Rights of Third Parties: Constitution of Trusts - Case Study Example

CONSTITUTION OF TRUSTS OVERVIEW The discussion here in the assignment is based on the ment that "The courts have found so many ways to circumvent the rule that equity will not assist a volunteer that the enactment of the Contracts (Rights of Third Parties) Act 1999 was of little relevance in the trust context. But before going into the main body of the report, I would going or see to the meaning of the following; contract, trust, constitution of trust, equity, Right of third party to enforce contractual term, privities of contract. In this report as well I look at the complexity and restrictness of the rules governing enforceability of promises in deeds and look the question saying: Does current English law hold a fair balance between the interets of innocent volunteers and those of wronged beneficiaries (in breaches of trust) WHAT IS CONTRACT Contract is an agreement or set of promise between two or more persons which is binding and therefore legally enforceable. It covers transactions like buying and selling, employment of staff, partnership agreement and so on. It can also be described as: "an agreement which is legally binding on the parties to it and which broken may be enforced by action in court against the defaulting party. Existence of contract - Damages sought by claimants on the basis of fraud and breach of fiduciary duty in respect to diverted insurance premiums - Negotiations between the parties taking place after proceedings issued - Letter sent by claimant asking whether defendant accepted responsibility for the fraud - Letter signed and returned by defendant but with caveat - Whether binding agreement concluded between parties. Willis Management (Isle of Man) Ltd v Cable and Wireless plc [2005] 2 Ll L R 597 (CA/UK) WHAT IS A TRUST A trust is an equitable obligation, binding a person (who is called a trustee) to deal with property over which he has control (which is called the trust property) either for the benefit of persons (who are called beneficiaries or cestuis que trust) of whom he may himself be one, and any one of whom may enforce the obligation, or for a charitable purpose, which may be enforced at the instance of the Attorney-General, or for some other purpose permitted by law though unenforceable. Pettit Equity and The Law of Trusts 8th ed. (1997) p 24. CONSTITUTION OF TRUSTS Constituting the Trust - act of vesting the trust property in the hands of the trustee. If inter vivos transferor will vest the property concurrent with declaration of trust, If testamentary property will vest upon testator's death in executors/administrators, - Rule - if trust not constituted, it is invalid - Problems: A declares trust in favour of B on Day 1, but doesn't transfer $$ to trustee until Day 5. - Rule - until the trustee receives the property, trust incompletely constituted invalid - Curative: On day 5, trust valid & operative b/c trustee has property - Settlor can be compelled to transfer property they promised to place in trust - where S received valuable consideration for promise to create trust RIGHT OF THE THIRD PARTY The Contracts (Rights of Third Parties) Act, which was given Royal Assent on 11th November 1999, radically changes a fundamental principle of English law, namely that only those who are parties to a contract can enforce rights under that contract - the 'privity of contract' rule. The Act applies to virtually all contracts. Therefore the construction industry must consider its impact on all its contracts - building contracts, subcontracts, consultants' appointments, collateral warranties, insurance policies, bonds, adjudication agreements etc. Right of third party to enforce contractual term: The third party must be expressly identified in the contract by name, as a member of a class or as answering a particular description but need not be in existence when the contract is entered into. This section does not confer a right on a third party to enforce a term of a contract otherwise than subject to and in accordance with any other relevant terms of the contract. For the purpose of exercising his right to enforce a term of the contract, there shall be available to the third party any remedy that would have been available to him in an action for breach of contract if he had been a party to the contract (and the rules relating to damages, injunctions, specific performance and other relief shall apply accordingly). Where a term of a contract excludes or limits liability in relation to any matter references in this Act to the third party enforcing the term shall be construed as references to his availing himself of the exclusion or limitation. PRIVITY OF CONTRACT The common law doctrine of privity of contract is to the effect that "no one can sue on a contract to which he is not a party". Put in another way "no one may be entitled to or bound by the terms of a contract to which he is not an original party". This principal gained the approval of the House of Lords in the case of Dunlop v Selfridge & Co LTD. (1915) The effect of current English law on the interets of innocent volunteers and those of wronged