The Criterion of Validity - Assignment Example

Equity and Trusts work Trusts, most simply defined is a situation where a person has property or rights which he holds or is bound to exercise for or on behalf of others, or for the accomplishment of a particular purpose or purposes.1 The person, called a trustee, is supposed to hold the property in trust for others, or for a particular purpose or purposes. The trustees have legal ownership, whereas the beneficiaries have equitable ownership. Trusts may be of various kinds, but the broadest division may be said to be that of a fixed trust and discretionary trust; also the subjects of discussion in the present case. A discretionary trust is a trust where the beneficiaries and/or their entitlements to the trust fund are not fixed, but are determined by the criteria set out in the trust instrument by the settlor.2 Whereas, a fixed trust is one where the beneficiaries are listed out and can be identifiable as a complete list and the entitlements are also certain. For a trust to be valid in law, there must be a certain degree of certainty about the instrument; the certainty must b in terms of certainty of subject matter of the trust (the trust property), certainty of purpose (or at least an indication of the creator’s desire on how the trust property, or its proceeds are to be distributed) and certainty of objects (or, the beneficiaries, or recipients of the trust benefits). In this case, we are concerned about the last aspect, that is, certainty of objects. For a Trust, Power of Appointment, Testamentary Gift or other such instruments to be enforced, it must be possible to determine who the beneficiaries (objects) are, either in person or as members of a particular class. There is a great deal of uncertainty in this area, and the principles vary somewhat according to the type of trust under consideration. However, what is clear is that certainty of objects, unlike Certainty of Intention, is a question of law, and therefore the usual rules of precedent apply. In a Fixed Trust, the trustees have no discretion how to distribute the benefits to and between the beneficiaries. The position, for fixed trusts, has always been that, for the trust to be valid, it must be possible to make a complete list of all the beneficiaries of the trust (often called the ‘complete list’ test). In a discretionary trust however, where the trustees have a discretion as to which beneficiaries within a class will take a benefit, it is not necessary to be able to list every member in the class. It is necessary, however, for the trustees to be able to say of any individual claimant whether they do or do not fall within the class of possible beneficiaries. This ‘individual ascertainability’ test was laid down in relation to discretionary trusts by a bare majority of the House of Lords in the case of McPhail v Doulton.3 Lord Wilberforce, who delivered the leading speech, held that the trustees of a discretionary trust must survey the class of potential beneficiaries in order to form some idea of the number of persons within it. In order to carry out this survey, and in order to exercise a fair discretion in the distribution of the fund amongst the class of potential beneficiaries, the class must be capable of reasonably precise definition. Lord Wilberforce referred to this as the requirement of ‘linguistic or semantic’ certainty,4 now more usually referred to as the requirement of conceptual certainty.5 Historically, discretionary trusts were subject to the same test for certainty (the complete list test) as fixed trusts. This position was confirmed by the Court of Appeal in the very influential case of IRCV Broadway Cottages Trust 1955. The winning argument was that unless the complete list of beneficiaries could be established, a court would not be able to order the execution of the trust if necessary. A trust that could not be exercised by a court order was, it was argued, undesirable and dangerous. There are two obvious problems with this argument. First, when the court executes a trust, it should do so to give effect to the wishes of the settlor. If a complete list of beneficiaries could be drawn up, the court could, presumably, order an equal distribution to all the beneficiaries. However, unless the court was prepared to assume the role of the trustee, with the trustees discretion, it could not do any more than this. If the settlor had intended a uniform distribution of income, he would have said so in the trust instrument; the fact that he allowed discretion to the trustees indicated that a uniform distribution was exactly what he was not looking for. In short, it is not necessarily easier for the court to supervise a discretionary trust when the complete list of beneficiaries is known in advance, than when it is not. Second, Broadway Cottages established a rule for certainty in discretionary trusts that was very different from that prevailing in a power of appointment. The distinction between the tests for certainty in mere powers and discretionary trusts was thought by many to be illogical, given that in many cases it is almost impossible to determine from the construction of the trust whether the trustees have a power or a discretion. Consequently, in McPhail v. Doulton the House took the opportunity to overturn Broadway Cottages, and make the test of certainty in discretionary trusts the same as for mere powers, as set out in Gulbenkian.6 When this test is applied to discretionary trusts, the test for certainty of objects is whether it is possible to determine whether a particular object is, or is not, entitled to benefit. However, this decision does not appear to disturb the rule for fixed trusts, which remains the ‘complete list’ test. This new test for certainty caused a deal of confusion, as became obvious when the case was