#2541 - What Is A Trust - Trusts and Equity

Fundamentals of Equity

Rationale

Equity is a connecting rationale of preventing a person from using his or her legal powers of contracting, ownership and disposition in a manner that would be contrary to good conscience.

+ Snell: ‘Equity refers to a conception of justice that transcends the substantive and procedural rules of the positive law. It introduces an ethical element into the positive law by holding the parties to a more sensitive or exacting standard of justice than the rules of positive law would require of them.’

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Historical Development

Historical connection in the jurisdiction of the Court of Chancery.

• Began with the Chancellor’s intervention in conflicts.

• Lord Ellesmere later applied the same principles in all cases.

The Judicature Acts 1873-1875

The Judicature Commission recommended the creation of a single Supreme Court. (n.b. This is what we now, following the abolition of the judicial functions of the House of Lords on 1^st October 2009 and their transfer to the Supreme Court of the United Kingdom, call the Senior Courts of England and Wales.) That new single court would have all of the jurisdiction then exercised by the superior courts of law, equity, probate, admiralty and divorce.

• The Judicature Acts 1873-1875, including section 25(11). See now Senior Courts Act 1981 (formerly known as the Supreme Court Act 1981), s.49.

• In terms of substantive law, this continues the relationship between law and equity established by the Earl of Oxford’s Case (1615).

• A distinctive feature of equity in all legal systems has been its secondary or supplementary nature. Equitable intervention presupposes the existence of primary rules of positive law. The effect of equity is to qualify the enforcement of the positive law to ensure a more complete standard of justice than the law itself would attain.

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The Fusion of Law and Equity

1. Procedural fusion – Berry v. Berry [1929]

2. Substantive fusion and the ‘fusion fallacy’

• Aquaculture Corporation v. New Zealand Green Mussel Co Ltd. [1990]; “For all purposes now material, equity and common law are mingled or merged. The practicality of the matter is that in the circumstances of the dealings between the parties the law imposes a duty of confidence. For its breach a full range of remedies should be available as appropriate, no matter whether they originated in common law, equity or statute”.

  • Chirnside v. Fay (No 2) [2005] 3 N.Z.L.R. 689;

Facts: Breach of fiduciary duty alleged. These duties are purely equitable in origin. Ct tried to avoid common law damages for loss of a chance.

Principle: Understanding thus is that the common law is merged in equity and so historical distinctions based on the origins of rights and remedies do not matter anymore.

3. Fusion by convergent evolution of principles

+ Burrows: This theory suggests that the distinction between law and equity is not technically abolished, but in similar situations the rules of equity evolve so they look like common law rules. There is a cross-fertilisation of ideas as two different systems of law are forced into the same situation. The argument is one of convergent evolution – i.e. common law rules of causation can apply to quantifying loss on the breach of trust claim; two separate origins but does not justify treating differently.

+ Fox: Argument is unobjectionable.

What makes equitable principles distinct in the modern law?

• Notion of conscience - all equitable doctrines relating to conscience to control common law rights. Would lose that if assimilated all into grand scheme.

• Everything in equity is a kind of secondary scheme; assuming the existence of a primary common law foundation. All qualifications work in a secondary way to a primary structure of common law rights, so if you wanted to wipe the slate clean you could abolish equity and keep common law; but if you abolished the common law you would necessarily abolish equity.

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Issues

Issue: Can the historical origin of rules in equity or common law justify markedly different results in cases which are functionally similar and which depend on the same policy?

- No:

• E.g. The award of equitable compensation against a bare trustee who owes a concurrent common law duty to pay compensatory damages. Similar tests for causation of loss should be applied at law and in equity: Target Holdings Ltd. v. Redferns [1996] (see Conaglen’s lectures on Breach of Trust). = Two diff systems of law forced together into same situation. Argument is one of convergent evolition – i.e. common law rules of causation can apply to quantifying loss on the breach of trust claim; two separate origins but does not justify treating differently.

• E.g. It is arguably an anomaly to require a 3rd party who receives misapplied trust money to be at fault if he or she is to be made liable to restore the money to the trust. A person who receives stolen money to which the C has a legal title is liable even if he or she receives it innocently: Lipkin Gorman v. Karpnale Ltd. [1991] (see Thornton’s lectures on Proprietary Claims) = At law the thief that stole your money pays the money to a third party. How do you claim off the third party? Common law says you can prove your money was received by the third party, you have a claim against them, regardless of whether 3^rd party knew the money was stolen. But if it is trust money that is stolen, and paid to third party, then the analysis is diff. The third party cannot be liable to the beneficiary unless they have notice to the breach of trust; it is a strict form of liability, requiring fault.

Fusion argument argues it is all about getting back misapplied property and no justification for treating eq and common law claims differently so we should drop the eq. It is anomalous (fusionist mindset).

+ Fox argues: At the level the law currently is, and how it ought to be, there are still reasons for still regarding equitable as a distinct body of law so not just assimilating it into a broad category.

Issue: Should we adopt an entirely ‘event-based’ categorisation of private law rights? In other words, ought we to abandon equity as a distinct subject?

• Reductionism can bring unhelpful over-simplification – Significant detail could be lost if the system is reduced into broad wrongs. The differences would be lost.

  • E.g. Treating the loss caused by negligent breach of duty as the same as the loss caused by the misapplication of trust funds.

  • E.g. Breach of trust is very different from common law misrepresentation – Net economic wealth is diminished by misrepresentation, but breach of trust involves misapplication of a specific trust asset, not some broad economic loss of wealth. These should be treated differently.

• Equity often works at the margins of primary legal categories –

  • E.g. Promissory estoppel qualifies strict contractual rights – Contract depends entirely on intention but estoppel involves a strong reliance element. Therefore the estoppel remedy does not necessarily involve giving expectation loss, only C’s reliance loss. Hence this equitable doctrine might lose its character if it was assimilated.

• The position of ethics would become unclear – The conscience in the law is an underlying equitable conscience. In abandoning the explicit ethical element which shaped the principled development of the substantive law we might be abandoning an element which informs legal change. It might be preferable to have a positive system with a negative element to it.

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The Nature of a Trust

‘Trust’: When the legal title is owned by one person (the trustee) and the beneficial interest is held by another (the beneficiary), although they can be the same people, such as in trusts for land. The trust provides for a legal owner to be able to deal with property for the benefit of those who cannot or do not want to deal with it themselves. T’s role is to hold and administer the trust assets; or apply the income of the trust for a charitable purpose.

Features of a Trust:

1. Separation of economic benefit (B) and management of property (T) – A characteristic feature of a trust is the separation rights of beneficial use and enjoyment of property from powers of management and disposition over it.

2. Separation of legal and equitable title – A trust splits up a bundle of rights in relation to an asset. The interest of B under the trust is recognised solely in equity. His or her rights to control the trustee in the management of the property are purely equitable. The content of B’s equitable title is what the trust actually gives them.

3. Management powers and duties in the trustee – A trust is typically not a relationship for the passive holding of property. T is expected to be an active fund manager (cf. Stack v. Dowden). T owes an equitable duty to secure the best financial return on the trust fund. T has power to deal with the property in the trust fund because he or she is the legal owner of it. If, for example, he or she sells shares out of the trust fund, he or she will have full legal power to enter into a contract of sale which is binding...