Principles of Equity and Trust in the English Law - Essay Example

?Law College: Principles of Equity and Trust The concept of equity and trusts has been a controversial issue in the English law especially while dealing with complex issues that arise between trustees and beneficiaries. Trusts are legal bonds in which one person, the settlor, grants powers to another, the trustee, to act on his behalf, say after his death, to pass his properties to their rightful beneficiaries. In this case, the trustee bears an obligation to pass the property to the beneficiaries, either as stated by the settlor or at his own discretion. As opposed to express trusts where the beneficiaries are explicitly stated, in discretionary trusts, the trustee has the power to elect the beneficiaries depending on the class of the beneficiaries declared by the trust. Often, the law is faced with tough decisions while determining the rightful beneficiaries, especially where the statements of the trusts are too general to define the benefactors of this bond. The principle of equity is applied for flexibility to ensure the will of the settlor is propagated and that the obligation of the trustee is accommodated. In this paper, we set our focus to one of the controversial cases in the history of the English law that has generated different reactions from different law analysts across the world. By evaluating the cumulative effect of the test laid down in McPhail v Doulton [1971] AC 424 as applied in Re Baden Trusts (No 2) [1973] Ch 9, it is possible to examine if there really exists any difference between discretionary trust and fiduciary powers. In McPhail v Doulton [1971] AC 424, Betram Baden, the owner of Mathew Hall & Co Ltd, held a discretionary obligation on behalf of his employees to settle the net income of the employee’s trust bond to their relatives and dependants. In this trust, the settlor allowed the trustee to choose to the best of his estimation the rightful beneficiaries of his property. In the court ruling, Lord Wilberforce ruled that as long as it was possible to ascertain that an individual was covered within the class of beneficiaries, the trust was valid. After this ruling, the executioners of this trust appealed and the case was returned to the lower courts where the Lords offered a different perception of the object ascetainity principle. The executors of this trust required the court of appeal to assess if the words stated in the trust were actionable enough to validate the trust1. In this case, the three different judges ruled that the trust was valid since the beneficiaries of the trust could be ascertained by examining the “dependents” and the “relatives” whom the settlers had regarded as his beneficiaries. This trust established by Baden can be categorized as a discretionary considering the obligation of it grants to the trustee of determining who the beneficiaries of the trust are. In the English Law two distinct classes of trusts may be identified depending on the obligation or the power granted to the trustee. One of the trust schemes is the express trust in which the settlor leaves property and a list of the beneficiaries who are supposed to share the so left property. This trust is rigid and the obligation of the trustee is to share the property among only the members inside the list that is provided by the debtor. The second category of trust scheme is the discretionary trust in which the settler leaves property but does not provide any formal list of beneficiaries. In this case, the trustee is left with the responsibility of determining the beneficiaries of the trust, through his own discretion. According to Natasha, the flexibility that this kind of trust offers is accompanied with a hard task of determining the individuals who fall under the specified class of beneficiaries. 2 The argument of this author is that the fact that there exist no clear cut boundaries between different classes of beneficiaries, then it is a challenge for the trustee to select the specific beneficiaries. 1 Mohammed Rahmjohn, Texts, Materials on Equity and Trusts 4/E. (1st Edn, Routledge 2008) 111-120. 2 Natasha Clark, Discretionary Trusts: Mere Power Too Meagre to Stand? (2009) The structure of the discretionary of trust is based on the capacity of the trustee to make a credible appointment among the specified classes of beneficiaries. In other words, the settlor provides the trustee with the fiduciary power to select, on the principle of care and loyalty, individuals who deserve a share of the property left in his custody by the settlor. The duty of care requires that the trustee uses the granted power to act in the best interest of the settlor in assigning the property so provided. This principle hinders the fiduciary from including personal interests within the trust unless he is covered in the class definition of the beneficiaries3. The default clause in the discretionary trust dictates an alternative ownership of the property if the beneficiaries of the trust are not identifiable. In any kind of trust, the concept of certainty of the objects of the trust becomes a major issue especially when a court decision is required. The certainty of the objects clause requires that it is possible to identify the individual who are in the classes of the beneficiaries stated