remitted back to the High Court for reconsideration (as Re Baden No 2). The High Court’s decision was appealed to the Court of Appeal which held that the trusts were valid, but for what appeared to be three different reasons. The differences of approach centered on whether the ‘is or is not’ test was a semantic test or an evidential test. This is further explained through illustrations below: If it is a semantic test, it must be possible to determine the meaning of the class with precision. For example, a trust for the benefit of ‘my employees’ is semantically certain – there is usually no doubt about what the word ‘employee’ means. On the other hand, a trust for the benefit of ‘my friends’ is semantically uncertain; the term ‘friend’ itself does not really admit of a precise definition. If the ‘is or is not’ test is an evidential test, then it must be possible to determine with certainty whether for any person whether that particular person is a member of the specified class or not. Most likely an evidentiary test can only be applied if the semantic test is satisfied. A trust for ‘my employees’ might be semantically certain, but evidentially uncertain, because even though I know what an employee is, I might have employees who cannot prove that they are employees (casual workers paid in cash, for example). With this semantic/evidentiary distinction in mind, we can consider the tests set out in the Court of Appeal. Stamp LJ imposed the most rigorous test – it must be possible to say for certain of any individual whether he is, or is not, a member of a conceptually certain class. That is, both conceptual and evidential certainty is required in order for the trust to be valid. In practice, the difference between this test, and the ‘complete list’ test, is very slight. At the other end of the strictness spectrum was the judgment of Megaw LJ. He held that a trust would not fail for uncertainty so long as it was possible to say, of a ‘substantial number of people’, whether they fell within the terms set out by the settlor. This test does not appear to distinguish conceptual certainty from evidential certainty; most likely it admits a measure of uncertainty in the boundaries of the class, and a good deal of uncertainty in the evidential requirements. The judgment of Sachs LJ fell between these two extremes. In his view, the trust would succeed if it would be possible to determine in theory whether any given person was inside or outside it. That is, he requires semantic certainty, but not evidential certainty. Most commentators seem to have accepted that Sachs’ view is the best compromise. The academic opinion is thus supportive of this ‘compromise’ view. On this basis a trust will be workable, to the extent that if a person presents himself to the trustees as a potential beneficiary, the trustees will know the conceptual basis on which to make the determination. There may still be an issue of evidence, but the evidence will be of whether the putative beneficiary falls within the class, not evidence as to the nature of the class itself. This distinction is pertinent. However, since academic opinion is more often than not divided, the ‘compromise’ view also has its own critics. The problem with Sachs’ view, is that it has the same weakness as the original decision in McPhail – it allows the creation of trusts which cannot be properly managed. This may negate the very purpose of concepts developed under Trust law and especially those discussed above. Despite their similarities, a trust is not the same as a power. In a trust, the trustees have a duty to disburse benefits, not merely a right to do so. Since they have a duty, and not merely a right, their use of discretion can be challenged in the courts. The trustees may not be able to defend their actions, if they cannot show that they considered the relative merits of all potential candidates for the benefits of the trust because they dont know who all the candidates are. Although the Sachs test prevents a situation where a particular person approaches the trustees, and the trustees are unable to tell even in theory whether he is entitled to benefit, only a trust that satisfies the ‘complete list’ test allows the trustees to be certain that they are able to exercise their discretion in favor of all objects. Thus, aside from the case of fixed trusts, the law regarding certainty of objects in most other forms of trust and gift is somewhat unclear. Although the rules for discretionary trusts and powers have been defined to be the same (in McPhail), powers and trusts are not the same, and Re Baden shows how difficult it can be to apply the McPhail test to discretionary trusts. Although the ‘is or is not’ test is easy to state, it is difficult to apply. Although it seems to be accepted that an outside opinion can be sought to resolve uncertainty, the authority for that proposition is not very strong. Finally, it is unclear whether the certainty test for gifts subject to a condition precedent is the same as the test. Or, for that matter, any of the tests derived from McPhail. Mention must also be made in this regard of another method sometimes adopted by the courts to ascertain the true meaning and intent of the trust document and fill in the gaps left by the lack of express words of the creator – by reference to a third party for an interpretation of the intent, or, by reference to the creator’s beliefs and practices for indications in that regard. It is the paramount principle of construction of trust obligations that the courts are striving to give effect to the wishes of the settlor. It is this principle which gave rise to the decisions in McPhail and Re Barlow7, despite the complications they may engender. If, therefore, the settlor identifies a person with responsibility for resolving uncertainty, there is a strong