Trust Law Is Still Evolving Especially Where Constructive Trusts Are Concerned - Case Study Example

Equity Introduction: The common law views a contract as a free will arrangement between two parties and allows certain rights to the two parties, sothat a common law judgment declares the person’s rights. Contract under common law is a private ordering of relations by “independent, freedom-seeking individuals where the role of the Courts is restricted to enforcing their bargained-for exchange”.1 However this may not represent the true will of the parties or may produce inequitable individual gain, which is an unattractive moral principle.2 Therefore, equity may act in personam to prevent the exercise of certain rights because it may be unjust or inequitable to exercise such rights. As stated by Spencer Nathan Thal, “the freedom of contract doctrine sanctions every transaction, however unequal the starting points and however unequal the outcome.”3 Common law sometimes involves general statements that may not apply to every case, in fact in those instances, it would be an injustice to apply the common law. Equity may thus be said to be a correction of the law in cases where it is defective because of its generality. In the legal context, equity means fairness or justice – therefore a person or law that functions in a fair and just manner is acting in accordance with the principles of equity. Moreover, the interests of third parties may not be adequately represented under the common law, however equity allows for separate legal and beneficial interests. The doctrine of privity under the common law does not make adequate provision for representing the interests of third parties and the emergence of the principle of the trust is a development in specific response to this handicap in common law. The lack of fairness, the element of generality and the inadequate representation of third parties in common law has produced the notion of a trust. Moffett introduces the concept of trusts as starting out in the form of a measure of “confidence reposed in some other” which in turn leads to certain “moral obligations that are conditioned on the basis of ethical principles.”4 Therefore, the common law fails in that it operates solely on the basis of the free will of the parties, however this principle was defective in that it could not adequately address the question of fairness to the various parties, including third parties and resulted in the evolution of the principle of equity and trusts, which is still evolving. Doctrine of privity: The doctrine of Privity states that in general, a contract is entered into by the two parties concerned and therefore it does not confer any rights or obligations on a third person who is not a party to the contract5. Financial and commercial transactions involve several parties and the Doctrine of Privity under common law makes no allowance for the ramifications of multiple secondary and tertiary parties involved in contracts. Common law principles such as promissory estoppel offer some scope for development in favor of third parties6, however property held in trust for a beneficiary is generally meant to be assigned on the basis of principles of equity. A trustee holds the legal title of the property on behalf of the beneficiary. In the case of Wilson v Darling Island Stevedoring and Lighterage Co Ltd7, Mason CJ and Wilson J advocate the use of trusts to work around the privity principle and point to the existence of certain specific statutory principles (p 289). But the Privity Doctrine needs to be repealed or undergo some radical reformation process in order to make it more relevant in the modern business climate. Old common law principles and the principles of contracting between two single parties no longer holds good in the case of many commercial transactions and the outmoded Doctrine disallows the settlement of relief to third parties who may not be direct parties to the contract but are nevertheless affected by the contractual provisions. In the case of Timson’s Executors v Yerbury8, Romer LJ laid out four methods that would constitute a disposition, by a person entitled to equitable interest in a trust, to a third party. The person can: (a) assign it to the third party directly; (b) direct the trustees to hold the property in trust for the third party; (c) contract for valuable consideration to assign the equitable interest to him; and (d)declare himself to be a trustee for him of such interest. This was earlier laid out by Lord Simonds in Grey v IRC9, who defined disposition by a beneficiary of a trust as follows: "If the word disposition is given its natural meaning it cannot, I think, be denied that a direction given by the beneficiary whereby the beneficial interest in the shares thetofore vested in another or others is a disposition.”9a Since the case of Grey, the prior wording of “grant and assignment” in the LPA10 was changed to “disposition” in order to incorporate a broader definition for the disposition of equitable and legal interests in trusts. Such provision for various interests could only result from the evolution of the trust, which helped to address the need to provide equitable relief and beneficial interest to third parties. The evolution of the trust helps to administer property “in accordance with equitable principles” where written or oral principles are not specific or where they may be invalidated under the principles of common law.11 Strict interpretation under common law: Under common law, the process of creation of a trust included the separation of legal and beneficial titles, however the settler held both legal and beneficial title. This implied a declaration of self as trustee by the owner of the property, which created uncertainty about the intention of the settler to permanently eschew his/her own interests in favor of a beneficiary. Since common law involves a strict interpretation of statute and terms of disposition, there is no scope offered for a determination of the intentions of the party/ies. In such a case while interpreting equity strictly without giving effect to the intentions of the parties, an inequitable result could accrue and therefore, this mandated further evolution of the common law to clearly distinguish the process of formation of the express and constructive trusts. In the Westdeutsche v Islington BC12 the Court addressed the question of the nature of the resulting trust and disproved the existing notion that a trust always results where there is a separation of legal and equitable titles. As spelt out by Lord Browne-Wilkinson, resulting trust will not rise automatically when there is a separation of the two titles mentioned above, rather it will be the case only in instances where the conscience of the recipient is involved, otherwise both legal and equitable title pass to the recipient.13 The nature of the constructive trust is also evolving, since it is imposed by the Courts, where some trusts may arise in response to statutes regulating concurrent beneficial interests in land for trustees and beneficiaries.14 “A trustee may be a beneficiary, in which case advantages will accrue in his favor, to the extent of his beneficial interest.”15 The case of Westdeutsche also established that no equitable title may be said to exist before a trust is created. Furthermore, where a donor