Constitution of Trusts –

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Constitution of Trusts
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focus on 3 certainties, power of appointment, self appoint trustee, formalities of trust and constitution of trust. (especially on three certainties) I will upload the relevant lecture notes to you as well, please have a reference on it. Last, please also use cases to references the answer please.
Constitution of Trusts
In *Milroy v Lord (1862) 4 De GF&J 264, 45 ER 1185 Turner LJ said, setting out the ways in which a settlor may provide (gratuitously; you can also sell people property!) for his intended beneficiary,
“He may, of course, do this by actually transferring the property to the persons for whom he intends to provide, and the provision will then be effectual and it will be equally effectual if he transfers the property to a trustee for the purposes of the settlement or declares that he himself holds it on trust for those purposes.”
The first of these three possibilities is gift. The second is a transfer to trustees on trust, and the third a self-declaration of trust. The rules on constitution of trusts therefore build on normal rules of transfer of legal title. If I want to give you a vase I hand it over. If I want to give you some shares I may have to fill in a share transfer form and register the transfer with the company. This is so in those cases we will look at and you need not worry about other methods of share transfer. If I want to transfer money in a bank account I ask that it be transferred through the banking system.
The Concept of Constitution
Every trust needs to be constituted. The settlor declares that the trustee holds property on trust for the beneficiary; however, this is of no use if the trustee does not have the property. Constitution therefore is the process of putting the trustee in possession of the property and giving him legal title. There are two steps to creating a trust. First the trust is declared then the property transferred to the trustee. Until the trustee has the property he has no obligations under the trust. There are two fact situations to be considered.
1) Where there is a contract, or covenant between settlor and trustee
2) Where there is no contract or covenant.
Completing a Transfer: No Covenant to Settle
There are two possible scenarios
1) The settlor is the trustee, or one of several trustees.
If the settlor is the sole trustee the trust is automatically constituted. This is an example of self-declaration of trust, which we have already seen. Nonetheless it is still essential that this be done properly. In Jones v Lock (1865) 1 Ch App 25 the father put a cheque in the hand of his baby son and said ‘I give this cheque to baby for himself’. That failed as a gift to the baby, and could not be reconstituted as a self-declaration of trust. Turner LJ said in Milroy v Lord,
“The cases, I think, go further to this extent: that if the settlement is intended to be effectuated by one of the modes to which I have referred, the court will not give effect to it by applying another of those modes. 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.”
In other words if you muck up doing one thing, equity will not say you’ve done another thing. If the settlor is one of several trustees he is obliged (given that his self-declaration of trust is effective and complies with all three certainties) to transfer the trust property to the other trustees and he can be compelled to do so. He has the trust property and is therefore under the obligations of a trustee, even if the other trustees are not T Choithram Int’l v Pagarani [2001] 1 WLR 1.
2) The settlor is not a trustee
Where there is no covenant or contract between the settlor and trustees to transfer the property, the settlor cannot be compelled to make the transfer, if he refuses to do so.
If I telephone you on your birthday to say that I have a birthday present for you and will bring it over later those words do not create any legal obligation on me to do so. It is merely an expression of the intention to make a gift. Similarly if I say I am going to give Fred Bloggs £1000 to hold on trust for you, I am under no obligation to actually transfer that money. It is merely an expression of an intention to transfer the money. You have given me nothing for my promise. In equitable parlance you are a volunteer and equity will not assist a volunteer. The same is also true of Fred. He has given nothing and cannot enforce the promise. The basic rule is that the settlor, creating the trust, must actually transfer the property to the trustee. The trustee must become legal owner. You will not be surprised that this is the effect of *Milroy v Lord (1862) 4 De GF&J 264, 45 ER 1185; Milroy executed a voluntary deed purporting to assign 50 of his shares to Lord to be held on certain trusts. Milroy v Lord was itself an example of the third of Turner LJ’s possible means of benefiting the donee of the settlor’s largesse. The shares were only transferable by entry in the company books. No such entry was made. Lord held a power of attorney, which would have allowed him to make the transfer to himself as trustee. He did not. It was held that Milroy had not intended for himself to be the trustee; further because Lord did not exercise the power of attorney and was not bound to exercise it, equity would not treat it as if there were a transfer.
