficiaries), of whom he himself may be one, and anyone of whom may enforce the obligation”. This definition highlights the idea that the trustee has legal title, while the beneficiaries have equitable title over the property. Maitland states that the trust requires both personal obligations and proprietary obligations, whichever type of trust is present.

What type of trust is

it?

(a) Express Trusts (intentionally created by the settlor, will be either fixed or discretionary, inter vivos or testamentary) (b) Purpose Trust (non-charitable purpose) (c) Charitable Trust (type of express trust for a charitable purpose). (d) Resulting Trusts (Law assumes that this is what was intended) (e) Constructive Trust (inequitable for the defendant to deny the obligations, there is no intention but there is an equitable obligation).

 If it is an express trust: An express trust is created by the settlor intentionally. It can be either fixed or discretionary and can be created inter vivos or testamentary. The trust must be clearly defined in order for it to be legally effective. The formal requirements for creating an express trust for personal property are based on the certainties. For real property, the trust must comply with s25(2) and s25(4) of PLA 2007 (must be in writing and signed). The Court needs to ascertain three certainties when deciding whether or not an express trust is clearly defined, these are: certainty of intention, certainty of objects and certainty of subject matter. The requirement for certainty is more demanding than contract because it can affect people that did not agree or were not part of the creation.

(a) Certainty of Intention: The first element of the three certainties that must established for an express trust to be present is the certainty of intention. It must be shown that the settlor or will maker intended to create the trust and the language or conduct must sufficiently show the intention. Richardson states that “mere precatory words give no more than moral obligation.” No set form of words is required and the word “trust” does not have to be used, however whether the words are 2

mandatory or imperative that give instruction will be considered in deciding whether a trust is intended. Ø (INTEGRATED APPROACH – discuss facts and case law at the same time) Ø There are many cases where no certainty of intention has been found such as: o Re Adams v Kensington Vestry where the statement “in full confidence that she will do what is right” was held not to bind the WM’s wife in trust but rather created a moral obligation. o Similarly, in Re Williams the court held that “in fullest trust and confidence”, as considered by Lindley LJ, was not sufficiently clear to create a trust obligation. o In Re Singh (Deceased) the will contained the statement “without creating a binding trust”, the court held that this was a clear indication that no trust intention existed. Ø The cases that have held that there is certainty of intention have looked more broadly at the evidence and shown that a trust can be inferred from conduct as well as the words used. For example: o Belton v C.I.R, the farmer had created a trust for his child and had registered sheep in a separate name, there was a separate safety deposit box and even went as far as to keep the sheep separate when grazing. The conduct showed clear intention to form a trust. o Similarly, the conduct in Re Kayford, of transferring customer’s deposit money into a separate account, even where the name of the account was different, showed sufficient intention to create a trust. o In Paul v Constance the court discussed the difference between a trust and a gif and held that C held an account in trust for P and himself as beneficiaries as it was “as much yours as mine.” Ø Applying the previous case law to the facts, it can be seen that… It is therefore likely that there has/has not been certainty of intention. Ø If there has been uncertainty of intention (or if I am wrong that court would find sufficient certainty of intention) there will either be a valid outright gif or the property would revert back to the settlor (Jones v Lock) (if the alleged trust is testamentary and the court holds that there is no trust, the person in the will will hold it absolutely (Re Williams, Re Kingston Vestry)

(b)Certainty of Subject Matter: There are two central questions to ask with the certainty of subject matter: what property has been lef on trust and what is the entitlement of each individual beneficiary under the trust. In order for trust property to be sufficiently certain it must be legal recognizable property e.g. money, alcohol, shares, land etc. This can be either real property, tangible personal property or intangible property (such as a chose in action) (Don King Productions v Warren). The property must not be future property (Williams v CIR). Ø (USE AN INTEGRATED APPROACH) Ø Where there has been no certainty of subject matter the language of the property is ofen uncertain. For example, in:

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Ø

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Ø Ø Ø

o Palmer v Simmonds and White v White, “the bulk of my estate” and “a small portion of what is lef” respectively, were both held to be uncertain as to subject matter. The subject matter can be certain where the quantum will be determined by an objective assessment by the trustee. o Re Golay’s Will Trusts “receive a reasonable income” was an effective and objective way to provide certainty. However, the standard of reasonable was not laid down by the courts. The other situation considered by the court is where the actual property lef in trust is uncertain. o For example, Re London Wine Co. concerned a beneficial owner of wine, with the company as the legal owner however there was no attempt to allocate particular bottles and some bottles were yet to be purchased, so the subject matter was uncertain. o Similarly, in Re Goldcorp, the single mass of gold could not be divided between beneficiaries individually so there was no uncertainty. o However, Hunter v Moss provides some uncertainty as 50 shares in a pool of 950 were not required to be separate in order to be sufficiently certain. Each beneficiaries’ beneficial interest in the property must be ascertained/ ascertainable (where there is discretionary), In Boyce v Boyce testator lef several cottages on trust to his wife and on her choice one to his daughter, the wife died before she could make her choice so the trust was void. Applying the case law to the facts, it can be seen in this case that … There is certainty of subject matter/ there is not certainty of subject matter. Where there is uncertainty as to the share due to each beneficiary because of lack of precision, the court may well apply “equality is equity maxim” If there is uncertainty of subject-matter the alleged trust is ineffective as it cannot attach itself to specific property. The property remains with the settlor/ or the estate (however if there is a gift to A, where B takes as much of it as he does not need, A takes absolutely.)

(C) Certainty of Objects: The final aspect in order to ascertain whether there is a validly created express trust is that there is certainty of objects. The beneficiary principle states that it must be possible to say who the beneficiary is and every trust must have a human beneficiary (except charitable and purpose trusts) who can enforce the obligations of the trustee. Morice v Bishop of Durham, Re Astor’s Settlement Trusts and Re Shaw were held to be invalid for the reason that the trust must be for the benefit of individuals. If the beneficiaries are identified by name in the trust deed, difficulties do not normally arise, unless there are many friends with same name. There are two main types of uncertainty: uncertainty as to the description of the class (conceptual uncertainty) and uncertainty as to whether the person falls within a particular class (evidential uncertainty) (the difference is distinguished in Re Beckbessinger and Re Tuck’s Settlement Trusts). The test applied depends on whether there is fixed trust or discretionary trust. Ø (INTEGRATED APPROACH FROM THE FACTS)

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Ø Fixed trust: it must be possible to draw up a complete list of beneficiaries (IR Commissioners v Broadway Cottages Trust). OT Computers v First National Tricity Finance was held to be invalid as the list of suppliers was described as “urgent.” Ø Discretionary trust: a trust where the trustees have discretion as to the distribution of the trust property (they can have exhaustive or nonexhaustive distribution). Prior to McPhail v Doulton the test was the same as for fixed trusts, the new test taken from Re Gulbenkians was whether it could be said with certainty that an individual is or is not a member of a class. Even if a class is sufficiently certain, there may be administrative unworkability if the class is too huge. o What words are setting up the class? Are they sufficiently certain? Look to case law: Brown v Gould held that “my old friends” was too vague and uncertain. Re Beckbessinger held that the word “an interest” did not establish a certain class. Re Baden’s Deed Trusts (No. 2) held that “relatives” was sufficiently certain. o If the answer is no: insufficient certainty, if yes then apply facts to case and say whether the individual is in or out of the class. (However, if I were wrong, my advice would be…) Ø Exception to the requirement for human beneficiaries: Purpose trusts (see pg 9 for purpose trust requirements). Ø If there is uncertainty of objects, the trustees will hold the trust property on resulting trust for the settlor or the estate. (Re Beckbessinger – the testator intended to create trust out of residuary estate, which failed. It was held in a resulting trust. ) v If it is a Charitable Trusts: A charitable trust is established for a charitable purpose. They are a type of express trust where it is not necessary to have a human beneficiary. The charitable trust is subject to a slightly different test but is still subject to the rule of perpetuities. • Look to charitable purposes and the four heads of charity. • Variations of the charitable trusts: through Cy-pres modifications. v If it is a Resulting Trust: A resulting trust means to jump back… Trusts arise in two circumstances: • types A “apparent gifs” and type B “failed trusts” resulting trusts. • Type A presumed resulting trusts are where there is payment by A for property with legal ownership vested in B. There is a rebuttable presumption that B holds the beneficial ownership of the property for A. • Type B automatic trusts are where A transfers B on an express trust which fails. The trustees then hold the resulting trust for the settlor. But the most recent view is that the settlor has expressly or impliedly abandoned any beneficial interest so no resulting trust will arise (Westdeutsche), although this may not be followed in NZ. v If it is a Constructive Trust: - page 11 A constructive trust is imposed by operation of law where it would be inequitable according to the established equitable principles to deny trusteeship. A constructive trust requires no intention. There are two types of constructive trust institutional (orthodox constructive trust) or 5

