Week 7 trusts- nature - Summary Equity and Trusts PDF

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LS 240: Equity & Trusts Notes: Topic Seven Trusts – The Nature of a Trust, Modern Functions of a Trust and Trust Distinguished From Other Relationships What is a Trust? A trust has been described as existing “when the owner of a legal interest or equitable interest in property is bound by an obligation, recognised and enforced in equity, to hold that interest for the benefit of others, or for some object or purpose permitted by law.” It follows that the essence of a trust is the holding of property by its legal owner (the ‘trustee’) for the benefit of other (‘the beneficiaries’). From this description, three elements common to all trusts are apparent: a trust must have a trustee who holds legal title to the trust property; the trustee must hold the property for the benefit of a beneficiary or a purpose recognised by law and trust property must be vested in the trustee. A person may be both trustee and beneficiary of the same trust property but, due to the requirements of duality, cannot be both sole trustee and sole beneficiary, in which case legal and equitable title merge and the trust is extinguished: Re Douglas (1885). Obligation is the central concept of a trust. As legal ownership generally gives the legal owner power to deal with property as he or she deems fit, an equitable obligation binds a trustee to administer trust property for the benefit of the beneficiaries or charitable purposes in issue. Trustees, it is said, ‘exist for the benefit of the beneficiaries, and for that alone’: Purcell v Deputy Federal Commissioner of Taxation (1920). Elements of a Trust - The legal right to property is vested in the trustee; - The trustee has obligations to the beneficiaries which are equitable and fiduciary in nature; - Those obligations relate to the property held on trust; and - The nature of the obligations gives rise to a proprietary interest in the trust property by the beneficiaries. Trustee - The titleholder, the title may be (most commonly) legal but may be equitable. - Trustees ‘exist for the benefit of beneficiaries, and for that alone’: Purcell v Deputy Federal Commissioner of Taxation (1920). - There may be more than one trustee - A trustee may be a natural person or a company - Must be subject to an obligation Trust Property - Must be identifiable and capable of being held on trust. Beneficiary

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A person (the cestui que trust) or group of persons (the cestuis que trust) for whose benefit the trustee holds the property.

Settlor - The person(s) or company establishing the trust. May be a testator. Trust Deed (or instrument) - The document used to create a valid trust. Inter vivos Trust - A trust created during the lifetime of the settlor. Testamentary (or post mortem) Trust - A trust created pursuant to a valid will of a testator. Express Trust - An express trust is created when the settlor expressly declares themselves as trustee of her or his property, or by transferring their property to another person as trustee. - There must be an express intention; certainty of intention, of subject and of object. - The intention may be expressed in a trust instrument or, subject to statutory requirements as to writing and to the parole evidence rule; it may be implied from surrounding circumstances. Private Express Trust - Where it is intended to benefit one or more natural or corporate persons. Public Express Trust - Where its purposes are recognised as charitable in law. Fixed Trust - The beneficiaries or class of beneficiaries are ascertained, and have equitable entitlements as per terms of the trust. Discretionary Trust - The trustees have absolute discretion to apply the trust property to the beneficiaries. Executed Trust - All necessary formalities to complete the trust have been fulfilled and its terms are clear. Executory Trust - The intention of the settlor to establish a trust has been manifested but some further step(s) remains finally to settle and define its terms: Herdegen v FCT (1988). Bare Trust - A trustee’s interest under a ‘bare’ trust is limited to holding legal title to the trust property, without any (further) duty to perform, except to convey it on demand to the beneficiaries or as directed by them. Statutory Trust - Statue may expressly create a trust. It may be created even when the legislation does not use the word trust: Authorson v Canada (A-G) (2002). (2) Non-Express Trusts Resulting Trust