‘In order to render a voluntary settlement valid and effectual, the settler 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 (to the trustee) and render the settlement binding upon him.’ (1862) 4 De GF&J 264, 45 ER 1185 (Turner LJ)
There are two levels to this. It must be clear a) that the donee of the shares (Lord) was to be a trustee. And b) that the legal title is transferred. This second requirement is the same requirement as if Lord had been to take the shares outright. However, there is an exception to this strict rule. If the transferor has made every effort to make the transfer, but the transferee is responsible for doing some act to complete the transfer equity will assume that the transfer is complete.
In Mascall v Mascall (1985) 50 P&CR 119 the claimant bought a house for £9000 close to his own intending to get his daughter who was ill to move in. She refused. However, he transferred the house to his son for a purported consideration of £9000. The claimant and the son had a row and the former attempted to recover the property on the grounds it was still his, as the son had never registered the transfer. The court held that a gift was complete in equity when the transferor had done all he could do to transfer the property. The claimant had executed the transfer and handed over the land certificate, so the transfer was complete, even though the transfer had not been registered.
In *Re Rose [1952] Ch 499 shares were transferred to a trustee. The transfer required registration. This was not done before the death of the transferor. The question was whether the shares were part of the transferor’s estate. It was decided not. Equity would treat the gift as complete so long as the transferor had done all that was in his power to ensure the transfer.
‘The circumstance that the transferee must do a further act in the form of applying for and obtaining registration in order to get in and perfect his legal title, having been equipped by the transferor with all that is necessary to enable him to do so, does not prevent the transfer from operating in accordance with its terms as between the transferor and transferee, and making the transferee the beneficial owner.’ [1952] Ch 499 (CA) 518-9 (Jenkins LJ)
In *Pennington v Waite [2002] 1 WLR 2075 Harold had been made a director of the company. It was a requirement that directors hold shares in the company and Ada made out a share transfer form and executed it. However, it was never given to the defendant. In an action by the executors of Ada’s will the question came up as to the validity of the transfer. It was said that it would have been unconscionable for C to deny the transfer and the beneficiaries under the will could be no better off. On the facts Ada had handed the transfer form to a company official who filed it and forgot all about it. When Harold asked about the shares, he was told not to worry, everything had been sorted out. He relied on this, and arguably therefore the decision is correct as Ada and the company would be estopped from denying the validity of the transfer. Estoppel takes place when a party (A) has made a representation that x is true to party B. B then relies on the representation to his detriment and A cannot now in a subsequent claim against B resile from the representation that x is true (even though it is not.)
Note though that in Zeital v Kaye [2010] EWCA Civ 159, [2010] 2 BCLC 1 Raymond Zeital completed a stock transfer form in 1997, naming Stefka, with whom he had formed a relationship, as the transferee of shares in a company, Dalmar which had purchased a flat for letting. In 1998, the company was struck off the register, although the flat continued to be let. It was not until August 2003 that Raymond gave the form to Stefka. He also gave her a second stock transfer form, without adding her name as transferee or dating it. He did not hand over the share certificate along with that second stock transfer form. After Raymond’s death in 2004, Stefka purported to appoint herself a director and obtained the restoration of the company to the register. In September 2004 the company entered into a members’ voluntary liquidation, and the flat was sold. A dispute arose concerning the proceeds of the sale, which turned on the beneficial ownership of the shares in the company. Raymond had died intestate and the shares would devolve to his daughters Giselle and Kim, if the transfers to Stefka had failed. The court decided that once a legal owner of shares hands a share transfer form over and the share certificate, the donee is in a position to register his title and becomes automatically equitable owner. Raymond had done none of these things and so the shares devolved on the intestacy rules. The lack of the transfer of the share certificate In Pennington v Waine was held by the court in Zeital irrelevant because the company held them itself and Pennington is therefore confined to its facts. It might be argued that Zeital goes back to the Rose test because of the language used that the donor had not done all he could have done, although perhaps without specifically overruling Pennington.
