2018-law-of-trusts-revision-materials-set-1-of-2

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2018 Law of Trusts Revision Materials (Set 1 of 2)

Equity and trusts (University of London)

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Law of Trusts Revision Materials (Set 1 of 2)

Topics:
 Breach of Trust, Constructive Trusts, Tracing
 3 Certainties (Essay and Problems)
 Private Purpose Trusts (Problems)
 Formalities

Note: I am extremely cautious with regards to providing students with sample answers to tutorial
questions. The fear is that students will uniformly reproduce memorised answers in examination
on a similar topic. This is something that the University of London examiners strongly discourage.
It is for this reason that I will keep sample answer handouts such as this one to a minimum. It
would be more profitable for students to attempt the tutorial questions on their own and then
consult with their lecturers/tutors for further guidance after they do so.
The following sample answer is only provided to students as a guide in how they should structure
their answers. In other words, it is more important to take note of how the sentences, paragraphs
and arguments are structured below. Students should pay careful attention to the sequence of
ideas and how arguments are substantiated with authorities from cases and academic writing.
I do not make any pretensions to offering you a ‘perfect’ answer to the examination question
above (indeed, in a discussive/reflective question, it is doubtful if there really is a ‘perfect’ answer
at all!). Students are therefore encouraged to use the sample only as a guide. It is my firm belief
that conscientious students should be able to produce better scripts than the one offered below.

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Breach of Trust, Constructive Trusts and Tracing

2010 Zone A Question 8

Carl was the manager of a large investment fund. For many years, he operated
a fraudulent scheme to misdirect investment funds to his wife, Alison. Many of
the investors contributed to the fund regularly by direct debit. They did so by
signing instructions for money to be transferred electronically each month
from their own bank accounts to one of the fund’s accounts. When Carl
prepared a direct debit instruction for signing by an elderly investor, he
sometimes listed the payee as the name and account of his own company,
which had a similar name to that of the fund. Carl then transferred money
from his company’s account to Alison’s bank account. Alison had no idea that
this money had been obtained by fraud. She thought it was Carl’s money being
paid through his company to avoid taxes.
Carl’s fraud was uncovered and he absconded leaving no assets behind. Over
the years, Alison received £1 million through Carl’s fraudulent scheme,
£200,000 of which still remains in her bank account.

The other £800,000 has been spent as follows:
(a) £200,000 to discharge a loan secured on Alison’s title to her house;
(b) £200,000 to purchase company shares;

(c) £200,000 for travel, holiday, and ordinary living expenses; and

(d) £200,000 to pay off a bank loan. With the loan monies, Alison had bought a
car (now worth £30,000) and a boat (now worth £70,000), both of which she
still has.

Advise the defrauded investors.

Suggested Solution:
Carl:

The investors are advised that Carl has breached his fiduciary obligations as well as
committed a breach of trust. By having two similarly named bank accounts, Carl has put
himself in a position where his own interest conflicts with his duties as a trustee. By
encouraging the investors to pay into his company’s similarly named account, he has
committed a breach of fiduciary obligations. Following that, he transferred the money from

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the company account to Alison’s bank account. As these transfers were clearly unauthorised
by the terms of the investment, they would amount to breaches of trust.

As a trustee, Carl would be strictly liable for his above breaches. He would also be
personally liable to account for the losses caused to the investment trust funds caused by
his breaches. However, as Carl has disappeared, the investors would have to consider if it
would be possible to take any action against Alison.

Alison:

On the facts, Alison is a ‘stranger’ or third party outsider to the investment trust. The
general rule is that she would not be liable for Carl’s breach of trust (Mara v Browne
(1896)). The exception to the rule is where Alison either received the monies with
knowledge of Carl’s breach of trust or, despite being initially ignorant of it, came to know
about Carl’s breach of trust later and used the funds as if they were her own despite her
knowledge (El Ajou v Dollar Land Holdings (1994)).

Following the decision in Re Montagu’s Settlement (1987), Megarry VC confirmed
that for a recipient such as Alison to be personally liable to restore the trust, it must be
shown that Alison had ‘knowledge’ and not merely ‘notice’ of the breach. In other words, it
must be shown that Alison had acted in want of probity by receiving and/or dealing with the
trust property despite having actual knowledge of Carl’s breach or wilfully and recklessly
failing to make such inquiries as a reasonable and honest man would make on the obvious
facts known to her. It is hereby argued that Alison did not have ‘knowledge’ or Carl’s breach
at all. On the facts, she also did not act recklessly or wilfully since she honestly thought that
Carl’s money was paid through his company to avoid taxes.

Despite the above, the Court of Appeal appeared to have adopted an alternative test
in BCCI v Akindele (2000). According to Nourse LJ, the basis for liability should involve, on
the above facts, Alison’s conscience – i.e. whether Alison’s state of knowledge was such as
to make it unconscionable for her to retain the monies received. Here, it is argued that, on
the available facts, Alison may not be liable at all since she acted on her own honest belief
that Carl’s money was paid through his company to avoid taxes rather than involving a
breach of trust.

Finally, it should also be noted that Lord Nicholls of Birkenhead (‘Knowing Receipt:
The Need For A New Landmark’ (1998)) suggested that a recipient such as Alison should be
strictly liable for receiving property as a result of a breach of trust. The justification for this
alternative basis for liability is to prevent unjust enrichment. Nevertheless, Alison would be
afforded the ‘change-of-position’ defence – i.e. that it would be unjust for the court to
compel her to restore the trust since her position has changed as a result of relying upon
the gifts from Carl without knowing about the latter’s breach. Once again, it is argued that
even with this alternative basis for liability, while Alison is prima facie liable for receiving the
monies, her lack of knowledge with regards to Carl’s breach remains a relevant factor as a
defence.

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On the above arguments, the investors are advised that it is unlikely that Alison will
be held personally liable to account for the losses caused by Carl’s breach. She remains an
‘innocent’ recipient of monies as a result of Carl’s fraudulent transfers.

Follow/Trace + Claim:
Despite not making out Alison’s personal liability to account for the losses caused by

Carl’s fraud, the investors should still have an equitable right to follow and/or trace their
monies into Alison’s bank account (should it be possible to do so on the circumstances). As
there is still a balance of £200,000 in the bank account, it is argued that the investors should
be able to follow that money in Alison’s account and claim them as theirs. Alison is not a
bona fide purchaser without notice. She is only a donee who received the money as a gift. It
is thereby argued that the investors would be able to claim the £200,000 balance in Alison’s
account.

As for the £800,000 that Alison has spent, it would depends on whether there are
any traceable proceeds for the investors to claim:

a) On the facts, it should be noted that Alison did not use £200,000 to purchase her
house. The money was only used to pay off the secured loan on her house. Following
the decision in Boscawen v Bajwa (1995), it is argued, that the rights of the original
mortgagee should be subrogated by the investors. In other words, the investors
should be allowed to take over as the new mortgagee and secure their loan to Alison
with a charge on her house.

b) The investors should also be allowed to trace into the company shares as they were
purchased using the trust money (£200,000). Following Foskett v McKeown (2001),
Alison’s knowledge is not a relevant factor. It is simply a question of the investors
tracing into the company shares purchased using their money.

c) The £200,000 expended on travel, holiday and living expenses are no longer
traceable since there are no proceeds for the investors to trace into.

d) Finally, it should also be possible for the investors to subrogate the rights of the bank
to sue Alison for the £200,000 loan (using the principle from Boscawen v Bajwa
above).. That being said, the investors would end up only as unsecured lenders.
Should Alison not be able to pay back the loan, they would end up with nothing.

Here, it is argued that a better solution is to simply allow the investors to trace into
the car and boat bought with the loan monies (despite the depreciation in the value
of the two properties). Professor Penner argued this ‘backward tracing’ approach is
logical and offers protection for investors in situations such as this one affecting the
investors. After all, but for Alison buying the car and boat, she probably would not

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have incurred the loan in the first place. Without the loan, she would not have used
the £200,000 belonging to the investors.

That being said, it is noted that the status of ‘backwards tracing’ as an equitable
remedy is uncertain in English law. While ‘backwards tracing’ can be discerned in the
reasoning of the House of Lords in Foskett v McKeown (2001) and also by the courts
in cases such as Law Society v Haider (2003), it should also be noted that the courts
refused to expressly admit that they were applying ‘backwards tracing’.
The case that extensively examined ‘backwards tracing’ was Bishopgate Investment
v Homan (1995). Vinelott J (at first instance) allowed ‘backwards tracing’ in limited
circumstances, such as (i) when it can be shown that the trustee misused trust
property with the intention to repay a loan incurred for the purchase of a specific
property; and (ii) where the trustee misused trust property in order to make funds
available (e.g. credit card or overdraft facility) to enable him to make a future
purchase. Alas, when the case reached the Court of Appeal, the result was
inconclusive as Henry LJ appeared to ‘agree’ with both the decisions of Dillon LJ
(who approved of Vinelott J’s approach) and Leggatt LJ (who rejected the same).
Despite the uncertainty in Bishopgate, it is argued that ‘backwards tracing’ does
feature in the reasoning of the courts and, on the logic of the reasoning, it is likely
that the courts may approve of it in the future. There is therefore a strong argument
here that the investors may be allowed to ‘backward trace’ into the car and boat
purchased by Alison using the loan monies.

2007 Zone B Question 4

Madeleine, trustee of the Chalmers and Redmayne family trusts, in breach of
trust deposited £50,000 from the Chalmers trust into her own bank account,
raising the balance to £75,000. She withdrew £25,000 from the account to pay
off her mortgage. She then deposited £50,000 from the Redmayne trust into
her account, raising the balance to £100,000 and made the following
withdrawals: she invested £25,000 in shares now worth £10,000; paid a
judgment debt against her of £25,000; gave £25,000 to her husband who used
the money to buy a painting; and paid £25,000 to her travel agent for a world
cruise she had booked.

Advise the beneficiaries of the Chalmers and Redmayne trusts.

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Suggested Solution:

Madeleine’s breach of trust:

The beneficiaries of the Chalmers and Redmayne trusts should be advised that as
Madeleine is a trustee who committed a breach of trust, she is strictly and personally liable
to account for the unauthorised use of the funds from the two trusts. In other words, the
beneficiaries are entitled to take an action against Madeleine compelling her to restore
£50,000 to each of the trust. That being said, should Madeleine not be able to make good
the losses caused by her breaches, the beneficiaries will then attempt to trace into
particular assets or funds in order to claim them as properties belonging to their respective
trusts.

Chalmers:

It should be noted that £50,000 from the Chalmers trust was misappropriated by
Madeleine and banked into her own bank account (which already had a balance of £25,000
of her own money). Madeleine later withdrew £25,000 in order to pay off her mortgage.
The question that the beneficiaries of the Chalmers trust would like to have answered is
whether the money used to pay off the mortgage was Madeleine’s own money (her balance
in the account was sufficient for the mortgage payment) or money from the Chalmers trust.

In Re Hallett’s Estate (1880), it was held that there was a ‘presumption of honesty’
on the part of the trustee when he withdraws money from a mixed fund. Therefore, it was
held that the trustee will always be presumed to withdraw his own money first. This was to
ensure that the wronged beneficiary could have a chance to claim whatever balance was
left in the account after the trustee’s withdrawal. Furthermore, it was also held that any
future deposits into the mixed account was the trustee’s own (Roscoe v Winder (1915))
unless he had expressly stated that the deposits were to replace the trust monies that he
had previously misappropriated (Robertson v Morice (1845)). This was also known as the
‘Lowest Intermediate Balance’ approach in tracing – i.e. the wronged beneficiary was
entitled to claim the lowest intermediate balance from the mixed account as representing
his interest. Should this be the approach taken by the beneficiaries of the Chalmers trust,
Madeleine would have been presumed to withdraw her own money in order to pay off her
mortgage. The money from the Chalmers trust would have been untouched.

That being the case, it is argued that this may not be the best approach to safeguard
the interests of the beneficiaries of the Chalmers trust. On the facts, there were future
withdrawals by Madeleine which further dissipated the monies in the account. Following
the decision in Re Oatway (1903), the wronged beneficiaries would have the benefit to elect
that the withdrawal of £25,000 came from the Chalmers trust. This approach was confirmed
by Lord Millett in Foskett v McKeown (2001) as the correct one to safeguard the interests
of the wronged beneficiaries as they had greater equity over that of the wrongdoing
trustee. In other words, the wronged beneficiaries of the Chalmers trust would be allowed,
in a manner of speaking, to ‘cherry-pick’ which is the approach that best protects their

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interests. It is here argued that the beneficiaries should elect to treat the payment of
£25,000 as coming from the Chalmers trust in order to allow them to subrogate the rights of
Madeleine’s original mortgagee and place a charge over the title to Madeleine’s house
following the principle in Boscawen v Bajwa (1995). This approach, it is argued, is more
beneficial to the Chalmers trust as it allows for a proprietary claim immediately – the trust
becomes the new mortgagee, with Madeleine’s loan secured against the title to her house.
In effect, this makes the Chalmers trust a secured creditor so that even if Madeleine could
not repay her loan, they would still be able to claim the title to her house.

Balance of £100,000 (after the mortgage payment):

On the facts, it should be noted that Madeleine made a further deposit of £50,000
(from Redmayne trust) into the account bringing the balance up to £100,000. As it has been
argued that the above mortgage payment was made with money from the Chalmers trust,
both the Chalmers trust and Madeleine would still have shares in the balance of £100,000
(along with the Redmayne trust). The question is, how would the balance £100,000 be
apportioned amongst Madeleine, the Chalmers and Redmayne trusts. This is important as
the £100,000 was later withdrawn by Madeleine for more expenditures and purchases. In
other words, whose money was used for which expenditure?

