The Economic Structure Of Trusts And Fiduciary Obligation - Essay Example

The Economic Structure Of Trusts And Fiduciary Obligation Question 1 Under the law of Equity and Trusts all trustees have fiduciary duties and two strict fiduciary duties are described as the no conflict rule and the no profit rule.1 The no conflict rule functions to prevent conflicts between the trustee’s duty and interests.2 The no profit rule functions to prevent the misuse of trust property by the trustee.3 It has been suggested that the no profit rule is a part of the wider no conflict rule principle.4 For instance in Bray v Ford: It is an inflexible rule of a Court of Equity that a person in a fiduciary position, such as the respondent’s, is not unless otherwise expressly provided, entitled to make a profit; he is not allowed to put himself in a position where his interest and duty conflict.5 Aside from putting the two rules together, the ruling in Bray also speaks to the strict application of the rule by using the word “inflexible”. The inflexibility of the rule suggest that in discretionary trusts, the trustee may be less inclined to exercise a reasonable discretion for fear of accusations or claims that he or she made a profit or placed himself or herself in a position where there was a conflict of duty and interest. The inflexibility of the no conflict rule and the no profit rule seems hardly fair in field where discretion requires the utmost flexibility in decision-making. The no profit rule has also been segregated from the no conflict rule6 and the rationalization of the no profit rule makes sense. In Swain v Law Society Oliver LJ stated that no profit rule is predicated on the distinct principle that obtaining a profit without authorization is a breach of fiduciary duties because the profit itself is actually trust property.7 The no profit rule is therefore not entirely inflexible as trustees may make a profit out of the trust with the proper authorization. 8 However, should a beneficiary complain of a breach of trust pursuant to the no profit rule, it may be difficult for the trustee to claim that the profit was authorized.9 The no profit rule is intricately tied to the no conflict rule as the operation of the no conflict rule is often applied to the making of profits.10 For instance in Industrial Development Consultants Ltd. v Cooley it was held that the trustee must account for profits made in his competing business.11 Although the ruling was obviously made pursuant to the no conflict rule, the case clearly related to making profits and thus the no profit rule. It would therefore appear that the no profit rule is ultimately unnecessary as any conduct amounting to the making of a profit can properly be dealt with under the no conflict rule. As for the no conflict rule, there is considerable debate over whether or not the rule should be stricter or more relaxed or constructed with greater flexibility.12 However, the House of Lords’ ruling in Boardman v Phipps makes it clear that the no conflict rule is strictly applied. In Boardman it was held that when fiduciaries make a profit they were liable to account for those profits regardless of whether or not there was fraud or whether or not bona fides was absent, because there was a conflict of interest.13 The ruling in Boardman was informed by observations made by Cranworth LC in Aberdeen Railway v Blaikie. Cranworth stated that: And it is a rule of universal application, that no one, having such duties to discharge, shall be allowed to enter into engagements in which he has, or can have, a personal interest conflicting, or which possibly may conflict, with the interests of those whom he is bound to protect.14 Upjohn LJ in his dissenting decision observed the use of the word “possibly may conflict” in Aberdeen necessarily means that: ...the reasonable man looking at the relevant facts and circumstances of the particular case would think that there was a real sensible possibility of conflict; not that you could imagine some situation arising which might, in some conceivable possibility in events not contemplated as real sensible possibilities by any reasonable person, result in a conflict.15 Lord Upjohn’s observation points out the unfairness of the strict no conflict rule and by necessary implication, the unfairness of the no profit rule. It seems unfair to strictly apply the no conflict rule without having regard to the facts and circumstances in terms of determining whether or not the trustee in question was not aware that there was or might be a conflict of interest. It is therefore hardly surprising that the lower courts have preferred Lord Upjohn’s position and have thus tended to apply his reasoning in the determination of cased invoking