#2536 - The Quistclose Trust - Trusts and Equity

The Quistclose Trust

Basic principle:

Where A pays money to B for a specified purpose (such as the payment of B’s debts to a third party, C), the money does not become part of the general property of B, but is clothed with a primary trust, to be used for that purpose and no other. If the primary purpose fails, a secondary trust arises, whereby B holds the unexpended money on trust for the donor, A.

Difficulties:

(i) Who is the settlor?

In each of the cases above, the settlor is clearly the donor, A. However, Quistclose trusts have also been held to exist in cases where the initiative for setting aside the fund for a particular purpose has come from the donee, B. In this situation, B will arguably be the settlor.

• Re Kayford [1975];

• Re Chelsea Cloisters (1981);

• Twinsectra v. Yardley;

Facts: Money was loaned to buy land. The solicitors undertook that they would only use the money the money to buy land for T. This was passed between solicitors and then onto a borrower without enforcing the purpose to acquire land. There was no repayment of this borrowed money.

General decision:

+ Lord Hoffman: Held that repayment of the money was owed because of the undertaking.

+ Lord Millett however, held that there was a Quistclose trust and rejected Lord Wilberforce’s two trust analysis in favour of the following: that the beneficial interest rests with the lender, the borrower has a mere power to use the loaned money for a stipulated purpose.

Regarding intention: CA focused upon the intentions of both donor and donee.

+ Potter LJ, CA: Cited Re Goldcorp Exchange Ltd [1995], where Lord Mustill said that what is required is ‘a mutual intention that the moneys should not fall within the general fund of the (donee’s) assets but should be applied for a designated purpose’. This focus on common intention does, however, leave uncertainty as to the identity of the settlor.

+ Lord Millett, HL: Similarly unspecific as to the identity of the settlor. He said that the question is ‘whether the parties intended the money to be at the free disposal of the recipient’ or not (at [74]).

Whoever is regarded as the settlor, there must be certainty of intention to create a trust:

• Re Multi Guarantee Co [1987];

• Twinsectra;

Held at the CA stage that this certainty of intention requires more than merely a declaration that the loan money is to be used for a specified purpose; some ‘additional indication’ is required that the money is to be held on trust. This will normally be satisfied, for example, by the agreement that the loan money be segregated from the donee's other assets, though segregation may not be essential in every instance.

+ Lord Millett, HL: Emphasised that intention to create a trust is to be based on an objective judgment of the parties’ dealings rather than upon their subjective wishes (para [71]).

(ii) Is the purpose for which the trust can be created limited to the payments of debts?

Although Quistclose trusts have generally involved loans to be used for the payment of the donee’s debts, they are not limited only to this situation.

• Twinsectra v. Yardley; decided that a trust can arise where a loan is made for any specified purpose, provided it is stated with sufficient certainty to allow the lender (A) to restrain misapplication of the loan moneys by the borrower (B).

+ Lord Millett: “In the earlier cases the purpose was to enable the borrower to pay his creditors… but the principle is not limited to such cases” [68].

• Re N (A Child)(Payments for Benefit of Child) [2009] EWHC 11 (Fam);

(iii) The relationship between trust and loan

Normally a trust and a loan are mutually exclusive. If B holds property on trust for A, A’s rights and remedies are equitable and proprietary; if A loans money to B, A’s remedy is a personal action for debt at common law. However, in a Quistclose trust, the two co-exist. If the money is expended by B in fulfilment of the primary purpose, B owes A a simple debt, but if the purpose fails, the money is held by B on trust for A.

• Quistclose; Per Lord Wilberforce: “I can appreciate no reason why the flexible interplay of law and equity cannot let in these practical arrangements”.

(iv) Express or resulting trust?

The ‘Quistclose trust’ has been categorised as a species of resulting trust by writers (Parker and Mellows, The Modern Law of Trusts, 9th ed., p. 316) and in judicial dicta (Lord BW in Westdeutsche Landesbank, p. 708). Given further force by Lord Millett in Twinsectra.

Vs.

However, other commentators argue that it might be seen as express (see Hanbury and Martin, Modern Equity, 17th ed., p. 241).

