Gift as a Transfer of Legal Property - Essay Example

Introduction A gift is the transfer of legal property such as land, a house or money. Since there is no consideration for the gift, a gift is not regarded a contract and as such a gift will fail if the person giving the gift does not take the necessary steps to divest himself from the gift. Where a gift fails it reverts back to the person intending to make the gift or to the estate of that person where the gift is testamentary. This reversion forms a resulting trust, which is a trust that is created when a property is not disposed of properly. It goes against the principle of equity for property to be left without a beneficial owner and courts follow the maxim ‘equity abhors a vacuum’ in filling this gap. The courts, therefore, assigns the property to someone in a resulting trust to avoid vacuum. Megarry VC in Re Sick and Funeral Society of St Johns Sunday school,1 Golcar defined a resulting trust as a property concept which follows that any property that an individual does not properly dispose of remains his. A completely constituted trust implies that the trust property is conferred to the trustees and the trust is binding on the donor who cannot revoke the trust. When the trust property is not properly vested the trust is considered incompletely constituted and it is void as equity will not force the donor to complete the trust. 2 The principles of constitution of trusts are derived from the case of Milroy v Lord3 where Turner L.J. set out three modes of making a gift, which are the actual transfer of property from the person making the gift to the beneficiary, a transfer of the intended gift to the trustees to be held in trust for the beneficiaries or the self-declaration of a trust. The principle in this case is that a gift can only be enforced in equity if it satisfies one of the three modes set out in Milroy. The rationale in this case is that trusts should not be used to protect gifts from being defeated and follows the maxim that equity will not complete an imperfect gift.4 Equity will not assist a volunteer The common rule with regard to imperfect gifts is that equity cannot perfect an imperfect gift and this was demonstrated in Milroy v Lord, where the court held that equity will not assist a volunteer, and as such, equity will not perfect an imperfect gift. In this case Mr. Medley made a deed purporting to transfer shares into Ds title to be held in trust. However the transfer was never made and when Medley died it was held that no valid trust existed and the shares we to go to Medleys estate and not the trust. Where there is lack of consideration, an undertaking to give property is unenforceable and is a simple gratuitous promise. Therefore, unless the property in the gift is transferred the intended beneficiary cannot do anything to enforce the trust. As per Milroy5 the circumstances that constitute a trust are voluntary settlement, transfer of property or self-declaration and with the lack of these there is no equity to perfect an imperfect gift. The maxim ‘equity will not perfect an imperfect gift’ is a subset of the maxim ‘equity will not assist a volunteer’. In Fletcher v Fletcher6 the settlor agreed to transfer a total of 60,000 pounds to the trustee for the benefit of his surviving ex nuptial sons who attained the age of 21. The settlor of the trust died and the trustees refused to sue for the money as only one of the sons was left. The court held that the remaining son could compel the trustees to sue the donors’ estate for damages for breaching the covenant. In this case consideration was supplied and, therefore, specific performance was available. The consideration was the agreement to transfer the property to the trustee and equity would compel the settlor to transfer the consideration as the trust arises upon payment of the consideration. A consideration in equity requires a valuable consideration or an advantage provided or a disadvantage suffered.7 The principle in Fletcher v Fletcher is restricted to debts which are enforceable at law and therefore it is restricted to covenants dealing with the transfer of money. This limitation was applied in Re Cook’s Settlement Trust8 where the trustees were directed not to enforce the covenant. The facts in this case are that the settled property, paintings, were transferred to Cook by his father, Cook in turn covenanted the paintings with the effect that if the paintings were to be sold then the proceeds would be held in trust for the benefit of his children. Cook gave one painting t his wife who wished to sell it. The trustees sought the direction of the court as to whether they could sue. The court in its decision observed that the intended trust was not perfect according to the principle set out in Fletcher v Fletcher because no immediate trust existed. Additionally the children were volunteers and as such could not enforce the covenant. Similarly, the children were not authorized to have the covenant enforced for their benefit since they were volunteer’s .The decision in this case followed both the decision in Re Pryce and Re Kay’s settlement. In Re Pryce9 the trustees of a marriage brought an action seeking the directions of the court on whether they could sue the wife for nonperformance. The wife had made a voluntary deed to divest her property into a life estate and then to her child and her next of kin. The wife subsequently refused to transfer the property and the trustees sought a determination on their obligation to sue for the benefit of her next of kin. Eve J distinguished the current case from Fletcher on the basis that in Re Pryce the property currently existed. In its decision, the court held that the next of kin were volunteers and as such could not get specific performance as they had not been provided marriage consideration. The next of kin were not parties and there was no obligation on the trustees to sue. Re Kay10 went further and decided that the intended trustee was prevented from bringing