Equity 1 Basic Concepts of Equity and Trust

BASIC CONCEPTS OF EQUITY AND TRUST

Abbreviations:
• C ➔ Claimant
• D ➔ Defendant
• T ➔ Trustee
• S ➔ Settlor
• B ➔ Beneficiary

HISTORY OF EQUITY
• The key distinguishing characteristic of equity is its connection with the Chancellor’s
jurisdiction. Ultimately, it is down to the principle of preventing unconscionable
enforcement of Common Law claims/causes of action.
• ➔ Equity is the body of rules which is administered by the Court of Equity [Maitland]
★ Spans both obligation and property - no clear characterisation.
★ Prevents person from using legal powers/rights in a manner contrary to good
conscience.
• Relationship with the Common Law: NOT 2 rival systems!
• ➔ Equity acts in personam.
• ➔ Courts of Chancery is not bound by Common Law rules of evidence, but can look to
substantive merits (different view of evidence and procedure)
• ➔ common injunctions issued by Courts of Chancery to prevent D from enforcing judgment
obtained at Common Law, if contrary to good conscience.
←
← The Earl of Oxford’s Case, 1615: dispute between Lord Ellesmere (Chancery) and Lord
Coke (Common Law)
★ Response to controversial practice of issuing common injunctions.
★ ➔ from the Common Law’s perspective, this was a mode of irregular appeal - outside
regular Common Law process
★ ➔ further, Court of Chancery was prerogative court, with Lord Chancellor exercising
discretion while acting as King’s delegate: Common Law courts were hostile to this.
★ Conflict: if P refuses to abide by injunction, he would be in contempt of Court of
Chancery and imprisoned. But if this went back to KB, CJ of KB would use habeas
corpus to release him. Unsustainable!
★ Hence, result of this case was to establish primacy of equitable jurisdiction over the
common law - enshrined in statute today.