in the trust. This is an issue that has brought about a controversy in the court of law leading to conflicts between trust law and the law of equity that requires that moderates the strictness of the law to the best interest of the beneficiaries. In the legal framework, the concept of certainty of the objects of a trust has generated a lot of heat in numerous court rulings. In McPhail v Doulton [1971] AC 424, the settlor provided that the trustee act in his discretion to appoint the beneficiaries within his relatives and depedants4. The obligation of the trustee in this case was to identify the specific individual within the two classes stated in the trust, who would benefit from the net income of the trust. The English Law demands that within a trust, three certainties be satisfied for the 3 Geraint Thomas, Thomas on Powers. (1st Edn, Oxford University Press 2012) 75. 4Mohammed Rahmjohn, Texts, Materials on Equity and Trusts 4/E. (1st Edn, Routledge 2008) 111-120. trust to be regarded as valid and actionable. First, the certainty of intention must be established by identifying that the settlor had the will to make a trust and that his intention was not to offer a gift to the trustee. Secondly, the certainty of subject matter has to be satisfied by ensuring that the property that the settlor wishes to transfer is ascertainable and tied to the trust. Lastly, the certainty of the objects demands that the trust provides a procedure to identify the right individuals who would benefit from of the trust during the transfer of the property. Any trust that does not certify these requirements can be declared invalid by a court of law and the court has the power, in such a case, to determine the best course of action. By stating the beneficiaries of the trust as “relatives” and “depedants”, it is possible to conclude that the settlor defined a class of identifiable beneficiaries subject to the discretion of the trustee. From this point of view, it is possible to conclude that the trust was valid and to dismiss the claims of the executor of this trust. It is not surprising that Lord Wilberforce upheld this trust as valid after concluding that the terms of this trust ascertained the beneficiaries. The question that was raised in this court was whether the linguistic terms of the trust were adequate to ascertain the beneficiaries of the trust. In his ruling, Wilberforce declared that the trust was actionable as long as it was possible to visually determine whether or not an individual was belonged to the classes defined by the terms of the trust5. The argument of this Lord is that the terms of the trust were adequate enough to determine the relatives and the financial dependents of the settlor, though subject to the discretion of the choice of the trustee. 5 Geraint Thomas, Thomas on Powers. (1st Edn, Oxford University Press 2012) 75. This ruling of Wilberforce seems to provide a new ground for determining ascertainability of the beneficiaries of a trust. He seems to advocate for individual ascetainability rather than the class ascetainability that the traditional law courts had adopted. In class ascertainability, the trustee is allowed to come with a list of the beneficiaries and that would share the property as a way of protecting the will of the settlor. In this view, Wilberforce idea is that individual scrutiny be conducted to determine if any claimant of the property is or is not a member of the stated classes and whether they should be included in the share. This adjustment of the law seems to suit the situation in that it was right at the moment to protect the each individual who could be termed as a beneficiary of the property left by the settlor. When the executors of this trust appealed, the jury again affirmed the decision after three judges reacted to the above question of certainty in different dimensions. Lord Megaw regarded the linguistic used in the trust as certain on the ground that it was possible to sensibly identify a good number of beneficiaries that belong to the category of dependents or relatives. On the other hand, Lord Sach argued that as long as the class of the beneficiaries was conceptually identified, it was possible to scrutinize evidence whether a claimant of the property is either a relative or a financial dependant of the settlor. Finally, Lord Stamp concluded the case by pointing out that the trustee had the obligation to survey the stated categories and identify the valid members of the class in order to fulfil the will of the settlor. The position held by the three members of the jury is that the conceptual and evidential backgrounds of a trust are distinct and that the validity of a trust can only be established if it is possible to identify a substantial number of beneficiaries within the classes. Their concession is that the fact that it may be visually impossible to determine all the beneficiaries of a trust, it is not a reasonable ground to hold a trust as un-actionable. 