The Main Purposes of Formality Requirements - Essay Example

What are the main purposes of formality requirements? Discuss whether the formality requirements you have studied in the Law of Trusts fulfil those purposes. Introduction A trust is an arrangement by which property is entrusted to someone called trustee who is bound by legal obligations to operate it in a certain manner without any personal interest. These obligations are either created by the settlor who previously owned the property, or under legally recognized circumstances. Thus, trusts can arise under many circumstances apart from the “conscious creation of it by the settlor, which are legally significant but are not however exhaustive and hence not specified to come within a definition. An example of a conscious creation of trust can be illustrated as follows. An elderly woman wants to gift to her baby grandson £ 100,000. As he is too young to keep all the money and for reasons of her old age, she creates a trust for him by transferring the said £ 100,000 to a trustee who may be her close friend, relative or her bank giving instructions as to how to deal with the money entrusted such as investing it for earning interest and paying the capital of £ 100,000 along with the accumulated interest on her grandson’s eighteenth birth day and also to meet her grandson’s education expenses and annual allowance of specified sum on his reaching his teens, in the meanwhile. These kinds of trusts of conscious creation are called Express Trusts and the trusts created otherwise are called “Constructive Trusts” The trustee does not have to be a separate person other than the settlor. Thus, the settlor herself in the above case can hold the property on trust by a proper “declaration of trust” known as “declaring a trust”. and act as a trustee to carry out the above said obligations. Thus, what is important in a trust is not a “transfer” of property from the settlor to the trustee but the duty in regard to the manner in which the trust fund is to be handled.1 Formalities The process of creation of trust involves two processes arising out of formality requirements. First is the evidence of the creation of the trust in writing. Second, characterized as “constituting a trust”, it involves completion and submission of specified documents to a third party. It follows therefore that a trust is valid only when the property has been validly transferred to the trustee. Declaration of trust by a settlor and a testator Settlor can declare a trust without observing any writing formalities for trusts of “personality such as money, shares, and chattels” by mere oral declaration. However, if the trust is in respect of land or interests in land, it must be evidenced by writing signed by the settlor declaring the trust. Such a requirement in writing is however not necessary in respect of implied or constructive trusts of land. If the express trusts are not in writing, they are unenforceable but not void. That is, although it is a valid trust, a beneficiary cannot enforce it. Thus, trustees cannot be compelled to carry out their obligations against their wishes in cases of trusts not in writing concerned with land and interests on land. Therefore, the writing requirement by the settlor is not contemporaneous with declaration of trust. The signature though normally should be that of the settlor, law does not prevent it to be that of the trustee. The formalities therefore serve as safeguards against fraud and abuse and ensure that settlor consciously creates the trust by formal declaration and “as a means of standardizing transactions”. Similarly, a trust of land by a testator by Will must be evidenced by a writing and signature. The Wills Act 1837 requires all other forms of trusts than for land also must be evidenced by a signed writing.2 Different formalities are for different purposes. Section 53 (1) © of the Law of Property Act 1925 stipulates that any equitable interest not assigned in writing is void. The stringent provision makes an unwritten transaction as never occurred at all in the eyes of law. Next stringent provision is section 53(1) (b) which states that there can be no proof of a transaction unless it is evidenced in writing. Thus, according to this provision, a declaration of trust of land must be supported by written evidence. As already mentioned, an oral declaration of trust is not invalid but it shall not be allowed in court. Thirdly, an obligation created by a transaction cannot be enforced in court if there is no written evidence. The three formalities are compulsory as precautionary measures and for two evidential purposes. Precautionary measures because property rights including equitable trusts under a trust are valuable rights and should not be handled in a casual or informal manner. The transferor or settlor will seriously consider the consequences of his act only if he puts his signature. Secondly, the writing requirement which enables documentary evidence, prevents frauds to be easily committed as one cannot successfully forge document and lie before the court about its origin. Thirdly, the written evidence also avoids administrative problems that would arise after passage of time when memory of oral transactions is capable of being faded. Furthermore, complicated transactions in writing give clarity of intentions on the part of the parties concerned. Written trust deed serves as record for the trustee which would help him avoid commission of inadvertent breach by paying a former beneficiary who might have assigned his rights to someone else. Although, the maxim is “Equity looks to intent not form”, since the Chancellor could always summon parties and interrogate them in person, Parliament has made the written forms as compulsory formalities for creation and transfer of equitable interests. In Doctrine of Rochefoucauld v Boustead (1897)3, the court of appeal enforced the oral express trust. The plaintiff who had mortgaged her Ceylon properties was asked by the mortgagee to repay the debt. Her friend Boustead orally agreed to buy the properties from the mortgagee to buy at a price that would cover the price and expenses and hold the property on trust for her until she repaid the price and expenses. Although the statute requires that he should have signed the written document, the court of appeal allowed parole evidence what can be called the “doctrine of Rochefoucauld v Boustead” in order to “prevent fraud “from being “used as an instrument of fraud”. In Bannister v Bannister (1948)4, an elderly woman transferred her two cottages to her brother-in-law at less than market price on an unwritten condition that she should spend the rest of her life in one of the cottages free of rent. Upon his proceeding to evict her, the Court of Appeal held that he held one of the cottages on rust. The court stated that regardless of his intention to defraud or not, his reliance upon absence of writing constituted fraud on his part. Thus, Yet Scot LJ invoked the doctrine of Rochefoucauld v Boustead by treating this transaction as a case of constructive trust instead of as an oral express trust5 In Hodgson v Marks [1971]6 , the requirement of section 53(1) (b) was circumvented by the Court of Appeal by relying up on section 53 (2) which gives rise to “the creation or operation of resulting, implied or constructive trusts”. It was reasoned that the transfer in this case was not for the purposes of gift and as such there was no reason why should there be no resulting trust of the beneficial interest to the plaintiff Hodgson. Hodgson was an elderly lady without much knowledge. Her lodger Evans persuaded her to give him her money which he would manage and invest it on her behalf. She was further made to transfer her house to him as a strategy to prevent her nephew from evicting Evans out of the hose. The transfer was not intended to give up her beneficial interest and Evans also paid no consideration for the transfer. Evans sold the house without her knowledge. But Hodgson and Evans continued to live in the house. It was only after some months, Hodgson and the new purchaser Marks came to know of each other’s claims.7 Conclusion The three formalities prescribed under the Property Act 1925 fulfil the purposes of prevention of fraud. However, the courts have demonstrated through case law that the statute cannot be used an engine of fraud. Bibliography Cases Bannister. Bannister v. Bannister. [1948] 2 All E.R. 133 in James Penner, The Law of Trusts. (8th Edition, Oxford University Press, 2012) 144-147 Hodgson v Marks [1971] Ch 892, 934 in Peter Birks, An Introduction to the Law of Restitution (Oxford University Press, 1985) 58 Rochefoucauld v Boustead. [1897] 1 Ch 196. LINDLEY L.J in James Penner, The Law of Trusts. (8th Edition, Oxford University Press, 2012) 144-147 Books Birks Peter, An Introduction to the Law of Restitution (Oxford University Press, 1985) 58 Gardner Simon, An Introduction to the Law of Trusts (3rd Edition, Oxford University Press 2011) 2-5 Penner James, The Law of Trusts. (8th Edition, Oxford University Press, 2012) 144-147 Virgo Graham, The Principles of Equity and Trusts. (Oxford University Press, 2012) 119-120 Read More