Chapter 3: Express Trusts: The constitution of trusts (Part 3)

A.The General Rule

o In Milroy v Lord (1862), Turner LJ laid down three modes of making gift: An outright transfer of the legal title to the property (or the outright assignment of an already existing equitable interest); A transfer of legal title of the property to a trustee to hold on trust; A self-declaration of trust. o The maxim Equity will not assist a volunteer describes an important guiding principle of the court of equity. The principle has two main strands: Equity will not enforce gratuitous promises; and Equity will not perfect an imperfect gift. Equity will not enforce gratuitous promises o If A promises B that he will give him Blackacre, or if A promises B that he will put Blackacre in trust for him, and A refuses to deliver on his promise, equity will not enforce the promise at Bs request. As Hackney (1987), at 118 puts it: You cannot sue for presents in equity. Equity will not perfect an imperfect gift o Milroy v Lord (1862) A man wishing to provide for his niece gave share certificates to a Mr. Lord to hold on trust for her. Now this transfer of physical possession did not pass legal title to the shares, so this act did not constitute the trust. But the uncle also gave Lord a power of attorney, which gave Lord the power to get the shares registered in his name. Unfortunately, the uncle died before Lord acted on the power of attorney to register the shares in his name, and the power of attorney was extinguished by the uncles death, so Lord was thereafter unable to get the shares registered in his name. thus the trust was never constituted, and the shares fell into the uncles estate on death. Tuner LJ said: In order to render the settlement [i.e. the gift] binding, one or other of these modes must, as I understand the law of this Court, be resorted to , fort here is no equity in this Court to perfect an imperfect gift. The cases I think go further to this extent, that of the settlement is intended to be effectuated by one of the modes to which I have referred, the court will not give effect to it by applying another of those modes. If it
Sources: Hayton & Mitchell: Commentary and Cases on the Law of Trusts and Equitable Remedies, 13th edition; The law of trusts, J E PENNER, 8th edition; UOL Subject Guide 2014 Page 1

is intended to take effect by transfer, the Court will not hold the intended transfer to operate as a declaration of trust, for then every imperfect instrument would be made effectual by being converted into a perfect trust. o Thus the three modes of conferring a benefit are three mutually exclusive modes: equity will not treat the intentions of a donor to make an outright gift, where the property for one reason or another fails to pass from the donor to the donee, as a selfdeclaration of trust. o Jones v Lock (1865) The cheque for baby case, everything turned on the true intentions of the father. Although he intended to make provision for the infant in various ways, he did not intend to declare a trust of the cheque. As a result, the court found that there was no self-declaration of trust, and the court would not give aid to one claiming the benefit of an imperfect gift. o Richard v Delbridge (1874) The court would not devise a trust n order to perfect the ineffective legal assignment by Delbridge of the lease to his mill and the stock-in-trade of his business to his grandson. Equity will also not perfect an ineffective transfer of the legal title to property to an intended trustee to constitute a trust by treating the intending settlor as having made a valid self-declaration of trust. If the property fails to get into the hands of the intended trustee, there is no trust. Equity will not assist volunteers to become donees or beneficiaries under a trust, but once a person is a done or a beneficiary, it matters not one whit whether he paid for privilege or got it for free- Ellison v Ellison (1802); Paul v Paul (1882).

Notes:
What limits does Milroy v Lord place on what (a) settlors and (b) the courts can do in respect of constituting a trust? o The first point to note is that Milroy v Lord establishes the general rule that equity will not assist a volunteer to perfect an imperfect trust. Consequently the limit placed on the settlor is that, if the settlor attempts to create a trust with a third party as trustee but that trust is imperfectly constituted, the settlor will not by that fact alone become the trustee. The general principle is that the court will not construe a failed attempt to make a gift in one way as an effective attempt in another way, and typically this will mean that the court will not treat a failed gift or a failed attempt to constitute a trust as a self-declaration of trust. o Regarding the limits on the court, you should remember that if the court intervened and imposed a trust on the settlor, it would result in a trust coming into existence which was not one intended by the settlor; it would, in other words, be a constructive

Sources: Hayton & Mitchell: Commentary and Cases on the Law of Trusts and Equitable Remedies, 13th edition; The law of trusts, J E PENNER, 8th edition; UOL Subject Guide 2014 Page 2

trust. However, as you read on you will see that the court has departed from the rule in Milroy v Lord in six specific situations.