← BUT equity does not assume Common Law itself is wrong - doesn’t abolish/compete with
Common Law rules. Rather, it corrects the judgement, presupposing existence and
application of Common Law rules. It provides a gloss/qualification on enforcement of
Common Law rules.
← ➔ equity is still secondary to Common Law insofar as it presupposes the existence of
Common Law rights [Maitland: Common Law can exist without equity, but not the other
way round]
• Hence, after the Earl of Oxford’s Case, procedurally, C would have to bring his claim
before the right court, depending on the nature of the right.
★ But might have to go to more than one court to get complete remedy.
★ Eg. Tort of nuisance is Common Law right of action, but if you want more than
Common Law damages, like an equitable remedy of injunction, you must get
judgment from Common Law court first and then bring judgment to Court of
Chancery to get injunction (can’t start off with latter because it has no jurisdiction)
Equity 1 Basic Concepts of Equity and Trust
★ Problematic! Chancery procedure was slow and expensive (for most of 18th century,
there were only 2 Chancery judges - Lord Chancellor and Master of the Rolls;
required documents to be prepared by clerks who charged based on length of the
documents)
• Judicature Acts 1873-1875:
★ Followed Judicature Commission’s recommendation of having a single Sup Court,
having complete jurisdiction, so that no matter what course of action/remedy is
sought, C can go to a unified court and obtain complete resolution.
★ ➔ there are still specialised courts, but have unified jurisdictions to hear all
matters/give all remedies
★ Codified outcome of the Earl of Oxford’s Case: Senior Courts Act 1981 s49
★ Impact: fusion of law and equity - the 3 perspectives of the consequences of the Acts
1. PROCEDURAL FUSION: putting together 2 different jurisdictions but without changing
substantive law - outcomes don’t change.
✤ eg. Berry v Berry, 1929: husband and wife separated and husband agreed to pay annual
maintenance, by deed. Later, both entered into simple variation by contract for reduced sum.
Under Common Law, if you want to vary obligation obtained by deed, must be done by another
deed. But the equitable rule is to “look to substance and not to form” hence any contract with
valuable consideration will suffice to vary original agreement.
✤ Under s25(11), equitable rule prevails so that the variation is upheld. But even pre-1875,
same outcome would have been arrived at - wife first goes to Common Law court with deed
and gets judgment, and husband then goes to Court of Chancery for common injunction to
restrain wife from enforcing Common Law judgment.
✤ Hence, the only change is there is now a unified procedure - substantive rules are the
same!
✤ This was the earlier view. But now, some think there was/should be substantive fusion...
2. SUBSTANTIVE FUSION (the fusion fallacy): much more radical! Saying that distinction
between equitable and Common Law rights ceased to exist! Rights will just be rights, with
historical origins being irrelevant.
✤ Allows use of Common Law defence against basic primary equitable claim. Eg. If T
breaches equitable duty of care not to be negligent, in managing investment fund, but
beneficiaries are negligent as well, T might counter Bs’ equitable claim with Common Law
defence of contributory negligence.
✤ But some think this extreme view is NOT representative of the English approach. Meagher,
Gummow and Lehane call it the “fusion fallacy”, and think that allowing remedies from one
jurisdiction to be imported to the other is wrong!
✤ But this is the approach adopted in New Zealand/some other jurisdictions. All remedies
are made available, regardless of origin ( Chirnside v Fay (No 2), 2005 : though this case was
reversed on appeal, the point on substantive fusion still holds)
3. FUSION BY CONVERGENT EVOLUTION OF PRINCIPLES: middle ground!
✤ ➔ Burrows argues that as law develops, it is proper for judges to borrow ideas across the
Common Law/equity divide, and may find good inspirations for development of law. (as
opposed to NZ view of solving individual cases, this is about a wider view of general
development)
✤ This approach is particularly attractive where we have 2 bodies of law operating
alongside, on same set of facts. Like cases should be decided alike, and mere historical
differences do not justify differences in outcome.
✤ Target Holdings v Redferns, 1996: A is cash buyer who retains solicitor to carry out
conveyancing when buying house. Passes purchase money to B, solicitor, to pass on to vendor
to complete contract. B is under common law duty (retained pursuant to contract of retainer),
and B is under equitable obligations as trustee for A. Should A be better off suing B under
Common Law rules, or should similar test for causation of loss apply?
Equity 1 Basic Concepts of Equity and Trust
✤ Lipkin Gorman v Karpnale Ltd, 1991: where third party receives misapplied trust money,
why should she be at fault before she can be required to restore trust fund? At Common Law,
3rd party recipient of stolen money is liable whether receipt was innocent or not.
✤ BUT note that the 2 approaches of Common Law and equity might not really be alike - if
judges are allowed to borrow ideas across the divide, they must be sensitive to the real
substantive differences between jurisdictions. There may be good reasons to justify why
equitable remedies are fault based - in Common Law contract, parties are expected to be
vigilant (thus have partial defences like contributory negligence), but under equitable trust
rules, there is no similar basis for mutual vigilance. Hence, don’t assume that the only cause
for difference is in historical origin.
• Should we be abolishing any reference to equity, and move instead to “event-based”
categorisation of private law rights? No!
1. Over-simplified reductionism ➔ equitable wrongs can be quite different from
Common Law wrongs - for instance, loss of profits under negligent misrep vs direct
out-of-pocket loss from misapplication of trust funds.
2. -just calling both “wrongs” will not be helpful.
3. Subtlety that equity offers ➔ equity works at margins of legal doctrines, and qualifies
strict contractual rights (eg. Promissory estoppel qualifies contract, but binding only
if D goes back on his word. Hence sits on fence between intention/contract and
wrongs/tort)
4. Need for morals/ethics in to direct future legal development
←
←
HISTORICAL DEVELOPMENT OF THE TRUST
• Originates from the use: owners transferring property to third parties to the use of owners
themselves/some other person
• Note that equity thinks in terms of remedies, not rights - recognises existence of right
where it awards a remedy - opposite from Common Law approach. Hence, if third party =
Equity’s Darling, B will have no remedy, therefore B’s right is extinguished. But if third
party is on notice, his conscience is affected, therefore B’s proprietary interests still exist
and are then enforceable against him.
• Common law saw third party transferee as legal owner - didn’t give transferor/other
intended beneficiaries any remedies. Hence latter had to look to Court of Chancery for
protection instead.
★ If father conveys land to friends inter vivos, directing them to hold land to the use of
himself during his lifetime, and after his death, to his daughter’s use, there are no
contractual obligations recognised by CL
★ But Chancery intervenes because Ts must not abuse terms of trust and assert
Common Law rights for their own benefits, as a matter of conscience.
★ However, bona fide purchasers for value without notice (Equity’s Darling) will be true
legal owners ➔ equity follows the Common Law unless their conscience is affected.
• Purposes of the use:
← 1) for owner to transfer property to himself and someone in joint names;
← 2) to hold land for Franciscan Friars who couldn’t own land (permanent nature);
← 3) to avoid the Statutes of Mortmain in the 13th C which prohibited gifts, aiming to prevent
land being taken out from circulation permanently;
← 4) to allow for land to be devised by wills;
← 5) to avoid feudal incidences of wardship and marriage, especially when the heir was still
in his minority.
← 6) circumvent rule that married women couldn’t hold property in her own right during
marriage.
★ Particularly because of the effect of (5) above on the Crown, Henry VIII enacted the
Statute of Uses 1536, attempting to remove these advantages of uses.
Equity 1 Basic Concepts of Equity and Trust
★ But this legislative change was short lived! Right to devise freehold land by will
eventually re-established by the Statute of Wills 1540. Feudal incidences eventually
abolished anyway.
• Sources: in the early days, law was mostly developed by successive Chancellors, as they
extended protection of B (first against transferees with notice of the use, then against
heirs of third parties who inherited the property, and then against anyone except Equity’s
Darling)
← -even today, rules are mostly from case precedent. Still, legislation has increasingly
intervened in past 150 years, in relation to appointment/removal of T and T’s
administrative duties and powers (eg. Trustee Acts 1925 and 2000)