Generally, should it be a current bank account, the general rule is that the balance
would be dissipated on a ‘first-in, first out’ (FIFO) basis following the rule in Clayton’s Case
(1816). Should that be the case, the subsequent withdrawals would be as such:

 £25,000 for the purchase of shares = Madeleine’s own money (first-in)
 £25,000 for the judgment debt = money from the Chalmers trust
 £25,000 as gift for Madeleine’s husband, who bought a painting with the money =

money from the Redmayne trust
 £25,000 paid to the travel agent = money from the Redmayne trust

In Barlow Clowes v Vaughan (1992), the Court of Appeal confirmed the above FIFO
approach as the general rule for tracing amongst ‘innocents’ in a current bank account.
However, the court refused to apply FIFO on the facts of the case as it involved a deposit
account. The ‘pari passu’ approach was applied instead whereby the ‘innocents’ were
allowed to claim proportionate co-ownership of the whole account based on their
respective contributions to the fund. Should that be the case, it is argued that the Chalmers
trust would be entitled to 1/4 of the £100,000 (based on its contribution of £25,000) while
the Redmayne trust would be entitled to 2/4 of the same (based on its contribution of
£50,000). It is not clear on the facts whether or not Madeleine’s account was a current bank
account or merely a deposit account. The discussion below on traceable claims, however,
assumes that it is the latter (and the results should be adjusted accordingly should it be the
former).

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Tracing and Claiming:

a) The beneficiaries from both trusts should be able to trace their interests (in ‘pari
passu’) into the shares that Madeleine purchased following the principle in Foskett v
McKeown (2001). Despite the decline in the value of the shares, the beneficiaries
are advised to claim the shares as traceable proceeds from the misuse of funds from
their respective trusts.

b) As for the judgment debt, it is not clear on the facts why Madeleine incurred the
debt in the first place. Should the debt be incurred earlier on because Madeleine
purchased an asset, the beneficiaries may be allowed to ‘backwards trace’ their
interests into the asset. After all, but for Madeleine buying the particular asset, she
probably would not have incurred the debt in the first place. Without the debt, she
would not have used the £25,000 belonging to the trusts.

That being said, it is noted that the status of ‘backwards tracing’ as an equitable
remedy is uncertain in English law. While ‘backwards tracing’ can be discerned in the
reasoning of the House of Lords in Foskett v McKeown (2001) and also by the courts
in cases such as Law Society v Haider (2003), it should also be noted that the courts
refused to expressly admit that they were applying ‘backwards tracing’.

The case that extensively examined ‘backwards tracing’ was Bishopgate Investment
v Homan (1995). Vinelott J (at first instance) allowed ‘backwards tracing’ in limited
circumstances, such as (i) when it can be shown that the trustee misused trust
property with the intention to repay a loan incurred for the purchase of a specific
property; and (ii) where the trustee misused trust property in order to make funds
available (e.g. credit card or overdraft facility) to enable him to make a future
purchase. Alas, when the case reached the Court of Appeal, the result was
inconclusive as Henry LJ appeared to ‘agree’ with both the decisions of Dillon LJ
(who approved of Vinelott J’s approach) and Leggatt LJ (who rejected the same).

Despite the uncertainty in Bishopgate, it is argued that ‘backwards tracing’ does
feature in the reasoning of the courts and, on the logic of the reasoning, it is likely
that the courts may approve of it in the future. There is therefore a strong argument
here that the investors may be allowed to ‘backward trace’ into the particular asset
purchased by Madeleine which incurred the debt.

c) As for the £25,000 given as a gift to Madeleine’s husband, the beneficiaries are
advised that they are entitled to trace and claim the money from him as he was not a
bona fide purchaser without notice but only a donee. Since he had dissipated the
money to buy a painting, there is no reason why the beneficiaries could not trace
their respective interests into the painting itself and claim it.

d) Finally, the £25,000 paid to the travel agent may be claimable by the beneficiaries
should it be possible for Madeleine to get a refund and cancel her trip. It is not clear
on the facts whether Madeleine had already gone on the cruise. If she had done so,
there would be no traceable proceeds left.
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2010 Zone B Question 6

Martin died, leaving his entire estate on trust for his widow, five children, and
grandchildren. His two sons, Frasier and Niles, were the trustees. Under the
terms of the trust, the trust assets could not be invested, directly or indirectly,
in any business involved in the manufacture or sale of weapons. The terms also
stated that no trustee would be liable for any breach of trust unless it was
‘caused by his or her own fraud or gross neglect’. Frasier made all the decisions
regarding the trust; Niles simply agreed with his ideas and co-signed the trust
documents as he requested.
One of the trust assets was the title to Martin’s former home. His widow
occupied it alone for seven years until her death, following which Frasier
convinced Niles that it was a poor time to sell, and that they should let the
home to Daphne at a rent well below market rates, which they did. Unknown
to Niles, Daphne was Frasier’s mistress.

Daphne managed a small private investment company called Moon Co. She
noticed that Frasier’s family trust held shares in Crane Ltd, which were not
publicly listed, but thought to be a very good investment. Daphne persuaded
Frasier to sell the Crane shares to Moon Co for fair market value. At the time,
Frasier was a minority shareholder in Moon Co, but not a director or officer of
the company.

Frasier invested the money from the sale of the Crane shares in two mutual
funds. Both funds had wide investment portfolios, including investments in the
weapons industry. One of the mutual funds did well over the next five years,
with a growth rate exceeding the market average, while the other performed
poorly, losing wealth over the same period.
Eddie is one of Martin’s grandchildren and a discretionary beneficiary under
the trust. He believes that his uncle Frasier is misusing trust assets and
mismanaging the trust. What claims, if any, does he have against Frasier and
Niles?

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Suggested Solution:

On the facts, Eddie would like to take a number of actions against Frasier and Niles
for misuse and mismanagement of the trust assets resulting in loss to the value of the trust
assets. As Eddie is one of the discretionary beneficiaries, he would have the necessary locus
standi to bring such actions against the trustees.

1) Breaches committed by Frasier and Niles:

Firstly, Eddie will need to make out the possible breaches committed by Frasier and
Niles. On the given facts, it is argued that the following are actionable breaches committed
by the trustees:

 The investment in the mutual funds would be construed as an unauthorised
investment expressly prohibited by the terms of the trust. This would amount to a
clear breach of trust for which the trustees would be strictly liable.

 Frasier’s decisions to rent the house to Daphne as well as the sale of shares to Moon
Co. will amount to breaches of fiduciary duty. While neither of these transactions
were expressly against the terms of the trust, the transactions will be regarded as
breaches of fiduciary duty because there are conflicts between Frasier’s duty to the
trust and his personal interests (resulting from his relationship with Daphne).

2) Liabilities and Defences:

As trustees, both Frasier and Niles will be jointly and severally liable for the above
breaches. This means that Eddie will be able to take action against the two of them jointly,
or even opt to sue either one of them to recover the full sum of damages/compensation for
the losses to the trust.

Niles will, of course, attempt to argue that he should not be personally liable as he
was merely a ‘sleeping trustee’ and that the actions were solely carried out by Frasier.
Following Bahin v Hughes (1886), this argument would not work. To be a ‘sleeping trustee’
itself would amount to a gross neglect on the part of Niles with regards to his duties as a
trustee.

Finally, the trustees may also argue that they could rely on the exemption clause in
the trust to be relieved of their personal liabilities. The first thing to note is that the
exemption clause has been defined very widely to relieve Frasier and Niles of liabilities in all
breaches (with the exception of those resulting from fraud or gross neglect). In Armitage v
Nurse (1998), the Court of Appeal held that such a widely defined exemption clause was
nevertheless valid. That being said, it is unlikely that the clause will exempt Frasier and Niles
from liabilities since:

 Frasier’s breaches of fiduciary duty involving Daphne and Moon Co. would amount
to fraud (for which there is no exemption). Aside from the limitations of the clause

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itself, even in Armitage, Lord Millett explained that there can never be exemptions
for fraud or dishonesty as the courts will always uphold an irreducible core of
obligations on the part of trustees/fiduciaries.
 As argued above, Niles’ failure to perform his duties to monitor the trust would
already amount to gross negligence on his part.
 Also, their failure to investigate the portfolios of the mutual funds would also, it is
argued, amount to gross negligence.

3) Remedies

Lastly, Eddie would argue that, with his successful actions against Frasier and Niles,
he should be able to secure the following remedies:

 The normal remedy for breach of trust (unauthorised transactions and/or
negligence) is to require the trustees to personally restore the losses to the value of
the trust – i.e. by surcharging the losses to them (in the event of negligence or
mismanagement, such as that in the case of Niles) and falsifying the account (in the
event of unauthorised transactions, such as those on the part of Frasier).

 Falsifying the account would mean that Eddie denies that the unauthorised
transaction was carried out by the trust. Therefore, any losses resulting from said
transaction would be the trustee’s own.

 Alternatively, Eddie may even choose to adopt a particular unauthorised transaction
should it result in a profit. That way, the said transaction would have been carried
out by the trust and any resulting profits would also belong to the trust.

 That being said, it is unlikely that Eddie will be allowed to do both – i.e. falsify AND
adopt the unauthorised transaction (Barlett v Barclays Bank Trust (1980); Tang Man
Sit v Capacious Investments (1996)). In other words, Eddie would not be able to
adopt the mutual fund that is doing well and reject the other one that is not
performing.

Therefore, Eddie is advised that if the Crane shares had increased in overall value
since their sale, the account could be adopted to make Frasier and Niles liable for the
increased amount. Additionally, the account could be surcharged to add the extra rent that
should have been earned from the house had it been properly rented out to others.

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*** Resulting Trust Problem Question:

2014 Zone B Question 5

Alfred owned a sailboat, which was moored in Cornwall. He leased the
mooring and a nearby boathouse from the local council. Mooring fees and
boathouse leases were much cheaper for local residents than for nonresidents.

When Alfred moved away from the area, he assigned his ten-year boathouse
lease to his brother, Billy, who was a local resident. In order to pay reduced
rent, Billy made a written declaration to the local council that he held the lease
for his own benefit and not as trustee or agent.

Alfred decided to trade-in his sailboat for a bigger sailboat. The new sailboat
cost £80,000. The seller gave £40,000 credit for Alfred’s old sailboat and the
balance of £40,000 was paid by Dale, who is Alfred’s and Billy’s father. Billy was
registered as the owner of the new sailboat in order to qualify for reduced
mooring fees. Alfred reimbursed Billy regularly for mooring fees and boathouse
rents.

Billy died recently. His widow, Christina, is the executrix and sole beneficiary of
his entire estate. She seeks your advice. Who is entitled to the sailboat and
boathouse lease?

Advise Christina.

Suggested Answer:
Christina, as the sole beneficiary of Billy’s entire estate, would like to know if she is

entitled to inherit the sailboat and the boathouse lease from Billy’s will. She is advised that
she would be able to claim the two properties as her own if they form part of Billy’s estate.
However, on the given facts, it appears that the two properties were registered in Billy’s
name purely for reasons to do with the fact that Billy enjoyed cheaper mooring fees and
boathouse leases as a local resident. It is clear that Alfred (and possibly, Dale) would likely
challenge Christina’s claim to the properties by saying that Billy held them on trusts for
Alfred (and possibly, Dale). Each of the properties will be discussed separately below:

(a) Boathouse lease:
Alfred would like argue that the boathouse lease in Billy’s name is actually to be held

on a trust for himself on a “presumed intention resulting trust” (PIRT). Where the legal title
to property is voluntarily (i.e. without consideration) transferred to another and there is no
indication as to the destination of the equitable interest, the transaction may give rise to a

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presumed resulting trust. On the facts, Alfred voluntarily transferred the title to the lease to
Billy and Billy did not provide any consideration for it. As Alfred gave no indication as to the
destination of the equitable interest (i.e. who the property was really intended to benefit or
who will actually be using the property), it would be logical to be presume that there will be
a PIRT favouring Alfred.

In Re Vinogradoff (1935), a grandmother voluntarily transferred £800 worth of war
loan stock into the joint names of herself and her 4-year old granddaughter. The
grandmother continued to receive the dividends until her death. By her will, grandmother
transferred her interest in the stock to another. The court held that a PIRT for the
grandmother’s estate was created and there was no evidence to rebut the presumption.
Similar to the situation in the case where the grandmother gave no clear indication as to the
destination of the equitable interest, Alfred could argue the same to support the case for a
PIRT.

Despite the decision above, it should be noted that following s.60(3) of the Law of
Property Act 1925, in a voluntary conveyance of an interest in land to another, a resulting
trust for the grantor shall not be implied merely by reason that the property is not
expressed to be conveyed for the use or benefit of the grantee. Christina would want to rely
on this provision to argue that the transfer of the boathouse lease to Billy would therefore
be a gift and there should be no resulting trust presumed by the courts. Should this be so,
the onus is on Alfred to prove to the court that he intended for Billy to hold the lease on
trust for himself rather than a voluntary gift to Billy.

That being said, it should be noted that Russell LJ held that there was a presumption
of a resulting trust in Hodgson v Marks (1971) in spite of s.60(3) above. According to the
reasoning in the case, there was evidence to show that Mrs Hodgson’s transfer of the title
to her house to Mr Evans was not to benefit the former. In other words, it was clear from
her intention that she retained an equitable interest to the house. Furthermore, in Lohia v
Lohia (2001), the court concluded that s.60(3) did do away with the presumption of
resulting trust in a voluntary conveyance of land. The court held that there should not be a
PIRT simply on the basis that the recipient of the land provided no consideration. What is
needed is evidence showing that the transferor/grantor did intend to retain an equitable
interest (as was the case in Hodgson). This was affirmed in Ali v Khan (2002) where the
transferor/grantor was father to the recipient. However, as the father was able to prove to
the court that he did intend to retain an equitable interest in the land, he succeeded in
arguing for a resulting trust.

Based on the above decisions, it is clear that Alfred would only be able to argue for a
resulting trust should he be able to prove to the court’s satisfaction that he did intend to
retain an equitable interest in the boathouse lease. The question here is whether or not the
court would allow Alfred to bring in evidence saying that he only transferred the lease to
Billy in order to exploit the ruling that Billy would pay a cheaper rate for the lease! This
would mean that Alfred is required to adduce evidence of an unlawful activity in order to
prove that a trust exists.

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In Tinker v Tinker (1970), the court held that one is not allowed to rely on one’s
impropriety in order to prove a claim on property. However, it should be noted that the
party in the case was trying to rely on his own impropriety to argue for a presumption of
advancement. The case therefore would not be helpful in Alfred’s case since Alfred would
be arguing a presumption of resulting trust based on his intention to retain an equitable
interest.