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Resulting trusts arise where one person (the settlor) confers title to property to another person but retains beneficial ownership of the property, in whole or in part. The resulting trust is premised on presumed intention arising out of a particular form of transaction. Constructive Trust - The court imposes a constructive trust where no trust has been declared, but where, according to the principles of equity, it would be a fraud for the person in whom the court imposes the trust to assert a beneficial ownership or otherwise not to account for a gain or compensate another for a loss. Trusts and Other Legal Relationships (1) Trust and Bailment - A bailment is the delivery of personal chattels by the owner of the chattels (Bailor) into the possession of another person (Bailee) upon express or implied promise that they will be redelivered to the bailor: Hobbs v Petersham Transport - Similarities – the bailee and a trustee both hold property for another, they owe a duty of care in respect of the property (Pitt Son v Proulefco) and the relationship is one of fiduciary (Hospital Products v US Surgical). - Differences – A mere contract of bailment does not create a trust (Davis v Hueber). This is because the trustee holds title to the trust property and so is legally capable of passing title, whereas the bailee does not have title to the bailor’s property only possession. It is the intention of the owner of the property at its transfer that determines whether a trust or a bailment relationship exists. (2) Trusts and Agency - Agency is a relationship between one person (agent) and another (principal) that gives the agent authority to affect the principal’s legal relations with their parties (International Harvester v Carrigan’s Pastoral Co). - Similarities – Both trustee and agent act in the best interest of and for the benefit of another and both are in a fiduciary relationship. - Differences – Agency relationship does not require that the agent be vested with the property of the principal at any time. An agent acts with express or ostensible authority whereas a trustee must follow direction specified in the trust. A trustee contracts as principal and is subject to personal liability for expenses incurred in management of the trust (Construction Engineering v Hexyl). (3) Trust and Contract - A contract is an agreement giving rise to a legally enforceable obligation binging its parties. - Differences – A trust is not ordinarily based on an agreement as under contract (Wickstead v Browne). Consideration is a requirement of contract and not trusts. A trust may be regarded as an equitable common law gift. Contracts create personal rights between the parties where as trusts can create proprietary interest in the beneficiaries. Liability for breach of contract requires the compensation of the innocent party for loss. A contractual obligation does not necessarily carry an equivalent fiduciary duty. Under contract, only parties to the contract can enforce

it; however a beneficiary may not be involved in the trust but may enforce it (Wilson v Darling Island). (4) Trusts and Partnership A partnership is a relation that exists between persons carrying on a business in common with a view to profit. In a partnership the partners are the agents of one another and therefore they too are subject to fiduciary obligations. Trusts may be for commercial purposes, but not always as with a partnership. A partnership is not an individual entity at law and is an associational form where as a trust is not.

(5) Trust and Debt - The relationship of debt arises where under a contract a sum of money is due from one person (debtor) to another (creditor). - Whilst there are circumstances where beneficiaries or the settlor of a trust are entitled to recover moneys from the trustee, this is not a right of action in debt. - A debtor is not placed under a fiduciary obligation to pay the moneys due or otherwise in relation to the creditor. Barclays Bank Ltd v Quistclose Investments Ltd [1970] AC 567 Facts: Rolls Razor Ltd, in serious financial difficulties, sought to borrow further funds. A financier was willing to lend £1 million, but only on condition that the company found a sum of £209,719 to pay a dividend which had been declared in July 1964. Rolls Razor Ltd obtained a loan from the respondent for the purpose of paying that dividend and a cheque for the necessary amount was paid into an account opened especially for the purpose. Before the dividend was paid, Rolls Razor went into voluntary liquidation. The respondent claimed that the £209,719 was held by that company on trust to pay the dividend and, as the trust had failed, the money should be repaid. The appellant bank claimed the money was available as part of the general funds of the company. Held: Their Lordships decided that the funds were held on a resulting trust for the lender. Lord Wilberforce stated that arrangements of this character, for the payment of a person’s debts by a third person, gave rise to a relationship of a fiduciary character in favour, as a primary trust, of the creditors and secondarily, if the primary trust fails, of the third person. Once the purpose is carried out, the lender has only a remedy in debt. Until then, the lender has an equitable right to see that the money is applied for the specified purpose. Barclays Bank Ltd v Quistclose has been accepted in Australia as authority for the rule that, where one party advances money to another with the mutual intention that it should not become part of the assets of the borrower but should be used for some specific purpose, then a trust of the moneys will be implied if the purpose fails. Important Points - The intention of the parties (in displacing the presumption that no trust will be created in an ordinary commercial transaction) is paramount; and