the no conflict rule.16 Holding trustees to a standard of practice and behaviour which involves avoiding the mere possibility of a conflict of interest is not only an onerous duty, but an impossible standard to prove and to defend. Nevertheless, a majority of the Lords in the House of Lords ruled that the trustees had a duty to avoid any possibility that there would be a conflict of interest.17 The unfairness in terms of the strict applications of the no conflict and no profit rules is demonstrated by the case of Murad v Al-Saraj [2005] EWCA Civ 959.18 In Murad, the court’s ruling challenges the strict no conflict rule established in Boardman. It was held that the principle required the imposition of liability and the creation of a constructive trust in circumstances where the individual in question had not been at fault. Thus liability should be founded on the basis of some fault on the part of the defendant.19 The court took a vastly similar approach in Foster v Bryant.20 In other words, the inflexibility of the no conflict rule and its partner the no profit rule could not be justified in all circumstances. It therefore follows that the prudent solution to claims relative to the no conflict rule and the no profit rules is to assess the trustee’s culpability by reference to wrongdoing on the part of the trustee. Question 2: Secret Trusts The secret trust is an exemption to the general rule that fits coming into effect upon the death of the settlor must be consistent with the Wills Act 1837.21 Essentially, half secret trusts and secret trusts are upheld on the basis that they operate outside of the Will22 for the express purpose of avoiding fraud against the settlor and/or beneficiaries of a half secret23 or fully secret trust when claims are made that the trusts conflict with the provisions of the Wills Act 1837 in terms of the need to identify beneficiaries.24 Nevertheless in order for a half secret or fully secret trust to be enforceable they must meet the formal requirements prescribed for the valid creation of secret trusts.25 Advice to Rosie will therefore be based on the law relative to the validity and enforceability of secret trusts. It is first necessary to establish the existence of a secret trust.26 To this end it was determined in Strickland v Aldridge that a secret trust exist when a settlor instructs another that he or she wishes that person to hold property upon trust for another and subsequently appears to leave that property to the person absolutely in Will.27 On the facts of the case for discussion Christopher contacted Robin several months before his death and apparently prior to the execution of his Will and instructed him to sell his shares and to use the proceeds for his partner Williams. Apparently, after contacting Robin, Christopher disposes of his shares by leaving them to Robin with the statement that he has already told Robin what to do with the shares. Since, what Christopher instructed Robin to do with the shares is not specified in the Will, it would appear that Christopher settled his shares on Robin absolutely. Therefore, Christopher did in fact create a secret trust. Given that the burden of proving the existence of a secret trust is on the person claiming that one exists28 and the standard is based on the balance of probabilities,29 Robin should have no difficulties meeting the burden and standard of proof. Although Christopher telephoned Robin in September and the will was executed during the same month, on a balance of probabilities, Christopher spoke to Robin prior to the execution of the Will. It does not seem likely that he left the shares to Robin to hold on trust for Williams and then telephoned Robin to seek his assistance in keeping the fact of his relationship with Williams a secret in terms of settling his shares on Williams. It is more probable that Christopher would not have left the shares to Robin unless he was already assured that Robin would ensure that Williams would be the beneficiary of the shares. There are three essential elements of a secret trust that must exist in order for a secret trust to be valid.30 The first element is intention.31 The settlor must have intended for the property in question to be utilized pursuant to instructions.32 The intention must bind the trustee and not be a transfer that relies on the trustee’s broad discretionary powers.33 Although the contents of the telephone conversation between Robin and Christopher are not revealed it can be assumed from Robin’s conduct that he received specific instructions and was not granted broad discretionary powers. Robin sold the shares and settled them on Williams. This kind of conduct can only be explained by the fact that Christopher must have specifically