← Modern uses of the trust

1. Let property be held for those who can’t hold it legally themselves (minors)
2. Allow for private provision for dependants (testamentary gifts can become public
knowledge) via a trust made inter vivos.
3. Tie up property to benefit persons in succession - ensure the property passes down
the way you want
4. Protect family property from wastrels/spendthrifts (as opposed to just giving them
money). Also, enjoy economies of scale from managing all family property in a pool.
5. Make gift to take effect in the future, depending on as yet unknown circumstances
(giving money to kids depending on their future situations)
6. Minimise income tax/capital gains tax/inheritance tax.
7. Enable 2 or more persons to own land beneficially (can have up to four legal owners,
but all beneficial interests must take effect behind a trust)
8. Facilitate investment through unit trusts and investment trusts (professional
management, diversification).
9. ➔ In a unit trust, fund manager obliged to buy back units at any time at a price
referenced to fund value.
10. ➔ For investment trust, manager not obliged, hence price paid depends on market
forces int he open market.
11. Allow companies to raise money on security of debentures/bonds (eg. Floating
charge)
12. Make provision for causes/non-human objects (eg. Trust for education)
13. Environmental Protection Act 1990: licence holders have to put money on trust to
satisfy any expenses necessarily incurred by the Environment Agency in aftercare of
waste disposal sites.
14. Pension funds.
← **besides the above trusts created by intention, there are also those arising from
operation of law (resulting and constructive trusts)

DEFINITION OF THE TRUST

Essential elements of a trust:

I. Property subject to the trust
✴ Identifiable property which is the subject of the trust
✴ Can be legal interest (typical case), or equitable interest (as when beneficiary
himself assigns equitable interest to another to hold on a different trust - sub-trust)
I. One or more trustees
✴ For land, there is a maximum of 4 trustees.
Equity 1 Basic Concepts of Equity and Trust
✴ If settlor purports to create inter vivos trust but does NOT name/identify trustees, or
appoints people who are already dead, there is no valid trust created!
✴ If testator fails to nominate trustees, personal representatives will hold property
until other trustees are appointed!
II. An equitable obligation
✴ Ts are under equitable obligation, but they can still be given completely unfettered
discretion to deal with the property.
✴ Equitable obligation will also bind those who take property but without being free of
B’s interests (eg. Purchaser with notice of breach of trust)
III. One or more beneficiaries
✴ Interest of B is a hybrid: more than right in personam but less than right in rem.
✴ -regarded as owner of the property for some, but not all, purposes.