B. Departures from the General Rule

o Detrimental reliance Where there is an imperfect gift or trust, there may be detrimental reliance on the part of the intended donee/beneficiary. For example, the intended donee of a gift of a title to land might detrimentally rely on the supposed validity of the transfer by expending money building a house on that land. Detrimental reliance may lead the court to order the perfection of the imperfect gift or trust: Dillwyn v Llewelyn (1862) 4 De GF&J 517; Pascoe v Turner [1978] EWCA Civ 2; Thorner v Major [2009] UKHL 18. If so, the purported transferor will hold the promised right on constructive trust for the intended donee. This process is usually called proprietary estoppel (which is similar to, but different from, promissory estoppel studied in the law of contract). It might be asked why the law does not simply respond by forcing the defective donor to make good the donees loss (compensation) or to give up his own gain (restitution) rather than making good his expectation. There is the added issue of a trust taking the right out of the defective donors estate in the event of his insolvency. o Proprietary Estoppel In certain cases of Proprietary Estoppel, the court, to give effect to the claimants minimum equity, will do what amounts to perfecting an imperfect gift. In Pascoe v Turner (1979), a man declared to the woman with whom he was living as her husband and the house. Following their separation he tried to turn her out. The court held that the minimum equity in the case was for the man to transfer the fee simple to the woman. In both Gillett v Holt (2001) and Thorner v Major (2009), men who had worked for most of their lives on farms of others in the expectation they would be given the farms, or part of them, by the owner in their wills, were awarded freehold interests in the farmland on which they had labored. o Unconscionability An even further dilution of the Milroy v Lord Principle occurred in Pennington v Waine [2002] EWCA Civ 227, where the Court of Appeal said, in the case of an imperfect gift of shares, that the donor need not even have done everything necessary to perfect the gift. What mattered instead was whether it would be unconscionable for him to resile from his gift. And, on the facts of this particular case, it was said to be unconscionable for the donor to resile as she had told the donee that the gift was perfect. Why this makes it unconscionable was unfortunately not explained. Moreover,
Sources: Hayton & Mitchell: Commentary and Cases on the Law of Trusts and Equitable Remedies, 13th edition; The law of trusts, J E PENNER, 8th edition; UOL Subject Guide 2014 Page 3

no member of the court seems to have noticed that this is precisely what happened in Milroy v Lord. The court relied on T Choithram v Pagarani Int SA [2000] UKPC 46 as authority, though that was, as we saw in the previous chapter, a case of an express trust, where it would of course be unconscionable to resile from a perfectly valid trust: cf Paul v Paul. Pennington. T Choithram SA v Pagarani (2001) o In this case generously construed the words of a rich businessman intending to transfer almost the entirety of his wealth on trust shortly before his death. Having just executed a deed of trust establishing a charitable foundation and appointing himself as one of the trustees, he orally indicated that he gave all his wealth to the foundation. He never executed the necessary documents to transfer legal title in his property to the trustees. The Privy Council held that in this context, his words of gift could be interpreted as words of declaration of trust and, being one of the trustees of the foundation, this constituted the trust, although the reasoning can be criticized. On the other hand, was a case of a constructive trust, for whichever way one views it, the purported donor did not make a self-declaration of trust. It is important to note that the result cannot be defended through an application of the dubious doctrine in Re Rose, for the donor had not done all she needed to perfect the gift. Nor can it be justified on the basis of detrimental reliance on the part of the purported donee. Although such reliance was arguably present, this was not the basis on which the case was reasoned. o The rule in Re Rose In this case, Mr. Rose properly executed a share transfer form and delivered it, with the appropriate share certificate, to his wife, who was then entitled to have the shares registered in her name. The court held that, in equity, such a gift is valid from the time that the donor does everything he is obliged to do to transfer the shares . This has since become known as the Re Rose principle. The court distinguished Milroy v Lord on the bases that in that case, the uncle had not done everything in law that he was required to do to transfer his title. Under the principle, after the donor of shares, for instance, has done everything he himself is required to do to pass title, and until such time as the shares are registered in the donees name, the donor holds the shares on trust for the done. Contrary to what was decided in Milroy v Lord, the Court of Appeal held that the donor/settlor was a constructive trustee of the rights at this point. The reason, said the court, was to be found in notions of common sense, which, of course, is no reason at all. Note that there was no detrimental reliance in this case, nor, as some students insist, can it be explained by an application of the magic formula that equity looks upon that
Sources: Hayton & Mitchell: Commentary and Cases on the Law of Trusts and Equitable Remedies, 13th edition; The law of trusts, J E PENNER, 8th edition; UOL Subject Guide 2014 Page 4