an action for damages against the covenanter. The court applied the principle in Re Pryce in preventing the intended trustee from pursuing his claim. The decision was based on the assumptions that if the intended trustee was allowed damages then he would have been allowed substantial damages and the damages would have been held in trust for the volunteer. The decision thus prevented the volunteer from becoming a beneficiary under a trust. In the three cases, Re Pryce, Re Kay and Cook, the claimants were not trustees but merely intended trustees. In these cases the intended settlors refused to add, to existing trusts, additional property which was yet to be acquired. The intended trustees were already trustees to perfectly constituted trusts of other property and their actions were aimed at obtaining property owed to the trust. The courts did not decide on the outcome if the trustees would have sued but only gave directions3 that the trustees were acting on behalf of the trust and were volunteer’s.11 The approach taken by the courts in their directions was not to assist volunteers to a trust by forcing burdens to the trusteeship. The rule in these cases follows the principle in Milroy that ‘equity will not assist a volunteer perfect an imperfect gift’. From this principle, it is imperative that equity has a negative attitude to imperfect gifts. There are however exceptions to the rule in Milroy.12 Exceptions to the rule in Milroy v Lord Although the maxim that equity will not perfect an imperfect gift appears to extinguish the possibility of an incompletely constituted trust being treated as completely constituted, there are some exceptions.13 One exception is seen in Strong v Bird14 where the court established that when a donor makes an imperfect gift, the gift can be perfected by appointment of the donee as the administrator or executor on intestacy. Failure to meet the requirements of a properly constituted trust, as per Milroy, were not fatal to the trust as the donee was appointed executor meaning he would receive property which was subject to the gift. This rule operates to perfect an otherwise imperfect gift given the intended recipient gets the gift by an indirect means.15. This exception is limited to situations where there is the intention to make the gift at the time of death and not at any other time in the future. For the rule in Strong v Bird to apply there must be an intended inter vivos gift, the intention to make the gift must exist until the day the donor dies, the done is appointed the executor and the intended gift must endure the donors death.16 The rule in Strong v Bird applies to debts, but this rule was extended to include gifts. Neville J, in Re Stewart, reasoned that vesting the property in the executor upon the testator’s death makes perfect the imperfect gift made during the donor’s lifetime. Furthermore, the testators intention of giving the executor beneficial interest serves to countervail beneficiaries’ equity under the will.17 In Re Rallis will Trusts18 it was held that trusts are subject to the rule in Strong v Bird and that irrespective of how the trustee acquired legal title, the rule in Strong v Bird would still operate to perfect the trust. It was also established that immediacy and continuing intentions were not necessary to perfect a trust. In this case a man died and left his property to the wife and daughter. Pursuant to a marriage covenant the daughter contracted to settle property, including after acquired property, but unfortunately the daughter passed on before the mother. When the mother died the daughters interest fell into possession. X was the only surviving trustee of the fathers will and was also the only surviving trustee of the daughters’ marriage settlement. Because X was the trustee of the daughters’ settlement and that of the fathers’ settlement, he had the legal title to the property intended to form the daughters trust. It was held that X was to hold the assets on trust for the daughters’ settlement. Since the intended trustee had legitimately acquired the legal title they were to act as intended.19 Situations where the "would-be beneficiary" is party to the contract Where the intended beneficiary is party to a contract, then such person can enforce the contract in the same manner he would enforce any other contract. This implies that the intended beneficiary can obtain substantial damages at law if the donor fails to constitute the trust. In Cannon v Hartley20 a father made a covenant to make provision for the daughter by giving her property to be acquired later under the will of his parents. When the father received the property he refused to settle as per the covenant. Although the daughter was not within the marriage consideration, she was a party to the deed, and as such, could enforce the contract and obtain specific damages. Romer J noted that although the daughter was a volunteer, she was not only party to the separation deed, but also a party to the covenant and, therefore, had a legal right to enforce it without the assistance of the court.21 In Pullan v Koe22 the court in deciding when, by whom and the manner a marriage settlement can be enforced held that a marriage settlement and covenants within it can be enforced by the spouses and the children. Other beneficiaries not within the marriage consideration cannot enforce it. The court also established that the covenant is enforceable as soon as the property is acquired and equity will treat as done that which ought to have been done.23 Contracts (Rights of Third Parties) Act 1999 The Act introduces a reform to the rule of privity of contract which provides that an individual can only enforce a contract if he is a party to it. Section 1 of the act provides for situations where a third party has a right to enforce a contract. These circumstances include where the contract is made for the benefit of the third party, and where the third party is identifiable. In regard to incompletely constituted trusts, where an individual