Features of a trust
1. Separation of economic benefit and management of property (economic approach)
✦ Separation of beneficial use/enjoyment, from powers of management/disposition over
property. Hence, dividing rights between T and B.
✦ Note that beneficial interests which accrue to B cannot be defined in abstract or
general sense - depends on the terms of trust instrument!
✦ T is often an active fund manager (Stack v Dowden, 2007: this type of constructive
trust imposed to divide capital proceeds of sale is NOT the paradigm form of trusts -
little by way of active management by T)
✦ ➔ if so, T will owe duty of care to Bs; T has the power to deal with property because
he’s the legal owner
2. Separation of legal and equitable title (legal approach)
✦ B’s interest and rights under a trust are recognised solely in equity.
✦ Cf Reade v Reade, 1799: (pre-Judicature Acts) if B wants to enforce claim in respect
of trust property, he can only sue in equity, not in the Common Law courts
3. Relevance of conscience
✦ Basis of B’s proprietary claim is that it would be unconscionable for T to deny B’s
interest - Westdeutsche Landesbank Girozentrale v Islington LBC, 1996 (Lord BW)
✦ ➔ Equity recognises obligation on T (legal proprietor)’s conscience, though it also
recognises that T is the legal owner (equity as gloss/qualification).
✦ If trust property is passed to third party, B can be said to have proprietary right
because former’s conscience is bound to restore asset to T (unless Equity’s Darling).
4. Limited equitable powers of trustee
✦ As legal owner, T’s powers are unlimited at Common Law. But equity imposes limits -
whether by trust instrument’s terms, or general law (eg. TA 2000).
✦ ➔ qualification of T’s general powers to deal with property as owner.
✦ If T acts in excess of his equitable powers, might commit breach of trust. He must
then account for resulting gains/losses.
✦ ➔ liability arises only in equity!
5. Fiduciary duties
✦ T is a fiduciary ➔ owes underlying duty of loyalty.
✦ Because of T’s uniquely powerful position in relation to B, due to his legal powers,
there are 2 fundamental rules:
✦ 1) T cannot exercise powers to make personal profit, and
✦ 2) T cannot enter transaction where there’s possible conflict between his trust
duties and personal interests.
✦ Eg. Wright v Morgan, 1926: T cannot sell trust property to himself in personal
capacity - conflict of duty and interest!
6. The “irreducible core” of trusteeship
Equity 1 Basic Concepts of Equity and Trust
✦ Parties might be able to contract out of fiduciary duties, but they definitely cannot
contract out of these specific obligations.
✦ A) T must act in good faith - trust instrument may contain exclusion clauses to allow
T to be negligent, but cannot allow T to be fraudulent without incurring liabilities!
✦ B) T must account to B for management of trust - inherent and non-excludable.
✦ Without these features, T will actually become the beneficial owner of the trust
property! The trust will thus cease to exist.

