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Equity and Trusts
Part 1 Revision Notes
The Trust
‘The essence of a trust is the imposition of an equitable obligation on a person who is the legal owner of
property (a trustee) which requires that person to act in good conscience when dealing with that property in
favour of any person (the beneficiary) who has a beneficial interest recognised by equity in the property
...
There are four significant elements to
the trust: that it is equitable, that it provides the beneficiary with rights in property, that it also imposes
obligations on the trustee, and that those obligations are fiduciary in nature
...
Trustee has legal title, but real beneficial ownership is with the beneficiary, who has an
‘equitable interest’
‘A trust comes into existence either by virtue of having:
•
•
•
•

been established expressly by a person (the settlor) who was the absolute owner of property before
the creation of the trust (an express trust);
by virtue of some action of the settlor which the court interprets to have been sufficient to create a
trust but which the settlor himself did not know was a trust (an implied trust);
by operation of law either to resolve some dispute as to ownership of property where the creation
of an express trust has failed (an automatic resulting trust) or to recognise the proprietary rights of
one who has contributed to the purchase price of property (a purchase price resulting trust);
or by operation of law to prevent the legal owner of property from seeking unconscionably to deny
the rights of those who have equitable interests in that property (a constructive trust)
...

For the beneficiary trusts create proprietary rights in the trust property and personal rights against the
trustees- this is built on a combination of property law rules and personal obligations
Property law: Westdeutche Landesbank v Islington LBC-‘ in order to establish a trust there must be
identifiable trust property’
...
To protect these rights, trustees are personally liable for any loss suffered by the trust
...
Through the express
trust the legal title passes to the trustee
...

Once the trust is validly declared, the settlor ceases to have any active role in the trust- Paul v Paul
The Court will look very closely at the precise written terms or at the verbal expression of the
settlor’s intentions
...
Trustee therefore has no discretion or obligations beyond the stewardship of the property on
behalf of the beneficiary
...
Trustee must simply perform the terms
of the trust slavishly
...

A trustee is an example of a fiduciary, so it is important to understand what the concept of fiduciary
responsibility entails
...
The
distinguishing obligation of a fiduciary is the obligation of loyalty
...
The core liability has several facets
...
This is not intended to be an exhaustive list, but it is sufficient to indicate
the nature of fiduciary obligations
...
’ - Bristol and West
Building Society v Mothew [1998] Ch 1 at 18, per Millett LJ
Resulting trusts
They are implied by court and not created intentionally by the settlor
...
Where the settlor transferred legal title to the trustee but failed to identify the person who would be
the beneficiary, the equitable interest will be held by the trustee on resulting trust for the settlor
2
...
Size of equitable interest will be equal to size of contribution in proportion to the total price
of property
Constructive trusts
They are implied by courts when circumstances are considered appropriate
...

Secret trust
Arises when the testator wants to benefit a person who cannot be named in the will, so they ask a trusted
confidant to agree to an arrangement where the confidant will receive a gift under the will for their own
benefit but which is in fact meant to be held on trust for a third person
...

Section 9 Wills Act provides that no will is valid unless in writing and signed by testator and witnessed
...
However secret trusts very clearly do not follow the
rule as oral agreement between testator and trustee is generally satisfactory
...
Fully secret trusts arise in circumstances where neither the existence nor the terms of the trust
are disclosed in the terms of the will
...
So
very hard to prove the arrangement was in place
...
Norman: T left his bungalow and some money to a Ms
...
Hodges failed to do so in her will and left the
property to the Normans under her will
...
money was not subject to it as Hodges was entitled
to use it during her lifetime
...
(ii) Intention communicated to the primary donee
...


Intention to benefit->Moral obligation not sufficient to generate a secret trust
Re Snowden- Woman dies, leaves property to her brother ‘he shall know what to do with it’
...
Grogan [1869] LR 4 HL 82: T executed a will in 1851 - all estate left toMr
...
In 1854, T
contracted cholera & sent for Mr
...
T told Grogan that will was in a desk drawer, with a letter
instructing Grogan as to certain bequests
...

Intention communicated:
Need a communication of the arrangement as well as the terms
...

Re Boyes- Testator told trustee he intended to leave property to him under a trust arrangement and that the
details would later on be sent to him
...
After trustee’s death, two unattested
documents indicated the testator wanted to direct the trustee to hold the property on trust for his mistress
and child
...

Re Keen- Court drew comparison with a ship sailing under sealed orders in an envelope which he is not
allowed to open until a certain time
...
(however
difference may be because this case is a half-secret and not a full secret like in boyes so potentially existence
more apparent
...
Trustee must have opportunity to turn down the office (Re Boyes)
...
Tebbs [1885] 25 LJ Ch 241: Office of secret trustee can be accepted in one of two ways:
1
...

2
...

T left £12,000 to Tebbs & Martin under will oral and written evidence presented to the court T intended
Tebbs and Martin to act as secret trustees
...
Held: Not required to act as trustee since no promise or undertaking ever made
...

Half secret trustit is mentioned in some form in the will- its existence of it but not the terms
...
g
...
Intention of the settlor is for the beneficiary and not trustee to have an equitable interest
...
Terms must be communicated to the intended trustee before execution of will
...
Trustee must accept the office and terms and “acquiesce” to the terms
Communication must be before or at the time of the execution of the will otherwise trust fails : ‘ a testator
cannot reserve himself the right to make future unwitnessed dispositions by merely naming a trustee and
leaving the purposes of the trust to be supplied afterwards’
...
Blackwell
...
Id of beneficiaries – mistress and her son -communicated to trustees orally & detailed
instructions given to one of them
...
Intended Trustees
accepted trust before execution of codicil so valid HST
Acceptance is in line with that laid down in Wallgrove v
...
Unnecessary to show that the trustee
committed fraud
...
For half-secret there is a possibility for this not to happen if the representatives of the trustee
know about the trust and give effect to it (Mallott v Wilson)
...
Two options: either still held that property is
held on trust for beneficiaries (although unclear by who would act as a trustee) or bequest fails for want of a
trustee and therefore property held on resulting trust by deceased settlor’s estate
...

Re Colin Cooper [1939] Ch 811: T intended to add money to an existing secret trust without communicating
this to the trustee
...

Evidence problems:
•
•
•
•

Parol evidence rule - oral statement cannot be adduced to contradict written evidence
...

Standard of proof required to proof that secret trust exists is very high (Re Snowden)
...


Part 2 Revision Notes
Purpose trusts
The nature of the Rights of Beneficiaries in the Trust fund
It is a necessary part of any trust that there is a beneficiary capable of enforcing trustees’ performance and
their duties under the trust- Bowman v Secular Society- this is the beneficiary principle which will be
discussed later on but for now we shall focus on the rights of beneficiaries:

•
•

They have both proprietary rights in the trust fund and personal rights against the trustee->as
known, courts of equity will act in personam against the conscience of a defendant
But they can also enforce their proprietary rights against the whole world

The principle in Saunders v Vautier- All beneficiaries, constituting 100% of the equitable interest in the trust
fund, provided they are all sui juris and acting together, can direct the trustees how to deal with the trust
fund
...
Example: in bare trust, the beneficiary could direct the trustee to make them
the legal owner of the property
...

It follows that according to this principle the beneficiary is able to override the settlor’s wishes
...
But when he reached 21 (adulthood at the time) he wanted it then and the
court found in his favour
...
But when the beneficiaries had
financial trouble, the court allowed them to use the money to alleviate that instead
Book points out that this is problematic as equity makes a point not to equate gifts to trusts, nor to perfect a
gift by making it a trust etc etc
...
, it is not what the settlor intended
...
However where it’s not open ended
it wouldn’t work, for example if it said ‘to all the settlor’s children’ and it was written when the settlor was
alive and therefore they could have had children in the future
...
It is these proprietary
rights that give them locus standi to petition the court
...
Re
Endacott ‘no principle has greater sanction or authority’ in the law of trusts than this
...
These are generally void under English law for this particular reason of not having a
beneficiary, since the trustee would have uncontrolled power to do as they wish with the property- Purpose
trusts offend the beneficiary principle!
To show the beneficiary principle in practice, we can look at Re Astor’s Settlement Trust, where a trust was
created with the objective of advancing ‘the preservation of the independence and integrity of newspapers,’
its objective being related to the Observer newspaper which the family had a role in creating
...
Void as no identifiable beneficiaries
...


Another issue with purpose trusts is: perpetuities: particularly the rule against inalienability- to do with ‘the
dead hand of the settlor’-the idea that we should not let a trust tie up property for too long-so if you set up
a trust to last too long-this would be void
...
This topic deals with non-charitable purpose trusts
...
g
...
Again need to ensure time specified as otherwise offends rule
against inalienability for tying up assets for too long
• Mussett v Bingle to build monument = valid
• Re Endacott [1960] ‘provision of some useful monument to myself ‘ – failed as no specific monument
• Gift to maintain monuments can be valid – see Re Hooper provided uses phrase like ‘so long as the
law allows’ - this will limit duration of trust to 21 years
...
Not charitable as
employees of a particular company not sufficient section of public – Oppenheim v Tobacco Securities Trust
Co Ltd [1951]
...
The benefit was sufficiently tangible to allow
them to go to court & enforce the trust – so did not offend beneficiary principle & was a valid trust
...
5million inhabitants and trust administratively unworkable]
...
Not
charitable – political
...
NB Rule v inalienability satisfied as

rules allow the members to dissolve the association and divide the assets up between themselves at any
time
...
Testator died – was the gift valid? The Chertsey
Labour Party subject to rules laid down by National Exec Committee of Labour party & national annual party
conference
...
Did
the gift fail the beneficiary principle? Did the gift fail the rule against inalienability?
Did the gift fail the beneficiary principle? Non charitable purpose trust or gift to Chertsey Labour party unincorporated association it could be construed as a gift to members as an accretion to the funds to be
dealt with in accordance with the rules – BECAUSE gift worded as outright gift to the association [Re Recher]
Did the gift fail the rule against inalienability? Yes void as the constituency party rules did not enable the
members to pass a resolution to dissolve the constituency party and share out the property between them –
such as decision would need consent of national party
NewsGroup Newspapers v SOGAT [1986] if rules allow local branch to secede and dissolve itself any gift to
the local association is valid
Associations for a specified purpose – see Re Lipinski’s Will Trust- Harry Lipinski left half of his residuary
estate to the ‘Hull Jacobeans (Maccabi) Association in memory of my late wife’ and then added a purpose
‘to be used solely in constructing the new buildings for the association and or improvements to the said
buildings’ Was the gift valid? He said that the legacy should be construed as either a gift to the members as
an accretion to the funds in accordance with Re Recher as the members would be the beneficiaries of the
new building and when finished the buildings would belong to the members beneficially just like the rest of
the associations property; Or Valid as a trust for the purpose of constructing and improving buildings
...
Did not offend inalienability as the wording of the
legacy suggests that the capital is to be spent once and for all on constructing or maintaining the buildings
...
Wife worried he might tear it Jones reply ‘Never mind if he does; it is his own, and he
may do what he likes with it
...
J also met with solicitor to discuss settling money
on child
...
CA – no valid gift or declaration of trust in

favour of the baby instead just ‘loose conversation’ Lord Cranworth LC at p29 - No valid gift as he did not
endorse the back of the check indicating it should go to the child
Richard v Delbridge- G owned lease & tried transfer ownership to grandson by writing on the back of it ‘This
deed and all thereto I give to … from this time henceforth’ Purported gift invalid [and court did not save the
imperfect gift by creating a trust]
Paul v Constance- Mr C owned bank account in his sole name
...
Arrangements made to allow her to draw out of account and she paid her bingo
winnings into it
...
Mr C orally declared a trust (informally) of a bank account by using words which
along with his conduct indicated an intention to create a trust
...
P & others as trustees P said “I give my shares to the
Foundation”
...
She argued =it’s a gift
...
Later that year, his wife came to London to move into their
new home
...
Subsequently, Mr Cole went bankrupt and the contents of the
home were claimed
...