More importantly, it should be noted that the facts here are closer to that in Tinsley
v Milligan (1994) where both the claimant and defendant were conspiring to defraud the
Department of Social Security. On the present facts, it is clear that both Alfred and Billy
conspired to defraud the local council. Lord Browne Wilkinson gave the following guidelines
in the case:

“A party to an illegality can recover by virtue of a legal or equitable property interest
if, but only if, he can establish his title without relying on his own illegality. In cases where
the presumption of advancement applies, the plaintiff is faced with the presumption of gift
and therefore cannot claim under a resulting trust unless and until he has rebutted that
presumption of gift: for those purposes the plaintiff does have to rely on the underlying
illegality and therefore fails.”

Following Tinsley, Alfred, who is a party to an illegality, will only be able to argue
that he retains an equitable interest in the boathouse lease by relying on his own illegality.
This would not be allowed. As a result, it appears that Alfred would likely fail in his attempt
to establish that he retains any interest in the boathouse lease and the lease would likely go
to Christina by virtue of Billy’s will.

(b) Sailboat:

As for the sailboat, firstly, it is clear on the facts that both Alfred and Dale
contributed to the purchase price in equal shares. However, the sailboat was registered
under Billy’s name. The relevant rule here (as was applied in Dyer v Dyer (1788)) is that
where property is vested in the name of another or in the purchaser jointly with others, a
resulting trust will be presumed in favour of those who provide the purchase monies and in
proportion to the contribution made by each person. On that note, Alfred and Dale would
likely argue that Billy held the sailboat on a resulting trust for them both in equal shares.

It is important to note that the property here is a sailboat and not an interest in land.
Therefore, s.60(3) LPA 1925 is inapplicable. As a result, it is submitted that there will be a
presumption of resulting trust favouring Alfred since he contributed to the purchase price.

As for Dale’s share, since Dale is Billy’s father, Christina is advised to argue that there
is a presumption of advancement favouring Billy (per Jessel MR in Bennet v Bennet (1879)).
It should be noted that the presumption of advancement from a father to his child is a
weighty one and will not be rebutted by slight or trivial evidence.

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That being said, as with the boathouse lease above, it is clear on the facts that there
was again another conspiracy to defraud the local council by exploiting Billy’s entitlement to
cheaper rates. As a result, it is argued that:

 The situation does not affect Alfred since he need not rely on the illegality to prove
his equitable interest in the sailboat (because of the presumption of resulting trust).
It will, however, affect Christina since she will have to adduce evidence of the illegal
act on Billy’s part in order to rebut the presumption.

 In the case of Dale’s share, Lord Millett in Tribe v Tribe (1995) explained that
evidence of an illegal act will NOT rebut the presumption of advancement.

In conclusion, it is submitted that Billy would receive a 50% interest in the sailboat
because of the presumption of advancement. This would thereby go to Christina, Billy’s sole
beneficiary under his will.

2014 Zone B Question 6

Wade is an elderly widower. His neighbour, Jerry, often helped him with odd
jobs and small repairs around the house. Five years ago, Jerry discovered that
Wade kept a large amount of cash in the attic, and since then, has stolen
£200,000 of it. Jerry deposited the stolen cash in his bank account into which
£200,000 of his salary was also paid over the same period. From that account,
Jerry paid his regular living expenses and made the following gifts:
“(a) £30,000 to buy a new car for his son, Lou;
(b) £70,000 to pay off the mortgage on the house owned by his daughter,
Marge;

(c) £50,000 to his sister, Norma, who paid it into her bank account along with
£50,000 of her own money. Norma then drew on that account to buy company
shares for £50,000 and a painting for £400, and spent the rest on ordinary
living expenses.”
When Wade discovered the theft, Jerry emptied his bank account and fled the
country.
Does Wade have any claims to Lou’s car (which is now worth £20,000),
Marge’s house, Norma’s company shares (which are now worth £30,000), and
Norma’s painting (which turns out to be an old masterpiece worth £400,000)?
Advise Wade on the basis that Lou, Marge, and Norma did not know that Jerry
had stolen the money.

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Suggested Answer:
(a) Will Jerry’s theft give rise to a constructive trust?

In Westdeutsche Landesbank v Islington LBC (1996), Lord Browne-Wilkinson
considered the situation where a thief steals a bag of coins. If the coins are mixed with other
identical coins and then withdrawals are made from the mixture, the legal owner of the
coins will be unable – under the common law rules on tracing – to find out where his coins
have gone, and who has got them.

The rules on tracing to find out where trust money has gone were more flexible and
allowed the beneficial owner of the money to trace his money even when the money was
mixed with other money and withdrawals were made from the mixture. But those rules
could only be taken advantage where the money was held on trust.

Lord Browne-Wilkinson held that the legal owner of the bag of stolen coins could
take advantage of the equitable tracing rules to find out where his money had gone: ‘stolen
monies are traceable in equity’. The reason why is that he held that once the money was
stolen it would be held on a constructive trust for the legal owner.

However, it should be noted that the ‘constructive trust’ that arises as a result of a
theft of monies is likely to fall under the second category identified by Lord Millett in
Paragon Finance v Thakerar (1999). After all, a theft is an unlawful act and it is difficult to
see how someone like Jerry could legitimately be called the legal title holder to money that
he has stolen! This would therefore not be a TRUE constructive trust but a FICTIONAL one
for the sole purpose of allowing equitable tracing to be carried out (for Wade). Rimer J
highlighted this point in Shalson v Russo (2005) by saying that “a thief ordinarily acquires no
property in what he steals… If the thief has no title in the property, I cannot see how he can
become a trustee of it for the true owner: the owner retains the legal and beneficial title.”

That being said, it should be noted that the second category identified by Lord
Millett calls for an equitable remedy for the wronged victim – “The second [category] covers
those cases where the trust obligation arises as a direct consequence of the unlawful
transaction which is impeached by the plaintiff… [These] were not in reality trusts at all, but
merely a remedial mechanism by which equity gave relief for fraud.” Earlier on, in El Ajou v
Dollar Land Holdings (1993), Millett J said that the equitable rules of tracing could be used
even in the absence of a fiduciary relationship. In other words, Lord Millett’s second
category is NOT a real constructive trust but a fictional or remedial constructive trust
implied for the sole purpose of allowing a wronged victim such as Wade to claim any
traceable proceeds from the stolen monies.

(b) Personal Liabilities of Lou, Marge and Norma?

On the facts, Lou, Marge and Norma are a ‘strangers’ or third party outsiders and
would not be liable for Jerry’s theft (Mara v Browne (1896)). The exception to the rule is
where they either received the monies with knowledge of Carl’s breach of trust or, despite

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being initially ignorant of it, came to know about the theft later and used the funds as if they
were their own funds despite their knowledge (El Ajou v Dollar Land Holdings (1994)). That
being said, it is not likely for any of them to be personally liable as it is clear on the facts that
they had no knowledge of Jerry’s theft.

(c) Tracing into Mixed Funds:
Despite not making out Lou, Marge and Norma’s personal liability to account for the

losses caused by Jerry’s theft, Wade should still have an equitable right to follow and/or
trace his monies should there be any traceable proceeds.

The first issue to be established here is whether the amounts spent by Jerry come
from his own money in the mixed bank account or were they Wade’s money that was
stolen. The general rule in Re Hallett’s Estate (1879) is that the wrongdoing trustee will
spend his own money first before proceeding to use any of the monies from the trust. This
would mean that Jerry spent his own money on the above-listed expenses and then ran
away with Wade’s money. As a result, Wade will have nothing to trace into!

Following the decision in Re Oatway (1903), it was held that the wronged beneficiary
would have the benefit to elect to use whichever approach was most beneficial to safeguard
his or her interests. This approach was confirmed by Lord Millett in Foskett v McKeown
(2001) as the correct one to safeguard the interests of the wronged beneficiary as he or she
had greater equity over that of the wrongdoing trustee. As Jerry is the wrongdoer and Wade
is the victim, it is argued that the equities are not equal between them. Therefore, Wade
will be allowed to decide on whichever course of action most beneficial to his interests.

Wade is therefore advised to argue that all of the above expenses were made using
his money and therefore he should be able to trace into the proceeds. Furthermore, Lou,
Marge and Norma are all donees and not bona fide purchasers without notice. Therefore,
should there be any traceable proceeds, Wade will be able to claim the traced properties
against them:

 Lou’s car: As this was a gift from Jerry to Lou, who was therefore not a bona fide
purchaser, Wade would be able to trace his interests into the car and claim it
(Foskett v McKeown (2001)). Lou’s knowledge or notice is not a relevant factor. It is
simply a question of Wade tracing into the car shares purchased using his money.

 Marge’s house: On the facts, it should be noted that Wade’s stolen money was used
to discharge Marge’s mortgage of her house. Following the decision in Boscawen v
Bajwa (1995), it is argued, that the rights of the original mortgagee should be
subrogated by the investors. In other words, Wade should be allowed to take over as
the new mortgagee and secure their loan to Marge with a charge on her house.

 Norma’s company shares and painting: Norma innocently mixed the traceable
proceeds of Wade’s money with her own in equal shares. The problem here is whose

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monies were used for the purchase of the shares and the painting. As Norma had no
knowledge of Jerry’s wrongdoings, she is an “innocent” like Wade.

In Barlow Clowes v Vaughan (1992), the Court of Appeal confirmed that the general
rule for tracing amongst ‘innocents’ is that the balance would be dissipated on a
‘first-in, first out’ (FIFO) basis following the rule in Clayton’s Case (1816). However,
the court refused to apply FIFO on the facts of the case as it involved a deposit
account. The ‘pari passu’ approach was applied instead whereby the ‘innocents’
were allowed to claim proportionate co-ownership of the whole account based on
their respective contributions to the fund. Here, it is argued that there is no reason
to apply the FIFO approach since it is unclear on the facts whose monies were
banked in first. Therefore, Wade should be allowed to share the traceable proceeds
of that mixture pro rata (Foskett v McKeown). In effect, this would allow Wade to
claim equal co-ownership of the shares and the painting.

2014 Zone B Question 8

Can an exemption clause relieve a trustee from liability for an intentional
breach of trust? If so, to what extent and why? If not, why not?

Suggested Answer:
The discussion of the effect of exemption clause on intentional breach of trust can

be divided into four parts: (i) which type of liability may be exempted, (ii) the application of
the Trustee Act 2000, (iii) whether there is “an irreducible core of trustee obligations” from
which no exemption is possible (per Millett LJ in Armitage v Nurse (1998)); and (iv) the
more stringent approach towards professional trustees in Walker v Stones (2001).

(i) Types of liability from which exemption is possible:
A trustee owes duties under the trust. Should the trust duties be breached, the

liability of the trustee is strict.
A breach of trust occurs when the trustee:

 Carries out an unauthorised transaction resulting in losses to the trust fund; [i.e.
MISFEASANCE] or

 Negligently manages/invests trust property – resulting in losses to the trust fund [i.e.
NONFEASANCE].
In general, a trustee will be personally liable to restore the losses to the value of the

trust with money from his or her own pockets. That being said, a trust instrument may
contain a clause, which exempts trustees from personal liability for breach of trust. An

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exemption clause, if effective, will thereby exempt the trustee from his or her liability to
restore the trust with his or her own money.

The benefit of such clauses is that they encourage trustees who would not otherwise
be prepared to accept the risky position of trustee to do so, and allow them to make
decisions with appropriate speed and without undue caution—in short they provide
protection for trustees in an increasingly uncertain and hostile climate.

Additionally, s.21(3) of the Limitation Act 1980 sets down the limitation period for
actions for breach of trust to six years from the date on which the cause of action accrued.
This was recently considered in the case of Williams v Central Bank of Nigeria (2014) where
the Supreme Court concluded that 3rd party liabilities for “knowing receipt” and “dishonest
assistance” are subjected to the limitation period above. While the traditional view of the
courts is that such wrongdoing 3rd parties are regarded as ‘constructive trustees’ for the
wronged beneficiaries, the Supreme Court argued that they are only personally liable as
‘constructive trustees’ under the remedial type (i.e. the second category) defined by Lord
Millett in Paragon Finance v Thakerar (1999). The decision in Williams, it is argued, is in line
with FHR European Ventures v Mankarious (2013) where Lord Sumption approved
previous authorities confirming that dishonest assisters and knowing recipients – while they
may be labelled “constructive trustees” for the purposes of their liability to account – are
not truly trustees at all.

There is, however, no exemption from proprietary liability, for if the trustee is
holding a trust right or its traceable proceeds in his hands, equity will simply require him to
hold that asset or proceeds on trust for the wronged beneficiaries.

(ii) Trustee Act 2000:

According to the Trustee Act 2000, there is a prima facie statutory duty of care
requiring trustees to exercise such care and skill as is reasonable under the circumstances,
but in Schedule 1, Paragraph 7 of the Act (dealing with the exclusion of said duty of care),
the duty can be excluded by an appropriately worded term in the trust instrument without
express limitation on the scope of the exemption clauses.

(iii) The “irreducible core” in Armitage v Nurse:
The case of Armitage v Nurse (1998) is recognized as the settled law on exemption

clauses. In this case, there was an exemption clause included in the trust instrument
protecting the trustee from all loss or damage attributable to him “unless such loss or
damage shall be caused by his own actual fraud”. In short, the trustee is exempted from all
liabilities for his wrongful actions or inactions short of actual fraud on his part leading to loss
and damage to the value of the trust.

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The Court of Appeal had to decide whether or not such a broadly worded exclusion
clause should be allowed. In the end, it was held that such a clause was indeed a valid one.
Millett LJ found that “no matter how indolent, imprudent, lacking in diligence, negligent or
wilful he may have been, so long as he has not acted dishonestly”, the trustee’s liability will
be exempted by the use of such an exemption clause in the trust instrument. In short, the
trustee will even be exempted from gross negligence on his part leading to loss and damage
to the trust.