Distinguishing between trusts and other legal concepts

A. Trust vs Contract
✦ There are 2 types of contracts: simple (typical; offer/acceptance; intention to create
legal relations; consideration) and specialty (by virtue of being constituted in a deed)
← Simple contracts
✦ Until CRTPA 1999, general rule that non-parties of the contract couldn’t enforce it
← -but this rule was mitigated by possibility of creating trust of the benefit of the contract,
expressly/impliedly. Third party could then sue as cestui que trust joining trustee as
co-claimant/defendant, should trustee not do so on his behalf. Possible to create
trust of benefit even where contract itself is of a type that cannot be assigned.
← -even after CRTPA 1999, was still important to know where trust of benefit of contract
was to be implied (obvious if done expressly), as legislation doesn’t apply to all
cases. But since Re Schebsman, 1944, courts adopted very limited approach -
reluctant to interpret contract as creating a trust in the absence of the clearest
possible evidence.
✦ Thus, most cases where a trust can arise will also fall under the Act. BUT still
important whether there’s a trust because of s2(1) of the 1999 Act:
← -s2(1) seems to permit parties to rescind contract conferring rights on a third party if
latter hasn’t; yet communicated assent! However, if third party only finds out about
term after purported rescission, if facts show that there was a trust, it would have
been breach of trust by trustee to rescind!
← Specialty contracts
✦ Typically covenants between settlor and trustees to settle on trust property which
has not yet come into existence.
✦ Before CRTPA 1999, it was established that B could enforce covenant by joining
trustees as co-claimants or co-defendants if there was trust of the benefit - but
controversial as to where such a trust could be implied.
✦ -Act now allows B to enforce covenant directly against settlor. But if settlor did not
intend B to be able to enforce term of the covenant, s1 says Act doesn’t apply. A
trust naturally wouldn’t exist in such a situation either.
✦ But if settlor concealed covenant’s existence, and then purported to rescind it, OR if
B isn’t born yet or is still a minor when settlor purports to rescind, it is still relevant
whether there’s a trust.
A. Trust vs Debt
✦ A liability in itself, without more, CANNOT be the subject matter of a trust. Re Sharpe
(a Bankrupt), 1980: moneys advanced by loan will not allow lender a beneficial
interest in the property! Mutually exclusive!
← -amount for trust must be segregated from other assets.
✦ B’s proprietary right will enjoy priority over the rights of any unsecured general
creditors, which will be purely personal.
✦ Possible for same transaction to give rise to trust AND debt: Barclays Bank v
Quistclose Investments, 1970: loan for specific purpose is held on trust for lender,
until and unless purpose is fulfilled. Once that happens, lender becomes unsecured
creditor (regular debt)
← -if purpose fails, and there was no express agreement on outcome, Twinsectra v Yardley,
2002, established that failure will give rise to resulting trust in favour of lender.
Equity 1 Basic Concepts of Equity and Trust
B. Trust vs Estates of deceased persons
✦ Actions by beneficiary against trustee faces a shorter limitation period of 6 years,
whereas that against a personal representative has a 12 year limitation period.
✦ Personal representatives, in handling personalty, have several, not joint, authority -
just one of them can give valid title to purchaser. (though over realty, their liability is
still joint)
✦ Personal representatives have a shorter term duty - wind up estate!
✦ Beneficiary under trust has equitable proprietary interest as soon as trust takes
effect BUT legatee/devisee/intestate successor doesn’t have any proprietary interest
in assets while still in course of administration - only have right to require estate to
be duly administered.
← -hence, personal rep’s fiduciary duties are owed to estate as a whole, not to ultimate
beneficiary
✦ But personal reps may also be nominated to be trustees - change in character
happens once they fulfil all duties as personal representatives - (discharged funeral
expenses, discharged debts/liabilities, satisfied gifts of specified items/sums). Once
all this is completed, deceased’s residuary estate is established.
← -once becoming trustees, absolutely entitled Bs can call for retirement of trustees, and
trustees will be obliged to consult with Bs of full age prior to disposal of property.
C. Trust vs Agency
✦ Relationship between principal and agent is that of creditor and debtor - acts on
principal’s behalf, and is subject to his control. Based on agreement (vs B and T who
usually don’t have agreement btw them - agreement is btw T and settlor).
D. Trust vs Equitable charges
✦ Equitable charge only imposes liability on property. Trust imposes fiduciary
character on the legal owner of the property.
✦ But both are equitable interests - can be overridden.
E. Trust vs Powers
✦ Power is discretionary whereas trust is imperative. Most trusts involve exercise of
powers or discretions by the trustee. But still, T can exercise independent judgment
on a wide variety of issues.
✦ “trust power”: where one has right, but is also under obligation, to make selection
relating to the beneficial enjoyment of property. Power is imperative here!
← ➔ if not exercised, court will execute the power!
← ➔ selection must be made from already defined class of persons.