In *Re Ralli’s Will Trusts [1964] Ch 288 Helen made a covenant to assign after acquired property to trustees, which included an interest under the will of her father. The claimant became both executor of the will and trustee of Helen’s settlement. A special rule was invoked to settle the interests under the will on trust. Essentially because the executor of the will has legal title to the estate of the deceased he did not need Helen to transfer title to him to constitute him trustee. He was automatically trustee of the property. The final rule to be aware of is that it does not matter how you become legal owner of the property, once you do your trust obligations bite immediately.
Covenants to Settle
Where there is a covenant between the settlor, and the trustee the question is different. Here there is an obligation on the settlor to transfer the trust property. Not only have he declared an intention to do so, but he has contractually bound myself. That property may exist at the time the covenant is made, or it may be what is called “after-acquired property”, that is a covenant to settle property acquired in the future. There are three possible situations.
1) Where the trustee has given valuable consideration for the promise to transfer he may rely on the doctrine of specific performance and compel the settlor to transfer the property.
2) Similarly if there is marriage consideration anyone within the marriage consideration may compel the transfer of the actual property. The spouse and any children are considered to provide the marriage consideration and can therefore enforce the contract. Pullan v Koe [1913] 1 Ch 9 involved a marriage settlement. The wife covenanted with the husband that she would settle certain property in consideration of the marriage. The wife did not settle a sum of money she should have. The moment the wife received the money it was bound by the covenant and was consequently subject in equity to a trust enforceable in favour of all those within the marriage consideration.
In these two scenarios equity takes the view that the trustees, or those within the marriage consideration, have given value for the promise. They are not volunteers. Specific performance is not available to volunteers
3) The settlor has not received any consideration in return, or the claimants have not provided any consideration. Normally in this situation the covenant will be a deed under seal. Normal contractual rules provide that a seal is good consideration at law. The cases have concerned after acquired property, and that has complicated matters unnecessarily. The question is whether the obligation to transfer property acquired in the future can be contractually enforced by or for the benefit of a volunteer beneficiary when that property comes into being.
Two questions arise in this case
a) Will the trustees be directed to enforce the covenant?
b) Can they be forced not to attempt to enforce the covenant?
a) *Re Pryce [1917] 1 Ch 234. In this case there was a covenant on the part of the wife to settle on trust certain property acquired after her marriage as part of her marriage settlement. Some of this property was not settled. She died. The next of kin were not within the marriage consideration; they were not children. They were volunteers and the covenant was under seal. The trustees applied for directions as to whether they ought to take proceedings to enforce the covenant, and then hold the property for the next of kin.
‘Volunteers have no right to obtain specific performance of a mere covenant… nor could damages be obtained either in this Court or … at law… Ought the court now for the sole benefit of these volunteers to direct the trustees to take proceedings to enforce the defendant’s covenant…I think it ought not; to do so would be to give the next of kin by indirect means relief they cannot obtain by any direct procedure and would in effect be enforcing the settlement…’ [1917] 1 Ch 234, 241 (Eve J)
Re Pryce is on its face authority for the proposition that trustees will not be compelled to enforce the settlement, but may be permitted to do so. To be fair to Eve J he was asked whether he would direct the trustees to sue and he decided not to give that order. It is still though occasionally cited as authority for the proposition that the trustees ought not to act. It is certainly authority that neither the volunteer beneficiary nor covenantee can obtain specific performance. This must be right. It is basic contract law that only those who give good consideration can get SP. Penner argues that the decision that the Court ought not to direct the trustee to sue may be wrong. The trustee is not invoking equitable principles at all, merely suing for damages.
b) In *Re Ralli’s WT Buckley J alluded to the enforcement of covenants to settle although as we have seen the decision did not turn on this. He said,
‘It is also true that, if it were necessary to enforce the performance of the covenant, equity would not assist the beneficiaries because they are mere volunteers and that for the same reason the plaintiff as trustee of the settlement would not be bound to enforce the covenant and would not be constrained by the court to do so, and indeed it seems might be constrained by the court not to do so.’ [1963] 3 All ER 940, 947-948 (Buckley J)
Re Kay [1939] Ch 329 involved a voluntary covenant executed by an unmarried woman (a spinster in the old-fashioned language of the case) to settle certain after-acquired property. She refused to settle property subject to the covenant. The court decided the beneficiaries, as volunteers had no right to enforce the covenant and therefore the trustees ought to be directed not to take any proceedings to enforce it. Re Kay then is authority for the proposition that the trustees are not permitted to enforce the settlement.