remedial constructive trust. (Fortex Group v Macintosh demonstrates the difference). Brown v Little demonstrated that there were circumstances that could arise where trusteeship would arise without intention. Commonwealth Reserves v Chodar highlights that the constructive trust is not intended to impose an ongoing trustee relationship it is a mechanism to enforce accountability.

1. Institutional Constructive Trust: The institutional constructive trust exists in its own right, and have subject matter, beneficiaries and trustees. The court is happy for it not to be too prescriptive. Look to the two types of case law that has been discussed: where the fiduciary makes an improper profit and assertion made of ownership to property which another has contributed. Work through either the test in Boardman v Phipps or the test in Lankow v Rose (Gillies v Keogh). 2. Remedial Constructive Trust: This is a discretionary trust imposed by the court where the other available remedies are inadequate. Arises on the date of the court judgment to do justice in particular cases. NZ seems to like using the remedial constructive trust (e.g. Commonwealth Reserves v Chodar and Fortex Group.)

Once there is a valid trust of any description look to the behavior of the trustees

and the beneficiaries.

Powers and Duties of the Trustees: - page 13 A trustee has a number of powers and duties that are inferred by the trusteeship. The trustees’ powers are found in the trust deed, Trustee Act 1956 and equity. Part 3 of the Trustee Act outlines a number of important provisions for trustee power. There is also a person responsibility of the trustee to behave in line with a significant amount of onerous duties that the law imposes. There is personal responsibility and liability when a breach has occurred. The general rule is that they must act in accordance with the act and maintain the trust honestly. Look through the duties listed pg 20-21.

Has there been a breach of any of these duties? And why? 6

What consequences flow from this breach? Beneficiaries Rights: the beneficiary can restrain trustees that are about to or intending to commit a breach of trust. Can get an injunction to prevent something from happening or compel performance. They also have the right to terminate the trust for no stated reason.

Remedies for Breach of Trust: - page 17 A breach of trust occurs where the trustee has failed to perform and obligation or duty. The consequences depend on the nature of the breach and a breach of trust does not automatically mean that the trustee must compensate the trust. Where the breach of the trust may be very minor and technical, there may not be relief in monetary terms. No matter how poorly they have performed, the trustee will be protected by honest behavior, a valid exclusion clause or the statutory provisions. The equitable remedies imposed are always discretionary and will try to give effect to the terms of the trust. • • •

Look to personal claim against trustee to make good a financial loss (Re Dawson, Re Mulligan, Bank of NZ v NZ Guardian Trust Account of profits (Boardman v Phipps, Chirnside v Fay) Then look to whether there is any relief for the trustee: valid exclusion clauses, statutory relief under s73 (power to relieve trustee from personal liability for “honestly and reasonably.” Have they applied to court for directions and followed the directions?