Judgment[edit]

The case establishes that a gift of chattels cannot be perfected by showing them to a donee and stating
words of gift
...
Namely, perfecting a gift requires 1)
Intention 2) Delivery and 3) Acceptance
...
He had not however, delivered anything to her, and she had not accepted anything
...

– …or deed (rarely)
•

Equitable interest
– in writing s 53 LPA

•
•

Cheques: endorsed by transferor and delivery to third party-not possible if cheque crossed account
payee only
Copyright-signed writing s 90 (3) Copyright Designs and Patents Act 1988

Exceptions: Equity may overlook a defective transfer and perfect gift/constitute trust:
1) Every effort- Re Rose
•

Applies if transferor has
– done everything required of him &
– relinquished control of asset
– transfer viewed by equity as complete if the donor has put the property beyond his recall &
the only steps left to be taken are to be dealt with by third parties
...
He filled in the share transfer forms on 30 March 1943, and handed them to the Mrs
Rosamond Rose, who gave them to the company
...
But the company registered the claimants as shareholders in Mr Rose’s place on 30 June 1943
...
The Inland Revenue wished to charge a tax, estate duty, on the transfer
...
This was the relevant date under
the Customs and Inland Revenue Act 1881 section 38(2)(a), the Customs and Inland Revenue Act
1889 section 11(1) and the Finance Act 1894 section 2(1)(c)
...

Judgment[edit]
The Court of Appeal held that the transfer took place in March, meaning the taxes were not due
...
Once he did this he was not
at liberty to merely cancel the transfer, and so when he handed away the forms, the shares were held on
constructive trust
...
F completed transfer deed & gave to S
...
Lawton LJ and Browne-Wilkinson LJ gave judgments holding that the property
belonged to the son in equity, and was held on trust for the son by the father, because the father had done
everything in his power to make the transfer effective
...


Re Fry-Father intends gift of shares to Son
...
F needed special licence
from Treasury before Co could register transfer
...
The gift was incomplete,
and there is no equity to perfect an imperfect gift
...
He had not obtained permission from the Treasury
...
At the time of the testator’s death a complete equitable
assignment had been effected
...
P & others as trustees
...
No
transfer of shares before P died
...
A signed Stock Transfer Form
...
Co Auditor told H he need do nothing
...

CA held gift perfect
– Events had reached a point where it would have been unconscionable for donor to retract
the gift
• Why?
– H was told by someone in the company he need do nothing
– H agreed to be Director of Co
4) Rule in Strong v Bird
Applies if:
•
•
•

Donor intended immediate lifetime gift/trust but transfer defective &
Donor’s intention doesn’t change &
Donee becomes Personal Representative of Donor

Re Freeland 1952
• F offered car to H “when fixed”
...
M still using car when F
died
...
no immediate gift as gift of car ‘as soon as I can get it on the road’
...
M failed to sign a deed
...
H under separate marriage settlement
covenanted that when she got her benefit she would hold it on trust for her children and then for Is

children
...
I’s husband trustee of both trusts and asked court if he could hold Hs
share of Rs estate on the trusts of the marriage settlement
...
The trust became constituted when legal title to the
property vested in I’s husband in his capacity as trustee of R’s estate

In Ralli, a daughter, Helen, had a remainder interest under a trust at the time when she purported to
promise that any money received from that first trust would be settled on the terms of a second trust
...
The trustees were the same for both settlements
and therefore those trustees sought to effect the promise automatically without waiting for Helen to ratify
her earlier promise
...
The question arose whether or not she was obliged to carry out her promise
to settle that property on a second trust, and whether or not she had created a valid trust at the time of
making that promise
...
Despite Ralli having been decided in ignorance of Brooks’, it is possible to reconcile the
judgments in the following way
...
The rights of a
remainder beneficiary will constitute an equitable proprietary right in the trust fund because, inter alia, such
a remainder beneficiary has a right to ensure that the trustees do not favour the life tenant to the exclusion
of the rights of the remainder beneficiary
...

Therefore, Helen had some property right which could be the subject matter of a trust, which meant that
she could validly declare a trust over it
...
The subtle
difference between the two cases turns on the nature of the right which the settlor had at the time of the
purported declaration of trust to decide whether or not there had been a valid declaration of trust
...
‘Every thing I possess plus
this banknote is for you if I die’
...
Mother kept note
...
Not
necessary for mother to hand note back and ask for daughter to hand it over again – earlier delivery
effective
...
He
died from pneumonia brought on by bus trip to Worcester not cancer
...
There was no
need to have an expectation of immediate death
Second condition- parting of dominion: Sen v Headley
S lived with M for several years in house in M’s sole name
...
M stated that the house was to be S’s
...

Property to be held on trust was provided by woman’s parents
...
Trustees could enforce
promise against woman as parties to deed
...

•

Common law damages available to beneficiary/trustee?

Volunteer B restricted to remedies available to other parties to covenant so common law damages but not
equitable specific performance – Cannon v Hartley

Part 4 Revision Notes
Creation of trusts-formalities
General rule: once the three certainties are present and the legal title to the trust property is vested in the
trustee (called constituting the trust), there is nothing more that the settlor needs to do to declare the trust
...
Declaration of trust on death- Section 9 of the Wills Act 1837- has to be in writing, signed by testator and
has to be witnessed/signed by 2 more witnesses
...
Declaration of trust over land- Section 53 (1) (b) of the Law Property Act 1925: declaration must be
evidenced in in written form and signed by someone with sufficient right in the property subject to the
trust if it is effected inter vivos
...

• Declaration of trust must be proved by writing
...

• Valid trust can be declared orally, it simply would not be enforceable in a court
...
The settlor must have a proprietary right in the trust property at the time of declaring the trust
Norman v Federal Commission of taxation: ‘ It is impossible for anyone to own something that does not
exist, it is impossible for anyone to make a present of such a thing to another person, however sure he is
that it will come into existence and it will be his to give’
...

b
...
53(2) LPA 1925: “This section shall not affect the creation or operation of implied, resulting
and constructive trusts’
...
e
...
They both continued to live in the house under the same arrangement with
regard to rent and payment of bills
...
He then in breach
of trust sold the house to Mr and Mrs Marks
...

3
...
i
...
Such a declaration actually requires form at the time
...


•
•
•

Two reasons: (1) Prevents fraud - prohibits oral hidden transfers of equitable interests under trusts
(2) Assist trustees – helps them to identify the who owns equitable interest subsisting under a trust
...
e the equitable interest has already been separated from the legal interest before the
disposition in question
N/A to creation of new trusts
The most important context it operates within is the stamp duty, which is a tax that is imposed on
documents which effect transfers of certain types of property between persons
...
So in a number of cases people have tried to
prove their situation falls outside section 53 (1) (c) to avoid tax
...
In 1955
he transferred more shares to trustees and asked them to hold them on trust for himself
...

Afterwards, he executed a written declaration in relation to the shares, which he argued merely
contended the oral agreement in written form
...

HL - oral direction by a Beneficiary to the trustees to hold the property upon trust for another =
purported disposition within s53 (l)(c) & so void for non compliance

But
...
Transaction terminates the trust by
uniting both the legal and equitable interests in the hands of the third party
...
The trustees no need identify the movement of the equitable interest because this is united with the
legal title (position of the trustee is redundant anyway as the trust no longer subsists)
...
Re Vandervell 2- Tony Vandervell was attempting to make a donation to the Royal College of
Surgeons to establish a chair in his name
...
However, this scheme was defeated in the case Vandervell v Inland
Revenue Commissioners
...
As such,
the trust company considered themselves as holding the purchased shares on trust for the children, and
Vandervell proceeded to pay dividends on the shares with the intention of benefiting his children
...
So Vandervell signed a document explicitly transferring any remaining rights in
the shares to the trust company
...
Furthermore, on the same basis, Vandervell's own executors made a
claim to recover the dividends themselves from the trust company
...
The former did not require writing, and, as the new trust
did not involve land, no formalities were required for its creation
...
It comes into existence whenever
there is a gap in the beneficial ownership
...
as soon as the option was exercised and the shares registered in the trustees’ name,
there was created a valid trust of the shares in favour of the children’s settlement
...
There could not be a resulting trust of a chose in action which was no more’
Lawton LJ
So ending RT of option AND declaration of new trust NOT within s 53(1)(c)
Sub trusts
If the beneficiary does not fully dispose of his interest but merely creates a sub-trust retaining some active
duties over the trust then the transaction is outside the section
...
Together absolutely entitled
...
Mother transferred her shares to son
...
Trustees executed deed transferring legal ownership to
mother
...
The more difficult situation is
where a settlor unknowingly behaves in a way which might have created a trust, or where the settlor leaves
their intention ambiguous in terms of a will or other document, or where the settlor leaves their intention
unclear in a verbal statement
...
Later on he
received £950 for an injury he received at work, so Mr Constance and Mrs Paul set up a joint bank account
...
They also
added joint bingo winnings and used money for a joint holiday
...

He dies
...
Court found that his earlier statement ’as much mine as yours’ showed intention that he hold the
account on trust for his lover
...

Re Kayford- mail order company takes money from customers before delivering them the goods
...
When they went insolvent, the question was whether the money in the
bank account were the company’s and should be split between the directors of the company or whether it
was held on trust for the clients, it was held by the court that it was the second, and the movement of them
to a separate account was to shield them from insolvency
...
Even without an intention to become trustees, the court
decided that the company was that when it was holding the money of the customers without having yet
transferred the goods
...