intends to make a gift to the beneficiary, it is vital that the intention of the donor be taken into consideration, for which there is no provision under common law. However, merely establishing intention alone may not suffice, therefore trust law has been constantly evolving in order to address the equitable interests of the various beneficiaries while also adhering to the intent of the original donor. In the case of Pagarani16 a donor made a gift to a charitable foundation through a deed that named the donor as one of the foundation’s trustees. However, while the donor made the oral gift to the foundation, he did not follow it up with a transfer of the assets to the other trustees, thus raising the question of whether the donor’s words could be construed to be a declaration of trust. The contention of the Plaintiffs in the appeal was that despite the donor’s words being construed as an oral declaration of trust, the gifted property could not be transferred to the trustees by the Court, since equity would not aid a volunteer. However, while the Court held that this proposition was true, however equity would not defeat a gift and since the donor had declared the trust through a deed, it would be unconscionable from the perspective of equity to permit the donor to withdraw from following through on his gift. This case possibly represents a step in the wrong direction, as far as addressing the deficiencies in common law through equity is concerned, however it serves to demonstrate that the reasons why the trust developed in the first place and is evolving into its various forms with constant modifications, is in fact to address the inadequacies under common law where neither the intention of the parties nor beneficial interests of third parties are actively taken into consideration. Hayton postulates a thesis wherein obligation aspects of a trust can create valid non charitable express trusts17 while according to Parkinson, the certainty of subject matter would validate the creation of a trust when a donor declares that certain property which forms a part of a larger estate is held in favor of a beneficiary.18 In the Vandervell v IRC19 in which a rich man made a transfer of stock to the RCS but with an option to purchase back the entire stock for a nominal sum. In this case, the IRC argued that Vandervell had in fact increased his tax liability, because he had made a valid transfer of stocks despite the fact that it was not in writing and his beneficial option to purchase was valuable because it indicated that he did not intend to make an outright gift of the stocks. In a similar, earlier case of Oughtred v IRC20, a wealthy man attempted to transfer shares to his mother on a bare trust, believing that the execution of a formal legal transfer of title would attract stamp duty and he claimed that beneficial interest passed under the oral contract. Therefore, when the formal title was registered, there was no transfer of beneficial interest. But the House of Lords found that there had indeed been a transfer of beneficial interest and the transfer was valid and mandated the payment of stamp duty. This case raised the issue of distinction between an oral disposition, which is not enforceable due to lack of a written instrument and an oral contract, which is enforceable. It may be noted that the opinion rendered in this case appeared to be based upon the principle that oral dispositions cannot transfer property while oral contractual agreements can. In the case of Re Vandervell21 the wealthy man was finally able to constitute an express trust in favor of his children. Upon Mr. Vandervell’s death, the executors of the estate made a claim for the dividends, on the basis that they belonged to the estate rather than the children’s trusts. But this argument was rejected by the House of Lords, with Lord Denning summing up the valid creation of an express trust by Vandervell as follows: “If he [Mr Vandervell] had lived and not died, he could not have claimed it back…..Even a court of equity would not allow him to do anything so inequitable and unjust.”22 Therefore in this case, equitable estoppel formed the basis, which the Courts deemed an exception to Section 53 (1) (c) of the LPA. Disposition is identified as conveyance of land at Section 205 (1) (ii) of the land Property Act of 1925. However, while such dispositions of trust proceeds are intended to be carried on an equitable basis, the realities of revenues payable and the issue of taxes has resulted in manipulation of trusts in such a manner that fraud is the result. Dispositions are influenced significantly by the revenue aspects rather than equity, through the incorporation of third parties and intermediary beneficiaries that have developed purely on the basis of economic implications. There is a conflict that arises in terms of the disposition of the legal owner of the trust vis a vis the equitable owner/s or beneficiaries of the trust and existing provisions of formality which are conditioned mostly on the basis of revenues accruing from the estate. Hence, the provisions of common law cannot address all these ramifications and a fair disposition of interests created under a trust are mandated through equity. Conclusions: On the basis of the above, it must be stated that trust law is still evolving, especially where constructive trusts are concerned. The strict interpretation of contractual obligations between parties and the doctrine of Privity of contract, coupled with the lack of provision under common law for the separation of legal and beneficial interests have been directly responsible for the evolution of trusts. Equity specifically addresses the need to ensure that justice is done to the parties and that the intentions of donors are also taken into account in determining interests on gifts and dispositions of property. As a result, it may be concluded that equity and the concept of trusts has been the direct result of the evolution of common law through addressing its deficiencies and lack of provision for a fair and equitable result. Bibliography Books/Journal Articles: * Baumann, Richard W, 2002. “Ideology and Community in the First Wave of Critical Legal Studies” Toronto: University of Toronto Press * Hayton, 2001. “Developing the obligation characteristic of the trust” 117 Law Quarterly Review, 96 * Lewin on Trusts, 2000. (17th edn) Sweet and Maxwell * Moffat, Graham Trusts Law: texts and Materials Fourth edition, * Parkinson, 2002. “Reconceptualising the Express trust” Cambridge Law Journal 657 * Smith, Stephen A, 2004. “Contract Theory: Oxford: Oxford University Press, pp 3 * Thal, S.A. 1988. “The inequality of bargaining power doctrine” The problem of defining contractual unfairness” Oxford Journal of Legal Studies, 17. Cases: * Grey v IRC (1960) AC 1 * Oughtred v IRC (1960) AC 206 * Timson’s Executors v Yerbury (1936) 1 KB 645 CA * Tweedle v Atkinson (1861) 1 B&S 393 * T Choithram International SA and others v Pagarani and others (2001) 2 All ER 492 * Vandervell v IRC (1966) 2 AC 291 (HL) * Re Vandervell (No: 2) (1974) Ch 269 * Westdeutsche v Islington BC [1996] 2 All ER 961 * Wilson v Darling Island Stevedoring and Lighterage Co Ltd * Walton Stores (Interstate) Ltd v Maher (1988) 62 ALJR 110 Legislation: Land and property Act of 1925 Trusts of Land and Appointment of trustees Act 1996. Read More