Re Baden (No 2) [1973] Ch 9

The discretionary power of selection is essential for funds benefiting staff, employees, and their families. This authority allows trustees to determine who receives assistance based on evolving needs, fostering a supportive environment. However, clear guidelines must accompany this power to prevent arbitrary decisions and ensure fair distribution, ultimately maintaining the integrity of the fund.

The test of validity examines whether a legal instrument or action is enforceable. In the context of trusts, it assesses the settlor's intentions, the definiteness of beneficiaries, and compliance with legal requirements. A robust test ensures that trusts can be executed according to the settlor's wishes and that beneficiaries can assert their rights, providing legal certainty for all parties involved.

Including relatives and dependents as beneficiaries in a trust can make it void for uncertainty if the descriptions are vague. Courts require beneficiaries to be identifiable; overly broad language can lead to ambiguity and invalidation of trust. To avoid this, the settlor should clearly specify beneficiaries, ensuring the trust meets legal standards for validity and administration.

In 1941, Bertram Baden ("Settlor") established a trust fund intended for the benefit of the staff of his company, their relatives, and dependents. Clause 9(a) of the deed directed Edwin Baden, Peter Duke Doulton, Sidney Kindler and Alexander Laing Pearson ("Trustees") to "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 dependents of any such persons." The settlor passed away in 1960. In 1962, his executors claimed that the trusts were wholly void and sought payment of the fund to the estate.

In response, the Trustees initiated proceedings via an originating summons, joining the settlor's executors as defendants, to determine the validity of the trust. Justice Goff held that the provisions of clause 9(a) constituted a power rather than a discretionary trust, thus ruling it valid.

On appeal, the Court of Appeal upheld Goff J.'s determination that the clause constituted a power but criticized the test he applied for validity. The case was subsequently appealed to the House of Lords, which reversed the Court of Appeal's decision, concluding that clause 9(a) constituted a discretionary trust rather than a power. The case was remitted to the Chancery Division for further examination of the clause's validity.

In the Chancery Division, Justice Brightman held that the applicable test was that articulated in In re Gulbenkian's Settlements [1970] A.C. 508, which states that a trust is valid if it can be determined with certainty whether any individual is a member of the beneficiary class. He clarified that "dependents" referred to individuals who were wholly or partially dependent on another's means and that this inclusion did not render the clause void for uncertainty. Brightman J. also explained that a "relative" is someone who shares legal descent from a common ancestor and noted that the term "relatives" could not create issues, as trustees could deny grants to those unable to provide sufficient proof of relationship. Consequently, he ruled that the clause was valid as a trust. The executors then appealed the case.

The court dismissed the appeal and held that in applying the test from In re Gulbenkian's Settlements, it was essential to distinguish between conceptual uncertainty and evidential difficulty regarding the validity of a discretionary trust. If a candidate could not demonstrate their membership in a class upon reasonable inquiry, they were deemed not to be a member. The test was not satisfied if "relatives" encompassed "all descendants of a common ancestor."

There was no conceptual uncertainty regarding the term "dependents" that would render the clause void.

As stated by Sachs L.J. and Megaw L.J., the term "relatives" posed no conceptual uncertainty when broadly defined. Stamp L.J. concluded that a discretionary trust for "relations" was valid, allowing the court to distribute assets to next of kin and clearly define the class of beneficiaries.

The case concerns essential legal principles regarding the validity of discretionary trusts. Established in 1941 to benefit Baden's company's staff and their dependents, the trust faced challenges in 1962 when the executors sought to declare it void. Justice Goff initially ruled the trust a power rather than a discretionary trust, but the House of Lords reversed this and recognized it as a discretionary trust.

Justice Brightman's application of the In re Gulbenkian's Settlements test emphasized that trust is valid if beneficiaries can be identified with certainty. He distinguished between conceptual uncertainty and evidential difficulty, ruling that the term "dependents" was sufficiently clear to uphold the trust's validity. The court affirmed that while the term "relatives" may be broad, trustees could require proof of relationship, ensuring the trust functions as intended.

This case reflects the importance of precise beneficiary definitions in trust law, balancing settlor intent with judicial interpretation to maintain the integrity of discretionary trusts.