The finding of an intention to create a trust is based on the surrounding circumstances
The court may also find that based on circumstances there is not enough intention to create a trust
...
He wrote a check in
favour of himself as a payee and said to his wife ‘look you here, I give this to the baby’ and put the cheque in
the babys hand
...
Was there a trust? It was found that there had not been a perfect gift
(the cheque was written for the father and made no mention of the baby)
...
So he either tried to make a gift or a point to his wife
...

Richards v Delbridge: ‘if a failed disposition is intended to take effect by transfer (or gift) the court will not
hold the intended transfer to operate as a declaration of trust, for then every imperfect instrument would
be made effectual by creating a perfect trust’
But it must impose an obligation as distinct from a mere power/gift etc- e
...
if a parent gives a child money
for a book saying ‘don’t spend it all on sweets’, it doesn’t make them trustees or create a legal obligation,
only a moral one
•

Look for imperative words = modern approach as they express a command, a duty to do something
...


Re Snowden Dec [1979] – ‘he will know what to do’-no
Gold v Hill [1999] – ‘to look after Carol and the kids’ -yes
V Precatory words
...
Div
...
Eames (1871) LR 6 Ch
...
Bowring-Hanbury (1905) AC 84-this was a case where the husband left his house to wife in an
ambiguous will
...
I hereby direct all my estate and
property acquired by her under this my will shall at her death be equally divided among the surviving said
nieces
...
If it’s a trust it simply means wife holds it in
trust for nieces until she dies
...

If the words fail to attach an obligation, rule in Lassence v Tierney (1849) 1 Bac & Cr 551 applies
...
e
...
He refused to pay & no money set aside to fulfil promise – no money
identified that could be subject matter of trust
Wording- all of these would be seen as uncertain due to the wording
Palmer v
...
Barnard (1789) 2 Bro
...
(1979) bottles of wine (tangible property) not segregated so not ascertainable – no
certainty compare to Re Stapylton Fletcher [1995] – wine in separate part of warehouse & paperwork
identified it as B’s property
Re Goldcorp Exchange Ltd [1995] held property has to be identified for it to be held on a valid trust
...
two classes of action-on successful one failed
...
Gold bullion not allocated to customer so not
separated – no certainty subject matter
...
Moss [1994] 50 out of 950 identical shares- no need to segregate as all the
same, no practical differenceBut property may be capable of objective assessment Re Golay [1965] ‘reasonable income’ can be
objectively measured
BUT - a subjective measure?
Re Kolb [1957] – ‘first class’ and ‘blue chip’ shares-’There is no strict definition of this term and the opinions
of different stockbrokers and others differ as to what stocks and shares can properly be called ‘blue chip’ at
any given time…The testator may have made his trustees the judge; but as he has not done so, that part of
the clause is, in my judgment, void for uncertainty’Cross J
Certainty as to the share of the beneficiery
Boyce v
...
Maria predeceased testator & had not selected a house
...
So this fails so lack of certainty of subject matter
Waddington v Waddington- Testator died leaving to wife ‘such articles of furniture not otherwise hereby
bequeathed as she shall require’
...

Certainty as to the object
Who benefits from the trust?
Can a trust be created to care for a loved pet after the death of its owner?
Can a trust be created for a purpose?
Why is it different if the trust is a fixed trust or a discretionary trust?
Here bare in mind there’s a difference between trust and power
...

Rationale for this is administrative – Morice v
...
Its important to know how
many people exactly as otherwise how can you divide equally
You can only divide equally if you know how many of them
...
Broadway
Cottages Trust [1955]-must provide a ‘ fixed list’ of beneficiaries
...

Re Gulbenkian [1970] – no need for fixed list; valid if can be said with certainty whether a person is or is not
a member of the class of beneficiaries
...
Who are the friends? What distinguished a good friend from an ordinary
friend? etc

discretionary trust – ‘amongst such of my children as my trustees select’, unlike a power, with discretionary
trusts you are obliged to exercise your discretion
Burrough v
...
Doulton [1971] AC 424- held that the Gulbenkian test will also be used for
discretionary trusts
...
2) [1973]- the case gave an alternative approach for cases where the
mcphail/gulbenkian test would fail
...
T
...
T
...
49 ‘of Jewish faith’ could be determined by Chief Rabbi
Re Leek [1968] 2 WLR 1385 ‘ as company consider have moral claim’ - trustees can decide
Evidential-(must be able to prove you belong to a certain class) McPhail v Doulton (above) and Re Baden
(No 2)
Trust by Bertram Baden for ‘employees, relatives and dependants of his company’
See judgments of Stamp LJ (court can determine conceptual certainty of relatives and dependants); Sachs LJ
(only require conceptual certainty – will never be defeated by evidential uncertainty); and, M#egaw LJ (do a
substantial number of objects fall within the trust?)
Ascernability-impossible to fullfill cause the intended beneficiaries died, cant be located detc
Re Manisty’s S
...
[1974] Ch 1
Administrative unworkability or capriciousness
Re Hay’s S
...
[1982] 1 WLR 202
Blausten v
...
District Auditor (1986) 26 RVR 24
Part 6 Revision Notes
-

First maxim – equity will not perfect an imperfect gift
If there is some basic formality that is messing, the gift will not take effect
E
...
if share certificate is not sent for registration

-

Second – equity will not assist a volunteer
Someone who does not give consideration
Though, a beneficiary of a trust is normally a volunteer

Improperly constituted trusts and imperfect gifts

-

Following considers situations where trust has not been properly created and yet C argues that the
trust is effective nevertheless
two general situations where this may arise
first, where intended beneficiary argues that that the settlor who failed to create a valid trust should
be bound by good conscience and thus should provide her with the property rights
Second, where one intends to gift a property but fails to make an effective transfer
question is whether this intention can be enforced by arguing that donor is a trustee on grounds that
it would be unconscionable for her to renege on agreement
‘equity will not assist a volunteer’
Courts will not infer an intention to create a trust over property in circumstances in which the
transferor actually intended to make an outright transfer of that property (Milroy v Lord [1862]
Thus, a C cannot rely on the law of trusts to effectuate an incomplete gift
There are some exceptions however

The problem with trusts and imperfect gifts
-

How do we know whether an action is a trust or an imperfect gift?
Equity will not permit an action which was intended to be a gift to be validated by deeming it to be a
trust instead (Ibid)

The rule that equity will not assist a volunteer and its impact on imperfect gifts
-

Principles of Milroy v Lord
No trust will be created unless legal title is passed to the trustees
An intention to make a gift cannot be recharacterized as a trust just to validate it

‘Doing everything necessary’, not an incompletely constituted trust
Re Rose [1949]
-

Transferor in August 1944, executed a transfer of shares in a company
Died in Jan 1946
Transfer not registered until march 1946
Everything had not been done and so would have failed
High court did not follow that approach
Held that he did all that he could have done and the fact that Mr Rose could not have unwound the
transfer once he had filled in the form was given great significance by the court, despite the fact that
it still had to be approved by the board of directors

The principle in Re Rose [1952]
-

-

-

‘if the donor has done everything necessary for her to do’ to make the gift, then equity will deem an
equitable interest in the relevant property to have passed automatically, even if the donee is a
volunteer
Exception to the volunteer maxim
Difference between this Re Rose case and the Milroy case is that Mr Rose had done everything he
could possibly to do to ensure effective transfer of property, it would have been unconscionable to
not allow an effective transfer
COA decision
30th March 1943, settlor tried to do two transfer of shares in an unlimited company as required by its
constitution
Under these articles (the constitution) the directors of company could refuse to register a transfer

-

-

Transfers registered on 30th June 1943
Settlor died
Was there an effective gift and where did it take place?
Transfer was intended to happen immediately
Held there was a valid gift and secondly, there was no tax bcos gift took effect on 30th March, i
...

when you intended it to happen
Lord Evershed held that all of the actions necessary to be taken by the transferor to affect a valid
transfer had been carried out, such that the court considered that it would have been against
conscience for the donor to have sought to renege on his intention to make it transfer of the
property
Equitable interest in shares had been transferred as soon as all necessary formalities were complete
Approved previous Rose decision

Perfecting imperfect gifts
Re Fry [1946]
-

Mr Fry executed transfer of shares of an English company in favour of his son
Formalities at the time required that transfer of shares could not occur until permission of treasurer was
obtained
Mr Fry passed before consent could be obtained
Judge stated that one could not say that Fry had done everything that could be done
Harsh case as he had done everything necessary for him to do
Decision may be attributed to being decided in wartime and thus court not wanting ownership of a
company to pass potentially into the hands of foreigners at that time

Jones v Lock [1865]
-

Mr Jones, a businessman, went to Birmingham, when he returned home his family said that he had not
bought a gift for his child
He wrote a cheque for £900, payable to himself and then said ‘look you here, I give this to baby’
Placed cheque in baby’s hands
Jones then took the cheque back, fearing baby would tear it and placed it in safe
He died 6 days later
Held that loose conversations of this sort in important transactions of this kind, would create legal
relations of trust, it was a gift which failed
Held that equity would not "perfect an imperfect gift" by creating a trust, if the proper formality for the
gift had not been completed
...
Pagarani [2001]

-

Held that a valid trust was created over that property even though the deceased person had not
transferred the legal title in the trust property to all nine trustees as trustees
Rationale being that the settlor had done all that was necessary to create a trust and therefore that the
equitable interest in his property should be taken to have passed automatically

“although Equity will not assist a volunteer, it will not strive officiously to defeat a gift” – per Lord Browne –
Wilkinson
Mascall v Mascall [1985]
-

Relaxed approach followed here
Transfer of a house
He gave all his wealth to a foundation
He soon died before certain deposit balances and shares had been transferred to foundation
Were they effective transfers?
Privy council
Held that since he had done everything he had to do to transfer the property, he was not entitled to
renege on the transfer
Third approach, which was temporary and is no longer
Equity will do what is conscionable
Doesn’t look at formalities

Pennington v Waine [2002]
-

Auntie wished to make transfer of shares in company to nephew
Requisite formalities were not completed
Gave shares to accountant tasked with sending shares off to be registered
This was not done
Formalities not complied with
Technically a failed gift
Court held would have been unconscionable for Ada to have refused to transfer those shares for Harold
Better to see this case as falling under contractual obligations, rather than a gift, otherwise it may
overlook formalities
Exceptional case confined to its own facts
Though, may be seen as extending the Rose principle which itself may be seen as a general principle of
the courts not keen to defeat a gift
Judges felt it would have been unconscionable for those shares to have been refused
Also, influenced by the fact that it had been Ada’s intention throughout her life to transfer those shares

“equity has tempered the wind (of the principle that equity will not assist a volunteer) to the shorn lamb (the
donee) by utilising the constructive trust” – per Arden LJ
Exceptions to the rule that equity will not assist a volunteer
Strong v Bird [1974]
-

-

If a debtor is named by the testator as an executor of the estate of the one to whom he owed the debt,
that chose in action is discharged
i
...
a gift is made of the amount of the debt
The appointment of Bird as the executor was an evidence that the loan to Bird was a gift to him
...
The donor must have intended to make an inter vivos gift
...
Such donative intention must have persisted until the donor's death
...
The donee is appointed the donor's executor (or administrator, Re James [1935])
4
...