as done which ought to be done, for there was no ought here: there is no duty in English law to make gifts. Re Fry (1946):contrast case o This case provides something of a contrast. In that case, a donor of British company shares who was resident in America was required by law to obtain the consent of the British Treasury before he could effectively transfer his legal interest. While the donor had done everything he could, in that he had completed the transfer form in favour of his son and had submitted the necessary forms to the Treasury, he died before the Treasury had given permission for the transfer. o Romer J held that the done had obtained no interest in the shares, and applying Milroy v Lord, refused to treat the transaction as having passed the beneficial interest in equity. o Romer J thought that it was up to the donor to obtain, not just apply for, Treasury permission, and that furthermore, since the Treasury might have sought further information before granting permission, the donor might well have had an opportunity to scuttle his own gift by failing to provide that information; therefore the donor had not done everything necessary to divest himself of his interest in the shares nor relinquished his power over them. Mascall v Mascall (1984): applying Re Rose case. o This is a case applying Re Rose Principle to transfers of land. o There the court held that the intending donor had made a complete gift in equity to his son by executing the registered land transfer document and handing it, with the land certificate, to him. As it turned out, the father later reaquired the land certificate, thus putting him in a position not to go ahead with the gift, and indeed he did not want to having since fallen out with his son. Nevertheless, the court held that as soon as he had executed the transfer form and had given it with the land certificate, the gift was complete in equity, and so he was ordered to hand over the land certificate to the son so the latter could complete the transfer of the legal title into his own name. Pennington v Waine (2002): recent case; the ambit of rule has been expanded by Court of Appeal. o There a shareholder properly completed a share transfer from in favor of her nephew, but instead of passing this to the company for registration, delivered it to one of the companys auditors; she also informed her nephew of her intention to transfer the shares. On the strength of this statement from the auditor, her nephew became director of the company, a position that required a shareholding. The shareholder died before the transfer was completed. o Clearly, in this case, unlike Re Rose, the transferor had not done everything in her power to secure the share transfer.
Sources: Hayton & Mitchell: Commentary and Cases on the Law of Trusts and Equitable Remedies, 13th edition; The law of trusts, J E PENNER, 8th edition; UOL Subject Guide 2014 Page 5

o The Court of Appeal held that, however, that the shares were held on trust for the nephew, apparently on the basis that all that is required for the rule to operate is the execution of the transfer form with the intention that the transfer is to have immediate practical effect in circumstances where it would be unconscionable for the transferor to renege on the transaction. o The court of Appeal made it clear that either settlor must have put it out of his power to stop the transfer proceeding, for example because he has irrevocably put the transferee or his agent in a position to complete the gift (e.g. by registration of the transferee as owner of shares or land), or else circumstances akin to proprietary estoppel must take it unconscionable for him to insist on ownership of the relevant property. o The rule in Strong v Bird Strong v Bird decides that in certain circumstances equity should allow the common law position to prevail where a deceased creditor had appointed his debtor as his executor could not sue himself. The common law treated the appointment as extinguishing or releasing the debt on the basis:that a debt was no more than the right to sue for the money owning to the creditor and that a personal action was discharged when it was suspended by the voluntary act of the person entitled to bring it [The true basis of the common law rule] lay in the significance attributed to the voluntary act [of appointing the executor] on the part of the testator. Once this is recognized the true character of the rule is perceived, it reflected the presumed intention of the party having the right to bring the action and was not absolute in its operation. In Strong and Bird, the court of equity decided that the common law should prevail, and thus the executor did not have to account for the debt, if the testator had manifested intent to forgive the debt in his lifetime and this intent had continued till death. This rule has been extended in Re Stewart (1908), Neville J, which negatively left the situation as it was at law, since he positively treated a gift as effective through the law did not, so perfecting an imperfect gift made by the testator I his lifetime to his wife who was one if his appointed executors. He said:Where a testator has expressed the intention of making a gift of personal estate to one who upon his death becomes his executor, the intention continuing unchanged, the executor is entitled to hold the property for his own benefit. The reasoning is first that the vesting of the property in the executor at the testators death completes the
Sources: Hayton & Mitchell: Commentary and Cases on the Law of Trusts and Equitable Remedies, 13th edition; The law of trusts, J E PENNER, 8th edition; UOL Subject Guide 2014 Page 6

