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Equity and Trusts: McPhail v Doulton Case - Essay Example

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The paper 'Equity and Trusts: McPhail v Doulton Case' presents the landmark Equity and Trust case McPhail v Doulton went to the House of Lords on an issue regarding the validity of a discretionary trust. The trust deed creating the trust provided for the settlement of a trust fund to be divided among the employees of Matthew Hall and Co. Ltd…
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Equity and Trusts: McPhail v Doulton Case
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McPhail v Doulton [1971] AC 424 The landmark Equity and Trust case McPhail v Doulton went to the House of Lords on an issue regarding the validity ofa discretionary trust. The trust deed creating the trust provided for the settlement of a trust fund to be divided among the employees of Matthew Hall and Co. Ltd as well as their family members and dependants. The question for consideration by the House of Lords was whether or not the certainty of objects was sufficient to form a validly constituted trust. Clause 9 of the relevant trust deed provided as follows:- ‘The trustees shall apply the net income of the fund in making at their absolute discretion grants to or for the benefit of any of the officers and employees or ex-officers or ex-employees of the company or to any relatives or dependants of any such persons in such amounts at such times and on such condition (if any) as they think fit.’ (McPhail v Doulton [1971] AC 424) Prior to this case the law regarding certainty of objects, one of the three certainties necessary for the formation of a completely formed trust, was different. The requisite certainty of objects was satisfied if the clause identifying the objects was such that it was possible for the trustees to make a complete list of all the designated beneficiaries. This was known as the ‘complete test.’ (Re Gestetner Settlement [1953] Ch 672) In McPhail v Doulton, the House of Lord departed from the ‘complete test’ and introduced an ‘in or out’ test. In the words of Lord Wilberforce, all that the trustees were required to ascertain was ‘can it be said with certainty that any given individual is or is not a member of the class’ of beneficiaries. (McPhail v Doulton [1971] AC 424 at p 454) Based on the facts of the case, the House of Lords held that it was possible to determine whether any given person was an employee, ex-employee, officer, ex-officer, dependant or family member. That being the case, the House of Lords ruled that the trust was a completely constituted trust. Lord Wilberforce, in McPhail v Doulton justifies the ‘in or out’ test by distinguishing between a discretionary trust and a fixed trust. If the certainty of objects was subject to a discretionary power, a ‘complete test’ would have been necessary for the distribution of the trust property. Moreover, a complete list of beneficiaries was only necessary in circumstances where the entire trust fund was in the process of being divided among the beneficiaries. In other words, the subject trust was not a fixed trust, it was a discretionary trust and an ‘in or out’ test could be applied with practical satisfaction. (McPahail v Doulton [1971] AC 424) Lord Wilberforce went on to point out that the administration of a trust might call for trustees to engage in a ‘duty of inquiry or ascertainment, in each case the trustees ought to make such a survey of the range of objects or possible beneficiaries as will enable them to carry out their fiduciary duty.’ (McPahail v Doulton [1971] AC 424) As in McPahil v Doulton ‘a wider and more comprehensive range of inquiry is called for in the case of trust powers than in the case of powers.’ (McPahail v Doulton [1971] AC 424) Put another way, the administration of a discretionary trust where it was not possible to draw up a complete list of beneficiaries was not impossible, although it might require more effort in the ascertaining of who was a member of the designated class of beneficiaries. Lord Wilberforce said that there may be class ‘where the meaning of the words used is clear but the definition of beneficiaries is so hopelessly wide as not to form "anything like a class" so that the trust is administratively unworkable’. (McPahail v Doulton [1971] AC 424) As an example of an administratively unworkable trust, would be words identifying the class of beneficiaries as ‘all the residents of Greater London’. (McPahail v Doulton [1971] AC 424) All five of the judges in the House of Lords agreed that clause 9 of the trust deed, the subject matter at issue in McPhail v Doulton formed a completely constituted trust. Be that as it may, the House of Lord was divided on the issue of distribution. Lord Hodson pointed out that it was improper ‘to sanction, in the case of an uncertain disposition…, the authorisation by the court of a scheme of distribution such as he(Lord Wilberforce) suggests.’ (McPhail v Doulton [1971] AC 424) Lord Hodson is referring to Lord Wilberforce’s suggestion that if a trustee fails to execute the trusts the courts will do so for him. The court can accomplish this by the appointment of new trustees ‘or by authorising or directing representative persons of the classes of beneficiaries to prepare a scheme of distribution, or even, should the proper basis for distribution appear by itself directing the trustees so to distribute.’ (McPahail v Doulton [1971] AC 424) Lord Hodson did not think that this suggested scheme of distribution could be justified by Lord Wilberforce’s finding that a more involved inquiry might be necessary to identify the class of beneficiaries in a case of trust powers as opposed to a case of mere powers. Lord Hodson said ‘to adopt this solution is, I think, to do the very thing which the court cannot do.’ In referring to the ruling in Gulbenkian Settlements [1970] A.C. 508, Lord Hodson said that the trustees are obliged to choose beneficiaries from the class of beneficiaries as designated in the trust instrument. The donor has not granted the power for the selection of beneficiaries from claimants who might fall within the class. To permit this course to be taken is tantamount to creating a narrower class of beneficiaries when there is no such power making provision for this course by the donor of the power. (McPhail v Doulton [1971] AC 424) Lord Guest indorsed the opinion expressed by Lord Hodson, he had an observation of his own to make. Stating that while he agreed that trusts such as the trust in McPhail v Doulton should be upheld because it served the public’s interest as it provided impressive benefits for the beneficiaries, he did not think that changing the law in this regard was a judicial function. He felt that it was a matter for the legislators. (McPhail v Doulton [1971] AC 424) The ruling in McPhail v Doulton made a desirable change to the law relating to the certainty of objects. It did so by validating dispositions of trust property if the list of beneficiaries could not be listed. For obvious reasons the requirement for such specificity was onerous and left little room for the inclusion of an intended beneficiary that might not have been in the donor’s contemplation at the time of making a declaration of trust. Cetainly, the unanimous opinion of the House of Lords in McPhail v Doulton widens the number and variety of valid discretionary trusts. This might make the distribution process more difficult for the courts to enforce in an appropriate case. However, as Lord Wilberforce points out, this is not impossible and can be accomplished by a mere process of elimination. Claimants can be adequately assessed on the basis of the ‘in or out’ test enunciated by the House of Lords. The rational behind the ruling in McPhail v Doulton is that a beneficiary cannot be said to own any part of the trust until such time as the trustees have exercised their powers to distribute the trust property in favor of that beneficiary. It therefore follows that the rules governing the principles of certainty should not be so confining that they compromise the trustees’ ability to perform their fiduciary duties. A good median exists in the rule that one need only to consider whether the class of beneficiaries is identified in such a way as to permit distribution by the courts if a trustee fails in his duty. The range of discretionary trusts have even extended beyond the ‘in or out’ test to a certain extent. In Re Manisty for example, a trust deed granting trustees the power to add beneficiaries to a list of designated beneficiaries was held to be valid. This power however had to be consistent with the intention of the settlement as evidenced by the trust instrument itself. (Re Manisty [1974] Ch 17.) The relaxation of the rules governing certainty of objects in McPhail v Doulton developed further in Re Hay’s Settlement Trusts. In this case Megarry VC held that a trust was valid despite the fact that the donor failed to list beneficiaries or a class of beneficiaries and conferred upon his trustees the power to choose beneficiaries. All that was required was that a beneficiary be designated in the event the trustees failed to distribute the trust property or all or it. (Re Hay’s Settlement Trusts 1981] 3 All ER 786.) The developments visited in Re Hay’s Settlement Trusts and Re Manisty reflect the consequences of the comparison drawn between the test for discretionary trusts powers and mere powers by the House of Lords in McPhail v Doulton. The unanimous conclusion is that there is no difference between the test required for the validity of discretionary trusts and discretionary powers. References McPahail v Doulton [1971] AC 424 Re Hay’s Settlement Trusts 1981] 3 All ER 786 Re Manisty [1974] Ch 17 Tom and Secret Trusts Whether or not Tom can keep the bequest of 100,000 pounds will depend in large part on the evidence Connie and Michael have to