The different types of trusts

1. The private express trust**

• Created by expression of actual intention of current owner. Can be from express
words/implied from words or conduct.
• It is a transaction, intentionally created by parties (not just construct imposed by law).
← ➔ intention of settlor to impose legally binding obligations on T.
• “Private” - for benefit of individual/class with standing to enforce T’s duties, regardless of
any benefit conferred incidentally to public at large. (public trusts refer to charitable
trusts).
• Parties:
1. Settlor, or testator/testatrix
★ Creator of trust, through expression of his legally binding intention to do so.
★ Can be self-declaration (settlor becoming trustee himself), or conveyance of
property to another to hold on trust
1. Trustee
Equity 1 Basic Concepts of Equity and Trust
★ Legal owner of the trust property, subject to equitable obligations.
2. Beneficiary
★ Person for whose benefit T holds and manages property. (cf object of power of
appointment)
★ Under English law, private trust must have human beneficiaries - can’t have
non-charitable private trust.
★ Generally has power to enforce T’s duties/hold T to account.
← ➔ but Roberts v Gill & Co Solicitors, 2010: B has no standing in his own right to sue third
party breaching contract with T/third party who commits tort against trust
property. However, proceeds of claim by T will be trust asset - T must account
for them to B.
3. Protector/protection committee
★ Neither B/T. But has powers over T’s management of the trust/T’s functions.
★ Common domestic eg: S devises house to surviving spouse for life, remainder to
children in equal shares absolutely, but Ts having power to sell with spouse’s
consent.
← ➔ spouse will be protector of trust - can exercise power of veto over T’s power of sale.
★ Sometimes, T might be offshore corporation, hence B in UK has little realistic
control over T’s actions. Need protector to take care of the trust (might be given
express powers in trust instrument to authorise transactions/appoint and
remove Ts).
★ Even more extreme example is that of some offshore jurisdictions which
recognise pure purpose trusts (no beneficiaries) - protector may be responsible
for enforcing T’s duties. Becomes an enforcer of the trust!
• INTENTION is of paramount importance in express trust!
★ [Langbein] drew analogy between express trusts and contracts - notion of “freedom
of trusts”, since express trust can similarly be seen as bargain struck between
settlor and trustee, with bargaining defining terms under which T is to hold property
← ➔ so to work out T’s powers/content of B’s beneficial rights, look to trust instrument
first, as expression of settlor’s intentions.
★ Default rules are provided by general law, but primary source of T’s powers/duties is
trust instrument itself - trusts created to escape default rules. Note there’s still
irreducible core.
← ➔ many disputes aren’t about general laws, but about construction of trust instrument to
determine S’ objective intentions (Re Sigma Finance Corporation, 2009: emphasised
importance of construction of words to determine intention, to express private trust)
• Functions of a private express trust:
1. Control complex beneficial entitlements to property by way of gift
← ➔ [Rudden]: trust is essentially making long term gift, controlling dealings of property
✴ Allows S to create a more complex property right than permitted under
Common Law - for instance, can’t create legal life interest under Common Law.
✴ -another example is allowing settlor to restrict B’s free disposal of property (Fox
points out this is motivated by human interest in controlling others’ lives -
whether W remarries)
✴ Can impose conditions for vesting of gift - prior to condition being fulfilled, gift
to B is contingent, vesting in interest only upon fulfilment.
✴ (note difference between vesting in interest and vesting in possession)
✴ ➔ eg of vesting in interest: where S leaves funds to Ts to hold on trust for wife
for life, remainder in equal shares to children absolutely on their attaining age
of 25. If kids reach 25, but wife is still alive, there’s only vesting in interest. If
wife dies, there’ll be vesting in possession. Before all this, when kids are not
yet 25, gift is merely contingent.
✴ Varying degrees of control:
✴ A) fixed trust: defines B’s interests from outset.
Equity 1 Basic Concepts of Equity and Trust
✴ B) discretionary trust: S only defines class of beneficiaries, and T owes duty to
make appointments at his discretion [“...property to be held on trust for W for
life, remainder to such of his children as Ts shall in their absolute discretion
select’]. Hence, obligation on T to exercise power, but discretion as to HOW it is
exercised (must be in good faith too!). Might be directed by a letter of wishes
(informal)
✴ C) mere power of appointment: S defines class of objects of powers, but donee
has power, not duty, to make appointments [“...property to be held on trust for W
for life, remainder to such of his children as Ts may in their absolute discretion
select, and in default of appointment to X absolutely] - double discretion (added
layer of whether T exercises power at all)
2. Separate beneficial use from powers/duties of management
← ➔ allows S to use expert knowledge of fund manager to get best returns, yet allowing B
to take benefit of accruing income without being concerned with technicalities of
investment.
3. “ring-fence” assets to immunise them from creditors’ claims
✴ Trust property belongs to T, but held on trust as segregated fund (not held
beneficially by T), hence immune to T’s creditors’ claims.
✴ Hence, if T becomes bankrupt, property held by T on trust is exempt from
bankruptcy.
✴ “protective trusts” are an extreme example: S bequeaths shares to Ts to be
held on trust for her daughter for life, daughter’s interest to determine in event
of her bankruptcy - income then to be applied to daughter/her husband and
children as Ts shall in their absolute discretion select.
← ➔ hence, once daughter becomes bankrupt, ceases to have any vested interest - nothing
to vest in her trustee in bankruptcy. Beneficial interest ring-fenced against
possibility of daughter’s own bankruptcy!
✴ Another function is to facilitate secured lending
← 1) Quistclose trusts (see later notes), or
← 2) trusts to secure returns on project financing loan (where lender makes loan to
developer, and developer undertakes to hold income received from lessees on
trust for lender. There’ll be contractual clause to bind developer to pay all rental
receipts into separate account and hold those on trust for lender, so that lender
has first claim in case of developer’s insolvency. Note that if developer
breaches contract and doesn’t do so, there’s no subj matter for trust - lender
will only have contractual claim)