That being said, Millett LJ argued that the trustee’s duty to act loyally, honestly, and
in good faith formed “an irreducible core” set of trust obligations, the breach of which could
not be relieved by any exemption clause. He then said that there is NO exemption if the
trustee acted dishonestly, in disloyalty or in bad faith. To give an example, a reckless breach
on the part of the trustee (i.e. where the trustee knowingly takes risks with the
beneficiaries’ interests) would amount to the trustee acting dishonestly or in disloyalty. This
includes cases where the trustee deliberately undertakes a breach knowing that he or she
could rely on the exemption clause to get himself or herself off the hook if things should go
wrong. Therefore, there will be no exemption for such reckless breaches as they violate the
“irreducible core” of duties above.

Finally, the test for “dishonesty” was a SUBJECTIVE ONE – i.e. if the trustees act “in
good faith and in the honest belief that they are acting in the interest of the beneficiaries
their conduct is not fraudulent” (per Millett LJ). Even if the trustee knew that he was acting
in a clear breach of trust, so long as he or she honestly believed that this was in the
beneficiaries’ best interests, the trustee’s personal liability will be exempted by the broadly
worded clause.

(iv) Professional trustees in Walker v Stones:

In the case of Walker v Stones (2001), the Court of Appeal introduced an OBJECTIVE
TEST for dishonesty in situations where the trustee is paid for his or her services. The test,
according to Slade LJ, is whether “the belief, though actually held, is so unreasonable that,
by any objective standard, no reasonable solicitor trustee could have thought that what he
did… was for the benefit of the beneficiaries”.

In other words, if the trustee committed a breach of trust, believing that he was
acting in the best interests of the beneficiaries, but that belief was so unreasonable that no
professional trustee could reasonably have held it, the courts will conclude that the former
was acting in a dishonest manner. This would result in setting the professional trustee’s act
outside the scope of the exemption clause allowable in Armitage above as a dishonest
trustee would be in violation of the “irreducible core of duties”.

Another point that was raised in Walker was that perhaps an exemption clause could
relieve a trustee of a ‘one-off’ breach if the trustee honestly believed that he or she was
acting in the best interests of the beneficiaries, but a consistent intentional disregard of the
trust terms should not be allowed. The argument is that should such persistent breaches be

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tolerated, they would amount to allowing the trustee to “re-write” the trust. Should the
professional trustees agree that such a “re-write” is desirable for the best interests of the
beneficiaries, the proper procedures for varying the trust should be followed (i.e. the
consent of the beneficiaries should be sought and the trust instruments should be formally
amended).

While there is no doubt that the Court of Appeal in Walker is applying a more
stringent requirement on professional trustees with regards to exemption clauses, it is
submitted that this is necessary. After all, professional trustees are paid for their services
and are usually entrusted with large amounts of public funds/properties.

(v) Other challenges to Armitage v Nurse:

It should be noted that Walker was not the only attempt to more strictly monitor
exclusion clauses for trustees following the controversial decision of Armitage v Nurse. The
Law Commission published in 2003 a consultation paper proposing that any exemption
clause purporting to relieve a trustee of liability for negligence or dishonesty would be
invalid at law. However, after lengthy consultations, it was finally decided in 2006 that no
legislative changes would be recommended (Law Com 301, 2006). The Law Commission's
Report concluded, on the basis of responses received during the consultation process, that
such a statutory provision would be detrimental to the trusts industry because:

 many trustees would be unwilling to operate on such terms because of the
inherently uncertain nature of a trustee's duties;

 trustee indemnity insurance costs would rocket, perhaps to prohibitive levels;
 there would be a rise in defensive trusteeship—with a resulting (further) rise in

operational costs and delays in the exercise of powers and discretions;
 such a provision might encourage litigation and even the growth of "compensation

culture" among beneficiaries, dissipating trust funds;
 fewer professionals and/or organisations would be willing to act as trustees; and
 settlor autonomy would be reduced.

In place of the original proposed reforms in 2003, the 2006 Law Commission’s Report
recommended that the Government should promote the adoption by professional and
regulatory bodies in the trust industry in England and Wales of a model rule of practice
providing that paid trustees or trust draftsmen who propose to include an exoneration
clause in a trust instrument should take reasonable steps to ensure that the settlor is aware
of the meaning and effect of the clause before execution of the deed.

There were further attempts to challenge the broadly worded exclusion clauses
allowed in Armitage in recent cases such as Walbrook v Fattal (2008) and Spread Trustee v
Hutcheson (2011). Both attempts failed and Armitage is upheld instead.

In Walbrook v Fattal (2008), it was argued that as Millett LJ in Armitage stated that
the core duties of a trustee were to act "honestly and in good faith", the two concepts were

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distinct and separate; and that a failure to act in good faith is situated on a spectrum
between negligence and dishonesty. Furthermore, Armitage did not take into account
mistakes or omissions made without good faith which logically should not be excluded as
well. In short, it was an attempt to squeeze in negligence and mistake into Millett LJ’s
“irreducible core” so as to lessen the effect of Armitage. Lewison J rejected all the
arguments and adhered strictly to Armitage and Walker above. Essentially, there is no
change in the law following this decision except that Lewinson J provided a useful definition
of dishonesty in the case of a professional trustee. According to him, one must show a
deliberate breach of trust committed by a professional trustee: (a) who knows that the
deliberate breach is contrary to the interests of the beneficiaries; or (b) who is recklessly
indifferent whether the deliberate breach is contrary to their interests or not; or (c) whose
belief that the deliberate breach is not contrary to the interests of the beneficiaries is so
unreasonable that, by any objective standard, no reasonable professional trustee could
have thought that what he did or agreed to do was for the benefit of the beneficiaries.

Lastly, there were arguments in Spread Trustee v Hutcheson (2011) to the effect
that Millett LJ was wrong in that gross negligence did not negate the “irreducible core” of
duties owed by the trustee. The Privy Council decided (on a majority of 3 to 2), however,
that Millett LJ had been correct in Armitage in that the irreducible core of obligations that a
trustee owes does not require a trustee to act without gross negligence. In other words, the
current law on exoneration clauses received an (indirect) endorsement from the justices of
the Supreme Court (via the Privy Council).

Conclusion:
In conclusion, the law on exemption clauses for trustees remain that of Millett LJ in

Armitage v Nurse. Broadly worded clauses are allowed so long as trustees acted within their
“irreducible core” of duties – i.e. honesty, loyalty and in good faith. Other than the revised
requirements for (objective) reasonableness on professional trustees in Walker v Stones, all
other attempts to revise Armitage have met with failure. This, it is submitted, is on the
policy-based justification of preventing the undesired situation of trustees refusing to take
up trusts obligations because of uncertainties in incurring liabilities. Nevertheless, it should
be noted that such a concern should rightly be balanced against the valid concerns that the
balance is tilted too far towards trustees leaving many settlors and beneficiaries without
remedies so long as professional trustees, following the Law Commission’s guidelines,
clearly explain the scope of exclusion clauses in the trust instruments before all the parties
sign the trust deed.

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*** Additional Question on Tracing

2014 Zone A Question 8

Jeffrey owned and operated a small food and wine shop, and had a separate
bank account for business income and expenses. It was usually overdrawn, and
the overdraft was secured by a registered mortgage of Jeffrey’s house. Every
month, Big Bank paid about £10,000 into that account, which was the total
received from customers who paid with credit cards each month.
Three months ago, Big Bank paid £110,000 into Jeffrey’s account. The amount
due was £10,000, but an extra £100,000 was paid because of a clerical error.
When that payment was made, Jeffrey’s account was overdrawn by £50,000
and so the balance in the account was raised to £60,000 in Jeffrey’s favour.

Jeffrey used £20,000 from that account to buy a new car for his daughter,
Maude.

He used another £30,000 to pay off a long overdue debt to his friend Walter,
who was surprised and asked Jeffrey where he got the money. Jeffrey said,
“Somebody made a big mistake. They’ll be wanting their money back soon, so
you better take it while you can.” Walter paid the £30,000 into his bank
account, raising the balance to £40,000. He then used £10 from that account
to buy a lottery ticket, which turned out to be a winning ticket worth £100,000.
Walter paid that money into that same account.

Big Bank recently discovered its mistake and wants its £100,000 back, but
Jeffrey is now bankrupt. Advise Big Bank whether it has any claims to Jeffrey’s
house, Maude’s car, and Walter’s bank account (which now has a balance of
£120,000)?

Suggested Solution:

1) Jeffrey is a constructive trustee of the 100k mistakenly paid to him by Big Bank (Chase
Manhattan v Israel British Bank). Note however that Lord Browne-Wilkinson criticised the
"unjust enrichment" approach of Chase Manhattan in Westdeutsche Landesbank v
Islington. According to him, Jeffrey would only become a constructive trustee at the point
when he had knowledge of the bank error. His wrongdoing would therefore trigger a
"remedial constructive trust" in favour of Big Bank. This will be important for equitable
tracing rules to be applied here. That being said, Millett J suggested in El Ajou v Dollar Land
Holdings that the absence of a fiduciary relationship between the parties would not be a bar
to applying the rules of equitable tracing in order to recover property for the innocent
victim.

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2) No point suing Jeffrey for personal claims since he is bankrupt. Also, Maude and Walter
had no actual knowledge of Jeffrey's wrongdoing (although it could be argued that Walter
was reckless as Jeffrey did indicate that he received the money because of someone else's
mistake). The question, however, was really about tracing directly so we will deal with that
point.
3) 100k was mixed with 10k of money rightfully belonging to Jeffrey. Question is, which of
the money was used for Jeffrey's mortgage, Maude's car and the transfer to Walter? This is
a situation involving a wrongdoer (Jeffrey) and a victim (Big Bank) so the equities are not
equal. Re Oatway and Foskett v McKeown held that Big Bank would get to "cherry-pick" the
best available options. Big Bank is advised to argue that the 50k (mortgage), 20k (car) and
30k (Walter) were all from the 100k mistakenly paid to Jeffrey. This would allow Big Bank to
trace into all 3 properties.
4) Jeffrey's house = subrogation of mortgagee's rights (Boscawen v Bajwa).
5) Maude was a donee, not bona fide purchaser. Therefore, Big Bank should be able to trace
its interests into Maude's car (Foskett v McKeown).
6) Walter would try to argue that he was entitled to receive payment of debt from Jeffrey. In
other words, Walter would try to argue that he is a bona fide purchaser (i.e. he provided
consideration by giving Jeffrey a loan earlier). This would be unlikely to work as Walter had
NOTICE of Jeffrey's misuse of money mistakenly paid to him. There is a case for this - Pilcher
v Rawlins (1872).
The 30k paid to Walter was then mixed in with Walter's own 10k.
Whose money was used to pay for the 10 pound lottery ticket?
Walter's notice would only deny him the right to be a bona fide purchaser. However, such
notice is not sufficient to be "knowledge" (under Re Montagu). Walter would therefore be
an "innocent" recipient. This would then be a situation of tracing between "innocents".
The general rule would be FIFO. Should that be so, Walter's money was deposited first and
the lottery ticket would therefore have been bought with Walter's own money.
That being said, Big Bank would argue that since it was a deposit account, pari passu should
be used instead (following the COA's guidelines in Barlow Clowes v Vaughan).
This would mean the 10 pound lottery ticket was jointly contributed by Big Bank (3/4) and
Walter (1/4). Big Bank would therefore be entitled to trace into 3/4 of the 100,000 lottery
winnings (i.e. 75,000) - following Foskett v McKeown.

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*** Most recent 2016 Exam Questions (on Breach of Trusts):

2016 Zone A Question 1

In Williams v Central Bank of Nigeria (2014), Lord Sumption said that dishonest
assistants and knowing recipients are not ‘true trustees’.

To what extent, if at all, do you agree with this statement?

2016 Zone B Question 7 (similar type of question)

Should personal liability for the receipt of assets transferred in breach of trust depend on the fault of the
recipient, and if so, what degree of fault should be required?

Answer Outline (2016 Zone A Question 1):

Introduction

- The question calls for an evaluation of the view of Lord Sumption in Williams v Central Bank
of Nigeria (2014) about the liabilities of 3rd party inter-meddlers with trusts. In that case, the
Supreme Court held that a Bank that had received funds alleged to have been transferred in
breach of trust should not face claims by a beneficiary of the trust for dishonest assistance
or knowing receipt because such claims were statute barred under s.21(3) Limitation Act
1980.

- The discussion below is a detailed assessment of the correctness of Lord Sumption’s
statements within the context of Lord Millett’s categorisations of “constructive trustees” in
the landmark case of Paragon Finance v Thakerar (1999).

Law

- Why do constructive trusts arise?
- Definitions:

o “A constructive trust is created by a transaction between the trustee and the cestui
que trust … whenever the trustee has so conducted himself that it would be
inequitable to allow him to deny to the cestui que trust a beneficial interest …” (per
Lord Diplock in Gissing v Gissing (1971))

o “A constructive trust is an implied trust created by the courts when it is
unconscionable for a defendant with the legal title to property to claim that
property (or some part) beneficially. This type of trust attaches to specific property,
held by a person in circumstances where it would be inequitable to allow him to
assert full beneficial ownership of the property.” (Mohamed Ramjohn, “Unlocking
Trusts”)

- From the above definitions, it is clear that the courts utilise the mechanism of “constructive
trusts” to prevent a legal title holder to property an opportunity to absolute ownership of
the property when it is “inequitable” for him to do so.

- When would it be “inequitable” for an owner to assert full beneficial ownership of
the property?

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- In Paragon Finance v Thakerar (1999), Lord Millett distinguishes two categories of
constructive trusts:
o CATEGORY ONE: “The first covers those cases where the defendant, though not
expressly appointed as trustee, has assumed the duties of a trustee by a lawful
transaction which was independent of and preceded the breach of trust and is not
impeached by the plaintiff… [These] are treated in the same way as express trusts
and… claims against the trustees were not barred by the passage of time.”
 E.g. McCormick v Grogan – a case of secret trust
 E.g. Rochefoucauld v Boustead – D agreed to buy property for C but trust
improperly recorded
 E.g. Pallant v Morgan – D sought to keep for himself property which C
trusted him to buy for both of them (i.e. co-ownership of property)
 E.g. Boardman v Phipps – D made “secret profits” as director of company;
made to hold the profits on constructive trust for the company
o CATEGORY TWO: “The second covers those cases where the trust obligation arises
as a direct consequence of the unlawful transaction which is impeached by the
plaintiff… [These] were not in reality trusts at all, but merely a remedial
mechanism by which equity gave relief for fraud.”
 E.g. AG for Hong Kong v Reid – D implicated for corruption/fraud (affirmed
to be the 2nd category in Sinclair Investments v Versailles Trade Finance
(2011)).