support the contention that Vito did in fact grant the funds to Tom to hold the same upon secret trust for them. A secret trust is created when a donor makes a bequest of property to another by a deed of trust or a will or otherwise and independent of the bequest tells him that he wishes him to hold the property for someone else. The person to whom the bequest is granted is obligated to carry out the wishes of the donor if he agrees to hold the property for the benefit of another or if he acquiesces by virtue of his silence. ( ) When Vito communicated his desire to have the bequeathed sum of 100,000 pounds distributed to Lucy and Shanto, Tom said nothing. Therefore his silence will be interpreted as consent to Vito’s wishes. The validity of such a secret trust was tested in Gold and Gilbert v Hill. In a non-testamentary disposition, Gilbert named Gold as the beneficiary of a 350,000 pound life insurance policy. On the insurance policy, Gold was described as Gilbert’s executor. Gilbert then executed a Will in which he named his solicitor, Hill as the executor of his estate and his wife was designated as the only heir to Gilbert’s estate. Following the execution of the Will Gilbert became involved with a woman named Carol. Gilbert at some stage following his involvement with Carol told Gold of the contents of the insurance policy advising Gold ‘If anything happens to me you will have to sort things out. You know what to do - look after Carol and the kids. Dont let that bitch get anything.’(Gold and Gilbert v Hill, The Times on 24th August, 1998.) Eventually, Gilbert died and Gold and Carol took the matter to court seeking a declaration that Gold held the insurance policy proceeds in trust for Carol. It was held that the information contained in Gilbert’s insurance enrollment or registration form together with his communication to Gold most likely supported the contention that Gilbert intended that Gold hold the proceeds on trust for Carol. The facts of this case can be distinguished from the facts of Tom’s case in that there is no evidence, outside of the conversation Tom and Vito shared while out fishing. The bequest to Tom by will does not indicate that he was intended to be anything other than beneficiary. In Gold’s case, the term executor indicated that Gold was not a beneficiary. Since Gold divulged the content of his conversation with Gilbert, there was evidence of Gilbert’s intended beneficiary. Therefore in Tom’s case unless he reveals the nature and content of his conversation with Gilbert, no one will be the wiser and Tom can keep the 100,000 pounds. The validity of a secret trust will be determined by whether or not the donor intended to create moral or legal obligations. Norse J said in Re Cleaver, I would emphasise that the agreement or understanding must be such as to impose on the donee a legally binding obligation to deal with the property in the particular way and that the two other certainties, namely those as to the subject matter of the trust and the persons intended to benefit under it, are as essential to this species of trust as they are to any other…..As in this case the principle difficulty is always whether there was a legally binding obligation or merely what Lord Loughborough LC in Lord Walpole v Lord Orford (1797) 3 Ves 402,419, described as an honourable obligation. (Re Cleaver p 1924) Vito’s instructions to Tom were unambiguous. There is certainty of subject matter as he specifically referred to the sum of 100,000 pounds thereby identifying the trust property. Likewise, Vito named the beneficiaries Lucy and Shanto and as a result he successfully identified the objects. However, if Tom is the only person with knowledge of this communication or the terms of the trust, there will be no legal obligation on his part to comply with Vito’s request. Fredo and Certainty of Objects Clause (b) of Vito’s will is flawed but not altogether invalid. The first part of the clause which disposes of the shares in Transit Ltd by granting the shares to Fredo and Vito’s brother as trustees to hold upon trust for a class of beneficiaries can be valid following the ruling in McPhail v Doulton. Ironically, by virtue of the same ruling, the second part of clause (b) is not valid. In order for a trust to be a completely constituted trust the declaration of trust must contain three certainties. The three certainties are certainty of subject matter, intention and objects. (Watt 2005) Vito’s intention can be discerned by the words used in his will. It is obvious that he intended to grant wide discretionary powers to both his brother and Fredo as to the distribution of the shares in Transit Ltd. According to the Chancery Division, of the three certainties intention is the most significant and important one. (Tana & Anor v Tana & Anor [2001] Ch 413 ) Once it is established to the satisfaction of the court that the donor had the required intention, the court will most likely validate the trust. Vito left no doubt as to