Donatio mortis causa
-

‘give up dominion’
Exception to the rule that a testamentary gift must be made properly or else it will not be effective
Gifts are made during donor’s lifetime, made in expectation of immediate death, and which are
intended to take effect on the donor’s death (Sen v Headley [1990])

Part 7 Revision Notes
-

Often give a gift to charities, but they may take it as a trust
And charities can form its company in various ways
Certainty of objects rule is inapplicable
Charities act 2006 has been embedded into 2011 act

Advantages of charitable status
-

Legal advantages
Certainty of objects rule inapplicable
Rule against inalienability inapplicable
Exemptions from some aspects of rule against remoteness of vesting (Christ’s Hospital v Grainger
[1891])
Cy-pres
Tax advanatages

Legal definition of charity
-

In the preamble to the charitable Uses Act 1601
Also see Scottish Burial Reform Society v Glasgow Corporation [1968]

So, for a charitable trust to exists three conditions must be satisfied:
1)
2)
3)
-

The purpose must be charitable in nature
The purpose must be for public benefit
The purpose must be wholly and exclusively charitable
...
661 - not necessarily destitute – reduced circumstances (see Evershed M
...
)
-

Poverty does not necessitate proof of outright destitution, rather it can encompass which exceeds
simply ‘going short’

Re Sanders’ WT [1954] Ch
...
L
...
910 - “construction of a workingmen’s hostel in Famagusta, Cyprus”
-

-

A gift for the construction of a working men’s hostel in an area of extreme poverty in Cyprus created
valid charitable trust for the relief of poverty on basis that the class of persons described could be
considered, to be suitably impoverished
High court

Public benefit test
Dingle v
...
C
...
Ltd
...
The appellant argued that it was not a charitable gift, and that the gift
failed
...
Since they were a ‘section of the public’, the gift was charitable and
did not fail
...

Charitable even though it went to a small group of 600
Exception to Oppenheim case where the trust was not charitable because of the personal r/s
between the trustees and the beneficiaries
Whereas here, the company, in trying to help their employees, were relieving society for having to
provide for these poor people and thus benefitting society – poverty exception
Essentially, the court appears to have the desire to accept genuine charitable causes, rather than
those done in favour of tax purposes

Re Scarisbrick [1951]
-

-

The court was asked whether a trust for poor persons within a restricted category, the testator’s
descendants, not meeting the usual requirement that the benefits be available to a wider section of
the community, may be held charitable
...

The dividing line between a charitable trust and a private trust ‘depended on whether as a matter of
construction the gift was for the relief of poverty amongst a particular description of poor people
[charitable] or was merely a gift to particular poor persons, the relief of poverty among them being
the motive of the gift [private]’ The fact that the gift took the form of a perpetual trust would no

doubt indicate that the intention of the donor could not have been to confer private benefits on
particular people whose possible necessities he had in mind ; but the fact that the capital of the gift
was to be distributed at once did not necessarily show that the gift was a private trust
...
255 - “knickers for boys in Farnham”
-

3(1)(j) “the relief of those in need because of…age”
Not a trust because affluent boys could receive the money
Trust for provision of clothing for boys was held to be invalid on the basis that there was no
necessary requirement that the boys in question be in poverty

The estate of John Duffy [2013] EWHC 2395 Roth J
Advancement of education
Charitable nature:
Royal Choral Society v
...
R
...

-

Harman J's held that “
...

Trust to think about having 40 letter alphabet, failed

Re Hopkins’ WT [1964] 3 All E
...
46 - Bacon-Shakespeare dispute (dissemination)
-

Valid
Search for this would be of high value to history and literature

Re Dupree’s WT [1945] Ch
...

-

Necessary teaching and education aspect
valid

IRC v
...
R
...
85 - own works of art contained in a museum
-

Keeping intact a collection of eclectic art objects for the benefit of the National Trust was held not to
have been charitable because it was considered to be impossible for the court to establish any merit
in the objects nor any public utility in the gift

R (Independent Schools Council v Charity Commission) [2011] UKUT 421
...
33 public benefit has the same meaning as it did previously
Fee paying schools will be charitable

-

Suggests that there is no such thing, it is a matter of fact
Held that a public benefit was required to be something which was both of benefit to the community
and directed at a sufficiently large section of the community

Public benefit test
Oppenheim v
...
[1951] A
...
297 - “for providing for the education of children of
employees or former employees of the British American Tobacco Co
...
” (110,000 employees)
-

-

Held that a trust could not be charitable if ‘the benefits under it are confined to the descendants of a
named individual or company’
So here, the trust was not validly charitable as there was a nexus between the people who
established the charity and the people who were intended to benefit such that the people who
stood to benefit could not be said to constitute a section of the public
This trust was not a charity
Because it lacked sufficient public benefit
HOL, 4-1 majority
Stated that the employees did not suffice to be a section of the public
Dissenting judgement – thought that we shouldn’t have such harsh rules, a question of degree
He said here bcos it was a large group, even though not a geographical, it should have sufficed
Majority said that it needs to be a geographical group

Re Koettgen [1954] - 75%
...
Educational Grants Assoc
...
[1967] 2 All E
...
893 - 80%
-

Rationalised as being properly considered as a trust for a public benefit, with a direction to the
trustees to give preference to a private class who fell within the definition of that public class
75% to 80% of income had to be spent upon educating children of company
Issue was, was this charitable?
Was not exclusively charitable as so much had…
Followed Oppenheim, the case above maybe exceptional

Advancement of religion
Charitable nature
Neville Estates v
...

-

Confirmed change of approach
2011 act s3(2)(a)
Definition hanged so that now religion includes ‘belief not in a god’

Public benefit:
Gilmour v
...
C
...
198 - Disjunctive – trust to build flats for persons over 65
Rowntree Memorial Trust Housing Assoc
...
A-G [1983] Ch
...
113 - “for the protection and benefit of animals including humane means of
slaughter”
-

Held charitable as there could be shown to be some moral improvement to the human community
by dint of treating animals better

Re Grove-Grady [1929] 1 Ch
...
Glasgow Police Athletic Assoc
...
C
...
Baddeley [1955] A
...
572 - “Stratford New Town Methodist Mission”
-

HOL
Trust promoted physical and spiritual well being
Held that not a charity
Firstly, purposes were not exclusively charity, social element
Also, class of beneficiaries were too narrow

Viscount Simmonds
-

Necessary to show public benefit, must be of the whole community

Williams’ Trustees v
...
C
...
See Section 5 of the Charities Act
2011 which re-enacts the recreational charities act and gives statutory force to recreational charities
provided certain conditions are fulfilled
...

-

This will override any case law to the contrary
2011 act, provision on recreational activities as being charitable
Still needs to be established that it provides a public benefit

Political Trusts
National Anti-Vivisection Soc
...
IRC [1948] A
...
31 - medical experimentation
-

Stop experimentation on animals
Bcos therefore seeking to change law, it could not be allowed as a charity
Courts assume that any change in the law is not for the benefit of the public
Courts apply this very harshly

Re Bushnell [1975] 1 All E
...
721 - ‘Socialised medicine’ - socialist state’
-

Confirmed here

McGovern v
...
32 - Amnesty International
-

Narrow exception
If incidental to the actual purpose of the charity, then this will be allowed

Re Koeppler’s WT [1985] 2 All E
...
869 - Conferences at Wilton Park
-

Courts are willing to uphold charitable trusts where there is genuine charitable intention

Re Hopkinson [1949] 1 All E
...
346 – Labour
-

-

trust for the advancement of adult education with particular reference to
...
to a higher conception of social, political and economic ideas and
values
...
Attorney General [2000] N
...
R
...
1017 - Education in militarism and disarmament
-

-

stablished that a trust or organisation whose purposes are ostensibly educational will not be
accorded chartable status where these purposes are meant to further some political agenda,
ideology or goal
Whilst peace is to be recognised as worthy of promotion, the organisation was set up to persuade
others of the views of those behind it
...


Public benefit for other purposes beneficial to community:
-

Community defined by geography

Verge v Sommerville [1924] AC 496
‘… inhabitants of a parish or town or any particular class of such inhabitants, may, for instance, be the
objects of such a gift, but private individuals, or a fluctuating body of private individuals cannot
...
C
...
299 - “to the vicar of St
...
)
-

In 2001 it provided for new objects, one of which being ‘the business of providing housing
accommodation, assistance to help house people, associated facilities and amenities,’
In 2004, changed its memo
Thus, the institution became a charity
Challenged by the revenue
Basis that this had not been established exclusively for charitable purposes
Defence argued Firstly, whatever they did they did for community
Secondly, what they were doing in general sense fell within Charities Act 1601

-

Thirdly, had sufficient public benefit
Held not exclusively charitable because it conferred private benefits on individual tenants as part of
it activities
All charitable purposes must be for the public benefit

CY-Pres
-

“as near as possible”
the doctrine of cy-press in charity law allows a property given on trusts for charitable purposes which
can’t be used in the precise manner intended by the donor to be used in for a different albeit similar
purpose
...