An enforceable debt created by a covenant under seal is a chose in action. It is an intangible piece of property, which can be held on trust. Indeed one of the old methods of evading the contractual rule of privity was the trust of a promise. It is sometimes said that where the trustee holds the benefit of the promise to settle on trust he can sue. Indeed he must sue. There is a fully constituted trust of a chose in action. There is a counter-argument though, discussed in Penner, that the trustee will be constrained not to sue – despite there being a trust of the chose in action. This is because the chose in action provides a benefit unsupported by consideration, and equity will only enforce a trust of a chose in action so supported. This seems a mightily strange argument when you consider that equity is perfectly happen to enforce trusts of other assets where no consideration has been given. If therefore there is a trust of the promise to transfer, the Re Pryce issue disappears.
Presumably therefore on this view Re Pryce is predicated on the view that the “trustee” is not a trustee. If there is no trust of the benefit of the promise, but the “trustee” sues and obtains damages those damages would prima facie be held on trust for the beneficiary, but if he has no equitable obligation to sue, it is within his power – whim – to decide whether or not to constitute the trust. This is a breach of the principle in Re Brook’s ST [1939] Ch 993, which is that only the settlor can decide whether to constitute a trust. There is some logic to the Re Kay position therefore. If therefore the trustee is permitted to sue; he must be obliged to sue. He must be obliged to sue wherever he is allowed to sue.
4) A further question arises in the context of a covenant to pay money or transfer specific property. Volunteer beneficiaries and trustees on their behalf cannot obtain the transfer of the actual property promised, but can they obtain common law damages for the breach of the covenant? It appears that they can if they are party to the covenant. Indeed the following cases appear to stand four-square against the interpretation of Re Pryce and Re Kay that the covenantee not be permitted to sue or not directed to sue. He clearly can sue for something. The only question is whether the covenantee holds the benefit of the covenant on trust. If he does, he is obliged to sue. If he does not, there still seems little reason to forbid him to sue. He sues qua covenantee and gets damages. He can choose whether to constitute the trust, but this is no breach of Re Brooke as he becomes the settlor himself.
‘The rule against relief for volunteers cannot, I think, be put any higher than this. A court of equity will not in favour of a volunteer give to a deed any effect beyond what the law will give to it.’ Fletcher v Fletcher (1844) 4 Hare 67, 67 ER 564, 568 (Wigram V-C).
In fact Wigram VC is happy to say that there is no problem with the presence or absence of a trust of the covenant. Penner suggests the covenantee’s right to sue is not dependent on there being a trust of the benefit of the covenant. One argument sometimes put is that if the trustee sues and obtains damages, which would otherwise be held on trust for the beneficiary he must hold them on resulting trust for the settlor to avoid this result. This is another mightily strange result, but one that seems to follow logically from the fact the trustee would receive as trustee (and therefore cannot in equity take the benefit) but where the trustee would otherwise choose whether the trust in favour of the beneficiary is constituted.
In *Cannon v Hartley [1949] Ch 213 the defendant covenanted to settle upon trust for himself, his former wife and daughter certain sums of money. He refused to do so. His daughter sued for damages. She succeeded. These can be substantial damages, Re Cavendish-Browne [1916] WN 341. This may not apply to actions to enforce covenants transfer after-acquired property. Query did Re Cavendish-Browne involve after-acquired property?
Who can sue?
Section 1 Contracts (Rights against Third Parties) Act 1999
1(1) Subject to the provisions of this Act, a person who is not a party to a contract…may in his own right enforce a term of the contract if a) the contract expressly provides that he may or b)…the term purports to confer a benefit on him.
1(3) the third party must be expressly identified in the contract by name, as a member of a class, or as answering to a particular description but need not be in existence when the contract is entered into.
It appears likely that the 1999 Act allows volunteers to enforce the covenant to transfer to trustees directly (in an action for damages only) assuming that section 1(1) is satisfied. The question of their equitable right that the trustee sue is sidestepped, but only if we think that the covenant purports to confer a benefit on him. They have a statutory right to sue for whatever common law remedies they would have been entitled to as a party to the covenant.