beneficiairies. The distinction that creates an innocent volunteer a beneficiary in the current English Law is that one party - called the promisee - makes an agreement to provide some consideration to a second party - called the promisor - in exchange for the promisor's agreement to provide some product, service, or support to the third party beneficiary named in the contract. The promisee must have an intention to benefit the third party - but this requirement has an unusual meaning under the law. Although there is a presumption that the promisor intends to promote the interests of the third party in this way, if party A contracts with party B to have a thousand killer bees delivered to the home of Party A's worst enemy, party C, then C is still considered to be the intended beneficiary of that contract. Wronged beneficiairies are parties who stand to benefit from the execution of the contract in the current English Law, although that was not the intent of either contracting party. For example, if party A hires party B to renovate party A's house, and insists that party B use a particular house painter-party C-because that house painter has an excellent reputation, then the house painter is an incidental beneficiary. Neither party A nor party B is entering into the contract with the particular intent to benefit party C. Party A simply wants his house properly renovated; party B simply wants to be paid to do the renovation. If the contract is breached by either party in a way that results in party C never being hired for the job, party C nonetheless has no rights to recover anything under the contract. Similarly, if party A were to promise to buy party B a Cadillac, and were to later go back on that promise, General Motors would have no grounds upon which to recover for the lost sale. Breach and defenses Where a contract for the benefit of a third party is breached by the non-performance of the promisor, the beneficiary can sue the promisor for the breach just as any party to a contract can sue the other. Because the rights of the third party are defined by the contract created between the promisor and the promisee, the promisor may assert against the beneficiary any defenses to the contract that could be asserted against the promisee. These include the entire traditional basis by which the formation of a contract may be challenged: lack of capacity, lack of consideration, the Statute of Frauds, etc.; and all of the traditional bases by which non-performance on the contract may be excused: failure of consideration, impossibility, illegality, frustration of purpose, etc. Because the promisor can assert any defenses that could be asserted against the promisee, the beneficiary also becomes liable for counterclaims on the contract that the promisor could establish against the promisee. This liability can never exceed the amount that the promisor owes under the contract. In other words, if the promisor is owed money by the promisee, any award to the third party for the promisor's failure to perform can be reduced by the amount thus owed. If the promisor is owed more than the value of the contract, the beneficiary's recovery will be reduced to nothing (but the third party can never be made to assume an actual debt). How the Contract Act help with reducing the complexity of this area of law sources. The Act is facilitative, that is it enables contracting parties to confer benefits on others, not themselves parties to the contract, which the third party can then enforce. No benefits or rights are given automatically (although they can be given impliedly ie without an express clause granting such rights). Throughout, the philosophy is one of party autonomy. The privity of contract rule has not been abolished; it will continue to govern relationships where no rights have been given under the Act (or the Act does not apply). The Act enables contracting parties to confer benefits, but not to impose burdens or duties on the third party. FOOTNOTE The following cases were discuss below: Strong v Bird Pennington v Waine Re Rallis WT Pascoe v Turner [1979] Donation Mortis Causa Strong v Bird The principle of Strong v Bird is that, in certain circumstances, equitable discretion will be refused when it would normally be granted, allowing an earlier common-law rule to prevail. The common-law rule is that if a testator appoints to be his executor someone that owes him money, the debt is cancelled when the testator dies. Why Well, since the executor is responsible for calling in debts to the testator's estate, he will be put in the invidious position of having to sue himself for the debt. Common-law rulings cancelled the debt to avoid this anomaly. Later equitable decisions made the executor responsible for his debts to the estate, despite the oddity of having to sue himself. In this case, because the testator had manifested an intention to remit the dead in his lifetime, and had maintained that intention up until his death, then the common law rule was allowed to stand, and the debt cancelled. Strong v. Bird - Man borrowed 1000 pounds from step mom. She lived with him & paid him 200 pounds every quarter. They