Trusts and Equity - Essay Example

Trusts And Equity No doubt equity is considered an addition to the common law through two sets of rules, which though distinct, must not be looked upon as two co-ordinate and independent systems. On the contrary, the rules of Equity are only a sort of supplement or appendix to the Common Law; they assume its existence but they add something further. Further, the rules of Equity, though they did not contradict the rules of Common Law, in effect and in practice produced a result opposed to that which would have been produced if the Common Law rules had remained alone 1. It seems not entirely wrong, to say that lawyers and legal theorists tend to deal with the first option, a rule-bound jurisprudence of equity and literary practitioners with the second, a less formal, more allusive supplementary notion of equity. But the question as to whether equity does or does not “belong” to the law is not just an institutional one. The answer also depends on whether equity is associated with something general, such as a universal rational order of justice, or something particular, such as the judicial discretion to interpret the law according to rules and precedents that can change over time. Similarly, it depends on whether the law is associated with something general, such as the predictability and security of rules, or something particular, such as the alterability and flexibility of rules and precedents over time. Thus, what is general about equity is its concern with what is universal. Conversely, what is general about the law is its concern with what is predictable; what is particular, its concern with what is posited. Different conflicts between the general and the particular may emerge, therefore, depending on whether equity is or is not considered part of the law. If it is part of the law, then the security, validity, and accessibility of rules may conflict with the potential unpredictability, arbitrariness, and privacy of judicial discretion. If not, then different aspects of judicial discretion, such as a judge’s “genius” or “paternalism, ” may conflict with non-judicial forms of discretion, such as the readiness of individual conscience to ascribe or accept guilt. (Polloczek, 1999, p. 9) Though since the Judicature Act came into force in 1875 the rules of Common Law and Equity are recognised and administered in the same court, yet they still remain distinct bodies of law, governed largely by different principles. Like the Common Law, the rules of Equity are judicial law, i.e. to find them we must look in the first instances to the decisions of the judges who have administered Equity. But some branches of Equity, like some branches of the Common Law, have been restated with amendments and additions in codifying Acts, such as the Partnership Act 1890. (Geldart, 1995, p.21) Meanwhile Equity is adding new fields of jurisdiction. In the sixteenth century and the beginning of the seventeenth, fraud and accident especially the accidental loss of a document are regarded as matters peculiarly appropriate for relief in a Court of Equity matters which a Common Law Court cannot sufficiently deal with. Mortgages form a special subject, which the Chancellor deals with. A man borrows money and transfers his land to the creditor, making the creditor legally owner. He promises to pay on a definite date. If he keeps his promise, his land is to be returned to him; if not, it is to belong to the creditor forever. Suppose by mistake or accident he fails to repay on the day named, is it fair that he should be held to the terms of the deed? Equity says no, and soon goes so far as to lay down a rule that a mortgage is a mere security for money, and something quite different from a genuine transfer of the ownership. (Geldart, 1995, p.31) We have the rules about the assignment of rights under contract. A owes money to B. Common Law regards this as purely a relation between A and B. B agrees with C that C shall have the right to claim the debt from A. Common Law pays no attention, C cannot claim the debt. The most that can be done is that B may allow C to use his name to claim the money. But Equity treats the debt as transferable. It will compel B to let C make the legal claim in his name; in the last resort it might allow C to take proceedings in Equity in his own name against A. Thus it came to be said that ‘in Equity debts and choices in action are assignable’. (Geldart, 1995, p.31) The Smith v. Anderson type of trust was set up by a trust deed made between trustees and an investor as an agent for all investors, with the latter subsequently forming a committee amongst themselves. This bore resemblance with the deed of Settlement Company used for trading purposes in the Bubble period. The unit trust that appeared in the 1930s witnessed the emergence of the manager as a party to the trust deed. This form of arrangement has become the basic structure of unit trusts in England as well as a number of common law jurisdictions. (Sin, 1997, p. 47) A trust constituted by a deed executed by the manager and the trustee is conceptually phenomenal. An inter vivos private trust used for the disposition of family properties is effected through the execution of a trust deed by the settlor and a complete transfer of properties to the trustee. 2 The terms of the trust deed are the mandate from the settlor. A unit trust deed, by contrast, is constituted without the participation of a settlor. It represents the terms that have been agreed by the manager and the trustee for the provision of their respective services to the unit holders and for the issue of units. It is thus not illegitimate to ask whether the unit trust is a trust at all or whether the unit trust is some other kind of relationship that merely bears the logo of the trust. (Sin, 1997, p. 47) In order for an express trust to be valid, it has been said that three certainties 3 are essential to a valid trust: certainty of the settlor’s intention, certainty of subject, and certainty of object. These three aspects provide a convenient anchor for examining the creation of the unit trust and the contractual ingredients involved. Settlor’s Intention Although the trust has a long history of being used for a variety of purposes, the vast body of principles is developed from the trust being used as a means of disposition of property. A person intending to make a gift of property inter vivos by means of a trust may do so by declaring himself a trustee of that property which he intends to dispose of or by his transfer of the property to a trustee. In all instances, it is said that there must be an intention to create a trust on the part of the settlor4. The intention in this context is far more complicated than is first visualized. It is a unity of two intentions, the intention to make a gift and the intention to make that gift by way of trust. These two intentions need not always overlap, but in this situation, they do. (Sin, 1997, p. 49) The Donative Intent Conceptually, the intention to make a gift must be distinct from the intention to create a trust. A person may make a gift by simply transferring the assets to the donee without any trust intention whatsoever. He may make a gift to a