- To summarise:
o CATEGORY ONE:
 Lawful transaction BUT breach of fiduciary duty
 TRUE Constructive Trust / Proprietary Claim
 NOT barred by Limitation Act 1980 (s.21(1) applies)
o CATEGORY TWO:
 Unlawful transaction (e.g. bribery or fraud)
 Equitable Remedy / “Remedial” Constructive Trust
 Time-barred (6 years) – s.21(3) Limitation Act 1980 applies.

Arguments

- Facts of Williams’ case:
o Dr Williams alleges that he was the victim of a fraud, dating to 1986, in which he was
induced to act as a guarantor of a fraudulent transaction to import food into Nigeria.
Under this transaction, Williams paid $6,520,190 to Mr Reuben Gale (an English
solicitor) that was to be held on trust pending the release of certain funds in Nigeria.
o It is alleged that Gale, in fraudulent breach of trust (knowing that the funds had not
been released to Williams in Nigeria), transferred $6,020,190 to the Central Bank of
Nigeria and personally retained the remaining $500,000.
o Williams brought a claim against the Bank on the basis that the Bank was a
constructive trustee, it “dishonestly assisted” with Gale’s fraud and it “knowingly
received” funds in breach of trust.

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- The Supreme Court held that:
o The interpretation of the meaning of a “trustee” is dealt with in s.68(1)(17) Trustee
Act 1925 – namely, express trustees, trustees de son tort and constructive trustees.
o The Court held that a constructive trust of the kind alleged against the Bank was
NOT a “true trust” (which was covered under s.21(1)(a)).
o According to Lord Sumption, the “constructive trust” was instead “imposed by
equity on strangers to the trust in the exercise of its remedial jurisdiction” and it
was merely a basis for granting equitable relief and the Bank should therefore not
be held to the same standards as a “true trustee” (i.e. CATEGORY TWO above).
o On this basis, the Court held that the Bank was therefore not a “true trustee” for the
purposes of the limitation exception at s.21(1)(a). S.21(3) applies instead to bar the
personal action against the Bank.

- Assessment of the decision:
o The Supreme Court’s decision has resolved a long-standing uncertainty regarding
limitation periods for claims which involve dishonest assistance or knowing receipt.
The court has also approved previous cases in confirming that dishonest assistants
and knowing recipients – often described as “constructive trustees” – are not truly
trustees.
o The decision in Williams, it is argued, is in line with FHR European Ventures v
Mankarious (2013) where Lord Sumption approved previous authorities confirming
that dishonest assisters and knowing recipients – while they may be labelled
“constructive trustees” for the purposes of their liability to account – are not truly
trustees at all.
o Problem – the decision did not clearly distinguish between dishonest assistants and
knowing recipients with regards to custodianship of the property in question. To put
it in another way, if the claimant had taken the case within the 6-year limitation
period, does it mean that he would then be able to make a personal claim from the
Bank as either a dishonest assistant or a knowing recipient? In most situations, the
dishonest assistant does not have custody over the trust property – unlike the
knowing recipient. Does this mean that a Category Two “constructive trust” can
arise on a personal level whether or not a person has custody over the property?

Conclusion

- Following Williams’ case, it is now clear that any personal claims against dishonest assistants
or knowing recipients must be brought within 6 years to be effective.

- This is a much-welcomed clarification of the law and it further demonstrates that the courts
are now more careful/precise with their usage of “constructive trusts” compared to the
situation before Paragon Finance.

- Another implication of the decision is that liabilities for “constructive trusts” can arise
whether or not the person has custody of the trust property.

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2016 Zone B Question 1

Is it possible to include a clause in a trust that exempts the trustees from all
liability for breach of trust so long as they have acted honestly? Should it be?

2016 Zone A Question 8 (similar type of question)

To what extent is it appropriate that trustees can find themselves strictly liable for breach of trust even when
they have acted honestly and reasonably?

Answer Outline (2016 Zone B Question 1):

Introduction

- The discussion of the effect of exemption clause on intentional breach of trust can be
divided into four parts:
o which type of liability may be exempted
o the application of the Trustee Act 2000
o whether there is “an irreducible core of trustee obligations” from which no
exemption is possible (per Millett LJ in Armitage v Nurse (1998))
o the more stringent approach towards professional trustees in Walker v Stones
(2001)

Law

- Types of liability from which exemption is possible:
o A trustee owes duties under the trust. Should the trust duties be breached, the
liability of the trustee is strict.
o A breach of trust occurs when the trustee:
 Carries out an unauthorised transaction resulting in losses to the trust fund;
[i.e. MISFEASANCE] or
 Negligently manages/invests trust property – resulting in losses to the trust
fund [i.e. NONFEASANCE].
o In general, a trustee will be personally liable to restore the losses to the value of the
trust with money from his or her own pockets. That being said, a trust instrument
may contain a clause, which exempts trustees from personal liability for breach of
trust. An exemption clause, if effective, will thereby exempt the trustee from his or
her liability to restore the trust with his or her own money.
o The benefit of such clauses is that they encourage trustees who would not otherwise
be prepared to accept the risky position of trustee to do so, and allow them to make
decisions with appropriate speed and without undue caution—in short they provide
protection for trustees in an increasingly uncertain and hostile climate.
o Additionally, s.21(3) of the Limitation Act 1980 sets down the limitation period for
actions for breach of trust to six years from the date on which the cause of action
accrued. This was recently considered in the case of Williams v Central Bank of
Nigeria (2014) where the Supreme Court concluded that 3rd party liabilities for

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“knowing receipt” and “dishonest assistance” are subjected to the limitation period
above. While the traditional view of the courts is that such wrongdoing 3rd parties
are regarded as ‘constructive trustees’ for the wronged beneficiaries, the Supreme
Court argued that they are only personally liable as ‘constructive trustees’ under the
remedial type (i.e. the second category) defined by Lord Millett in Paragon Finance
v Thakerar (1999). The decision in Williams, it is argued, is in line with FHR
European Ventures v Mankarious (2013) where Lord Sumption approved previous
authorities confirming that dishonest assisters and knowing recipients – while they
may be labelled “constructive trustees” for the purposes of their liability to account
– are not truly trustees at all.
o There is, however, no exemption from proprietary liability, for if the trustee is
holding a trust right or its traceable proceeds in his hands, equity will simply require
him to hold that asset or proceeds on trust for the wronged beneficiaries.

- Trustee Act 2000:
o According to the Trustee Act 2000, there is a prima facie statutory duty of care
requiring trustees to exercise such care and skill as is reasonable under the
circumstances, but in Schedule 1, Paragraph 7 of the Act (dealing with the exclusion
of said duty of care), the duty can be excluded by an appropriately worded term in
the trust instrument without express limitation on the scope of the exemption
clauses.

- The “irreducible core” in Armitage v Nurse:
o The case of Armitage v Nurse (1998) is recognized as the settled law on exemption
clauses. In this case, there was an exemption clause included in the trust instrument
protecting the trustee from all loss or damage attributable to him “unless such loss
or damage shall be caused by his own actual fraud”. In short, the trustee is
exempted from all liabilities for his wrongful actions or inactions short of actual
fraud on his part leading to loss and damage to the value of the trust.
o The Court of Appeal had to decide whether or not such a broadly worded exclusion
clause should be allowed. In the end, it was held that such a clause was indeed a
valid one. Millett LJ found that “no matter how indolent, imprudent, lacking in
diligence, negligent or wilful he may have been, so long as he has not acted
dishonestly”, the trustee’s liability will be exempted by the use of such an exemption
clause in the trust instrument. In short, the trustee will even be exempted from
gross negligence on his part leading to loss and damage to the trust.
o That being said, Millett LJ argued that the trustee’s duty to act loyally, honestly, and
in good faith formed “an irreducible core” set of trust obligations, the breach of
which could not be relieved by any exemption clause. He then said that there is NO
exemption if the trustee acted dishonestly, in disloyalty or in bad faith. To give an
example, a reckless breach on the part of the trustee (i.e. where the trustee
knowingly takes risks with the beneficiaries’ interests) would amount to the trustee
acting dishonestly or in disloyalty. This includes cases where the trustee deliberately
undertakes a breach knowing that he or she could rely on the exemption clause to
get himself or herself off the hook if things should go wrong. Therefore, there will be
no exemption for such reckless breaches as they violate the “irreducible core” of
duties above.

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o Finally, the test for “dishonesty” was a SUBJECTIVE ONE – i.e. if the trustees act “in
good faith and in the honest belief that they are acting in the interest of the
beneficiaries their conduct is not fraudulent” (per Millett LJ). Even if the trustee
knew that he was acting in a clear breach of trust, so long as he or she honestly
believed that this was in the beneficiaries’ best interests, the trustee’s personal
liability will be exempted by the broadly worded clause.

- Professional trustees in Walker v Stones:
o In the case of Walker v Stones (2001), the Court of Appeal introduced an OBJECTIVE
TEST for dishonesty in situations where the trustee is paid for his or her services. The
test, according to Slade LJ, is whether “the belief, though actually held, is so
unreasonable that, by any objective standard, no reasonable solicitor trustee could
have thought that what he did… was for the benefit of the beneficiaries”.
o In other words, if the trustee committed a breach of trust, believing that he was
acting in the best interests of the beneficiaries, but that belief was so unreasonable
that no professional trustee could reasonably have held it, the courts will conclude
that the former was acting in a dishonest manner. This would result in setting the
professional trustee’s act outside the scope of the exemption clause allowable in
Armitage above as a dishonest trustee would be in violation of the “irreducible core
of duties”.
o Another point that was raised in Walker was that perhaps an exemption clause
could relieve a trustee of a ‘one-off’ breach if the trustee honestly believed that he
or she was acting in the best interests of the beneficiaries, but a consistent
intentional disregard of the trust terms should not be allowed. The argument is that
should such persistent breaches be tolerated, they would amount to allowing the
trustee to “re-write” the trust. Should the professional trustees agree that such a
“re-write” is desirable for the best interests of the beneficiaries, the proper
procedures for varying the trust should be followed (i.e. the consent of the
beneficiaries should be sought and the trust instruments should be formally
amended).
o While there is no doubt that the Court of Appeal in Walker is applying a more
stringent requirement on professional trustees with regards to exemption clauses, it
is submitted that this is necessary. After all, professional trustees are paid for their
services and are usually entrusted with large amounts of public funds/properties.

Arguments

- Should trustees be allowed to be exempted from all breaches of trust so long as they acted
honestly?
o It should be noted that Walker was not the only attempt to more strictly monitor
exclusion clauses for trustees following the controversial decision of Armitage v
Nurse. The Law Commission published in 2003 a consultation paper proposing that
any exemption clause purporting to relieve a trustee of liability for negligence or
dishonesty would be invalid at law. However, after lengthy consultations, it was
finally decided in 2006 that no legislative changes would be recommended (Law
Com 301, 2006). The Law Commission's Report concluded, on the basis of responses

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received during the consultation process, that such a statutory provision would be
detrimental to the trusts industry because:

 many trustees would be unwilling to operate on such terms because of the
inherently uncertain nature of a trustee's duties;

 trustee indemnity insurance costs would rocket, perhaps to prohibitive
levels;

 there would be a rise in defensive trusteeship—with a resulting (further) rise
in operational costs and delays in the exercise of powers and discretions;

 such a provision might encourage litigation and even the growth of
"compensation culture" among beneficiaries, dissipating trust funds;

 fewer professionals and/or organisations would be willing to act as trustees;
and

 settlor autonomy would be reduced.

o In place of the original proposed reforms in 2003, the 2006 Law Commission’s
Report recommended that the Government should promote the adoption by
professional and regulatory bodies in the trust industry in England and Wales of a
model rule of practice providing that paid trustees or trust draftsmen who propose
to include an exoneration clause in a trust instrument should take reasonable steps
to ensure that the settlor is aware of the meaning and effect of the clause before
execution of the deed.

o There were further attempts to challenge the broadly worded exclusion clauses
allowed in Armitage in recent cases such as Walbrook v Fattal (2008) and Spread
Trustee v Hutcheson (2011). Both attempts failed and Armitage is upheld instead.

o In Walbrook v Fattal (2008), it was argued that as Millett LJ in Armitage stated that
the core duties of a trustee were to act "honestly and in good faith", the two
concepts were distinct and separate; and that a failure to act in good faith is situated
on a spectrum between negligence and dishonesty. Furthermore, Armitage did not
take into account mistakes or omissions made without good faith which logically
should not be excluded as well. In short, it was an attempt to squeeze in negligence
and mistake into Millett LJ’s “irreducible core” so as to lessen the effect of
Armitage. Lewison J rejected all the arguments and adhered strictly to Armitage and
Walker above. Essentially, there is no change in the law following this decision
except that Lewinson J provided a useful definition of dishonesty in the case of a
professional trustee. According to him, one must show a deliberate breach of trust
committed by a professional trustee: (a) who knows that the deliberate breach is
contrary to the interests of the beneficiaries; or (b) who is recklessly indifferent
whether the deliberate breach is contrary to their interests or not; or (c) whose
belief that the deliberate breach is not contrary to the interests of the beneficiaries
is so unreasonable that, by any objective standard, no reasonable professional
trustee could have thought that what he did or agreed to do was for the benefit of
the beneficiaries.

o Lastly, there were arguments in Spread Trustee v Hutcheson (2011) to the effect
that Millett LJ was wrong in that gross negligence did not negate the “irreducible
core” of duties owed by the trustee. The Privy Council decided (on a majority of 3 to
2), however, that Millett LJ had been correct in Armitage in that the irreducible
core of obligations that a trustee owes does not require a trustee to act without

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gross negligence. In other words, the current law on exoneration clauses received an
(indirect) endorsement from the justices of the Supreme Court (via the Privy
Council).