his intentions to create a trust and his intention for the trust to be carried out. He identified his trustees and bequeathed property to them instructing his trustees to hold the property for a specific purpose for the benefit of others. There is no difficulty here in the construction of Vito’s intentions to create a trust. Equally there is no ambiguity in Vito’s will as to the certainty of subject matter. It is clear that Vito intended his shares in Transit Ltd to form the trust assets. Certainty of objects however, is another matter entirely. While the class of beneficiaries comply with the common law ‘in or out’ test as enunciated by the House of Lords in McPhail v Doulton in respect of the actual shares, the class of beneficiaries in respect of the income from the shares is too vague and will fail for uncertainty. Lord Wilberforce, in delivering the leading opinion in McPhail v Doulton provided a simple test for determining whether or not trust will fail for lack of certainty. All one had to do was ascertain whether or not, the court, if called upon to do so, could effectively distribute the trust property among the designated beneficiaries. (McPhail v Doulton [1971] AC 424 at p 454) In McPhail v Doulton, employees, ex-employees, relatives of employees and officers, officers and ex-officers were held to be sufficient certainty of objects. Based on the decision of the House of Lords in McPhail v Doulton, the trust settlement can and will be held valid on the grounds that the certainty of objects are sufficient for administrative distribution. Moreover, in a later case, a trust granting trustees the absolute discretion to add beneficiaries was held to be valid. (Re Manisty [1974] Ch 17) In another case the court validated a trust in which there were no designated trustees and the donor permitted the trustees to name the beneficiaries that trust was held to be valid. It is therefore not necessary for Vito to have provided a complete list of the beneficiaries. The rationale behind the liberal interpretation of certainty of objects is that a discretionary power is not unlike a discretionary trust.( Re Hay’s Settlement Trusts 1981] 3 All ER 786) The second part of clause (b) however, is a different matter altogether. According to the ruling in McPhail v Doulton, the provision for distribution to a class such as the residents of the West Midlands is exactly the type of vagueness Lord Wilberforce warned against. He specifically stated that a bequest to all of the residents of the city of London would fail because it would be impossible to distribute a discretionary income from trust property among such a vague class of beneficiaries. (McPhail v Doulton [1971] AC 424 at p 454) Gifts to Non-Charitable Unincorporated Association.(Aston Villa Football Club Supporters’ Association) Aston Villa Football Club Supporters’ Association as a non-charitable unincorporated association is not a legal entity. As such, the manner in which it can hold property is limited. Lord Lawton LJ said that an unincorporated association exists by ‘agreement between two or more people who are bound together for one or more common purposes not being business purposes, by mutual undertakings each having mutual duties and obligations, in an organisation which has rules which identify in whom control of it and its funds rests and on what terms and which can be joined or left at will’ (Conservative and Unionist Central Office v Burrell [1982] 1 WLR 522, at p525) While the gift of 2000 pounds is a valid gift that can be held for the benefit of the group, matters are complicated by the acquisition of a bus, as it requires registration in the name of a legal entity. Funds, however can be held in the same manner as membership fees are paid and held by the Association. Walton J observed that ‘if a number of persons associate together, for whatever purpose, if that purpose is one which involves the acquisition of cash or property of any magnitude, then, for practical purposes, some one or more persons have to act in the capacity of treasurers or holders of the property. In any sophisticated association there will accordingly be one or more trustees in whom the property which is acquired by the association will be vested. These trustees will of course not hold such property on their own behalf.’(Re Bucks Constabulary Fund (No.2) [1979] 1 WLR 936) In the event of dissolution of the unincorporated associations the distribution of the funds and assets are not subject to equitable doctrines and will be distributed according to the laws governing contracts. (Re Bucks Constabulary Fund (No.2) [1979] 1 WLR 936) Therefore the validity of the 2000 pound gift will be construed with reference to contract laws together with the by laws of Aston Villa Football Club Supporters Association. Distribution of an Equitable Interest in Realty Technically, the shares in Lucrative plc is movable property, it is subject to the provisions of Section 53 (1)(c) of the Law of Property Act 1925. (Grey v Inland Revenue Commissioner [1960] AC p.2) By virtue of the ruling in this case, the transfer of shares in a company is subject to ad valorem stamp duty the requirements contained in Section 53 (1) (c) will apply. That section provides that a disposition of an equitable interest or trust subsisting at the time of the disposition, must be in writing signed by the person disposing of the same, or by his agent thereunto lawfully authorised in writing or by will.’