trust without creating the trust. It is well established that the mere existence of a donative wish, without more, will have no legal consequence, for equity will not perfect an imperfect gift. The donor must have done everything, which, according to the nature of the property, is necessary to be done in order to dispose of the property in favour of the donee. The court will not, in the absence of any manifestation of an intention to create a trust, find a trust in order to make good the gift despite the disposer’s donative intent 5. The Trust Intention If the distinction between a donative intent and a trust intent is drawn, the majority of cases on certainty of intention, or, to be precise, cases where, the donor gives property with precatory words of wish, hope, desire or confidence that the donee will dispose of the property in a particular way 6, should be understood as cases on the first question of the existence of a donative intent. The court is ascertaining whether there is an intention to make a gift to the person who is the object of the precatory words. In cases where a private trust is established, the court has satisfied itself that the donor wants to effectuate his donative wish through the method of a trust. In more concrete terms, if the settlor chooses to transfer the property to a transferee to be held on trust, the intention is that the transferee shall acquire the rights of ownership subject to the duties to hold or to manage the property for the enjoyment of the beneficiaries. It is intended that he shall have the status of a trustee, not an absolute owner. If a declaration of trust is the mode intended, there must be an intention on the part of the donor to become a trustee an intention not only to make a gift but to assume the onerous duties of a trustee. The cases clearly go as far as saying that if the settlement is intended to be effectuated by one of the above two modes, the court will not give effect to it by applying the other of these modes 7. The donative character of private trusts inevitably means that the court’s preoccupation is the ascertainment of the subjective intention of the settlor. In this sense, the trust’s existence depends on the unilateral intention of the settlor 8. The trustee’s intention is not relevant to trust creation, for the court of equity will execute the trust even if the trustee does not wish to act 9. Trust Intention without a Settlor In a private trust inter vivos, the settlor is the creator of the trust 10 and it is his unilateral intention that determines the existence of the trust. But in a unit trust, there is no settlor. It is a creation of the trustee and the manager, a transferee of properties and a delegate to whom certain powers have been vested. There are two stages, which require consideration. The first is the execution of the unit trust deed by the trustee and the manager. The second is when an investor subscribes units of the unit trust. (Sin, 1997, p. 50) Absence of a Settlor The absence of the settlor from the creation process of the unit trust can be contrasted with a typical private trust where the terms of the trust are the mandate of the settlor. Conceptually, the absence of a settlor is not novel. Unincorporated joint stock companies, partnerships, clubs, and associations have all lived behind the trust and it does not appear to have been necessary to characterize any person as the settlor. Indeed, in none of the definitions of the trust propounded by jurists and scholars 11 is the settlor regarded as a requisite of the trust institution. The reason is that the trust is equity’s institutionalisation of the confidence reposed in the trustee for the protection of the beneficiaries, not the settlor. The settlor disappears from the picture after that gift has been affected. (Sin, 1997, p. 55) Once the interlocking elements of donative intent and trust intent are disentangled, it is not difficult to accept the proposition that the trust in the unit trust does not have a settlor. If no gift is involved, it would be artificial to characterize a party as a settlor. Thus understood, the absence of the settlor is a feature that negatives the donative element of the trust within the specific context of the unit trust. Where there is a settlor, the trust intention is necessarily that of the settlor alone. His absence therefore also negates the unilateral nature of the trust intention. (Sin, 1997, p. 55) When the trust is used as a method of affecting a gift, it is said that the trust must be completely constituted with the trust property transferred to the trustee. This is because equity will not assist a volunteer or perfect an imperfect gift 12. (Sin, 1997, p. 55) Resulting Trust According to Chambers, “the resulting trust is described as ‘a situation in which a transferee is required by equity to hold property on trust for the transferor; or for the person who provided the purchase money for the transfer”. (Chambers, 1997, p. 2) The resulting trust, like all true trusts, can only exist when certain requirements are met. The term ‘constructive trustee’ is sometimes used to describe someone who holds no property in trust, but has assisted a breach of trust and is under a personal liability to compensate the beneficiary for losses caused thereby. Most resulting trusts arise in one of two situations: (i) where there has been an apparent gift of property or (ii) where an express trust has failed to dispose of all of the trust property. In both cases, equity assumes that the owner was not intended to receive the benefit of the property and raises a resulting trust in favour of the provider of that property. In Re Vandervell’s Trusts, Megarry J. concluded that the resulting trust operated on different principles in each of these two situations. His lordship classified the resulting trust of an apparent gift as ‘presumed’ and the resulting trust on the failure of an express trust as ‘automatic’. The presumed resulting trust was said to be based on the presumed intention of the provider of the property to create it and could be rebutted by evidence to the contrary. The automatic resulting trust arose independently of intention and was irrefuttable. (Chambers, 1997, p. 4) According to a review, “Equity itself is not an appreciated or self sufficient system of common law. According to Mitland, common law could have survived the abolition of equity, the abolition of common law would have resulted in anarchy because equity at every point presupposed the existence of common law. Equity served as a gloss on the common law but failed to intervene at all points”. (Equity, 2006) References & Bibliography Chambers Robert, (1997) Resulting Trusts: Oxford University: Oxford. Equity, 2006 Geldart William, (1995) Introduction to English Law: (Originally Elements of English Law): Oxford University Press: Oxford. Hayton David, (1999) English Fiduciary Standards and Trust Law In Vanderbilt Journal of Transnational Law. Volume: 32. Issue: 3 p: 555 Polloczek Paul, (1999) Literature and Legal Discourse: Equity and Ethics from Sterne to Conrad: Cambridge University Pres: Cambridge, England Sin Kam Fin, (1997) The Legal Nature of Unit Trust: Oxford University: Oxford, England. Read More