instructed Robin to act as he did. The second essential element is communication.34 The settlor is required to communicate his or her intention to the putative trustee together with the terms of intended trust.35 However simply requesting that the putative trustee merely hold the property in accordance with any documents attached to the Will shall not be sufficient communications.36 Obviously these communication requirements are relevant when instructions are in writing and the trustee must rely on written instructions.37 The communications must be made directly to the intended trustee. In this regard, there is no doubt that the Christopher communicated his intention and the terms of the trust to Robin directly, albeit orally. Oral communications are perfectly permissible. In half secret trusts, the oral communication must be consistent with the Will.38 In other words, if Christopher had instructed Robin to settle his shares on Williams, but left the shares to someone else in his Will, the half secret trust would have been inconsistent with the Will. The trust appears to be a fully secret trust and even it is a half secret trust, it appears to be entirely consistent with the Will as the shares were given to Robin pursuant to the Will. The communication element of secret trusts also requires that the putative trustee knows of the settlor’s intention prior to the settlor’s death. In the event the putative trustee does find out about the secret trust until after the death of the settlor, the secret trust will not be a valid trust and will not be enforceable.39 On the facts of the case for discussion, there is no doubt that Robin was informed of the secret trust by Christopher himself and thus the terms of the secret trust and its existence were communicated to Christopher prior to his death. The final element for rendering a secret trust valid is the requirement that the intended trustee gives his consent to act as trustee in the administration of the secret trust.40 Consent can be either express or implied or by mere indication of acquiescence.41 On the facts of the case for discussion, there is no evidence one way or another as to whether or not Robin consented to act as trustee in the administration of the secret trust. However, since the shares were left to Robin, it can be concluded on a balance of probabilities, Robin gave his consent to act as the trustee in the administration of the secret trust. The conversation took place several months before Christopher’s death. Had Robin withheld his consent, Christopher had sufficient time to find another trustee and another trustee would have been appointed. Bibliography Textbooks Bray, J. A Student’s Guide to Equity and Trusts. (Cambridge, UK: Cambridge University Press, 2012). Gardner, S. An Introduction to the Law of Trusts. (Oxford, UK: Oxford University Press, 2011). Hudson, A. Equity and Trusts. (Abingdon, Oxon: Routledge-Cavendish, 2010). Lau, M. W. The Economic Structure of Trusts. (Oxford, UK: Oxford University Press, 2011). Moffat, G. Bean, G.M.D. and Dewar, J. Trusts Law: Text and Materials. (Cambridge, UK: Cambridge University Press, 2005). Pretto-Sakmann, A. Breach of Trust. (Oxford, UK: Hart Publishing, 2002). Ramjohn, M. Text, Cases and Materials on Equity and Trusts, (London, UK: Cavendish Publishing Limited, 2008). Webb, C. and Akkouh, T. Trusts Law. (Hampshire, UK: Palgrave MacMillan, 2011). Wilson, S. Todd & Wilson’s Textbook on Trusts. (Oxford, UK: Oxford University Press, 2007). Articles Journals Collins, N. ‘The No-Conflict Rule: The Acceptance of Traditional Equitable Values?’ (2008) 14(4) Trusts & Trustees, 213-224. Flannigan, R. ‘The Fiduciary Obligation.’ (1989) 9(3) Oxford Journal of Legal Studies, 285-322. Day, M. ‘Fiduciary Duties.’ (2009) 15(6) Trusts & Trustees, 447-457. Pawlowski, ‘Intention and Obligation in Secret Trusts – Some Practical Implications,’ (2002) 8(2) Trusts & Trustee, 7-11. Statutes Law of Property Act 1925. Wills Act 1837. Cases Aberdeen Railway v Blaikie [1854] 1 Macq 461. Attorney-General for Hong Kong v Reid [1994] 1 AC 324. Blackwell v Blackwell [1929] AC 518. Bray v Ford [1896] AC 44. Boardman v Phipps [1966] UKHL 2. Brown v IRC [1965] AC 244. Foster v Bryant [2007] Bus LR 1656. Industrial Development Consultants Ltd. v Cooley [1972] 1 WLR 443. Keech v Sandford [1726] Sel Cas Ch. 61. McCormick v Grogan [1869] LR 4 HL 82. Moss v Cooper [1861] 1 John & H 352. Murad v Al-Saraj [2005] EWCA Civ 959. Ottaway v Norman [1972] 3 All ER 1325. Reading v R [1949] 2 KB 232. Re Keen [1939] Ch 236. Re Snowden [1979] 3 All ER 172. Re Spence [1949] WN 237. Re Stead [1900] 1 Ch 237. Strickland v Aldridge [1804] 9 Ves 516. Swain v Law Society [1982] 1 WLR 17. Wallgrave v Tebbs [1855] 2 K & J 313. Read More