#17294 - The Three Certainties - GDL Equity and Trusts

In order to create a trust:

• A) The settlor must have legal capacity to create the trust.

• B) Any statutory formalities, that may apply depending on the nature of property, must be met and

• C) The trust must be properly constituted.

• D) Three certainties must be satisfied.

Formally declared in Wright v Atkyns (1823) and Confirmed in Knight v Knight (1840)

• 1) Certainty of Intention

• 2) Certainty of Subject Matter

• 3) Certainty of Object

For the trust to be valid, the settlor must have intended to impose a legal (as opposed to a mere moral) obligation to act and deal with the property in accordance to the trust instrument.

Intention to create a trust can be shown easily with words or conduct

• But you don’t have to understand that you are creating a trust in order to create a trust - What we are looking at is the consequences

The words ‘on trust’ is not required (Re Kayford [1975])

• Neither does the usage of the word trust guarantee the creation of a trust (e.g. I trust you…).

Distinction drawn between

• (i) imperative words, which show an intention to create a legally binding obligation. This will generally create a trust.

• (ii)precatory words, which merely express a mere hope or a wish. E.g. ‘in full confidence’ ‘trusting’ ‘hoping’. This may but do not have to create a trust

Precatory Words:

• Historically they always created a trust (before Executors Act 1830), court was more inclined to create trusts as otherwise the executors got the estate.

• Lamb v Eames (1871) “to be at her disposal in any way she may think best, for the benefit of herself and her family”

  • Court: ‘it is a cruel kindness indeed to impose a trust when none was intended.’ Held this was a gift.

• For short period court stopped awarding trusts, but later a more balanced approach came in

• Re Adams and Kensington Vestry (1884) “in full confidence that she will do what is right”

  • Took into account the fact that this was for the wife, therefore a gift.

• Comiskey v Bowring-Hanbury [1905] “in full confidence that she will devise it to such one or more of my nieces as she may think fit…in default of any disposition by her thereof by her will or testament I hereby direct that”

  • Mandatory nature of the instruction, trust imposed.

• Re Steele’s Will Trust [1948]

  • Will had been professionally prepared. Same words used as in the case of Shelley v Shelley (1868): “I request that…”

  • As identical clause is used then the same outcome must be applied

• Re Hamilton [1895] - context of provision vs that of the whole instrument

  • Lindley LJ: ‘take the will you have to construe and see what it means, and if you come to the conclusion that no trust was intended then you say so’

  • Eg if there is a clear intention to create a trust in one clause, but not in another clause, it is unlikely that the second clause was intended as creating a trust.

• Marguiles v Marguiles (2000) ‘knowing his wishes…giving what is appropriate” too vague to demonstrate intention.

Intention by Conduct

• Re Kayford [1975]

  • Kayford, a mail order company, was holding money from his customers in a separate bank account named ‘Customer Trust Deposit Account’

  • The court held that the money had been held in trust and so could be claimed by creditors

• Re Challoner Club Ltd (1997)

  • Set the money of members aside, but there was no clear prerogative as to it being set aside for a specific reason. There was the possibility that they could use the money for their own benefit not for the benefit of the members. Thus in retaining the right to decide a trust was not created.

• Paul v Constance [1977] - Cash in the bank account was used for bingo winnings of Claimant and her deceased partner. These had been shared. Deemed held on trust.

  • Conduct of sharing a bank account and depositing joint winnings is sufficient to demonstrate intention.

Quisclose Trusts

• Barclays Bank Ltd. v Quistclose Investment Ltd [1970]

  • A creditor has lent money to a debtor for a particular purpose – the purpose is a condition of that loan.

  • In the event that the debtor uses the money for any other purpose, it is held on trust for the creditor.

Refers to the property that is subject to the trust obligation

Two problems:

• 1) Vague Descriptions

• 2) Part of a Larger Whole (as either tangible or intangible property)

Vague Descriptions

• Palmer v Simmonds (1854) who gave the ‘bulk of my estate’

  • Too uncertain a term – if intending to create a trust they tend to be more specific than this.

• Sprange v Barnard [1958] ‘remaining part of what is left’

  • No trust as the husband could have used everything.