argument for saying that the courts should defer to that person, rather than declaring the trust invalid. The contrary argument is that it is universally accepted that certainty of objects is an objective matter, not a subjective one, and therefore should not turn on particular persons opinion. This issue was considered in Re Tuck8, in which the settlor required his inheritable baronetcy to pass only to a son who married a woman of the Jewish faith. Where there was any doubt as to the wifes suitability in this regard, the Chief Rabbi was to decide the matter. Although the trust was upheld, it is uncertain whether the basis of the decision was an acceptance of the ‘Chief Rabbi’ clause or something else. Lord Denning, for his part, was unequivocal in his acceptance: “I do not see any reason why a testator or settlor should not provide that any dispute or doubt is to be resolved by his executors or trustees or even by a third person...” Lord Russell held that it was unnecessary to consider the Chief Rabbi clause, since the class of persons of the Jewish Faith was already conceptually certain. Everleigh LJ held that nominating the Chief Rabbi only served to indicate the settlor’s opinion of Jewishness, and therefore did not require that the Chief Rabbi would have to be consulted at some later stage. At present, therefore, although it is generally accepted that certainty of objects can be resolved by reference to the opinion of a person nominated by the settlor, it is far from clear that the case usually cited to that effect really has that conclusion as part of its ratio. In addition, it should be noted that Re Tuck concerned a succession, not a trust, and if different rules apply to gifs and trusts, which is what Re Barlow suggests, then Re Tuck does not have to apply to trusts at all. With these principles in mind, as a measure of the general law surrounding trusts and their interpretation, we may now look into the specific clauses as put forth for consideration by the legal counsel. “my friends” As explained earlier, the expression, my friends, is semantically or conceptually uncertain. The term friends, not really lending to any specific meaning, purport or a precise, discernible definition. For instance, in its most proverbial sense, it would also encompass the persons the creator may have gone to the club with; or, his chauffer might argue that he was more of a friend and confidant to the creator of the trust than just a chauffer. Therefore, it would seem to fail the very first test of ascertaining validity and meaning for the trust deed. In the event that the trust is an inter vivos trust, the creator should, most certainly be asked to create another, more precisely worded trust to clarify his intent. If challenged, the discretionary trust in the instant case will only be valid if the trustees (and ultimately the court) could say for certain of any claimant whether they are or are not a ‘friend’. The difficulty with the term ‘friend’ has already been explained, and it is difficult to find any two people who can agree upon what a ‘friend’ is. Friend and friendship are conceptually uncertain words. While there can be no conclusive definition of the certainty required, the testator can, if he is insistent on giving to a class, define the class in more universally verifiable terms. For instance, he may state, ‘to all my friends, with whom I play poker’, or, ‘to all my friends, with whom I have traveled all my life’, or, ‘to all my true friends – who have been with me since sixth grade’; thereby giving universally and objectively verifiable cases and instances of who exactly the testator considers his friend and would be willing and wanting to be a beneficiary of his trust. The best way would of course be to create a fixed trust and name the concerned individuals whom the testator wishes to be beneficiaries of his philanthropic goodwill. Nevertheless, in accordance with the maxim certum est quod certum reddi potest, the courts will treat as certain that which can be made certain. One possibility is to define the concept along lines approved by the testator (the testator in the instant case actually urges this approach upon his trustees). It may be that the testator had written books or letters in which he attempted to define the term. If a usable definition can be found the court may see fit to direct the trustees to take the testator’s own definition of the term ‘friend’ as a way of remedying the uncertainty of the concept. However, although the court approved an approach similar to this in Re Tepper’s Will9 in relation to an individual gift subject to a condition subsequent (the gift was made on condition that the donee remained ‘within the Jewish faith and shall not marry outside the Jewish faith’, the judge admitting evidence of the testator’s own practice in order to render certain the meaning of the term ‘Jewish’), it is doubtful that it would be applied to a gift, such as the present, which is held on trust to be divided amongst a class. On balance, it is very doubtful that the court would remedy the uncertainty inherent in the description ‘my friends’ and the discretionary trust will therefore fail for uncertainty of objects. The consequence of the invalidity of the trust is that the trustees will hold the fund on trust for the residuary beneficiaries under the testator’s will. In such a case, as this, it would seem to be that even with a certain measure of common sense and knowledge of the testator’s wishes, it may not quite be possible to credit a sufficiently certain amount of certainty to the trust deed – so essential to fulfill, in a proper fashion, the desires of the testator. Should it be forcefully attempted to read into the trust deed in an attempt to uphold its validity, there is a good chance of the entire exercise being reduced to a