Personal Remedies against strangers to the trust: - page 19 The trustee may get a remedy from a third party where the third party should also be held accountable for the breach. The court will find a third party liable where there is knowing assistance (where the third party was never in possession of the trust property but aided the breach of trust in some way) and knowing receipt (the third party was a recipient of trust property and vulnerable to a tracing claim). The rule in Barnes v Addy said that “strangers are not to be made constructive trustees… unless those agents receive and become chargeable with some part of the trust property or they assist with knowledge in a dishonest and fraudulent design on the part of the trustees.” 7

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Knowing Assistance: fiduciary duty, breach of duty, assistance by stranger and dishonesty on part of the stranger. (Royal Brunei Airlines, Twinsectra v Yardley, Westpac NZ v Map & Associated and Fletcher) Knowing receipt: fiduciary duty, breach of duty, third party received relevant property and that the third property had “knowledge” of the fact that a breach of duty was committed. (Baden states required knowledge, Westpac Banking Corp v Savin, Equiticorp and Ponamu).

Express Trust Summary - Can be made by a person while they are living (‘inter vivos’) or may arise after their death via a will (testamentary). - There are various purposes for an express trust; e.g. managing family wealth or managing property for those who are unable to do so. - The settlor sets up the trust during their lifetime or may leave a provision in their will setting up the trust. - Normally come from a written document (trust deed), but can also be constructed verbally or through conduct.  Key components: settlor (creates the trust), the trust property, the trustee (under obligations/duties – either an individual or corporation), the beneficiary, the duration of the trust (125 years (new trust bill)– subject to the rule against perpetuities). The Three Certainties: 1. The certainty of intention: - The settlor must intend to create a trust over his/her property (NOT A GIFT OR LOAN). NB: precatory trusts are not valid (e.g. “…in the hope that/in full confidence” – various case law on this). Re Singh: Consider the will as a whole, not just the one line in question. Belton v CIR: sheep farmer setting up a trust for his son with 60 sheep in his son’s name. Also borrowed money from the trust fund to purchase a piano (loan without interest). Held: no specific words are necessary to create a trust, merely intention is needed. It was able to be inferred that a trust had been formed. Re Kayford: Company in financial difficulties but were still receiving orders from customers. ‘Customers’ Trust Deposit Account wasn’t formed for the monies received. Held that there was intention to create a trust. “Payment into a separate bank account is a useful indication of an intention to create a trust”. Paul v Constance: separated couple (not divorced) but deceased was (at the time) living with Mrs Paul. Concerned a bank account – “this is as much yours as it is mine”. The deceased died intestate and the estate went to his estranged wife. However there was sufficient certainty that the deceased had intended to create an express trust which was to benefit (C). Court drew reference to all of the different circumstances and actions to hold that there was a trust. - NB: Scarman LJ’s discussion on the difference between the intention to make a gift and the intention to create a trust. Jones v Lock: “here, I give this to baby” (cheque) – was it for the baby or part of his estate. Held: wasn’t intended to create a trust, it was merely a symbolic. Equity will not correct an incorrectly made gift by holding there to be a trust. Uncertain Intention: 8

- If there is a failure of certainty – if it is not certain that the trustee intended a trust – then the courts will either: 1. Decide that an outright gift was intended (Re Singh) 2. Decide that the trust fails and that the settlor still owns the property (but see the discussion of ‘resulting trusts’ later in the course). If dead in the residue (Jones v Lock) 2. Certainty of subject matter: - The trust property must be sufficiently certain. - Two key issues: a) What property has been left on trust; and b) the entitlement of each individual beneficiary under the trust. - It must be legally recognised property, or it can be intangible (property which has no existence apart from recognition by law – Don King Productions v Warren; recognises that intangible property can be the subject of a trust, BUT it must be very clear as to what is being placed on trust and it must be a definable amount). Palmer v Simmonds: “bulk of my estate” – too uncertain therefore no trust. White v White: “a small portion of what is left” – void for uncertainty, must express the intention to create a trust with sufficient precision. There must be some identifiable property which is attached to the trust. Re Golay: “… receive a reasonable income ...