• In the Estate of Last [1958] ‘anything that is left’

  • Clearly stated that the donee could not use everything, merely the income from it, so here this was treated as sufficiently certain to create trust.

• Re Golay [1965] 1 WLR 969 ‘enjoy one of my flats during her lifetime and to receive reasonable income from my other properties.’

  • Reasonable is a relatively certain term and objectively definable.

When it is part of a larger whole as tangible property.

• Traditionally they need to be segregated or labelled.

• Re London Wine [1986]

  • Wine often stored for customers. All was stored together; none had been allocated to any specific customer – when ordered company picked up from the cellar, if not present they went out and purchased more.

  • As property was not interchangeable (each wine bottle was unique) it must be possible to segregate the specific property. Trust failed as this was not done.

• Re Goldcorp Exchange Ltd [1995]

  • Same as above, but gold bullion. Those customers who had identified gold coins could still reclaim their gold, but all other customers lost their assests.

When it is part of a larger whole as intangible property.

• Intangible property is all the same therefore no segreagation is necessary.

• MacJordan Construction Ltd v Brookmount Erostin Ltd [1992]

  • This may be decided differently today.

  • Construction contract – parties paid when work was certified. Brookmount failed to keep these sums separate. When went liquid they had 157,000 in account and owed 109,000 to MacJordan.

  • Although funds in bank accounts are intangible (and indeed fungible), there still needs to be an ascertainable fund over which the trust is declared. No trust found.

• Hunter v Moss [1994]

  • Company director stated that the finance director could have 50 out of his 950 shares. As the shares are identical, the executor does not need to be told exactly which shares are to be given to each beneficiary.

• Re Harvard Securities [1997]

  • Buying blocks of shares which it sold onto customers. They retained legal title to the shares as nominee for each client, but the parcels were not registered individually.

  • Neuberger held there was no need to segregate the parcels

Critique of intangible distinction and Hunter v Moss

• Hayton argues that Hunter v Moss was irrationally decided – prefers a co-ownership analysis (i.e. every shareholder owns a percentage of every share). Thus, if shares are lost or sold, they share rateably.

  • What would happen if the trustee sold 100 of the shares, the question would then arise ‘whose property did he sell?’ did he sell 50 of his own or 50 of the beneficiaries of any proportion there in?

• Professor Brian Goode argues that shares are fundamentally different to most other property because they are not truly individual assets. Rather, they are mere fractions of a single asset (i.e. the company). Thus the trust ought to have been declared for 5% of the share assets not for 50 shares.

• Parkinson argues that we should use contractual principles.

  • Subtraction – we can simply subtract the amount that belonged to the trust and leave the rest.

  • Proportionality – 1/10 to customers 9/10 etc. We must distinguish between subject matter of the trust and the actual trust property. As the actual trust property can be easily identified within the whole later on.

  • Tracing Rules – can be used to resolve Hayton’s objection above.

  • Biggest problem with this is the right of creditors, as if we can establish a trust subsequent to insolvency then a lot of creditors would be unable to reclaim their property

• Commercial Solution

  • Sale of Goods Act 1979 s.20A (amended):

    • If companies sell a product to a customer, if the goods haven’t been dispatched then the paying customers become tenants in common of the property in question.

    • If there is not enough product to satisfy them all, then the amount owed to each customer is reduced proportional to the contribution of each customers.

There is a final problem regarding the extent of a beneficial interest in a property (only relevant in fixed trusts).

• Boyce v Boyce (1869)

  • Testator left two houses on trust for his daughters. One daughter to choose one and the other would take the remainder. The first daughter died before choosing. The trust failed because it was uncertain which house Maria would have chosen, and which would go to Charlotte.

Morice v Bishop of Durham (1804) “there must be some persons in whose favour the court can decree performance”

• This is why purpose trusts are generally frowned upon.

Certainty of Object Test in Fixed Trusts: Complete / finite list test

• IRC v Broadway Cottages Trust [1955] Ch20

  • Certainty of objects will be satisfied if you can create a full and accurate list of all of the beneficiaries.

Certainty of Object Test in Powers of Appointment: ‘Given postulant’ / ‘is or is not’ test

• Re Gulbenkian [1970] per Lord Wilberforce:

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