2. Other commercial trusts

1. Asset holding by nominees - bare trust where T doesn’t owe any active duties. T holds for
B (entire beneficial owner) absolutely.
★ Only duty is to dispose of property as B directs T to.
★ Can arise expressly/by operation of law.
★ Leading authority - Christie v Covington, 1875: if bare trust arises in express
transaction, T is called a “nominee”.
★ Convenient! Allows true T to vest legal title in a nominee, so that T doesn’t have to
be involved in technicalities of transactions. Quite common today - rare for
shareholder to actually hold legal title for shares. Instead, it is more common for
instance for firm of stock brokers to hold shares as nominees for corporate trustees
of a family trust. Shareholder holds a partial equitable right under a chain of trusts
2. Pension trusts: trust used to provide defined income to EEs and dependants. EE has
contractual rights under trust; ER owes statutory and contractual obligation to keep
scheme in the black.
★ Giving deferred remuneration to beneficiary/employee, who earned trust income
from giving services under contracts of employment.
Equity 1 Basic Concepts of Equity and Trust
★ Triangular! 3 parties. Trustees, employee and employer.
★ Employees have dual entitlement to payment - matter of contract at CL, and also
under terms of trust instrument.

3. Other kinds of trusts

1. Express trusts for charitable purposes
★ No beneficiaries with standing to enforce Ts’ duties.
★ Rather, enforced by AG and Charity Commissioners.
★ Must be within recognised head of charity in Charities Act 2006
2. Trusts arising by operation of law (LPA 1925, s53(1)(b), (2))
★ Resulting trusts: where there’s
← A) transfer without consideration, or
← B) failure of an express trust to exhaust settlor’s entire beneficial interest/
★ Constructive trusts; not dependent on intention of trustee for creation (often
contrary to T’s wishes) - strips T of profits of wrongful conduct.
← ➔ arises where it is unconscionable for legal owner to deny beneficial interest of another
in the property - Millett LJ in Paragon Finance v DB Thakerer, 1999

RIGHTS AND DUTIES OF TRUSTEES AND BENEFICIARIES

Position of the Trustee

• Legal ownership is vested in trustees. Smith v Anderson, 1880: T is owner and deals with
the property as principal - subject only to equitable obligation to account to Bs.
• Because of potential for abuse, equity imposes strict rigorous duties on T. Parties,
however, have freedom to vary/negative default provisions, as long as there is no
illegality/public policy concerns/uncertainty, provided the irreducible core is retained
(duty to act in good faith).
• Bs’ interests are paramount - T can refuse B’s wishes if T thinks B isn’t objectively acting
in his own best interests. But note Saunders v Vautier rule (see later)
• Standard of care: T must exercise as much care as a prudent man of business would,
when investing for others for whom he felt morally obliged to provide.
• T has no distinct legal personality - hence, is personally liable, unless he makes clear to
third parties with whom he deals that he is liable only insofar as the fund is available to
satisfy liability.
• Generally, only T has standing to sue third party for wrongdoing - but if he refuses to do
so, in breach of trust, B can then join him as co-defendant.
← -still, B is suing “in right of the trust and in the room of the trustee - Parker-Tweedale v
Dunbar Bank, 1991, as opposed to B suing in his own right.