1. Where the beneficiary is a covenantee, he can sue for damages
2. Where there is a trust of a promise the trustee can (and must) sue for damages
3. Where there is no trust of a promise, the trustee need not sue for damages, but since he is not to take the assets outright on receipt, and cannot be left to decide for himself whether the trust is constituted a resulting trust for the settlor arises
Penner ch 8
Webb & Akkouh ch 7
Feltham ‘Intention to Create a Trust of a Promise to Settle Property’ (1982) 98 LQR 17
J Garton ‘The Role of the Trust Mechanism in the Rule in Re Rose’ [2003] Conv 364
An Introduction to Ownership and the Trust Concept
Under English law a person can hold an asset outright. This means he has full ownership. He may also hold it on trust. In this case he has more circumscribed entitlements to the asset.
Legal Ownership
Normally we have full ownership of a thing. If I own a car, I can drive it around with only me in it, hire it out to you to drive, use it as taxi, have it crushed, give it away or sell it. There are therefore a great variety of allowable activities I can engage in. Tony Honoré listed a number in a famous book chapter entitled simply “Ownership” (T Honoré ‘Ownership’ in AG Guest (ed) Oxford Essays in Jurisprudence (OUP Oxford 1961) 108).
1. right to possess, or to have exclusive physical control
2. right to use, which Honoré confines to personal use
3. right to the income, which will include any natural incomes – apples from an apple tree, lambs from a sheep, but also eg rental income from an apartment
4. right to manage and deal with the asset, control its use and licence others to make personal use of it
5. right to the capital; this is the right to deal with the asset as you see fit
6. right to security; that is the right to prevent others from making use of the asset
7. the right of transmissibility, the ability to give it away, or sell it so that the transferee acquires precisely the rights you had
8. absence of term; this refers to the nature of the right as not limited in time – a right to use the asset only for 10 years for example will not satisfy this.
Critically I have the right to possess the car. That is a right to physically take and hold the object (irrespective of the fact that cars are a bit too heavy to carry around.) The car is a chose in possession. That also entails a right to stop you having it without my consent – or anybody else. The most important property rights over the car are basically my rights to use it, transfer it, and exclude anyone else from it.
That right of exclusion is a right in rem. That means it is a right against an indefinite group of people relating to an object, or an asset. A right in personam is a purely personal right. These are critically different. I can enforce my personal contractual rights for instance only against my co-contracting party. I cannot sue Ben to enforce my contractual rights to buy a car agreed with Chloe. Such personal rights, called choses in action, or things that can only be enforced through court action, can themselves be held on trust. This is because the right to be paid under a contract can itself be a property right. I can assign or transfer it, and I can stop others from interfering with my rights to be paid. Here the critical part enabling us to call it a property right is its assignability or transferability.
Perhaps oddly the common talks of title. Title is shorthand for entitlement to possess, and we can have different levels of entitlement. If I lend you my car you have a right to possess the car. If not, you would be unable to drive it legally. However, you have no right to deny me my car back, because I have a significantly better right to it than you. Choses in action cannot be possessed; I either have a right to the money or I do not. Indeed linguistically we tend not to talk of owning debts or bank accounts. The common linguistic feature though that makes both my bank account and my car property is that we do talk of having both.
Ownership rights may be shared. Co-ownership takes one of two forms. It may be a joint tenancy or a tenancy in common. Joint tenants share the four unities.
1. possession
2. interest
3. title
4. time
The unity of possession means that the co-owners have a contemporaneous right to possess or control the whole of the property. Neither party in a joint tenancy is entitled as against the other to exclusive possession. The unity of interest means that each joint tenant has exactly the same rights over the asset; that of title implies that the parties’ rights were created by the same act and the unity of time that they were created at the same time. If those requirements are met collectively the joint tenants are treated as if they were a single owner with each being as entitled to the whole of the thing as the others. Consequently when a joint tenant dies the other joint tenant(s) simply acquire his share. This right of survivorship is a cardinal feature of joint tenancy. Joint tenancy therefore inevitably devolves to sole ownership eventually. No right of survivorship applies in the context of a tenancy in common. All other things being equal, the common law (as contrasted with equity) has a preference for a joint tenancy and choses in action can only be held at law as joint tenants.