covenants to transfer property to a trustee for the benefit of a third party, this provision gives the third party a right to enforce the contract. The core of the Act is section 224 which lets an individual who is not a party to a contract to enforce a term in the contract where the contract expressly provides so or where the contract purports to give the third party the benefit and it does not appear from the construction of the contract that the parties did not expect the term to be enforced by the third party. The double negative contained in the last condition is meant to confer a rebuttable presumption which favors the third party. This presumption follows that if a contract confers a benefit on a third party, then the parties to the contract intended to confer a right to the third party to sue for such a benefit. This presumption, therefore, puts the burden on the parties to the contract to refute it. The Act makes available to the third party all remedies, including equitable remedies such as specific performance and injunctions as if he was party to the contract.25 The act also provides for remedies available to third parties and these remedies include all the remedies which would have been available in breach of a contract if he had been a party to it. This implies that the third party will have available remedies such as damages, specific performance, injunctions and other relief. The effect of this provision is that it accords a volunteer the same rights available to the parties to the contract. Although section 1 (5) gives a volunteer the right to bring an action for damages it is noteworthy that such right is subject to the rules of quantification of damages. This section treats the right of a third party in a manner that is comparable to the position in Cannon v Hartley. On the other hand, where the third party is provided a consideration for the promise such as a marriage consideration, he is entitled to damages if the remedy is appropriate. However if the damages are not appropriate, then the third party is entitled to specific performance as per Pullan v Koe. This principle is not affected by the act but rather confirmed.26 Apart from the remedy of damages available to third parties as volunteers, the act has not altered the availability of other remedies. Accordingly the act provides that the volunteer can only be allowed damages for four reasons. The first reason is that the objective of the Act is to reform the privity of contract and treat a third party as if he is party to the contract. In this respect the third party can bring an action against one party without joining the other party to the contract. The second reason is that reforming the principle of privity of contract does not imply that the law of equitable remedies is changed. The third reason is that section 1 (5) provides that the rules on specific performance and damages shall apply. This implies that where the third party is seeking a remedy for a Rembrandt painting, for example, then damages will not be appropriate and the most appropriate remedy would be specific performance. Since the third party is a volunteer he should not expect equitable remedies he was not entitled to before the act and the rules on the remedies are not changed by the act. The fourth reason is that a volunteer is treated as not having any benefit from the contract and therefore cannot gain any benefit from it. Discussion Although there are exceptions to the maxim that equity will not aid a volunteer, the Act27 disables this maxim. Equity takes a negative approach to third parties to a contract and does nothing to aid a volunteer. 28 This approach stems from the deeply entrenched principle of the privy of contract. A common exception is where the property vests fortuitously o where the intended beneficiary is also a party to the contract. The Contracts (Rights of Third Parties) Act 1999 aims at reforming this rule of privy of contract and adopts an approach that negates privy of contract. In this regard it is evident that the Act has completely changed the position of a volunteer under incompletely constituted trusts.29 The act reverses the decision in Re Pryce and Re Kay but approves the decision in Cannon v Hartley which provides that a volunteer is entitled to substantial damages for breach but not an equitable remedy of specific performance. Conclusion In view of these facts, the maxim equity will not assist a volunteer; can be considered best with the exception –except when it will because of several exceptions to its strict application. The suppression of the privy rule by the Contracts (Rights of Third Parties) Act 1999 and its likelihood to create unforeseen and unintended liability to third parties is likely to make it excluded from all written trusts. The intuitive nature of the privy rule and the maxim that equity will not assist a volunteer are likely to cause challenges in applying the Act. Cases Cannon v Hartley [1949] Ch 213 Fletcher v. Fletcher (1844) 4 Hare 67 Milroy v Lord [1862] EWHC J78 Pullan v Koe [1913] 1 Ch 9 Re Cooks Settlement Trusts [1964] 3 All E.R. 898 Re Kays Settlement [1939] Ch 329 Re Pryce [1917] 1 Ch 234 Re Rallis Will Trusts [1964] Ch 288 Re Stewart [1908] 2 Ch 251 Strong v Bird [1874] LR 18 Eq 315 Legislation Contracts (Rights of Third Parties) Act 1999 Bibliography Andrews N, ‘Does a third party beneficiary have a right in English law?’ (1988) 8 Legal Studies 14 Andrews N, Strangers to Justice No Longer: The Reversal of the Privity Rule under the Contracts (Rights of Third Parties) Act 1999 (2001) 60 The Cambridge Law Journal 353 Bray J, A Students Guide to Equity and Trusts (Cambridge University Press 2012) Bray J, Key Cases: Equity & Trusts (Routledge2013) Burrows A, ‘We Do This at Common Law but That in Equity’ (2002) 22 Oxford Journal of Legal Studies 1 Densham R, Incompletely constituted trusts: Covenants to settle property (Equity & Trusts: Text, Cases, and Materials 2013). 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