chaotic mêlée, in which nothing can quite be determined. The result of that exercise, contrary to fulfilling and upholding the testator’s intentions for the trust, may amount to a quick and certain degradation of his wishes and intentions in creating the trust. In such circumstances, it might, in fact, and deed, be better to not try to forcefully uphold the trust deed where there exists none and risk further confusion and degradation, rather, allowing the testator to clarify and make certain his intent. “for the benefit of all assiduous lawyers working within the European Union” This clause would present a similar, almost insurmountable obstacle in terms of the potential beneficiaries of the trust. To even state that the trust is for the benefit of all lawyers working within the European Union would bestow upon it, a certain degree of ascertainability. But to say that it is for the benefit of all assiduous lawyers working within the European Union, is to bring within it too much uncertainty. The term assiduous again, being devoid of any proper, universally agreed to meaning. Furthermore, this gift is, on the face of it, for a class of persons, that is, for the benefit of all assiduous lawyers working within the European Union; implying thereby, that the gift had to be shared by all the members of that particular class and the test of certainty of object would therefore be more stringent than in the case of absolute individual gifts subject to a condition precedent. If the creator himself were a lawyer, his beliefs and practices may be looked into for a more determinate insight into the meaning of the term assiduous; but on the whole, on a balance of factors, the intended beneficiaries appear to be too uncertain and indeterminate for the trust to be upheld. It is almost impossible to determine as to which lawyers would fall in the category of assiduous and how would a lawyer be classified as one. Yet again, it would seem to me that rather than try and read too much into the testator’s intentions behind creating the trust, in an attempt to uphold it, and in that, risk the very purpose behind his creation of the trust, it may be better to ask him to clarify the same in a better and more precisely drafted fashion. “to my executors, the whole of my art collection to hold on trust for all or any of the good looking girls I dated in my youth” Finally, there is the issue of the individual gifts of paintings to the good looking girls the testator dated in his youth. These appear to be absolute gifts subject only to a condition precedent, namely that each claimant must prove that she is one of the good looking girls the testator dated in his youth. It is the nature of such gifts that the donee takes the whole of the subject matter (i.e. the painting or paintings), this can be contrasted with a discretionary trust where the beneficiaries share the fund. Because there is no need to share a fund between a class of persons the test of certainty of object is less stringent in relation to a gift subject to a condition precedent. Such a gift will be valid in relation to any claimant who can prove that she is a good looking girl the testator dated in his youth, even though persons may exist of whom it cannot be said whether or not they would fall within that category.10 In the present case however, it is doubtful whether this trust too can be valid and enforceable in law by way of uncertainty of objects. Firstly, there is the matter of the claimant being a good looking girl. It is not just any girl whom the testator would have dated in his youth, but only a good looking girl; beauty, again, like friend and friendship, is a matter of highly subjective opinion. Again, it would be difficult to be in agreement of whom the testator intended to be the beneficiary of his gift. In the present case, the situation might be made simpler if any evidence (in the form of letters or other declarations) could be found of the testator having called or considered the claimant in question as a good looking girl or having stated to that effect. But again, the question of indeterminate potential beneficiaries leaves the problem to naught. In order to bring in the required level of certainty, the testator could do well to give certain criterion to qualify and objectify his intention. Even a statement making the trust ‘in favour of all the girls I dated in my youth’ would have a more certain and objectively verifiable criterion for the executors to identify the intended beneficiaries of the trust. Or, if he wishes to make an open ended trust for only certain women he dated in his youth, he ought to clarify it to describe what women he would consider beautiful. Here too, rather than try to widen the meaning of the clause and risk including, as beneficiaries, those specific individuals the testator may have wanted to keep out by adding the qualifier good looking to the girls he dated, it might be a better idea to have the testator clarify the same using more precise and verifiable language. Thus, in spite of the various judgments, the peculiarity of the interpretation of trusts still exists. BIBLIOGRAPHY TREATISES AND BOOKS: George W Keaton & L. A Sheridan, Equity, 3rd Edn, Barryrose Books, London, 1987 Halsbury’s Laws of England, 4th ed., Vol 48 Hanbury and Martin, Modern Equity, Jill E Martin, Sweet & Maxwell, London, 17th Edn, 2003 John McGhee, Snell’s Equity, 13th Edn, Sweet & Maxwell, London, 2000 ARTICLES: L. McKay, “Re Baden And The Criterion Of Validity”, V.U.W Law Review 258 1973-1975 LIST OF CASES: Blathwayt v Baron Cawley [1976] AC 397 Blausten v IRC [1972] Ch 1 256. McPhail v Doulton [1971] A.C. 424 Re Barlow Will Trust [1979] 1 W.L.R. 278 Re Gulbenkian [1970] A.C. 508 Re Manistys Settlement [1974] Ch 17 Re Tepper’s Will [1987] 1 All E.R. 970 Re Tuck [1978] 2 W.L.R. 411 (CA) Read More