Initial Failure
Re Harwood [1936] Ch
...
191 - Not Jewish or Roman Catholic Medical Students
-

limitation, funds could not go to either women, Jews or Catholics
Royal college of surgeons refused it
Court confirmed that under CY Pres can modify charitable trusts
Court removed this limitation
Also, held here that courts can alter size of payments made under a trust

Re Rymer [1895] 1 Ch
...
Thomas’ Seminary for the education of priests”
...
488 - “Mrs
...
286 - Corporate prima facie invalid unless general charitable intent
-

In reference to case before this one, distinction is drawn between unincorporated and incorporated
charities

-

Transfer to unincorporated charities will generally constitute a purpose trust and be capable of being
applied Cy-pres
Transfer to an incorporated entity will not necessarily constitute a general charitable intention
where that specific entity is identified by the settlor

Part 8 Revision Notes
The beneficiary principle
Basis of the beneficiary principle
-

Must be ascertainable beneficiaries (Morice v Bishop of Durham [1804])
Two ideas are fundamental to trust law
A) Consciences of the trustees can only be controlled when there are benefiaries who can take them
to court as then the court can take control of the trust if need be
B) Trust requires that some property be held on trust for some person as beneficiary such that the
beneficiary acquires a proprietary right in the trust property
This proprietary right gives Beneficiary (B) locus standi to take matter to court

Policy against abstract purpose trust
-

Trust which is not for the benefit of ascertainable beneficiaries is a trust for the pursuit of an abstract
purpose
Void under English law bcos no ascertainable B

Strict approach to the beneficiary principle
Approach based on the avoidance of trusts lasting in perpetuity
-

Traditional approach of the principle took literal interpretation
i
...
whether any possible risk of trust failing to vest in a person as a beneficiary

Re Wood [1984]
-

-

held to void for remoteness of vesting
trust created for purpose of working gravel pits with profits held on trust for identified family
members
heavily criticised as clearly, gravel pits would eventually be exhausted so that trust would at some
point cease to have effect and thus the trust could not last in perpetuity
new approach is that if the trust property might have vested outside the perpuity period it was held
invalid

Approach based on identifying an abstract purpose without any benefit
Re Astor’s Settlement [952]
-

trust for ‘preservation of the independence and integrity of newspapers’
held no B and that the purpose was uncertain

Re Shaw [1957]
-

26 letter alphabet
Could it succeed as a non-charitable trust?
No, it had a pure purpose
No way of controlling the trust, no object and thus the court could not decree any favour in anyone

-

Cannot get around this by construing it as a power

Distinction between people and purpose trusts
-

People trusts have identifiable B’s and so, are valid
Purpose trusts do not and thus are invalid

Example of the traditional approach
Leahy v AG for NSW [1959]
-

Property to be left ‘upon trust for such order of nuns of the Catholic Church… as my executor and
trustees shall select’
Trustees selected non-charitable order of Carmelite nuns
Abstract purpose (trust for ‘such order of nuns’) or people trust (with identifiable beneficiaries of the
Carmelite nuns)?
Literal interpretation, held to be abstract purpose and thus void

Direct or indirect use or enjoyment of property
Re Denley [1969]
-

Modern approach
Different approach to the case above
Sports ground left for the recreational purposes of a company’s employees

Trust provided that land ‘be maintained and used as and for the purpose of a recreation or sports ground
primarily for the benefit of the employees of a company and secondarily for the benefit of the such other
person or persons as the trustees may allow to use the same’
-

Void purpose trust or valid people trust?
Held to be latter
Could be said that facts of cases were too dissimilar

Re Endacott [1960]
-

T transferred his residuary estate to council
Was done for the purpose of providing some useful memorial to myself
Did this create a trust?
Firstly, this was not a gift
Secondly, T intended to impose an obligation upon council
Failed due to uncertainty of objects
Lord Evershed said that the whole thing was far too wide and uncertain

Re Osoba [1979]
-

There was a will made for T’s widow,
‘for her maintenance’
‘For the training of my daughter up to university grade’
Widow had died and daughter finishes uni
Both were joint beneficiaries
On death of widow, daughter succeeded onto entire fund
References to maintenance and education were mainly declarations
merely declared motivations of the testator, to benefit both

Re Abbot Fund Trusts [1900]
-

collected 248 pounds for purpose of helping two ladies who were deaf and dumb
two ladies had been defrauded of monies from their father by the trustee who misappropriated their
money
status of the fund?
Court held that he could not believe that it was the wish that it would become the property of these
two ladies
Therefore, on their deaths, since it was a fund of general purpose (to assist them with their
disabilities), the money that had not been used by them did not go to their respective estates but on
a resulting trust

Re Andrews’ Trust [1905]
-

Here, a fund was contributed to, by the friends of a deceased clergyman for the education of his
children
All of them were infants
Stated in the trust document that the money was not for a specific se nor to be equally divided
between them
Necessary to carry out their education
Education of the children was paid for, partly from this trust fund
Surplus in the fund after this, which had not been used
No resulting trust back to the subscribers of the fund but to the founders of the fund
Balance could and would however, be divided equally amongst the children in Re Osoba
Court wanted to get around the purpose
construed education as not being limited in a narrow sense

Purpose trusts
General proposition – non-charitable trusts of imperfect obligations are void – Re Astor’s Settlement Trust
[1952] Ch 534 & Morice v Bishop of Durham (1805) 10 Ves 522
...
They are mainly
concerned with animals, monuments and praying masses in private
...
The trust must be for a purpose which has been recognized in the past as valid,
2
...
There must be someone who is willing and able to execute the trust
...
38
-

T left sum of money to trustees for care and upkeep of family graves and monuments
‘so far as the trustees legally can do so’
Upheld
Based on previous case law

Part 9 Revision Notes
Fiduciary making unauthorized profits
The development of the principle that a fiduciary may not make unauthorized profits

-

Fiduciary obliged to account for all unauthorized, personal profits
By means of constructive trust imposed over those profits – or if profits cannot be identified, by
personal account to the beneficiaries of the trust
Principle is to stop fiduciaries from conflict between personal/fiduciary interests
From the case of Keech v Sandford [1726]

per Lord King LC: - “this may seem hard, that the trustee is the only person of all mankind who might not
have [the trust property]: but it is very proper that rule should be strictly pursued, and not in the least
relaxed; for it is very obvious what would be the consequences of letting trustee have the lease…”
...
Persons’ in a fiduciary office acting in breach of their duty of loyalty
“A fiduciary is, simply, someone who undertakes to act for or on behalf of another in some particular matter
or matters
...
It may be specific or limited
...
And the undertaking may be officiously assumed without request…
[A fiduciary] is expected to act in the interest of the other – to act selflessly and with undivided loyalty” –
Finn, Fiduciary Obligations
...


‘A fiduciary is someone who has undertaken to act for or on behalf of another in a particular matter in
circumstances which give rise to a relationship of trust and confidence
...
The principal is entitled to the single-minded loyalty of his fiduciary
...
A fiduciary must act in good faith; he must not make a profit out of his trust;
he must not place himself in a position where his duty and his interest may conflict; he may not act for his
own benefit or the benefit of a third person without the informed consent of his principal
...
They are
the defining characteristics of the fiduciary
...
This is
sometimes described as ‘the double employment rule
...
If he does, he may have no alternative but to cease to act for at least one and preferably both
...
’

a
...
175 of companies’ act 2006) conflict of interest
Must notify company (s
...
In breach of that fiduciary duty, Cedar had
made a secret commission of 10million from the vendor
...

The Supreme Court dismissed the appeal, and held that Cedar (the defendants) held the €10m
commission on constructive trust for FHR (the claimants)
...


1
...

2
...
" In that regard, the former proposition is "part of the
[latter] wider rule"
...
"[A] fiduciary who acts for two principals with potentially conflicting interests without the informed
consent of both is in breach of the obligation of undivided loyalty; he puts himself in a position where
his duty to one principal may conflict with his duty to the other
...
General rule:
Keech v Sandford [1726]
per Lord King LC: - “this may seem hard, that the trustee is the only person of all mankind who might not
have [the trust property]: but it is very proper that rule should be strictly pursued, and not in the least
relaxed; for it is very obvious what would be the consequences of letting trustee have the lease…”
...
It does not appear to me that this rule is, as had been said, founded
upon principles of morality
...
”

Leading case
Boardman v Phipps [1967]
-

A trust where the property comprised shares in an Australian company
Boardman was a solicitor to trust, not a trustee,
Phipps family were beneficiaries of the trust
B was concerned that trust only had minority interest in those shares
Less valuable and the majority holder can dictate
B thus wanted more shares
Trust did not want to purchase shares
B sought approval and asked trustees for approval
Didn’t obtain approval of beneficiaries
One beneficiary was in fact, too old to consent
Consent was thus not properly given, as beneficiaries’ consent was not given

-

As a result, B made a substantial profit
What was the liability of B? in terms of these additional shares which he ultimately purchased in his
own name after the trust not wanting to purchase him
Majority of 3-2, held that B was accountable for profits he had made
Held on trust for beneficiaries, in proportion to the value of shares of each beneficiary
Minority thought since he had not acted in bad faith he ought not to be subjected to constructive trust
Boardman was held to be entitled to some compensation however (known as equitable accounting)
for his efforts in spite of the imposition of the constructive trust

Basis of constructive trust in this context: avoidance of conflict of interest

-

-

-

Clear that basis of constructive trust is avoidance of conflict of interest
Alternative argument raised in Phipps, that Boardman, by obtaining confidential info while on trust
business, was a misuse of trust property – rejected by the HOL that confidential info could be
considered property
Judges thought it may be in some situations, where confidential info has distinct commercial value
A lack of desire to impose proprietary rights and remedies unless there is a proprietary basis to the
action (e
...
misuse of trust property)
Counter argument to Boardman not having been liable as a constructive trustee but on the misuse of
the trust property is that the confidential info may well have been useless without the analysis
Boardman placed on it – difference between this and secret formula yet to be patented
COA in Bhullar v Bhullar [2003] reasserted principle that constructive trust in this context is not
dependent on any interference with trust property, but rather is based on the avoidance of conflicts
of interest

Dissenting view in Boardman v Phipps
-

-

Agreed with conflicting interest principle in general
But that Boardman had not breached the principle since he had not acted in bad faith and used his
own money during these transactions
Lord Upjohn’s view was that a solicitor ought to be able to act separately on her account and her
client’s without need to impose constructive trust over any profits realized, provided no conflict of
interest between her fiduciary duties to her client and her own desire for making profit
Though, Boardman ought to have known that he was not entitled to take profits without informed
consent of the beneficiaries

Traditional view
-

View of Hudson, that Boardman ought to have known better,
A solicitor he was and should have been aware of the strict rule that had existed since 1726 (Keech v
Sandford)
Could have protected himself completely either having the trust instrument altered so that his activity
was authorized or by seeking authorization from beneficiaries of the trust
Consent from one other trustee is insufficient to authorise actions such as his (Regal v Gulliver) as he
should have known

No requirement that the profit be made directly from the fiduciary office

-

-

No need to demonstrate that the profit was earned ‘from the fiduciary office’ as opposed to being
made in general terms in a manner which caused a conflict between fiduciary’s personal interest and
his fiduciary duties
No added condition beyond that taking of a profit that the fiduciary must have taken that directly from
their fiduciary office and not while acting in another role
No need for the D to occupy a traditional fiduciary role (Cobbetts LLP v Hodge [2009] – senior lawyer
was not a full partner yet deemed to owe fiduciary duties as his role included bringing investors to
firm)

When fiduciary will have acquired authorisation

-

Can trustees give other trustees permission to breach fiduciary duties? Or can such permission only
come from beneficiaries bcos it is to the beneficiaries that the trustees ultimately owe their fiduciary
duties to?