imperfect gift made in the lifetime and secondly that the intention of the testator to give the beneficial interest to the executor is sufficient to countervail the equity of beneficiaries under the will, the testator having vested the legal estate in the executor. In Re James (1935), Farwell J extended Re Stewart (1908) to perfect an imperfect gift of real property made by a donor to his housekeeper who, on the donors intestacy, had herself appointed by the court one of two administratrices of the deceased donors estate, thereby obtaining legal title to the house. This extension has been doubted by Walton J in Re Gonin (1979) and rejected by the British Virgin Islands Court of Appeal in Re Paragarini(1999): after all, it is the voluntary act of the testator in appointing his debtor as his executor that extinguishes the debt at law, so that the fortuitous appointment by the court of administrator who was a debtor of the intestate did not extinguish the debt, and so Strong v Bird would have been differently decided if the defendant had been administrator and not an executor. The rule in Strong and Bird requires that the property of a gift to be perfected is specific and identifiable as subject matter that might have been previously transferred in accordance with the deceaseds belief/ intentions. Thus ineffective gift of or promises to give future property or sums of money cannot be perfected by the rule. o The rule in Re Ralli Although this looks similar to Strong v Bird, it seems to form a separate rule (if that is what it is, it being only an obiter pronouncement in a first instance case), for it applies even though there is no continuing evidence of an intention to give. Indeed, given that it involved an unperformed promise to give rather than a failed donation, any talk of a continuing intention is nonsense. In Re Ralli [1964] Ch 288, a promise by deed (covenant) to create a trust had not been performed during the lifetime of the promisor. The promisee was appointed executor of the promisors will, and on the latters death, received the promised rights by virtue of that office. Buckley J held, obiter, that this was enough to constitute the covenanted for trust. The fact that the executor came by the right fortuitously was irrelevant. Unfortunately, there is much talk in his lordships judgment of vague notions of conscience. Moreover, the decision is difficult to square with the earlier decision of Re Brooks ST [1939] Ch 993, which was not cited to the judge.

Sources: Hayton & Mitchell: Commentary and Cases on the Law of Trusts and Equitable Remedies, 13th edition; The law of trusts, J E PENNER, 8th edition; UOL Subject Guide 2014 Page 7

o Donatio mortis causa (deathbed gift) It also called deathbed gift, are gift that made inter vivos, but which are conditional, only taking effect on death. Cain v Moon (1896) laid down the essential requirements for a valid donation mortis causa (DMC):o The gift must be in contemplation, although not necessarily expectation, of death. All the reported cases deal with a donor suffering from illness, but, for example, going to battle or attempting to climb the Matterhorn should do. o The done must in some respect receive the property in question before the death of the donor. What this amounts to turns on the nature of the property: for a chattel, the done must take possession or acquire the means to do so. E.g. the key to a box in which it is held. Receiving some clear token of the property will suffice, as in Woodard v Woodard (1995), where receiving the keys to a car, although not the logbook, was sufficient. For a bank account balance, some indicia of title must be transferred, such as the deposit book; in case of shares, the delivery of share certificates has been held to work (Dufficy v Mollica (1968)), and the Court of Appeal recognized a Donotio Mortis Causa of land for the first time in Sen v Headley (1991) where the indicia of title transferred was the title deeds. o The circumstances must have been such as to establish that the gift was to be absolute and complete only on the donors death so as to be revocable before then. A condition to this effect need not be expressed and will normally be implied form the fact that the gift was made when the donor was ill (Re Lillingston (1952)).