Conclusion

- In conclusion, the law on exemption clauses for trustees remain that of Millett LJ in
Armitage v Nurse.

- Broadly worded clauses are allowed so long as trustees acted within their “irreducible core”
of duties – i.e. honesty, loyalty and in good faith.

- Other than the revised requirements for (objective) reasonableness on professional trustees
in Walker v Stones, all other attempts to revise Armitage have met with failure.

- This, it is submitted, is on the policy-based justification of preventing the undesired situation
of trustees refusing to take up trusts obligations because of uncertainties in incurring
liabilities.

- Nevertheless, it should be noted that such a concern should rightly be balanced against the
valid concerns that the balance is tilted too far towards trustees leaving many settlors and
beneficiaries without remedies so long as professional trustees, following the Law
Commission’s guidelines, clearly explain the scope of exclusion clauses in the trust
instruments before all the parties sign the trust deed.

3 Certainties + Private Purpose Trusts

2014 Zone B Question 1
“How is the duty of making a responsible survey and selection to be carried out
in the absence of any complete list of objects? This question was considered by
the Court of Appeal in Re Baden (No 2) [1973] Ch 9. That case was concerned
with … a discretionary trust and not a mere power; but plainly the
requirements for a mere power cannot be more stringent than those for a
discretionary trust… The trustee must not simply proceed to exercise the
power in favour of such of the objects as happen to be at hand or claim his
attention.” (Megarry VC in Re Hay’s Settlement Trusts, 1982)
Discuss.

Suggested Answer (I-L-A-C):
Introduction:

The question calls for a critical discussion of the tests of object certainty in trusts and
powers of appointment. Following the direction of Lord Langsdale in Knight v Knight (1840),

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the three certainties of intention, subject-matter and objects must be satisfied for there to
be a valid trust. Over the years, the courts have developed various tests for the certainty of
objects in fixed trusts, discretionary trusts, and powers of appointment. The discussion
below will survey the different tests developed by the courts and consider their applicability
specifically to powers of appointment (as was the situation in the case of Re Hay’s ST
(1982)).

Law:

The requirements of certainty in both trusts and powers have to do with two main
reasons, namely:

1. To distinguish between situations where the testator really intended to impose a
mandatory trust duty (upon trustees) or merely assigning a power of appointment to
a power-holder.

2. To ensure that the property is correctly identified and is dealt with in accordance
with the wishes of the testator. It must be clear to the trustees or power-holders
themselves exactly what their duties or powers are. The trustees or power-holders
should also be clear as to whom the testator intended to benefit (namely, the
objects for the trusts/powers).

As a trust involved mandatory duties imposed upon the trustees, the courts have
always held that a stricter test is required before objects-certainty is satisfied. In IRC v
Broadway Cottages (1955), the House of Lords held that for both fixed and discretionary
trusts, the “Complete-List Test” must be applied to determine objects-certainty. This means
that the trustee bears the burden to show that conceptual certainty and evidential certainty
are both certified. Conceptual certainty would not be satisfied if there is uncertainty or
vagueness in defining the class or classes of individuals who comprise the objects. For
instance, “good citizens” is too vague – C.T. Emery gave that as an example of a hopelessly
wide concept. As for evidential certainty, the trustees also bear the burden to list down
every single individual who is a member of the class of objects. For instance, “testator’s
children” – trustee must list down every single son and daughter of the testator. There is,
however, no necessity to physically locate all of the objects (i.e. whereabouts certainty is
not required) as the trustees may apply to the courts for directions on distributing the trust
properties/rights should any the location of any the objects not be ascertainable (this is
known as a Benjamin Order from the case of Re Benjamin (1902)).

On the other hand, the test for certainty of objects in relation to powers has always
been whether the power-holder (or donee of the power) may say with certainty that any
given individual is or is not a member of the class of objects. This is known as the “Any-
Given-Postulant Test” or the “Is-Or-Is-Not Test” – as laid down by Harman J in Re
Gestetner’s Settlement (1953). As can be seen from the requirement, the power-holder
must be able to show conceptual certainty in order to determine the boundaries of the class
so that it is possible to decide whether any given individual is or is not a member of the
class. However, unlike the Complete List Test above, there is no requirement that the
power-holder be able to draw up a comprehensive list of all the objects (i.e. evidential
certainty need not be satisfied by the power-holder). This was re-affirmed by the House of
Lords in the case of Re Gulbenkian’s Settlement (1970).

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Following the House of Lords’ decision in McPhail v Doulton (1971), the “Any-Given-
Postulant Test” is also now applied to discretionary trusts. This means that the “Complete
List Test” only applies to objects-certainty for fixed trusts, and the “Any-Given-Postulant
Test” applies to objects-certainty for both discretionary trusts and powers. The House of
Lords’ decision in McPhail was re-affirmed by the Court of Appeal in Re Baden (No. 2)
(1973) where Sachs LJ, Stamp LJ and Megaw LJ suggested different approaches as to how
the “Any-Given-Postulant” test should be carried out for discretionary trusts.

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Arguments:

Despite the broad guidelines given in the cases above, it is submitted that a lot of
uncertainties remain as to how precisely the “Any-Given-Postulant Test” should be carried
out for discretionary trusts and powers.

To begin with, Lord Wilberforce in McPhail laid down three limitations in respect of
the “Any-Given-Postulant Test”: (i) conceptual certainty is required (for both trust/power);
(ii) evidential certainty is also required but this point alone will not result in the trust/power
failing; and (iii) the trust must be administratively workable (i.e. the class of objects cannot
be so large as to be irrational, too troublesome or too costly for the trustees to carry out the
trust duties).

Harman J’s approach in Re Gestetner (1953) is similar for powers, in that conceptual
certainty is required for objects-certainty for powers. In essence, this means that the test
will be satisfied if the boundaries concerning the identification of the class of objects are
clearly drawn. The problem is that the courts ended up applying a different test altogether
from 1953 to 1970 for objects-certainty in powers! The test applied was the “One-Person
Test” – i.e. whether at least one person clearly fell within the class of objects. Examples
include Re Gibbard (1966) where “old friends” was considered certain for a power because
it was possible to find one person who is an old friend of the testator! This would definitely
fail if the correct conceptual/class certainty test was applied. Thankfully, the House of Lords
rectified the situation in Re Gulbenkian (1970). In that case, Lord Upjohn reiterated the
strict “Any-Given-Postulant Test” against the erroneous approach of the Court of Appeal in
the same case.

While the above authorities should be sufficient to conclude that conceptual or class
certainty is a definite requirement for the “Any-Given-Postulant Test” in both trusts and
powers, a lot of uncertainties prevail as to how the trustees or power-holders should satisfy
evidential certainty. The question is simply this: while we know that the trustees or power-
holders are not required to draw up a comprehensive list of every individual in the class of
objects, how much surveying should the trustees or power-holders carry out before we can
conclude that evidential certainty is satisfied? In other words, is there a duty for the trustees
or power-holders to survey the field and draw up a list of as many possible members of the
class as they can?

In Re Baden (No.2), Sachs LJ gave a very ‘slack’ approach. According to this
approach, all that is required is for the trustee to be able to determine conceptual or
linguistic certainty. The onus to prove evidential certainty is reversed upon the postulant
seeking to prove that he or she is a member of the class of objects. If he or she succeeds in
proving this, he or she is an object of the class (and evidential certainty is discharged).
Failure to convince the trustee would simply mean that he or she is outside the class of
objects. This reversal of burden simply means that the trustee need not care about who
actually shows up bringing proof. The trustee is only concerned about whether the
postulants who actually show up succeed or fail in proving they are members of the class.
The advantage of this test is that it is very easy to carry out and seems to imply that there is

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no real duty upon the trustee to survey the field at all. The disadvantage is that it may end
up contrary to what the testator originally had in mind (i.e. the testator may have had a
larger class of objects in mind that just the postulants who actually show up bringing
evidence).

Stamp LJ, on the other hand, required a very precise and strict approach. The
trustee, according to this approach, must be able to clearly say of any individual that he or
she is either within or outside the class. This would naturally require the trustee to survey
the field widely in order to achieve the required clarity and precision. While he was careful
to state that the trustee need not comprehensively list down every object of the class, in
practice, it is argued that the wide duty to survey the field here is really not that much
different from the “Complete List Test” above. While this approach is clearer a fairer one
compared to that of Sachs LJ’s above, it is submitted that it is too similar to the “Complete
List Test” to be of any use.

Megaw LJ, in the same case, proposed instead a ‘substantive numbers’ approach.
According to him, all that is required is that the trustee can say for certain that a substantial
number of individuals belong within the class of objects, and it is immaterial that it is not
possible to say with certainty that other objects are within or outside the class of objects.
The advantage of this approach is that it appears to escape the difficulties of strictly
satisfying conceptual or linguistic certainty. The disadvantage is that the approach is
questionable. After all, when examined critically, this test is really not that different from
the “One-Person Test” that has been rejected in Re Gulbenkian. Both tests dispenses with
the need for conceptual or class certainty and collapses the test into a mere ‘numbers
game’ (one person satisfying the test; or in this case, a “substantial number” of persons!).

In Re Hay’s ST (1982), Megarry VC argued that the suggested approaches in Re
Baden (No. 2) above are specifically for discretionary trusts rather than for powers.
According to him, the test for objects-certainty in powers should not be more stringent than
in discretionary trusts. This implies that the duty of power-holders to survey the field should
logically be lesser than that of trustees. The problem with the ‘guidance’ provided by
Megarry VC is that it is very vague and uncertain. How much more stringent is the duty to
survey the field in a discretionary trust, as compared to the situation of a power? It appears
that the courts seem to prefer a case-by-case approach on this question rather than to lay
down clear and precise rules on the scope of said duty.

Finally, it should be noted that Re Hay’s ST involved a HYBRID or INTERMEDIATE
POWER. Such a power would allow the power-holder to appoint anyone in the world with
the exception of people in a restricted class – e.g. “John should choose anyone in the world
except for himself, his spouse and his next-of-kin.” Megarry VC carefully noted how such an
intermediate power would be valid but an ‘intermediate trust’ would fail for administrative
unworkability. It is argued that his distinction here is a guide for us to distinguish between
the scopes of the duty to survey the field in a discretionary trust compared to the same duty
in a power of appointment. As a discretionary trust involved a mandatory duty, an
‘intermediate trust’ would include practically every person in the world (excluding the

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individuals in the restricted/excluded class). This would fall within what Lord Wilberforce (in
McPhail) meant when he said that “a class so large… as to not resemble a class at all” would
be too uncertain and such a trust would fail for administrative unworkability. Here, it is
argued that the reason why an intermediate power would never fail for administrative
unworkability is because a power of appointment is entirely optional – i.e. the power-holder
cannot be compelled to exercise his/her power. Therefore, it should more accurately be said
that there is no duty to survey the field at all within a power. However, should the power-
holder choose to exercise his/her power, he/she simply proceeds to exercise the power in
favour of such of the objects as happen to be at hand or claim his/her attention.

Conclusion:
In conclusion, we can confidently say that the “Any-Given-Postulant Test” is the

appropriate test for objects-certainty in both discretionary trusts and powers following the
decisions of McPhail/Re Baden. While there are still arguments as to how the test is to be
carried out in practice (note the different approaches of the judges in Re Baden (No.2)), it is
safe to say that the problems are largely academic. The fact is, it should be noted that there
has not been another appeal to the higher courts for clarification for more than forty years
since Re Baden (No.2). That would imply that trustees in the real world have been applying
one of the suggested approaches (or a combination of more than one suggested approach)
in order to administer discretionary trusts. The same implication would also apply to
situations involving powers of appointment following Re Hay’s ST. In fact, it could be said
that there would be far less problems with powers since they are generally non-justiciable
(and non-compellable) in the first place.

2013 Zone A Question 2
Explain the nature and validity of the following clauses in Arnold’s will
concerning the distribution of his residuary estate:
(a) my trustees may distribute up to £100,000 as they see fit among alumni of
the University of London who live in countries that are struggling with disease,
poverty, or armed conflict;
(b) my trustees shall distribute one-third of my residuary estate as they see fit
among my friends and their immediate families;
(c) the remainder of my estate, if any, shall be distributed equally among all
current and former members of the English Wine Appreciation Society.

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Shortly before Arnold died, the records of the English Wine Appreciation
Society were destroyed in a fire. The secretary of the society said that it was
impossible to compile an accurate list of current and former members.

Suggested Solution:

The discussion below analyses the three bequests in Arnold’s will against the
requirements of the three certainties as set down by Lord Langsdale in Knight v Knight
(1840).

(a) £100,000 among alumni of UOL:

A proper construction of the words in Arnold’s will would suggest that Arnold
intended to confer upon his trustee a power of appointment. As the trustees MAY
DISTRIBUTE UP TO £100,000 (presumably with any undistributed sums going to the 3rd
disposition in (c) below for the English Wine Appreciation Society), this appears to be a ‘gift-
over in default of distribution’ clause. With that, it is argued that the first bequest cannot be
a trust obligation but merely a power of appointment. As the power was conferred upon
Arnold’s trustees, it would therefore be a fiduciary power of appointment. This means that
Arnold’s trustees are cannot be compelled to exercise the power – but merely to consider
from time to time to exercise it. Also, should they decide to exercise the power, it must be
exercised in good faith as befits their fiduciary office.

There is no issue with subject-matter. The trustees are empowered to distribute up
to £100,000 of Arnold’s residuary estate.