agreed that the debt he owed her would be paid by deducting 100 pounds from each of her quarters (until repaid). This was done for 2 quarters and then from that point on, the step mom didn't hold back any money & paid the full 200 pounds. She did this for 4 years. She died. Under her will, he was named as sole executor. Argument - Other relations of hers claimed that he owed the estate the balance of the debt & that it was an asset of the estate that would be available in part to them Court: the debt is extinguished. It was released when the debtor was appointed at her will. Debt extinguished & forgiven. Principle: if 4 conditions are satisfied, a gift, which has not been formally made otherwise, may be held to be perfected. Conditions: Alleged donor must intend to make a gift to the alleged donee or to release a debt. Gift not perfected because it is not delivered during alleged donors life. There is a continuing intention to give which continues right up to the death of the alleged donor. Alleged donee is then appointed executor of the alleged donor's estate. When this happens, the legal title will vest in the alleged donee by virtue of his being the executor. Rule in strong v. bird said that he also acquires beneficial ownership and is not an asset of the estate. Historically, Strong v. Bird was thought to only apply to personal property. Realty land went directly to those indicated by rules of inheritance. These rules have changed. Strong v. Bird now applies to land (in addition to personal property) Q: does rule in Strong v. Bird apply to personal reps or just to executors Personal reps - executors & administers (when someone dies intestate) Pennington v. Waine (2002) Woman transferred shares in company to nephew so he could be a director. Form of transfer prepared by Pennington & put in company's file, not hers. P told nephew about shares & got him to sign form appointing him as director. Woman tried to transfer more shares (51% of company in nephew). Issue: had there been an effective transfer of the shares Not quite like Mr. C's case; No declaration made by her that she was holding shares for him. Not quite like Re Rose, b/c critical document was never given to H; it was given to Mr. P Court: logical problem was that there had been no delivery (in Re Rose there had been delivery) court nonetheless finds transfer effective b/c nephew had been told he didn't have to do anything to complete the transfer and since she had clearly intended to benefit him, the court thought it would be unconscionable to refuse transfer. -a kind of equitable estoppel Re Ralli's Will Helen, when married, party to a marriage settlement (arrangements with property). Father of from intended to make a substantial gift of property to new couple in trust. Helen gave a covenant (promise under seal) that she would acquire future property & put on some trust conditions. Trusts would have operated to benefit nieces & nephews of Helen. Despite covenant promise, Helen never put received property (from her dad) on trust. She died as a widow with no kids. Issue: who got property Helen's dad's estate or nieces/nephews Court: nephews & nieces. Pascoe v. Turner (1979) Guy owned a house. Lived with a woman for awhile (as h & w), then left her for another woman, but let her stay in house while he moved out, and told her house was hers. She spent 200 pounds on improvements. Then he wanted to revoke permission to occupy. Court: equity in favour of the woman. She had been told something about a right to be in the house (which used to be hers) and she had spent money on the reliance of this representation. Issue: how can this equity be satisfied - Court gave her title to the land! (You go girl) - If license, H could have sold land to 3rd party - If not hers, she couldn't record interests in land & vulnerable to H Donatio Mortis Causa Effect of this exception is that equity acts to assist a volunteer! - An outright & legal gift will be effected if requirements met - Requirements: a person to deliver property to another in expectation or contemplation of the donor's own death on the express or implied condition that the transfer of title will not become perfect & complete until the donor dies. 1. Made in contemplation/expectation of death - No complete certainty as to what this means - Imminent 2. Gift taking effect is conditional upon the donor's death - Donor can revoke the gift at any time before his death (right of revocation). In this way, it is different from an inter vivos gift which cannot be taken back. 3. Delivery of the property. - Change of possession from donor to donee which must have been done on intent of donor to depart with ownership, not just possession. - Must be a kind of thing that can be delivered (can't be cheques, leasehold) - There are common law rules & requirements for this type of gift. Equity comes into this rule more indirectly. References: Hardingham Neave & Ford, Wills and Intestacy in Australia and New Zealand (2nd ed) Law Book Co (1989) Philip H. Pettit, Equity and the Law of Trusts, Tenth Edition (2005) Sarah Radford, Contracts (Rights of Third Parties) Act: Special No.1, Issue 45 March 2000. Read More