C.Notes:
Assume that you want to make a gift of some shares and your title to a painting to a friend. Give a short spoken explanation of the different ways in which that gift can be made. Which is the simplest to effect? o There are three principal methods by which a gift of the shares and the title to the painting can be made: 1. A transfer of the shares (as choses in action) must be made in the proper manner and the title to the painting by delivery or deed 2. By you declaring yourself a trustee of the shares and your title to the painting in favour of your friend 3. Finally, you can transfer the shares and the title to the painting to a third person to hold on trust for your friend. It is these three modes of transfer which the court in Milroy v Lord held were mutually exclusive, and, in particular, would not treat failed attempts to transfer the right by modes (1) and (3) above as cases of (2) (i.e. as self-declarations of trust, regarding which you will notice that no transfer of any right is necessary, and is therefore the simplest to effect).

Sources: Hayton & Mitchell: Commentary and Cases on the Law of Trusts and Equitable Remedies, 13th edition; The law of trusts, J E PENNER, 8th edition; UOL Subject Guide 2014 Page 8

Read the decision of the Court of Appeal in Re Rose. Is it really true that it presents no conflict with the same courts earlier decision in Milroy v Lord? o Turner LJ in Milroy v Lord said that equity will not assist a volunteer to perfect an imperfect trust. Re Rose presents one of six departures from this general rule. But does this departure represent a conflict with the Court of Appeals decision in the earlier case? In his leading judgment, Evershed MR certainly did not think it did. He said that Turner LJs judgment was only meant to apply where the transfe in question had not been carried out in the appropriate way. This, however, is nowhere stated in Milroy v Lord itself. Nor is there any logical reason why it should make a difference. Indeed, it could be said that Milroy v Lord tells us that any intervention by the court would result in a trust being created that was not intended by the settlor/donor. Furthermore in both cases the donor had told the donee that the gift was perfect, so this cannot be a distinguishing factor. Thus, despite Lord Evershed MRs words, there does appear to be a conflict with the previous case. Does the law in this area teach us anything of the meaning of unconscionability? o The term unconscionable, like unfair or unjust gives little guidance to a court trying properly to characterise the sorts of facts which should cause it to perfect an imperfect gift, for it is a conclusion only. What it fails to tell us is what particular facts lead to this conclusion. Perhaps the most obvious cases occur when the parties have acted on the basis that a gift was valid, and so have detrimentally relied upon it. But it is not clear that the only way to deal with such an occurrence is to perfect the gift, rather than compensating the relying party for his loss, or stripping the donor of any extra advantage he would receive if the gift were now treated as invalid, for example, strip him of the value of a house his intending donee built on land which was not properly transferred. Cases such as Re Rose and Pennington do not, however, present compelling cases of unconscionability, whatever that word might mean.

D.Notes for further cases for Pennington:-case analysis

o Curtis v Pulbrook (2009), Judge: Richard Sheldon Q.C. o Keywords: Fiduciary relationship; Indemnities; Joint accounts; Oral trusts; Presumed undue influence; Trusts; Withdrawals o Summary: Payments made by a signatory to a joint bank account held by a husband and wife had not been valid where they had been made in reliance on a deed of indemnity given by the husband that had been procured by undue influence. A declaration that the monies in the account would pass to the husband on the wife's death had not been orally varied to provide for an equal division, so that payments made by the signatory in reliance on an indemnity given by the wife had been made out of money belonging to the husband.
Sources: Hayton & Mitchell: Commentary and Cases on the Law of Trusts and Equitable Remedies, 13th edition; The law of trusts, J E PENNER, 8th edition; UOL Subject Guide 2014 Page 9