The real issue here seems to be certainty of objects of the power. Following Re
Gulbenkian’s Settlement (1970), the test for certainty of objects for a power of
appointment is the ‘any-given-postulant’ test from Re Gestetner’s Settlement (1953). The
House of Lords in McPhail v Doulton (1971) also confirmed that the test for certainty for
discretionary trusts and powers of appointment is the same one. This means that while the
trustees need not compile a list of every individual fits into Arnold’s intended class of
objects, they must still be able to ascertain with certainty whether or not a particular
individual is or is not a member of the class that Arnold had in mind (i.e. Conceptual
Certainty is required). In this case, it means that the trustees must be able to make out what
Arnold meant by “alumni of the University of London who live in countries that are
struggling with disease, poverty, or armed conflict”. While it may be possible to identify
some countries which are clearly struggling with disease, poverty, or armed conflict (as well
as certain countries where such issues clearly do not exist), there may yet be some countries
where it may not be possible to say with certainty whether or not they are struggling with
such issues. All three issues here were given in very general terms – for instance, does
‘struggling with disease’ mean an epidemic, or would a dengue outbreak suffice?, or, would
‘poverty’ mean crippling economic disabilities or mere economic disadvantage?

With that, it is argued that the court may likely invalidate this power of appointment
on the grounds that it failed to satisfy the ‘conceptual certainty’ test above. The question

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remains unanswered whether a power of appointment (whether a mere power of
appointment, or that of a fiduciary nature, as in the present case) should be required to
satisfy the same high standards of certainty as that required for discretionary trusts. After
all, in the past, the courts were willing to allow for such powers of appointment to be
validated so long as it was possible to ascertain at least one person satisfying what the
testator had in mind (as was the case in Re Gibbard (1966) and Re Allen (1953)). Should that
‘one-person test’ be applied (or even the test proposed by Megaw LJ in Re Baden (No. 2)
(1972) – where a ‘substantial number of persons’ be identified), the above power may be
valid. Following Re Gulbenkian, however, it does appear that powers will be invalidated if
the class/conceptual certainty test cannot be satisfied. Barring a possible restatement of the
law by the courts, it is argued that the power of appointment in (a) will fail for lack of object
certainty.

(b) One-third of residuary estate among my friends and their immediate families:

As for Arnold’s second bequest, it is clear on the words in the will that he intended
to create a mandatory obligation (‘shall’) on his trustees to distribute his property. This
would therefore be a trust (Lambe v Eames). Furthermore, as the trustees have also been
given a dispositive discretion (‘as they see fit’), it would be a discretionary trust.

Once again, the subject matter of the trust is clearly defined – i.e. one-third of
Arnold’s residuary estate.

As above, the test for certainty of objects in a discretionary trust would be the ‘any-
given-postulant’ test in McPhail v Doulton (1971). The problem lies with the fact that the
word ‘friends’ is uncertain.

While there may be several older decisions upholding the certainty of ‘friends’ (for
example, in Re Gibbard (1966), “old friend” was upheld for a power of appointment by
Plowman J; in Re Coates (1955), “forgotten friend” was also upheld for a power of
appointment; and in Re Lloyd’s Trust Instruments (1970), Megarry J specifically defined
“old friends” as “longstanding friends”), these decisions no longer appear to be authoritative
for two reasons:

I. They involve powers of appointment, not discretionary trusts. Despite the
obiter statements of Upjohn J in Re Sayer (1957) implying that the tests are
really the same for both powers and discretionary trusts, it is argued that
discretionary trusts should be subjected to a more stringent standard
compared to powers. Therefore, it is doubtful that those are authorities for
discretionary trusts in the first place.

II. The above decisions does not even appear to be authoritative for powers of
appointment following Re Gulbenkian (1970). After all, they were all decided
using the ‘one-person test’ for object certainty. That test has been expressly
overruled by the House of Lords in Re Gulbenkian.

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Furthermore, in Re Barlow’s Wills Trust (1979), Browne-Wilkinson J clearly
explained that ‘friends’ would fail for object-certainty in a discretionary trust. In that case,
the bequest was valid because Browne-Wilkinson J construed it to be a situation involving
‘a series of individual gifts with a condition precedent’.

With all the above arguments, it is argued that ‘friends and their immediate families’
would fail for conceptual uncertainty in a discretionary trust.

(c) Remainder for members of English Wine Appreciation Society:
As for Arnold’s third bequest, it is clear that he intended to create a mandatory trust

obligation (‘shall’) upon his trustees without allowing them any dispositive discretion
(‘distributed equally among all current and former members…’). This would therefore be a
fixed trust.

The remainder of Arnold’s estate is ascertainable. Hence, there are no issues with
subject-matter certainty.

The problem here, as with the two bequests above, concerns object certainty. Firstly,
it should be noted that the test for certainty of objects for a fixed trust is the ‘complete list
test’ in IRC v Broadway Cottages (1955). This means that the trustees are obligated to list
every person who fits into Arnold’s intended class – i.e. both Conceptual Certainty and
Evidential Certainty must be satisfied.

Here, it is clear that the problem is not Conceptual Certainty. It is clear that Arnold
intended the class to be made up of all current and former members of the English Wine
Appreciation Society. There are no issues with the ‘concept’ Arnold had in mind. The
problem is therefore with Evidential Certainty as the trustees will not be able to compile an
accurate list of members since the records of the Society have been destroyed.

That being said, it should be noted that Sachs LJ explained in Re Baden (No. 2)(1972)
that trusts should not fail for Evidential Uncertainty. Here, it is submitted that the trustees
need only to exercise a reasonable effort to compile the list to the best of their abilities (for
instance, to advertise for members to present their details). Following that, the trustees
need only to satisfy the court, on a balance of probabilities, that the list compiled is
complete. There is no requirement that the trustees physically locate every single member
(i.e. Whereabouts Certainty is not required). Once the court is satisfied, on a balance of
probabilities, that the list compiled is complete, it may order the distribution of Arnold’s
remainder assets in equal shares to all the persons listed (i.e. a Benjamin Order).

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2013 Zone B Question 7
‘The difficulty with applying the Court of Appeal’s judgment in Hunter v Moss
to any case not on almost identical facts lies in the absence of any clearly
expressed rationale as to how such a trust works in practice. There has not
been unanimity among those courts which have followed Hunter v Moss, nor
among the many academics who have commented upon it, as to the correct
approach. The analysis which I have found the most persuasive is that such a
trust works by creating a beneficial co-ownership share in the identified fund,
rather than in the conceptually much more difficult notion of seeking to
identify a particular part of that fund which the beneficiary owns outright.’
(Briggs J, in Pearson v Lehman Brothers Finance SA (2010)).

Discuss.

Suggested Solution:

The essay below is a discussion of the rules and principles surrounding the
requirement of certainty of subject-matter in a trust. Following Lord Langsdale in Knight v
Knight (1840), a trust will only be valid if it can be shown with sufficient certainty that (i) the
settlor or testator intended to create a trust; (ii) the subject-matter (i.e. the rights or
properties) of the trust is identified (or ascertainable); and (iii) the objects for which the
trust is intended to benefit can be ascertained with certainty.

Once the court is satisfied that the settlor or testator intended to create a trust (i.e.
certainty of intention is satisfied), prima facie a trust will be upheld. However, in order for
such a trust to be properly administered, the court requires that the trustee can clearly
ascertain which rights are to be held on trust (i.e. certainty of subject-matter) and for
whom the trust was intended to benefit (i.e. certainty of objects). Should there be
uncertainties in ascertaining the subject-matter and/or the objects of the trust, the court
may infer that no trust was intended in the first place. In other words, the natural
conclusion is that should the settlor or testator had really intended to create a trust, he or
she would have identified the subject-matter and/or objects of the trust with sufficient
certainty to provide guidance to the trustees (and the court). In Mussorie Bank v Raynor
(1882), for instance, the court concluded that any uncertainty in subject-matter would
result in a reflex action indicating an uncertainty of intention to create the trust in the first
place. In short, if there is uncertainty in the subject-matter (or objects) of a trust, no trust
would be created.

It is for this matter that the courts have always demanded that in order to satisfy
subject-matter certainty, the rights or properties to be held on trust must be either:

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I. identified at the very outset (e.g. the testator has two land titles – the one to
be held on trust is Blackacre, and not Greenacre); or

II. ascertainable by the trustees/court at the time the trust is to be
administered (e.g. the value of the testator’s residuary estate is not known
from the outset but it will be ascertainable at the time the trust is to be
administered).

In order to uphold the above, the courts have devised guidelines in several key cases:

 Palmer v Simmonds (1854) – Should the subject-matter be an indeterminate
quantity of assets, there is no certainty. In this case, the court held that the
words, ‘the bulk of my residuary estate’ is too uncertain.

 Sprange v Barnard (1789) - In this case, the testatrix wanted to create a trust
of whatever assets are left after her husband’s consumption during the
latter’s lifetime. A ‘whatever-is-left’ subject-matter is too uncertain as there
may be nothing left for the trust.

 Re London Wine Shippers (1986) – Where the subject-matter of a trust is a
part of a larger whole, the portion to form the subject-matter must be clearly
ascertained or segregated from the whole. In this case, the wines that were
to be held on trust were not physically segregated from the rest of the wines.
As a result, there was no trust created since it was impossible for the court to
determine which wines belonged to whom (even though the wines were all
the same – i.e. ‘fungibles’).

It is with the third situation above concerning ‘fungibles’ that the discussion below is
centred upon. While the decision of Re London Wine was applied in subsequent cases such
as Re Goldcorp Exchange (1995), the Court of Appeal departed from the reasoning that
fungibles must be physically segregated from the larger whole to make up the subject-
matter of a trust in the controversial decision of Hunter v Moss (1994). In Hunter, the Court
of Appeal had to decide whether or not the rule in Re London Wine applied to unsegregated
shares from a larger lot of similar shares. While approving of the rule for PHYSICAL
fungibles, the Court of Appeal held that the rule did NOT apply to INTANGIBLE fungibles
such as shares. In the case, 50 shares out of a larger lot of 950 similar shares were never
segregated but the Court of Appeal said that there was no problem ascertaining which
shares were to be held on trust. After all, they were all of the same value – i.e. simply set
aside any 50 of the 950 shares to be held on trust for the beneficiary.

Furthermore, the Court of Appeal in Hunter distinguished the facts from those involving
PHYSICAL or TANGIBLE fungibles. Colin Rimer J, sitting as a deputy High Court Judge, held
that since the shares were all identical, the lack of segregation between them did not
invalidate the trust. Re London Wine was distinguished because the subject matter there
was potentially different, while all of Moss's shares were identical. In other words, Re
London Wine was confined to tangible property since “ostensibly similar or identical assets
may in fact have characteristics which distinguish them from other assets in the class” –
some of the wine may have been uncorked or might have deteriorated in some other way.

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Rimer J instead cited with approval Rollestone v National Bank of Commerce in St. Louis, a
decision of the Supreme Court of Minnesota where it was held that there was no need for
segregation in a situation involving intangible property. Dillon LJ, in the Court of Appeal,
approved of Rimer J’s decision and said that Re London Wine was “a long way from the
present. It is concerned with the appropriation of chattels and when property in chattels
passes. We are concerned with a declaration of trust…” and concluded that “just as a person
can give by will a specified number of his shares in a certain company, so equally, in my
judgment, he can declare himself a trustee of 50 of his ordinary shares and that is effective
to give a beneficial proprietary interest to the beneficiary under the trust”. In other words, as
there was no tangible distinction between the shares, and as such no reason to hold the
trust void just because the shares had not been segregated, the trust was thereby valid.

The difficulty with such a situation is that should the settlor had actually made use of
the unsegregated lot of shares for investment purposes, whose shares did he dispose of?
Were they the settlor’s own shares or the shares that made up the subject-matter of the
trust? What if the subsequent investment result in a loss? Will they be the settlor’s own
loss? On the other hand, what if the investment result in a profit? Will they be the
beneficiary’s profit via the trust? It is for such reasons that the decision in Hunter has since
been subjected to severe criticisms by academics such as David Hayton and Alastair
Hudson, as well as judges such as Campbell J in the New South Wales Supreme Court
decision of White v Shortall (2006). In that case, Campbell J simply held that it was a
discretionary trust and allowed the trustees to segregate the shares that make up the
subject-matter of the trust from the rest of the shares. This approach, while retaining the
rule in Re London Wine, it is argued is even more problematic as the court should not be
arguing that it was a discretionary trust simply to carry out the act of segregation. What if
the facts clearly show that a fixed trust of unsegregated (intangible) fungibles was intended?
Would the trust therefore fail simply on the grounds of fidelity to Re London Wine?

On the other hand, Jill Martin defended the decision in Hunter as one that is "fair,
sensible and workable... [it] is a welcome example of the court's policy of preventing a
clearly intended trust from failing for uncertainty". She then attempted to resolve the above
difficulty of ‘what if the settlor/trustee disposed of the intangible fungibles?’ by arguing that
we could simply apply the rules of tracing to determine which of the shares were first
disposed of. For instance, the presumption in tracing (Re Hallett) is that the trustee will
dispose of his own funds first (i.e. a presumption of honesty on the part of the trustee).
Therefore, there should be a presumption that should the settlor had used part of the 950
shares for investment purposes, it would have been his own shares – and, as a result, any
profit or loss will also be the settlor’s own. The 50 shares to be held on trust remains
untouched. While this is a novel solution, it is argued that Martin is wrong for several
reasons:

 Tracing is a remedy to protect wronged beneficiaries of a VALID trust. It should not
be used to justify or validate an invalid trust.

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 Such ‘tracing trusts’ are NOT recognised by English law – despite the fact that some
European judges have employed similar reasoning (see Re Lehman Brothers
International (Europe) (2009)).
Briggs J, in the above quote, also tried to justify the decision of Hunter, by arguing

that there was a beneficial co-ownership in the whole of the unsegregated lot of intangible
fungibles. This approach, it is argued, it a far more sensible one compared to that of
Campbell J in White v Shortall. Furthermore, Hunter has now been applied as
representative of English law on INTANGIBLE fungibles making up the subject-matter of
trusts. In Re Harvard Securities (1997), the Privy Council, despite taking account of the
criticisms of Hayton and Underhill, nevertheless upheld Hunter as representative of English
law.

In conclusion, setting aside all the above academic and judicial criticisms of the
decision in Hunter, it is argued that the decision is one that is entirely logical and in
accordance with common sense. After all, how does one PHYSICALLY segregate something
that is INTANGIBLE in the first place? It is the opinion of this candidate that despite the
possible difficulties of Hunter, it should nevertheless still be upheld and remedies be sought
out to deal with such difficulties rather than taking a retrogressive approach by returning to
Re London Wine.