Traditional analysis: The primary trust was normally seen as express, arising out of the donor’s clearly stated intentions as to the use of the money (or the donee’s intentions, in cases such as Re Kayford). The secondary trust looked like an ‘automatic’ resulting trust, arising by operation of law upon failure of the primary trust.

Most cases in the 1980s and 1990s tended to regard the secondary trust as resulting rather than express, but took the view that it was not necessary to show that the parties addressed their minds to the possibility of failure of the original purpose (e.g. see Re EVTR [1987], and the CA in Twinsectra).

Issue: Yet Lord Wilberforce in Quistclose spoke of it as arising ‘expressly or by implication’; indeed, his Lordship focused upon the parties’ intentions in relation to the secondary trust, suggesting that it might also be seen as an express trust: “if the primary purpose cannot be carried out, the question arises if a secondary purpose (i.e. repayment to the lender) has been agreed, expressly or by implication…”.

• Westdeutsche Landesbank;

+ Lord BW: Used Quistclose trusts as an example in support of his view as to the relevance of intention in resulting trusts. However, even according to BW’s view of the matter, there is no need for positive evidence of intention to receive back the money before a RT will arise.

RT normally arises in favour of settlor. Yet in Quistclose trusts the secondary trust is always in favour of the donor, A, even where the settlor appears to be the donee, B (e.g. Re Kayford).

However, if the secondary trust is express, and the settlor (as is usually the case) is the donor (A), then when is the trust declared? If it is regarded as being declared at the outset when the loan is made, problems of certainty of subject-matter arise, as the secondary trust fixes only upon such sums as are not expended in accordance with the specified purpose (which will not be known when the loan is made). But once the primary trust is declared, the settlor (A) would normally retain no power to declare new trusts over the property: unless the settlor retains some form of beneficial interest under the primary trust.

Lord Millett cut through all the arguments about the nature of the primary and secondary trust in Twinsectra v Yardley. Adopting the analysis which he himself had previously put forward extra-judicially (Millett (1985) 101 LQR 269), he argued that there is in fact no ‘primary’ and ‘secondary’ trust as Lord Wilberforce had described in Quistclose, but one unitary trust throughout (see (v) below). According to his Lordship, the Quistclose trust is, from the outset, ‘an entirely orthodox example of the kind of default trust known as a resulting trust’ ([100]).

(v) Where does the beneficial interest lie under the primary trust (or while the purpose is still capable of fulfilment)?

Issue: This issue did not arise directly in any of the cases until Twinsectra, but had received wide academic and judicial consideration:

• Quistclose;

+ Lord Millett: Suggested that there is a beneficial interest favouring the lender – where power is borrowed for a specific purpose.

Criticism: Artificial – just money lending. Also, the HL said this approach only applied to the secondary trust (not the primary. (Millett is incorrectly (?) squashing the two together).

• Cooper;

Facts: On the employee’s resignation he was allowed to keep his Mercedes that his employers had bought on credit (and paid for in instalments). There was 34,000 of this left to pay and the money was given by the employee to the employer for this purpose. It was not put in a separate account, and the employer went into administration before the cheque was paid to Mercedes wiping out their outstanding payments for the car.

Decision: Here there was a Quistclose trust – it was not fatal that there was no separate account (even though Lord Millett had previously said you did). Evans-Lombe LJ said that a purpose trust had arisen here. On the contrary however, Lord Millett would suggest that a resulting trust had occurred.

+ Megarry V-C: In Re Northern Developments equated the Quistclose trust with purpose trusts for the benefit of identifiable individuals (Re Denley's Trust Deed).

+ Gibson J: Held in Carreras Rothmans that although both the donor (A) and the third party creditors whom the money was intended to pay (C) had equitable rights to enforce the primary purpose, the beneficial interest in the money was ‘in suspense’ until payment was made or the purpose failed. He doubted whether it is helpful to analyse Quistclose trusts ‘in terms of the constituent parts of a conventional settlement’.

+ Chambers (Resulting Trusts, 1997, at pp. 71-73): Contends that the primary trust is not normally a trust at all, but a ‘quasi-trust’, under which both legal and beneficial ownership are vested in the donee, B, but with the donor, A, retaining an equitable right to restrain B from using the property for other than the agreed...