o Abstract: The claimant (T), by his personal representatives, sought repayment of sums drawn by the first defendant (P) from an account in the joint names of T and his wife. P had been the trustee of various family trusts and had been involved in the management of financial affairs for T and his wife, who was P's cousin. P had been given a mandate to draw funds from the joint account held by T and his wife. They made a declaration that a certain amount of money in that account belonged solely to T and the balance belonged solely to T's wife. A family dispute arose, principally about P's conduct as trustee and proceedings were started against P and T's wife, who by that time was also a trustee of one of the trusts. T's wife gave a letter of indemnity for P's costs of defending the proceedings. T's wife then died. T signed a deed of indemnity in favour of P on the basis that it was his wife's wish that the proceedings continue to be defended. P drew large amounts of money from the joint account to pay legal costs in purported reliance on the deed of indemnity and the letter of indemnity. He also drew amounts for payment of his fees for managing the joint account and the financial affairs of T and his wife. T alleged that the monies had been withdrawn by P in breach of fiduciary duty for his own benefit or the joint benefit of himself and the second defendant. T argued that the deed of indemnity was void under the principles of non est factum, or that it should be set aside in equity because it was procured by P's undue influence. T also argued that the money paid under the letter of indemnity had been paid out of money that belonged to T on the basis that, under the declaration, all the money in the joint account had passed to him as survivor on his wife's death. P submitted that the deed of indemnity was valid and that there was no undue influence, as he had recommended that T get legal advice before signing it but T had refused, possibly because of his reluctance to use the steep stairs up to his solicitor's office, and as P had read the deed to T and warned him of its seriousness and gravity. In relation to the monies paid under the letter of indemnity, P submitted that half the joint account had belonged to T's wife on her death because there had been an oral variation of the declaration to that effect to ensure that there was sufficient money in her estate to pay pecuniary legacies to her children. o Judgment for claimants in part. (1) When the deed of indemnity was signed, the relationship between P and T was one of influence. It was clear from the evidence that T had placed trust and confidence in P in relation to his financial affairs and that P owed T a fiduciary duty in respect of funds under his management. In addition, the deed was a transaction that excited suspicion or called for an explanation. The indemnity given in the deed was potentially extremely and manifestly disadvantageous to T and advantageous to P. If the deed was upheld T would have lost virtually all the money belonging to him in the joint account, which represented the principal source of his wealth. There was no consideration passing to him in return for the indemnity, and it
Sources: Hayton & Mitchell: Commentary and Cases on the Law of Trusts and Equitable Remedies, 13th edition; The law of trusts, J E PENNER, 8th edition; UOL Subject Guide 2014 Page 10

could not be accounted for by the family relationship or ordinary motives. As a result, the presumption of undue influence arose, Royal Bank of Scotland Plc v Etridge (No.2) [2001] UKHL 44, [2002] 2 A.C. 773 followed. On the evidence, P was unable to rebut the presumption. It was not credible that P had advised T to obtain legal advice before signing the deed but that T had not done so because of difficulties of access to his solicitor's office. The fact that P had read the deed to T and warned him of the consequences was insufficient to rebut the presumption. Accordingly, the deed was set aside and T's claim in respect of the payments under the indemnity deed succeeded. (2) P's evidence of the alleged oral variation of the declaration was rejected. The reasons given by P for not documenting the alleged oral variation had to be treated with scepticism. Further doubt was cast on the alleged variation by the fact that there had been no mention of it in any documentation until some time after the instant proceedings had begun. Although the reason given for the alleged variation was plausible, there was no evidence that T's wife had made pecuniary legacies in her will and there was evidence that at the time everyone expected T to predecease his wife. If the estate planning had been concentrated on T's wife, as P suggested was the case, there would have been no need to vary the declaration. The declaration stood, and all the money in the joint account belonged to T. P had not been entitled to make payments under the letter of indemnity out of that account. (3) The fee payments represented a continuation of a longstanding arrangement for payment to P in respect of his management of the financial affairs of T and his wife, and were valid.

Sources: Hayton & Mitchell: Commentary and Cases on the Law of Trusts and Equitable Remedies, 13th edition; The law of trusts, J E PENNER, 8th edition; UOL Subject Guide 2014 Page 11