2004 Zone A Question 1

Fred, a former Professor of Law at Trinity College London (TCL), made the
following bequests in this will:

a. £250,000 to my executors on trust for such hard-working law students of
TCL as they in their absolute discretion think fit. In case of any dispute as to
who is hard-working, the Dean of the TCL Law Faculty to decide;

b. £100,000 to my executors on trust to provide snooker tables in the TCL
student union; and

c. my executors to allow any outstanding legal academic to purchase my law
library for £100,000.

Fred has now died. Advise the executors on the validity of these gifts.

Suggested Solution:
Fred’s executors would like to know whether the bequests in the will are valid in

order to properly carry out what Fred intended in the will. Should any of the bequests be
invalid, the property in question will then go to Fred’s residuary estate. Following the

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guidelines laid down by Lord Langsdale in Knight v Knight (1840), it is imperative that for a
trust to be valid, it must be clearly shown that the testator (in this case, Fred) had intended
it to be such and that the executors must also be certain as to the subject matter and the
objects of the gift.

a. ‘hard working law students’:

In the first bequest, it could be gleaned on the wordings that Fred intended to create
a discretionary trust as the trustees are given a dispositive discretion on what to do with the
money. There does not appear to be any uncertainty on the subject matter (£250,000) as
well. The problematic area seems to be the question of whether ‘hard-working law students
of TCL’ is a sufficiently certain description of the objects of the trust.

As this is the case concerning a discretionary trust, the test for certainty of objects,
following McPhail v Doulton (1970) is the ‘any-given-postulant test’. In effect, this basically
reverses the burden for evidential certainty upon the postulants themselves, rather than to
lay it upon the trustees (although it is important to note that Lords Sachs, Stamp and
Megaw in Re Baden (No. 2) (1972) proposed different tests as to how the certainty is to be
determined). That being the case, Lord Wilberforce (in McPhail) emphasised the importance
of conceptual certainty, despite the reversal of evidential burden. In other words, it is still
necessary for the trustees to be able to determine with certainty what exactly Fred meant
by ‘hard working law students of TCL’.

Here, it is submitted that Fred has given no guidance as to what he meant by ‘hard
working law students of TCL’. The ‘hard working’ qualifier, it is argued, is precisely the sort
that C.T. Emery defined as a ‘hopelessly wide concept’ such as ‘a good citizen’.

The only assistance provided by Fred is that reference can be made to the Dean of
the TCL Law Faculty should there be any dispute on the meaning of ‘hard working law
students of TCL’. The question is whether such an external reference to a third party should
be allowed for a trust. According to Lord Denning in Re Tuck’s ST (1978), a reference could
be safely made to a third party (such as the Chief Rabbi) in order to ‘cure’ conceptual
uncertainty. However, it should be noted that in Re Tuck’s, none of the other judges
approved of this approach. Furthermore, the case involved a gift rather than a trust and it
was also held that there was no conceptual uncertainty in that case.

Professor Hayton, in his criticism of Lord Denning’s approach, strongly disapproved
of such clauses allowing third parties to be the judges to determine the meaning of the
words of the testator. It is submitted that Hayton’s view is most likely correct as the effect
would be to turn the trust into the Dean’s trust rather than Fred’s case. Following the
approach of Jenkins LJ in Re Coxon (1948), such opinion clauses should not cure conceptual
uncertainty but may only go so far as to determine matters of fact – i.e. that Fred’s
conception of ‘hard working students’ is in agreement to that of the Dean’s. In other words,
that would go only as far as to provide evidential certainty on that matter. It is unlikely that
the courts will go so far as to allow the Dean’s conception to supplant that of Fred’s.

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Despite the above, it should be surmised that the two main reasons why the courts
have been reluctant to admit a third party’s opinion are: (i) the fear that the third party will
usurp or oust the jurisdiction of the court; and (ii) that the trust will end up becoming the
third party’s trust instead of the original testator’s trust. Here, it is argued that these fears
are largely unfounded. Firstly, as in our case, the Dean’s opinion could be admitted as
‘expert evidence’ by the court in order to clarify what Fred meant by ‘hard working students
of TCL’. After all, the Dean is clearly in a better position to know what a ‘hard working
student’ is in the context as compared with the court. This is not a usurpation or ousting of
the court’s jurisdiction at all. Furthermore, this will not make it into the Dean’s trust since by
admitting his opinion, the court is doing nothing more than upholding Fred’s intention. In
the end, it remains Fred’s trust.

Should the court be willing to accept the above counter-arguments, Fred’s trust may
be valid as the conceptual uncertainty could be resolved by reference to the Dean of the TCL
Law Faculty.

b. ‘snooker tables’:

As for the second bequest, as there does not seem to be any problems with certainty
of subject matter (‘£100,000’) and who Fred intended to benefit (‘the TCL student union’),
the essential question is what exactly was intended by Fred. On the available wording in his
will, it appears that Fred intended that his trustees use the funds to provide snooker tables
for the student union. This appears to be a ‘private purpose trust’ – i.e. that the trustees use
the trust property in order to achieve a specified purpose, namely, the provision of snooker
tables for the student union.

The rule, following Re Endacott (1960), is that a trust for a non-charitable private
purpose will not be upheld by the courts. In that case, Lord Evershed held that in a private
purpose trust where there are no ascertainable beneficiaries, there will be no one to
enforce the trust. Therefore such trusts (save for a very narrow category of exceptions – i.e.
‘anomalous private purpose trusts) would fail as they violate the ‘beneficiary principle’ of
trusts, in that trusts are valid only when they are enforceable by beneficiaries.

Goff J, however, argued in Re Denley that should the persons who derived a benefit
from the private trust be ascertainable, such trusts should be upheld. In that case, the
persons that the settlor intended to benefit were the ‘employees of the company’. On the
wording in Fred’s second bequest, it does appear that ‘the student union of TCL’ is closer to
the situation in Re Denley rather than the impossibly wide obligations in Re Astor (where
the purpose was a vague one – ‘promoting freedom of the press, etc.’).

That being said, it is argued that Goff J is probably wrong in his approach. He very
conveniently equated ‘people for whom the trust was intended to benefit’ with the
‘beneficiaries’ under a trust. This, it is submitted, is a fundamental error as a beneficiary
under a trust holds a beneficial interest in the property of the trust, but not so the ‘people
that the trust was intended to benefit’. It is precisely because of such a beneficial interest
that a beneficiary is allowed to enforce a trust at all.

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In contrast to the approach of Goff J, it is argued that an ‘enforcer principle’ would
make much more sense. In other words, a private purpose trust COULD be valid should the
settlor also appoint someone to as the ‘enforcer’ of the trust to apply to the courts to
compel the trustees to carry out the obligations of the trust. While such an approach has
been expressly approved of in ‘offshore’ jurisdictions (and also strongly supported by
Hayton), it should be noted that the approach has not been adopted by the English courts at
present. In other words, the rule is still that in Re Endacott (despite the criticisms of that
decision) and Fred’s second bequest would likely fail as well. Moreover, there is nothing in
the bequest that suggest Fred appointing an ‘enforcer’ at all unless it can be argued that the
student union of TCL are implied enforcers (which would, in effect, simply be an application
of the approach of Goff J above). It is unlikely that the courts would uphold such an
approach.

c. ‘outstanding legal academic’:

Finally, the third bequest appears, on first glance, to face the same problems with
uncertainty of objects (‘outstanding legal academic’) as that in the first bequest above. That
being the case, it should be noted that Fred had not intended to create a trust here. On the
wording in the will, it appears to be a gift subjected to a condition precedent – i.e. that a
purchaser of Fred’s law library who satisfied the condition of being an ‘outstanding legal
academic’ would be able to purchase it at a special price of £100,000. The facts are very
similar to the situation in Re Barlow’s WT (1979), where Browne-Wilkinson J upheld such a
bequest allowing the ‘friends’ of the testatrix to purchase her paintings at below market
value. Browne-Wilkinson J expressly said that should it be a trust that was intended,
‘friends’ would fail for conceptual uncertainty of objects. However, it was upheld because it
was only a gift with a condition precedent.

That being the case, it is not entirely certain that the courts will continue to adopt
the approach of Browne-Wilkinson J above. The decision has been subjected to severe
academic criticisms, chiefly by C.T. Emery, who argued that the testatrix’s direction should
not have been construed as a series of individual gifts to ‘friends’ but as a power conferred
on the trustees by her will to sell to her ‘friends’. The situation would then be quite different
as the test for certainty of objects for a power is that of Re Gulbenkian’s Settlement (1970)
which is the ‘any-given-postulant test’ requiring conceptual certainty. Should that be the
case, ‘friends’ in Re Barlow and ‘outstanding legal academic’ in Fred’s will would likely be
held to be conceptually uncertain.

In other words, whether or not Fred’s third bequest is valid would depend entirely
on how the court decides to construe Fred’s direction. Should it be construed as a gift with a
condition precedent (following Re Barlow), it would likely be valid. However, if the court
construes it as a power to the trustees to sell Fred’s law library at £100,000 to an
‘outstanding legal academic’, it would likely be invalidated on the grounds of conceptual
uncertainty.

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2005 Zone A Question 5

Assess the validity of the following testamentary gifts in the will of Fred:

i. any of my relatives may purchase one of my antiques at half its market value;

ii. my shareholding in Lawtel plc to be sold and the proceeds held on trust for
the education of my nieces and nephews, whatever funds being unnecessary
for this purpose to be held on trust for such charitable or benevolent purposes
as my trustees shall select;

iii. the residue of my estate to be held on trust for such persons and in such
amounts as my trustees shall at their absolute discretion select, save that
nothing is to go to my trustees or their next of kin or to my spouse or my
children.

Suggested Solution:
The question calls for an assessment of the validity of Fred’s 3 testamentary

bequests. Following the guidelines laid down by Lord Langsdale in Knight v Knight (1840), it
is imperative that for a trust to be valid, it must be clearly shown that the testator (in this
case, Fred) had intended it to be such and that the executors must also be certain as to the
subject matter and the objects of the gift. Each of Fred’s bequests will be assessed
separately below:

i. ‘relatives to purchase one of my antiques at half its market value’:
Firstly, on first glance, Fred’s first bequest faces a problem with uncertainty of

subject matter (‘one of my antiques’). It should be noted that for certainty of subject matter
of a trust, the property or rights to be held on trust must be identified from the outset or
reasonably ascertainable. Here, the word ‘antiques’ itself may be open to a wide range of
interpretations unless Fred has actually furnished his executors with a list of items which he
considered to be ‘antiques’. Furthermore, Fred did not clearly specify which of the
‘antiques’ he was referring when he said ‘one of my antiques’.

That being the case, it should be noted that Fred had not intended to create a trust
here. On the wording in the will, it appears to be a gift subjected to a condition precedent as
the given facts are very similar to the situation in Re Barlow’s WT (1979), where Browne-
Wilkinson J upheld such a bequest allowing the ‘friends’ of the testatrix to purchase her
paintings at below market value. Browne-Wilkinson J expressly said that should it be a trust
that was intended, ‘friends’ would fail for conceptual uncertainty of objects. However, it was
upheld because it was only a gift with a condition precedent. Applying this by analogy to the
present case, the executors could simply allow any of Fred’s ‘relatives’ to purchase ANY of
Fred’s antiques at half its market value. [It should be noted that there is no issue with

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objects here as Lord Wilberforce in McPhail v Doulton (1970) held that ‘relatives’ is
conceptually certain.]

That being the case, it is not entirely certain that the courts will continue to adopt
the approach of Browne-Wilkinson J above. The decision has been subjected to severe
academic criticisms, chiefly by C.T. Emery, who argued that the testatrix’s direction should
not have been construed as a series of individual gifts to ‘friends’ but as a power conferred
on the trustees by her will to sell to her ‘friends’.

Despite the uncertainty today whether the courts will follow Re Barlow and enforce
Fred’s first bequest as a gift with a condition precedent; or agree with Emery that it is a
power, it should be noted that both will likely be valid in the present case.

ii. ‘education of my nieces and nephews’ and ‘charitable or benevolent purposes’:
As for Fred’s second bequest, it appears that he was attempting to create a private

purpose trust in that his trustees have been entrusted with a duty to carry out a specific
purpose (i.e. the education of Fred’s nieces and nephews) with the proceeds from the sale
of Lawtel plc shares. Following Re Astor’s ST (1952) and Re Endacott (1960), such trusts are
void because there are no human beneficiaries to enforce the trusts. It should also be noted
that Fred’s purpose did not fall into one of the ‘anomalous exceptions’ of care for testator’s
animals, building of tombs/monuments, prayers/masses for the dead, etc.

That being said, Fred’s trust may also be construed as a ‘Sanderson-type’ Trust
following the decision in Re Sanderson’s Trust (1857). In that case, the testator left funds on
trust to care for his imbecile brother. Page VC held that in such cases, the court may
construe the trust to be a ‘people trust’ (i.e. the trustee to hold the funds for the imbecile
brother) rather than a ‘purpose trust’. This direction was also followed in subsequent cases
such as Re Skinner (1860), Re Andrews (1905) and Re Osoba (1979). In all these instances,
the ‘purposes’ specified by the testators were held to be nothing more than an indication of
the motives of the testators in setting up the ‘people trusts’.

However, on the available facts, it did not appear that Fred wanted to give all of the
proceeds from the sale of shares to his nieces and nephews. After all, he did specify to the
trustees what to do with the remainder of the funds after carrying out the purpose. Page
VC, in Re Sanderson (above), also noted that in such instances, the court will have to say
that it was a ‘purpose trust’ rather than a ‘people trust’ that was intended. If that was the
case, the argument that Fred’s trust is a ‘Sanderson-type’ trust would fail and the court
would conclude that it was an invalid ‘private purpose trust’.

Should that be so, would the trustees then be able to use the proceeds solely for
‘charitable or benevolent purposes’? Firstly, it should be noted that Fred did not intend the
whole sum to be used for such purposes but only ‘whatever funds being unnecessary’ for
the purpose of educating his nieces and nephews. Would such a ‘whatever-if-left’ trust be

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