A tenant in common by contrast has an undivided share, and the only unity the tenants in common need is the unity of possession. Tenancies in common can be created in a number of ways; there may, for example, be a transfer indicating the two parties are to have separate interests; eg a transfer to parties to hold “equally”. We see in a moment that equity allows for both joint tenancies and tenancies in common.
The Trust
What does it mean to say I hold my car on trust for you? I have legal title. That means I have the right at law to drive it around, hire it out as a taxi etc. You have equitable title, or equitable ownership. There are two situations we must consider. Firstly, there is the case where the legal owner has some duties to perform regarding the property. The trust instrument (most trusts are in writing although not all need to be) will set out what the trustee has to do. Perhaps the trustee is to hire the car out and pay the proceeds to the beneficiary, or perhaps he merely has to allow the beneficiary to drive it. The second situation is where the legal owner has no duties to perform. This is what is known as a bare trust. They rarely exist for long, because most of the time as soon as they are discovered the equitable owner will want the property for himself. In any case the car must be used solely for the benefit of the equitable owner, whose right is that the trustee safeguard it and use it for his benefit. The legal owner can derive no benefits from the property, but he has a number of duties. The trustee must manage the property for the benefit of the equitable owner, and any benefit he derives from the property can be stripped from him. The delegation of management functions is one of the most useful aspects of a trust. If the trustee refuses to properly manage the property B can enforce the trust and compel him to do so. In extremis the court can order the removal of T as trustee and appoint another.
He can, however, demand the property be transferred to him. The beneficiary of the trust can then compel him to hand over the property. He can decide to become the full owner of the property. In *Saunders v Vautier (1841) Cr & Ph 240, 41 ER 482 the trust was to accumulate the income of the stock subject to the trust until the beneficiary was 25. However, the beneficiary wanted the stock to be transferred when he was 21. As the sole beneficiary he was entitled to this. He had a right that the trustee put him in possession.
We can say therefore that a trust is an obligation. As an obligation there must be two parties – a trustee and a beneficiary. It must be capable of being enforced. If it can be ignored it is not much of an obligation. The obligations, as we will see, are onerous. In the old parlance of equity we would say that equity acted upon the conscience of the trustee to prevent him from exercising his legal rights inappropriately. That type of talk is not particularly helpful, but McFarlane (The Structure of Property Law (Hart Oxford 2008) 23-25) talks of the beneficiary having a right against a right. That’s a pretty obscure term, but what it means is that I, as the beneficiary, have an equitable right that the trustee use his legal rights (his legal title to the car, or right against the bank to be paid) only for my benefit (and the trustee has an equitable obligation to do so). Between the legal and equitable owner the latter is treated as the owner, but between the former and third parties the legal owner is treated as if he had full power over the property. However, the trust is also a property right. We saw earlier that critical features of a property right are that it can be enforced against an indefinite group of people. If the trust is a trust of £1m and the trustee’s obligation is to manage the funds and pay the income to the beneficiary that is clearly a personal obligation. I cannot, as the beneficiary, sue someone other than the trustee for not investing the money. That is silly; they have nothing to do with the trust. If, however, the trustee misapplies asset and for instance gives it away as a birthday present to a third party the proprietary rights held by the beneficiary can lead to obligations being imposed on the third party, who now obtains legal title and becomes the (or at least a, probably, constructive) trustee. The beneficiary has two sorts of rights
1. Personal rights against the trustee; rights that cannot (like the right to be paid income) be enforced against third parties
2. Rights to exclude third parties from the asset. These rights to exclude third parties make the beneficiary’s rights proprietary. The only difference from legal rights is that where the third party is a bona fide purchaser for value without notice – ie one who gives more than merely nominal consideration, and does not know, nor ought to know of the trust, the third party takes free of the equitable interest. The beneficiary cannot enforce his rights. However, that still enables the beneficiary to enforce against an indefinite group.
This does not mean that the trustee does not have proprietary rights. He does. Imagine a thief steals the car. The trustee retains rights against the thief to the asset; at law he can sue for the car or compensation. That legal right he has solely for the beneficiary’s benefit. The trustee must sue. Indeed it i

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