6 Geraint Thomas, Thomas on Powers. (1st Edn, Oxford University Press 2012) 75. Also The ruling of the case is a reconstruction the law of trust that requires that the beneficiaries of a trust be uniquely identified before sharing of property. Critics such as Klinck have pointed out this ruling a revolutionary action to alter the metric tests of proving certainty of beneficiaries. While the class validity required that the trustees comprise a list of members who belong to the categories expressed by the terms of the trust, the court identified this redundant and conjured a new approach to this problem. Although the argument of Wilberforce may seem quite unpopular among the lord in the court of appeal, all the terms of this ruling seem to converge to the same point. They seem to agree that to disapprove the idea that there must be an accurate list for the linguistic in a trust to satisfy the validity test. However, the idea of Wilberforce seems rather crude as he applies the “is” or “is not” a metric to measure validity of a trust7. His statement means that the trustee has an obligation to evaluate the universal class of the beneficiaries and evaluate whether each and every member in the class qualifies to be a beneficiary of the trust. The three Lords criticized the idea of Wilberforce as rather unconscionable on the ground that it would be an enviable metric. The reasoning of the judges in this law presents a different problem in the law of trust. If this decision was something to go by, it would mean that as long as there exists a member of the beneficiaries, the trustee can be able to satisfy the conditions of the trust without even seeking further whether there exists other members within the classes that are defined in the discretionary trust. The consequences of such an action would be that it would leave many people that were intended to benefit from the property unsorted as required by the settlor. By the virtual of the duty of care that is bestowed upon a trustee, such an action would be a violation of the duty of care that is attached to every discretionary trust8. From this point of 7,8 Sarah Wilson, Todds and Wilson’s Textbook on Trusts. (1st Edn, Oxford University Press 2007) 113-147 view, it is possible to regard such a ruling as against the good will of the settlor and its flexibility can be used as to defraud the beneficiaries of their rights. Critics such as Wilson have regarded this as ineffective revolution that would see the will of the settlor violated by the trustees. In short, this revolution comes along with loopholes that if exploited can see the will of the settlor violated in the long run. Another way to look at this ruling in two rulings against the controversy presented by Mathew Hall & Co Ltd is to examine the principle of equity that is tagged on the law governing discretionary trust. In the English common Law, the law of equity is well defined in the maxim “equality is equity”9 that describes the role of the law in maintaining fairness in the judgment by providing equal benefits to members entangled in a common dispute. The equity law is applied in law to ensure that the law does not remain too strict to an extent of denying the beneficiaries of the laws their rights. It is based on the principle of good will and moral obligation of the law in protecting its dependents in controversial situations. Equity seeks to correct the law due to situational demands, so as to ease the conscience of the parties who are involved in a common row that demands flexibility. The position of the jury on equity is that it is not in itself a contradiction or an extension of the law, but a supplement to fulfil the moral obligation of the law in defending its subjects. In discretionary trusts, the trustee is given an obligation to transfer property to the beneficiaries and hence the beneficiaries acquire their rights to the material property through this obligation. Consequently, the law has an obligation to protect the rights of the beneficiaries by protecting limiting possible abuse of power by the fiduciaries. 9 Mohammed Rahmjohn, Texts, Materials on Equity and Trusts 4/E. (1st Edn, Routledge 2008) 111-120. Also Dennis Klinck, McPhail v Doulton and Certainty of Objects: A semantic Crictism. (2002). The act of the court in bending the law to protect the rights of the beneficiaries of the discretionary trust established by Baden, the jury applied the principle of equity to disapprove disposition of this trust by the executors. Just like the principle of equity demands, the jury protected the rights of the relatives and financial depedants of the settlor by redefining the metrics of testing the validity of the contract. According to Lord Wilberforce, equitable distribution of property is the only way for the court to authorize sharing of property left by a testator. This idea of Wilberforce seems to echo the words of Broadway Cottages in his ruling where he upheld the principle of equity as the fairest possible means of distributing property. There exist obvious shortcomings that would come along with the previous test for certainty of beneficiaries. If the law was to stick to the words of the law that holds that a list of beneficiaries be submitted, it would imply that if this test fails, no one would benefit from such property. The idea of Rahmjon is that such a situation would be most likely be against the wish of the testator, and hence against the good will of the discretionary trust10. In a nutshell, the reaction of the jury in this case was best suited for this situation that demanded that the will of the settlor be upheld. At this point, it is crucial to evaluate the cumulative effect of the ruling of the jury on this matter regarding the certainty of objects. The certainty of objects demands that within the utterances defining the discretionary test, there exists a clear and testable statement that defines the beneficiaries of the trust. Unlike the express trust where the beneficiaries are stated explicitly, the discretionary trust allows that the trusts exercise a duty of care in his obligation to choose the beneficiaries they feel best suited for the property that the settlor leaves behind. 