Two cases in which authorisation was found

Queensland Mines v Hudson [1977]
-

-

-

Two important factors here
Board of directors of the company were commercial people who could make an informed decision
about pursuing those opportunities; and also, Hudson was found not to have hid any details part of
the opportunity
One director received informed decision of the remainder of the board that this opportunity would
not be pursued by the company, giving implied consent to Hudson (managing director) to pursue
opportunity on his own account; which he subsequently did after resigning
Court held that authorisation was given – profits not held on constructive trust
Controversial as Queensland could not afford to take up the opportunity & Hudson had learned of
opportunity as fiduciary of that company
No real conflict however

Foster v Bryant Surveying Ltd [2007]
-

-

Foster and Bryant were directors of a company when Bryant resigned after his wife was made
redundant by the same company
Alliance, who was a client of the company, still wanted both of them to keep working
...
Mr Foster argued that Mr Bryant's services should be contracted
out through their company still, not a separate one
...
Mr Bryant, fully funded
by Alliance, set up a new company
...

Foster sued Bryant for breach of fiduciary duty
Held to be no breach
Rix LJ held that the standards of loyalty, good faith and the no-conflict rule should be looked at with
reference to all the circumstances
...
His duties included procuring business in the
field of developing gas depots
...
However, the Gas Board were not prepared to let the contracts
to the company
...
In the course of the meeting,
Mr Cooley acquired knowledge that the company did not have; and would have wanted to have
...

Held: He was accountable for the profit
...
A company director owes a fiduciary duty to report relevant information of concern to
the company:

Regal Hastings v Gulliver [1942]
-

Several directors and their solicitor each invested their own money into a cinema which was to be
taken over, to prevent the cinema becoming insolvent
Following the takeover, the directors and the solicitor made significant personal profit, as did the
cinema itself because of the investment
Were the directors and the solicitor liable to the new parent company for their personal profits
Directors yes, solicitor no
As agents of the business, the directors were liable for breaching their fiduciary duties without consent
Court held that a director is in breach of his duties if he takes advantage of an opportunity that the
corporation would otherwise be interested in but was unable to take advantage
...
170 of the Companies Act 2006 provides that directors owe their duties to the company
Regal suggests that fiduciaries cannot simply rely on the permission of other fiduciaries
Consequently, duty of disclosure would be to shareholders of a company or to beneficiaries
Fiduciary must be acting as a fiduciary when taking their profit

Remedies
-

fiduciary is liable to hold profits on constructive trust for beneficiaries of that fiduciary duty

Sinclair Investment Holdings v Versailles
-

Primary remedy is for proprietary constructive trust over personal profits
Secondary remedy (if no property over which the constructive trust can take effect) is for a personal
remedy in the form of an account of profits
Third is court may suggest equitable accounting to reduce amount for D

CMS Dolphin Ltd v Simonet [2001]

-

Held that Mr Simonet resigned without giving proper notice, and so he was in breach of contract
...
The maturing business
opportunities were the company’s property, ‘where he knowingly had a conflict of interest, and
exploited it by resigning from the company’
...
If no longer there, it must pay
money compensation on the same basis
...
Foreseeability of loss, however, was irrelevant
...
But principles of traditional trusts did not necessarily apply to bare trusts
in a commercial contract
...
It was part of the machinery for its
performance
...


Duties of directors under the companies act 2006
-

Directors owe fiduciary duty to companies

Self-Dealing rule
-

-

Self-dealing is the conduct of a trustee, an attorney, a corporate officer, or other fiduciary that consists
of taking advantage of his position in a transaction and acting for his own interests rather than for the
interests of the beneficiaries of the trust, corporate shareholders, or his clients
...

The principal of that fiduciary (the person to whom duties are owed) may sue and both recover the
principal's lost profits and disgorge the fiduciary's wrongful profits
...

Validates acquisitions by trustees of the interests of their beneficiaries and finds that they will be
enforceable provided that the trustee does not acquire any advantage attributable to his fiduciary
position
No details can be concealed, price obtained was fair and beneficiary was not required to rely entirely
on the trustee’s advice

English law cases not applying strict rule

Murad v Al-Saraj [2005]
-

The Judge held that even if the Murads had known, they would have gone ahead with the purchase,
although they would have demanded a greater share of the profits
...
Mr Al-Saraj argued that his liability should not be
his full profits, but only those that he would not have made if the fraud and secret profit were not
present
...
However, he had fallen out with his co-director; and had been effectively
excluded from the management of the company
...
In so doing, he used
no property belonging to In Plus and made use of no confidential information which had come to him
as a director of In Plus
...
The two strands of the fundamental rule that obliged fiduciaries to account for personal benefit
or gain had two separate themes were labelled the ‘no conflict rule’ and the ‘no profit rule’
...


Exceptions
Consent to the making of profit by the fiduciary
Guinness v Saunders [1990]
-

A former director of the recently taken-over Guinness brand was paid a £5
...
It said that Mr
Bryant should still give his services
...
But he lost the argument
...
However, this was all done a few days before the resignation had
actually taken effect
...


Remuneration
O’sullivan v Management Agency and Music Ltd [1985]
-

A contract entered into by a person in breach of a fiduciary relationship could be set aside in equity
even though it was impossible to place the parties in the precise position in which they had been
before, provided the court could achieve what was practically just between the parties by obliging the

wrongdoer to give up his profits and advantages, while at the same time compensating him for any
work he had actually performed under the contract
...

B was a successful rock group which broke up in 1975
...
In 1988, M improved tapes of a live concert that were of poor technical quality
...
M sought a direction that he was
entitled to the expenses incurred in carrying out the work, and a producer's fee
...


Re Duke of Norfolk’s Settlement Trusts [1981]
-

Confirmed that a court has the jurisdiction to remunerate a trustee, to authorize it and to increase it

See also section 28 Trustee Act 2000
...
– Hudson
-

Stranger will be constructive trustee as he will be made liable as if he had actually been a trustee for
the loss caused by breach of trust
Stranger is personally liable to account in that he does not hold any property on trust and is not an
ordinary, constructive trustee
Her liability is to compensate beneficiaries of trust from her personal property
Act/omission that facilitates breach is sufficient
Liability here, is not determined upon payment

Barnes v Addy [1874]

-

A stranger to a trust can be liable in equity for assisting in a breach of trust, even though he received
no trust property
...
– per Lord Selbourne
Test of dishonesty
Royal Brunei Airlines v Tan [1995]
-

‘knowing assistance’ towards ‘dishonest assistance’
Subjective to objective
i
...
a person is dishonest if she fails to do what an honest person would have done in those
circumstances

per Lord Nicholls – “dishonesty is a necessary ingredient of accessory liability
...
A liability in equity to make good resulting loss attaches to a person who dishonestly procures or
assists in a breach of trust or fiduciary obligation
...
”
“Subjective characteristics of dishonesty do not mean that individuals are free to set their own standard of
honesty in particular circumstances
...

Honesty is not an optional scale, with higher and lower values according to the moral standards of each
individual
...

“Acting dishonestly, or with a lack of probity, which is synonymous, means simply not acting as an honest
person would in the circumstance
...
”

Introducing subjectivity to the test of ‘dishonesty’
-

Idea that a person can claim not to have realised that other people would consider their actions to
have been dishonest is sometimes referred to as the ‘Robin Hood’ defence

Twinsectra v Yardley [2002] HOL
- Hutton held that the test for dishonesty required not only an inquiry as to what an honest person
would have done in the circumstances but also an inquiry into whether or not the D subjectively
appreciated that what he had done would have been considered dishonest by honest people
- Second limb is subjective
Per Lord Hutton “There is, in my opinion, a further consideration which supports the view that for liability as
an accessory to arise the defendant must himself appreciate that what he was doing was dishonest by the
standard of honest and reasonable men
...
Notwithstanding that the
issue arises in equity law [sic] and not in a criminal context, I think that it would be less than just for the law to
permit a finding that a defendant has been dishonest in assisting in a breach of trust where he knew of the

facts which created the trust and its breach but has not been aware that what he was doing would be regarded
by honest men as being dishonest”
...

Brinks Ltd v Abu Saleh and Others (No 3) [1999]
-

Shows a tendency towards subjectivity
D not held to be liable due to her ignorance of the true nature of their dealings meant that she was
held to not have assisted her husband dishonestly

Re-establishment of purely objective test for dishonesty
Dubai Aluminium Co Ltd v Salaam [2003]
-

HOL confirmed that appropriate test for dishonesty was objective one in Royal Brunei

Barlow Clowes v Eurotrust [2006]
- Privy Council decision returning back to pure objective test set out in Royal Brunei
- Revealed shortcomings in Lord Hutton’s test
Abou-Rahmah v Abacha [2006]
- Relied on dicta in Royal Brunei which suggested court can reference D’s personal attributes as long as
Court does not allow D’s personal beliefs to excuse a dishonest act
- Also validated Privy Council decision (which are purely persuasive) of Barlow Clowes v Eurotrust
Rationale behind imposition of liability for dishonest assistance
- To protect the beneficiaries from acts of strangers interfering with trust in some way such that they
assist or facilitate the breach of trust
- Liability for dishonest assistance is a form of secondary liability in that dishonest assistant will be used
upon establishing liability of the trustee or if trustee cannot be held liable for breach of trust
- Trustee need not be dishonest – just need a breach of trust which caused loss to beneficiaries
- Judges use the formula of constructive trust to impose liability as though the D were an express trustee,
not as if the property is actually held on trust for the dishonest trustee
Who is the honest person?
- Court must identify facts known to the D – so that the hypothetical, honest person can be taken to
know them – but not taking into account D’s characteristics
Confusing position for judges at first instance
- For some reason, Dubai v Salaam is rarely cited by courts
- Unclear for judges at first instance whether to follow Twinsectra or Eurotrust
- Is knowledge reference to D’s character and intelligence, or to the facts known to her at the time?
Starglade v Nash [2009]
- In COA, chancellor held;
“there is a single standard of honesty objectively determined by the court
...
”
- Takes objective standard
- Makes it subjective however by limiting the ‘objectively honest person’ to a person who is subjectively
the same as the D
- Thus, the law returned to the position under Twinsectra, despite decision in Barlow Clowes,
-

Ultimately, what we have is a recognition that it is question for courts to decide on a case by case basis

-

-

-

Balancing need to understand the inflexible ‘ordinary standards of honest behaviour’ and the need to
ignore ‘the subjective understanding’ of the D while nevertheless considering his ‘knowledge and
qualities’
Chancellor held the test to be objective, in the sense that the relevant standard is ‘the ordinary
standard of honest behaviour’
And also held that the ‘subjective understanding’ of the D is ‘irrelevant’
(my opinion) – it appears that the law is fundamentally objective, but will occasionally, when necessary
and prudent, consider some subjectivity on behalf of the D, so the law has not truly returned to
Twinsectra, but has adopted a stricter, less subjective view of it, retaining its objectivity
Appears that the approach accepted by the HOL in Dubai Aluminium v Salaam should be accepted as
the leading case

Requirements of liability
i)
ii)
iii)
iv)

Existence of a trust or fiduciary relationship (company director or senior employee) concerning
property
Breach of trust or company law in the case of misapplied company funds
3rd party must assist (help) in the breach of trust or company law
Dishonesty on the part of the 3rd party who assisted in breach of trust
...