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Notice of such intention (the intention to create a trust) must be clearly conveyed to any third party. The Quistclose case gives rise to the so called primary-secondary theory of trusts, or ‘two trust’ approach. The Quistclose principle was accepted in Australian law in Australasian Conference Association Ltd v Mainline Constructions Pty Ltd (1979) 141 CLR 335. Gibbs ACJ stated the principle as: ‘ That case [Quistclose] is authority for the proposition that where money is advanced by A to B, with the mutual intention that it should not form part of the assets of B but should be used exclusively for a specific purpose, then there will be implied (at least in the absence of an indication of a contrary intention) a stipulation that if the purpose fails the money will be repaid, and the relationship gives rise to a relationship of a fiduciary character, a trust. Mere payment of the funds into a specially designated bank account will not, absent the requisite mutual intention and notice to the third party, be sufficient to establish a Quistclose resulting trust: Re Fada (Australia) Ltd [1927] SASR 590. See also Re Multi Guarantee Ltd [1987] BCLC 257 – The guarantee company did not manifest a sufficient intention to create a trust.

The question of whether a Quistclose trust arises in any given case will turn on the particular facts of the case which must be carefully scrutinised. Re Australian Elizabethan Theatre Trust (1991) 102 ALR 681 Facts: The AETT received gifts which were tax deductible, on behalf of other bodies. The Commissioner of Taxation had ruled that he would only allow the deductions on donations given to the AETT on behalf of other organizations when the AETT decided voluntarily to transfer the funds. The practice therefore was that the donor would give the money to the AETT “unconditionally” but expressing ‘a preference’ for the manner in which it was to be used. Decision: Gummow J held that no trust arose in favor of any of the organizations. The gifts were ‘unconditional’ and words expressing any preference were merely precatory. In Quistclose, Lord Wilberforce emphasized that the form of words used indicated that the loan moneys were to be used ‘exclusively’ or ‘only’ in a particular way. Here the word ‘unconditional’ as used in the AETT standard form has a primary meaning calculated to lead to the opposite result. It suggests an absence of qualification or obligation. The essential point is that a trust cannot exist where there are counter intentions, in this case the use of the word ‘unconditional’ and then the requirement that shareholders provide a ‘preference’. Gummow J further expressed that: ‘To speak of a Quistclose trust as if it were a new legal institution rather than an example of the particular operation of principle upon the facts as found, is to set the listener or reader off on a false path.’ In Australia is has generally been classified not as resulting trust but rather an express trust. Australian judges have rejected the two stage approach of Lord Wilberforce, holding the Quistclose type of trust to be an orthodox single express trust.

Twinsectra Ltd v Yardley [2002] 2 AC 164 • Lord Millet classified the trust as “an entirely orthodox example of a …resulting trust”. • “The starting point is provided by two passages in Lord Wilberforce's speech in the Quistclose At p 580, he said… • These passages suggest that there are two successive trusts, a primary trust for payment to identifiable beneficiaries, such as creditors or shareholders, and a secondary trust in favour of the lender arising on the failure of the primary trust. But there are formidable difficulties in this analysis, which has little academic support. What if the primary trust is not for identifiable persons, but as in the present case to carry out an abstract purpose? Where in such a case is the beneficial interest pending the application of the money for the stated purpose or the failure of the purpose? There are four possibilities: (i) in the lender; (ii) in the borrower; (iii) in the contemplated beneficiary; or (iv) in suspense. • (i). The lender. In "The Quistclose Trust: Who Can Enforce It?" (1985) 101 LQR, 269, I argued that the beneficial interest remained throughout in the lender. This analysis has received considerable though not universal academic support: see for example …and referred to with apparent approval by Gummow J in In re Australian Elizabethan Theatre Trust (1991) 102 ALR 681. Gummow J saw nothing special in the Quistclose trust, regarding it as essentially a security device to protect the lender against other creditors of the borrower pending the application of the money for the sated purpose. On this analysis, the Quistclose trust is a simple commercial arrangement akin…. which enables the borrower to have recourse to the lender’s money for a particular purpose without entrenching on the lender’s property rights more than necessary to enable the purpose to be achieved. The money remains the property of the lender unless and until it is applied in accordance with his directors, and insofar as it is not so applied it must be returned to him. I am disposed, perhaps pre-disposed, to think that this is the only analysis which is consistent both with orthodox trust law and with commercial reality. -

Twinsectra dismisses the two trust approach, yet by continuing to classify the Quistclose trust as a resulting trust, fails to engage with the issue of intention. On the one hand a Quistclose trust will not arise unless the express intention of the parties is to create a trustee relationship rather than one of creditor-debtor. Yet the trust arising from the intention of the settler is an express trust, not a resulting trust....