(Law of Property Act 1925 Section 53(1)(c)) Accordingly, the bequest of the 5000 shares in Lucrative Plc complies with the provisions and requirements set forth in the Law of Property Act 1925 Section 53(1)(c). The written evidence of the transfer is contained in the birthday card the Vito gave Connie on the celebration of her 18th birthday. The fact that Vito failed to actually executing the actual share transfer in favor of Connie will not invalidate the gift of the shares to her. The maxim ‘equity regards as done that which ought to be done’ dates back to 1802 and will operate to perfect the share transfer to Connie. Lord Eldon said ‘I take the distinction to be, that if you want the assistance of the court to constitute a cestui que trust, that the instrument is voluntary, you shall not have that assistance, for the purpose of constituting a cestui que trust, as upon a covenant to transfer stock, it rests in covenant, and is purely voluntary, this court will not execute that voluntary covenant, but if the party has completely transferred stock, though it is voluntary, yet the legal conveyance being effectually made, the equitable interest will be enforced by this court.’ (Ellison v Ellison [1802] Ves 656 at p 662) Lord Gill maintained that if valuable consideration is given for the trust, whether of not the trust is completely or completely constituted is of no moment. ‘Equity regards as done that which ought to be done and will perfect an imperfect conyeance for value by treating it as a contract to convey.’ (Lee Eng Teh v Teh Thiang Seong [1967] 1 MLJ 42) A gift out of love and affection to a close relative, as in marriage and children of the marriage is looked upon as valuable consideration under the general principles of equity. (Martin 2005) By virtue of the above principles of equity, the transfer of 5000 shares to Connie will be perfected by the courts and will not ball to the residuary estate in favor of Kay. The remaining shares in Lucrative Plc do not appear to have been specifically dispensed with by Vito in his will although he did make provision for his residual estate to devolve to his wife Kay. The residual estate is all properties remaining after administration of the trusts or bequests created by a will. (Martin 2005) The penthouse is realty and will devolve in accordance with the provisions and requirements contained in the Law of Property Act 1925 as amended. Section 52 of the Act makes it mandatory for the disposition of realty to be conveyed by deed only. ‘All conveyances of land, or any interest therein are void for the purposes of conveying or creating a legal estate unless made by deed’. (Law of Property Act 1925 Section 52) Vito failed to provide written evidence of the creation of a trust in the Penthouse to Michael who could not hold a legal estate in realty since he was a minor at the time of his oral declaration of trust. (Martin 2005) As a result the penthouse will devolve with the residue of Vito’s estate and as such Kay will have the title to the property. Had Vito make a written declaration of his intention to create a trust in the Penthouse in favor of Michael the Penthouse would not form a part of Vito’s residuary estate, rather a resulting trust would have been created by operation of equitable principles. The House of Lords maintained that all resulting trusts were founded on the presumed intentions of the parties. (Girocentrale v Islington Burrough Council (1996) AC 669) Be that as it may, Vito’s intentions were only communicated to Michael who for all intents and purposes has an interest to serve. Moreover, in the absence of written evidence Michael will not be able to substantiate a claim in connection to the realty even if he had a corroborating witness to the oral declaration of trust made by Vito. References Conservative and Unionist Central Office v Burrell [1982] 1 WLR 522 Ellison v Ellison [1802] Ves 656 Gold and Gilbert v Hill, The Times on 24th August, 1998. Girocentrale v Islington Burrough Council (1996) AC 669 Law of Property Act 1925 Section 53(1)(c) Lee Eng Teh v Teh Thiang Seong [1967] 1 MLJ 42 Martin, J E Hansbury. Modern Equity. (2005) Sweet and Maxwell. London McPahail v Doulton [1971] AC 424 Re Gestetner Settlement [1953] Ch 672). Re Bucks Constabulary Fund (No.2) [1979] 1 WLR 936 Tana & Anor v Tana & Anor [2001] Ch 413 Watt, Todd. Watt’s Cases & Material on Equity & Trusts. 2005 Oxford University Press. Oxford. Read More
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