Requirement that there has been a breach of trust
- Liability is based on fault – liable for act of assisting and for dishonesty
- Without breach of trust, no loss for D to account for
- D must have genuinely assisted the breach in some way (i
...
link to the loss suffered by C) (Brown v
Bennett [1999])
Time and nature of the assistance and its relation to the breach of trust
-

trustee need not be dishonest – sufficient for them to have been manipulated

Subjective test:
R v Ghosh [1982]
Re Clowes [1994]
Williams v Central Bank of Nigeria [2014] UKSC 10
-

Issue here was limitation period
Normally isn’t issue in regards to fraud
Assistance is not solely enough to find liability must be met with dishonesty
The Supreme Court allowed the Bank’s appeal and held that claims for knowing receipt and
dishonest assistance are therefore subject to a six-year limitation period
...


Central Bank of Ecuador v Conticorp [2015] UKPC
-

Interest (compound) is available
...
It requires knowledge of the circumstances surrounding the breach of trust
Occurs where a person knowingly receives trust property which has been transferred away from the
trust or otherwise misapplied, and where that person has acted unconscionably, then that person
will incur a personal liability to account as a constructive trustee to the beneficiaries of that trust for
loss
...
” – Hudson
-

Whether there has been receipt will either be decided in accordance with the rules of tracing claims,
or it will be based on the defendant having possession of the property
...
In contrast, if a
bank may receive funds and move the funds over, it would not be a beneficial receipt)
...
(mental requirement) test is no longer
knowledge, it is “unconscionable receipt”
...


The nature of receipt
Taking property into your possession
-

What constitutes receipt?
Cases are not clear
Appears enough that the property passes through the stranger’s hands, even if the stranger never
had the rights of an equitable or common law owner of the property

Agip v Jackson [1990]
Held that ‘there is receipt of trust property when a company’s funds are misapplied by any person whose
fiduciary position gave him control of them or enabled him to misapply them’ – Millet J
-

Thus, one receives trust property if she has that property in her control/possession
Bank which payments come through constitute knowing receipt, despite not having any rights of
ownership over that money (Polly Peck Int
...
2) [1992]
Same with a personal bank account, owner of that account deemed to have received that money
Using another’s property to pay debts constitutes receipt (MT v Digital Equipment [2003]

Taking beneficial ownership of property
-

Different test for what constitutes ‘receipt’ in this context as set out by Hoffmann LJ in El Ajou v
Dollar Land Holdings [1994]
Requires beneficial receipt rather than simply taking property into one’s possession
Numerous problems with this

The nature of ‘unconscionability’ in unconscionable receipt
Concept of unconscionability
BCCI v Akindele [2000]
-

COA held that for a D to be liable in unconscionable receipt, enough to establish that he knew or
ought to have known of the breach of trust or fiduciary duty
Judgement by Nourse LJ
From judgement is clear that D is taken to have acted unconscionably if her knowledge was such that
it would be unconscionable for her to retain any benefit from the receipt of the property, or it would

-

cause the beneficiaries uncompensated loss without the D having a good defence or an absence of
knowledge
In the case, it might have been enough to show that D had had knowledge of actors which would
have put an honest and reasonable man on inquiry (test for knowledge as from Baden)
However, Nourse LJ held D would not be liable for knowing receipt
He was found not to have acted unconscionably and thus not liable under the receipt claim

Charter plc v City Index Ltd [208]
-

COA took similar approach to Nourse LJ
Carnwath LJ

“Liability for ‘knowing receipt’ depends on the D having sufficient knowledge of the circumstances of the
payment to make it ‘unconscionable’ for him to retain the benefit or pay it away for his own purposes”
-

Notion of unconscionability is therefore linked to the requirement of knowledge
Question is not whether D has acted unconscionable in general terms, but whether or not D had
such knowledge of the circumstances so as to make his retention or dealing with the property
unconscionable

Re Montagu’s Settlement [1987]
-

Court considered whether or not D had requisite knowledge of breach of trust and then ask whether
in general terms had D acted unconscionably
i
...
unconscionable receipt and merely not knowing receipt

N
...
The liability under receipt is limited to what you have
received, and nothing greater to that
...

First three categories deemed to indicate forms of actual knowledge
Last two are indicators of constructive knowledge/notice
Re Montagu [1987] whittled down to the first three for purposes of liability for knowing receipt

The three are as follows:
(i)
(ii)
(iii)

actual knowledge;
wilfully shutting one’s eyes to the obvious;
wilfully and recklessly failing to make such inquiries as an honest and reasonable man would
make;

-

-

Generally taken to be the current law
These three categories involve an element of ‘wilful’ behaviour on part of D
In Re Montagu, Megarry VC, preferred to exclude other categories bcos they did not require
wilfulness, and thus if D had claimed to forgotten knowledge which previously she has had, then she
would be liable for knowing receipt – unfair on D’s
If D was not required to have acted wilfully or intentionally, then it would be easier to fix D with
knowledge than in circumstances in which the C was required to prove that D had acted intentionally
in failing to make reasonable inquiries as to the source of the property which he had received

Analysing three Montagu categories
-

First category requires proof that D consciously knew of breach and source of property which she
received
If can’t prove move to second and third
Second and third known as constructive forms of knowledge, D deemed to have had knowledge of
breach even if actual knowledge cannot be proved definitively

-

Second category requires that there be something obvious that should have indicated there had
been a breach of trust which D ignored

-

Third category asks what inquiries are which an honest and reasonable person would have made in
the circumstances

-

Fourth and fifth category are broadest and merely require that there were ‘circumstances’ which
might have put D on inquiry

Knowledge may depend on context
Polly Peck v Nadir (No
...
In terms of knowledge, the standard is
unconscionability and did not want to look at knowledge
...


Charter Plc v City Index [2008]
-

It is common ground before me that the COA decision in BCCI reflects what the law is
...

At the COA: LJ C said in this court that BCI represents the present law
...


Doubts on the case of BCCI, but test remains:
Twinsectra v Yardley [2002]
Obiter: no direct claim of receipt, but Lord Millet indicated for receipt based liability, he would prefer a
restitution approach
...
Therefore, it can
only be an obiter statement because no claim as actually brought for unconscionable receipt
...
It was worse because he had access to client
accounts
...
Turns up at Playboy Club with cash
or he diverted money from clients account to his own account
...
Club knew that he had money in his own name,
nothing to indicate suspicious behaviour
...


Restitutionary claim at common law (receipt based):

1) Personal liability: give back what you have wrongly received
2) It is a strict claim
...
If you have received the money
wrongfully, that is enough for liability
...
Liability is sufficient simply based on receipt
...

Undermines the need to bring a claim in equity
...
Confirmed by Lord Templeman
2) Was it at the expense of the plaintiff? Like a debt-creditor relationship in this case
...
What was being stolen was this debt
...
In the general
approach-if you take someone’s money, you can see how unjust it is
...

4) Are there any defences available to the defendant? Change in position
Remedy
-

D is liable to compensate the beneficiaries of a trust for any loss they suffered due to breach which
has caused property to pass knowingly to D
The D does not hold property on trust for the claimant
Personal liability
D is construed to be liable as if they were a trustee

Defences
-

-

-

The defence that the defendant was a bona fide purchaser for value without notice of the claimant’s
rights
...

Also, if the D can demonstrate a change in position in good faith in reliance on receipt of trust
property, D would be entitled to resist the claim for personal liability
...
Must show there has been an alteration of
position
...


Part 12 Revision Notes
-

Tracing is the process by which a claimant may identify his property in the hands of third party and
bring a tracing process against him
...
Tracing
2
...


The distinction between tracing and following has been explained by Millett LJ in Foskett v McKeown [2001];
“Following and tracing are both exercises in locating assets which are or may be taken to represent an asset
belonging to the claimant and to which they assert ownership
...
Following is the process of following the same asset as it moves from hand to hand
...
–
-

-

i
...
following is done to recover a specific item of property which belonged to C, whereas tracing is
concerned where C’s property has passed into D’s hands but was substituted for another item of
property in which C does not have proprietary rights in
if substitute property has not been mixed with any other property, C may trace
if mixed, then can only bring tracing claim in equity not common law
Tracing is NOT a remedy but a mere process – the remedy will be decided by the court if a successful
claimed is brought
...