Position of the Beneficiary

• B always has a right in personam against T, to inspect trust accounts, and
affirm/repudiate T’s actions. He can demand T to pay back to the fund anything found
missing (specific item/monetary value), or any loss caused by T’s breach of duty.
• B’s rights:
1. In the case of a bare trust: B can demand transfer of legal title from T to himself. Can
also assign/declare sub-trust of his equitable interest. Can assert proprietary claim
on property against all but Equity’s darling/purchasers who have overreached within
LPA 1925 s27 (hence has proprietary right in rem).
2. In the case of B with a limited interest under a fixed trust: he has disposable
equitable proprietary interest - but can’t claim assets unless acting in unison with
other Bs (in full capacity and collectively absolutely entitled). Has right to income
produced by trust asset, and part of equitable ownership.
Equity 1 Basic Concepts of Equity and Trust
3. In the case of B under a discretionary trust, he only has hope of receiving something
- can’t compel T to pay him anything, or substitute another for himself as potential
recipient. Still, sufficient in rem standing to trace misdirected assets and claim their
return.
• Hence, look at B’s rights as in personam when concerned with direction T to perform the
trust requirements. But where T becomes insolvent/something goes wrong, consider B’s
in rem rights.
• BUT if all Bs are absolutely entitled amongst them and are of full capacity, then Saunders
v Vautier, 1841: can call for trust property to be vested in them/their nominees, hence
terminating the trust. Settlor can’t oust this principle even by express declaration!
← ➔ “absolutely entitled” - not holding property contingent on any event/interest is absolute.
← ➔ merger of equitable and legal rights, hence extinguishing the trust.
★ Facts of Saunders: in this case, testator made testamentary gift of East India
Company’s stock to be held on trust for B. By the terms of the trust, T was to
accumulate annual income until B reached 25. When B turned 21, he wanted money
straightaway - court held B’s interest was absolute - already vested in possession,
just that T had been instructed to withhold possession. NOT a contingent trust (if B’s
interest had been contingent on him first reaching 25, B’s interest would not be
absolute till then). Hence B was entitled!
★ Cf Re Brockbank, 1948: where there’s more than one beneficiary (widow with life
interest, and remainder of property divided amongst various children), individual Bs
are NOT absolutely entitled. But collectively, they are entire beneficial owner - if they
act collectively, and are all sui juris, can direct T to wind up trust.
★ Herdegen v Federal Commissioner of Taxation, 1988: notes that rule in S v V is not
exactly the same as a bare trust. Under latter, T holds property for B absolutely, and
T’s sole active duty is to obey B’s orders re the property. But rule in S v V is not
limited to bare trusts - Bs can still be owed active duties by Ts! (in S v V, there was
active duty to accumulate income)
★ Rationale: addresses imbalance that trust allows settlor to exercise control over
property which doesn’t actually belong to him anymore (“dead hand control”).
← ➔ [Matthews] thinks this rule is important - powers of control over property remain in
line with beneficial ownership. Also encourages free alienability of property
(commerciability)
• Further to the Saunders v Vautier rule, Stephenson v Barclays Bank, 1975: where there are
several Bs, together absolutely entitled, the S v V rule applies to each of them separately,
provided each B’s share can be severed from the fund without harm to the remainder . Also
applies to severable parts of, or interests in, the trust fund!
← -hence, if income payable during specified period to such of A, B and C as T shall select,
A, B and C can jointly demanded that income be paid to them - payment of income is
severable from trust fund. But this is only if Bs’ identities are fixed, not fluctuating. Also,
B must not have a merely contingent interest.
• B’s alienation of his interest: provided that B’s interest is vested (not subject to condition
precedent/subsequent), he can alienate it to third party.
★ Alienation occurs on B’s death (through testamentary gift) or insolvency assignment
to trustee in bankruptcy). Can also be through direct assignment (subject to
formalities of s53(10(c) LPA 1925 - if alienation is through disposition, must be
recorded in writing)
★ Restrictions on alienation generally void - contrary to public policy.
• Note if trust arises from contract, parties who are the beneficiaries can contract out of
their S v V rights!