10 Mohammed Rahmjohn, Texts, Materials on Equity and Trusts 4/E. (1st Edn, Routledge 2008) 111-120. This kind of trust is subject to the opinion of the trustee and it is often that a trustee may take advantage of his fiduciary powers to deny intended beneficiaries their right to share in the property. The traditional law required that the trustee formulate a list of the beneficiaries of that are expected to benefit from the property and also determine the proportion that each beneficiary should receive. This would mean that if such a test fails, there would be no inheritor of the property as the law would declare such a trust as un-actionable. This above ruling brings a completely different scenario where discretionary trust or power will never fail for uncertainty of objects. Going by the statement of Lord Megaw, as long as there are a substantial number of identifiable beneficiaries, the trust cannot be regarded as dispositional. With this stand of the court regarding the identity of the beneficiaries, it would be unlikely that the test for object certainty would fail in any discretionary trust. In turn, this implies that supplementing the law in this manner defends the will of the testator, which is an affirmative action of the law. Another question that arises from this ruling is whether there exist any difference between fiduciary power and discretionary trust in the law. In the former law set up, a discretionary trust requires that all the property be transferred to the beneficiaries and therefore there is no need for a default. On the other hand, the fiduciary power provides the trustee with higher order discretion and they are at liberty to transfer all the property to the beneficiaries, or to keep part or all of it. This privilege of the fiduciary power to keep the property seems to be nullified by this revolution the law. The fiduciary cannot keep the property as long as it is possible to determine even one potential beneficiary of the property so acquired. This idea of the law to limit the discretionary power of the fiduciary has been applauded by many scholars. 11Sarah Wilson, Todds and Wilson’s Textbook on Trusts. (1st Edn, Oxford University Press 2007) 113-147 Natasha, points out to the use of this kind of argument in court where he Privy Council in Schmidt v Rosewood Trust Ltd12 used the convergence of the fiduciary power and discretionary trust to protect the right of a client to obtain a land share from a fiduciary. The checks and measures of this ruling seem to favour the intentions of a settlor and the will of a beneficiary. In conclusion, the court ruling in McPhail v Doulton [1971] AC 424 and its application Re Baden Trusts (No 2) [1973] Ch 9 in the court of appeal formed a turning of the common law in its application in settling disputes regarding the certainty of objects in trusts. The declaration of the jury that a certainty of objects is ascertainable as long as it is possible to identify a single beneficiary ensures that test for certainty of the object will always pass. Although this may be conceived as a loophole that can be exploited to deny some beneficiaries their right, it ensures that fiduciary power is not abused to deny beneficiaries their rights to property. This in itself can be identified as an end to the weaknesses of the law that allows fiduciaries to keep property wherever the test for certainty of objects fails, which is likely to be against the wish of a testator. This move seems to be in line with the principle of equity that allows supplementation of the law to protect the rights of those under the mercy of the law. At the same, this change seems to bridge the difference between fiduciary power and discretionary trust by minimizing the degree of discretion that was assigned to fiduciaries. In this view, this change in the law governing trust closes in to reduce the instances in which fiduciaries use the power handed to them to work against the will of the settlor, which is an affirmative action of the law. 12 Sarah Wilson, Todds and Wilson’s Textbook on Trusts. (1st Edn, Oxford University Press 2007) 113-147 Bibliography Klinck D, McPhail v Doulton and Certainty of Objects: A semantic Crictism. (2002). < http://www.rdo-olr.uottawa.ca/index2.php?option=com_sobi2&sobi2 Task=dd_ download&fid=427&Itemid=789> Accessed on 12th Sept, 2013. Natasha C, Discretionary Trusts: Mere Power Too Meagre to Stand? (2009) < http://www.applebyglobal.com/articles-2009/discretionary-trusts-by-natasha-clark.pdf> Accessed on 12th Sept, 2013. Rahmjohn M, Texts, Materials on Equity and Trusts 4/E. (1st Edn, Routledge 2008) 111-120. Thomas G, Thomas on Powers. (1st Edn, Oxford University Press 2012) 75. Wilson S, Todds and Wilson’s Textbook on Trusts. (1st Edn, Oxford University Press 2007) 113-147 Read More