Court may order for compensation as a remedy - Property be restored directly to owner, property be
held on resulting trust, or constructive trust, or subject to a charge
Eventual remedy is separate issue to tracing claim (Boscawen v Bajwa 1995])

Understanding nature of the claim
-

-

-

Function of law here is to recover stolen property to owners, or to recover substitute property if the
original property cannot be identified/recovered
C literally traces her property rights
Distinction between seeking to establish title in the original item of property which was previously
owned, and seeking to establish title in the substitute property (known as traceable proceeds)
Former is a case of fact and proof – my car is stolen, but I can easily recover it from the number plate
providing D has not sold it
Latter is more complicated – where D has sold my car, would have to bring proceedings against D to
recover sale of proceeds from car, money never belonging to me but clearly derives from the sale of
my car
Trace property rights from car into money
Where substitute property has been mixed, a tracing claim can only be made in equity as the
claimant can argue that it would be unconscionable for the defendants to refuse to part with the
money as a substitute for the original property that was stolen
Though, C must have had an equitable interest in the original property

Comparison with personal liability to account
-

Focus of tracing claim is establishing proprietary claim to specific property
Where property is likely to increase in value, the establishment of a proprietary claim will allow C to
claim entitlement to any profits derived from that property

Distinction between common law tracing and equitable tracing
-

-

Initially common law tracing was limited to following
Extended to tracing only for ‘clean substitutions’ for original property, where original property is
substituted by other property but where that substitute property is kept distinct from all other
property
Equitable tracing is more extensive in that it allows c’s rights in mixtures of which property is passed
into
Common law tracing

-

Allows C to identify that a particular item of property belongs at common law to him
C has to prove that the property claimed is the one to be restored or that the property has not been
mixed with other property

Lipkin Gorman v Karpnale [1991]
-

-

Partner in a solicitor’s firm, took money from client account to gamble at casino
Casino held some money separately in an account for the partner
Firm sought to recover monies paid to the casino which had come originally from its client account
though (among other claims) common law tracing)
Held was a right in common law tracing re those amounts of money which were identifiable as
having come from that client account – C could establish common law tracing rights against sums of
money held by the casino to the partner’s account which could be proven to have come from firm’s
account and passed to D without being mixed with other moneys

Common law tracing is ineffective in regard to electronic transfers of monies as that form of
intangible property is not clearly identifiable (El Ajou v Dollar Land Holdings [1993])
If money were transferred to a ‘fresh’ account where no credit was present then money could be
identifiable (FC Jones v Jones)
Also see Agip v Jackson 1991], where CLT was not available due to the fact that the monies were
passed through various banks and companies, often changing currency, and thus, the money was no
longer identifiable

Understanding the limitations
-

To avoid CLT claim, usual tactic for D’s (who often are money launderers) is to divide original money
up into randomly sized portions and pay it into mixed bank accounts
These limitations have caused academics to argue that distinction between CLT and equitable tracing
to be removed

A new direction?
Fc Jones v Jones [1996]
-

-

D received a loan from a firm of £11,700, which she turned into £49,860 investing in potato futures,
she kept this money in a fresh, separate account from her other accounts
Turns out firm was technically bankrupt before giving the loan to D, thus rendering the loan monies
property of the official receiver
The original loan monies were no doubt entitled to the hands of official receiver, what about the
profit?
OR nor the firm has equitable rights in the further amounts and thus could not pursue a claim in
equitable tracing
COA held that the entire sum was to be paid to the OR as part of a CLT claim
Reasoning suggests significant development
Millett LJ
Nature of the claim, was explained by Millet J as being a proprietary right to claim whatever was held
in the ban k account, whether the amount at the time of the claim was more or less than the original
amount deposited
Immaterial whether those amounts constituted profits

Equitable tracing
-

Allows tracing into mixed properties
Must have had some equitable interest in property or the person who transferred that property
away had some fiduciary r/s to (e
...
trustee)

Need for a prior equitable interest
Traditional rule
-

i
...
must always ensure that there is a pre-existing equitable interest

Boscawen v Bajwa [1995]
-

Millet LJ explained tracing into a mixed fund, held that;

‘… equity’s power to charge a mixed fund with the repayment of trust moneys enables C to follow the
money, not bcos it is his, but bcos it is derived from a fund which I treated as it if were subject to a charge in
his favour’
Liability to equitable tracing even of innocent volunteers
-

D need not have acted unconscionably
Rather, the unconscionability will be in denying the rights of the beneficiary to their property

Re Diplock [1948]
-

D given gift from a testator in accordance with terms of a will
Afterwards, said gift was held to be void in other litigation on basis that charitable purpose failed
Residuary passed to intestacy, claim then brought by intestacy, which was next-of-kin, sought to
recover gift
Found that D’s acted in good faith and had right to believe gift was theirs
Though, subject to rights of the residuary beneficiaries to trace the money in equity, despite not
acting unconscionably
Appears that court will seek to protect the beneficiary under original fiduciary duty rather than allow
the subsequent innocent volunteer to retain any rights in the windfall which he has received
Distinguish between innocent volunteer and a bona fide purchaser without notice
Applied by HOL in Foskett v McKeown [2000] – innocent volunteer is prima facie liable to a tracing
action, with precise remedy to be decided

Benefits of equitable tracing
-

Benefit of equitable tracing over CLT are shown in money laundering cases such as Agip
As equitable tracing can be done into mixed accounts
Also, possible for equity to make a variety of awards of trusts and other remedies not available to
common law
Equitable process also awards discovery of documents during litigation to assist in tracing process,
and provides injunctions to prevent D’s dissipating property after date of injunction

Limitations on the right to trace in equity
-

Loss of right to trace (see later) in re to electronic transfers
In Bishopsgate Investment Management v Homan [1995], held that beneficiaries had lost their right
to trace into those particular accounts bcos the property had disappeared from them (said account

had been overdrawn between time of payment of money and bringing of claim and therefore had no
property in them)
Equitable tracing into mixed funds
Mixture of trust money with trustee’s own money
-

Courts often strive to achieve the outcome that is just on behalf of the beneficiaries and therefore
selecting the approach which gets them there most efficiently
Consequently, different outcomes can be generated by different approaches on the same set of facts

Honest trustee approach
-

Is property acquired from the mixed account money from the trust or trustee’s own money?
On basis that trustee is required to invest trust property to achieve the best possible return for the
trust, and that trustee is required to behave in good faith, court is likely to assume that trustee
intended to use trust property to make successful investments and to use her own money for any
inferior investments

Re Hallet’s Estate [1880]
-

-

Mr Hallet, a solicitor, a trustee/beneficiary of his own marriage settlement, paid money from that
settlement into his own personal account
He had a client (c), who’s trust fund he managed
Also, took money from her trust fund and put into his personal account
No tracing at common law bcos monies were mixed
He used this account incurring further liability
Upon his death, the funds in his account could meet the monies owing to C but not anything else
COA adopted the flowing presumption – would treat the outgoing money as fraud as money
belonging to Hallet, remaining money would be treated as the settlement money and those of C’s
Done this way to protect the innocent parties
The money belonging to the thief (D) have disappeared
The rule is clear – if a trustee mixes trust money with his own, and then withdraws monies, he is
deemed to have taken out his own money, with the trustee being able to claim the balance of his
account above that of creditors
Trustee must be assumed to have acted honestly so that he lost his own money and invested the
trust money appropriately

Beneficiary election approach
-

In contrary to the ‘honest trustee approach’

Re Oatway [1903]
-

-

Held that where a trustee wrongfully mixes her own money and trust money, trustee is not entitled
to say that the investment was made with her own money and that the trust money has been
dissipated
Beneficiaries entitled to elect either that the property be subject to a charge as security for amounts
owed to them by the trustee or that the unauthorised investment be adopted as part of the trust
fund – ‘beneficiary election approach’

Foskett v Mckeown [2001]
-

Confirms what had happened in Hallet,

‘a trustee must not benefit from his trust… a beneficiary an elect to have a share… without doubt the
claimant can trace into a mixed fund
...
g
...
g
...
v Vaughan [1992]
-

-

-

Slightly different approach
Investors in collapsed Barlow Clowes organisation had their losses met in part by department of
trade
Secretary of said department then sought to recover the amounts which had been paid to those
former investors by tracing the compensation paid to them into assets of Barlow Clowes
COA favoured a distribution between rights of investors on a pari passu basis, considering Clayton’s
Case too formalistic and arbitrary
Approved a ‘rolling charge’ approach from Canadian cases
This meant that the investors would have to consider not only size of their contribution to the fund,
but also length of time for which that money was part of the fund (longer an investment is made,
more money expected to make)
More equitable approach rather than leaving to chance diminutions/increases in value such as the
first in first out approach – rather the innocent contributors would share the loss/rise in value

Clayton’s Case yet to be overruled, just distinguished and criticised

Russell Cooke Trust Co v Prentis [2003]
-

-

Lindsay J held that the Clayton’s Case approach was still binding but capable of being distinguished
or being displaced where it would lead to an unfair conclusion
However, it will be more often than not, that the ‘first in first out’ approach will appear to be unfair
to one party or another
This approach suggests that court’s purpose – when dealing with mixture of property of two
innocent people – is to achieve justice between them if there is no obvious fault on part of one party
or another

Commerzbank AG v IMB Morgan plc [2004]
-

Reaffirmed approach in previous case
Fraudulent investment scheme operated through a correspondent bank account managed by
Commerzbank
Money taken from public and mixed in the bank account
Held to be unjust and impracticable to apply Clayton’s case on these facts

Which approach is to be preferred?
-

(according to the author) Judges will disapply Clayton’s case on the slightest indication that to apply
it, it would produce injustice in the form of ‘irrational and arbitrary results’
In re current bank accounts, first apply Clayton’s case and then consider the proportionate division
approach – which one provides more equitable result

Tracing payments made by mistake
-

A mistakenly pays monies to B, can A trace that payment and enforce remedy?

Chase Manhattan Bank NA v Israel-British Bank (London) Ltd [1981]
-

Payment between banks made twice by mistake
Recipient bank went into insolvency before repaying second payment

-

-

Did payer have proprietary right in the payment so that it could be traced by the payer and deemed
to be held on trust for it? (thus, protecting that payment from insolvency)
Held yes and property should be held on trust for payer and therefore payer could trace into assets
of recipient bank as a result of the equitable interest founded under the trust

Lord Browne-Wilkinson in Westdeutsche Landesbank approved this decision on basis constructive
trust arose when payment/property had been received and recipient knew of the mistake
Knowing of the mistake would justify creation of constructive trust
Ignorance of the mistake would not have given rise to an equitable property right (Lloyd’s Bank v
Independent Insurance Co Ltd [1999])

Loss of the right to trace
Loss of the right to trace: general principle
-

C will lose right t trace if property in which she wants to trace her rights ceases to exist or cannot be
found
Often happens in electronic transfers where money I moved so many times the ‘trail’ disappears
If account is overdrawn then C loses right to trace as her property had clearly left the account by the
time the account has reached zero (Westdeutsche Landesbank)

Ultraframe (UK) Ltd v Fielding [2005]
-

C had no right to trace as C could only demonstrate that D had earned a profit from behaviour which
had been allegedly unconscionable but could not demonstrate that that profit had been derived
from C’s property or from its traceable proceeds

-

C must be able to demonstrate that the property in D’s hands constitutes the traceable proceeds of
C’s property

Bishopsgate Investment Management v Homan [1995]
-

Held impossible to trace money into overdrawn account on basis that property from which the
traceable substitute derives from is said to have disappeared
Also, held that there could be no equitable remedy enforced against an asset acquired before the
misappropriation of the money took pace
Bcos it is not possible to trace into property which had been acquired without the aid of the
misapplied property
E
...
I buy a car in January and misappropriate funds in February, cannot be said that that trust
property made it possible to acquire the car

Backwards tracing
Federal Republic of Brazil v Durant International Corporation [2015]
-

Privy Council
D’s organised money-laundering scheme so that it would appear as though amounts had been
debited from bank accounts before traced monies had even been paid into them
This would suggest that the two transfers were unconnected

-

-

Court held that these debits and credits were part were part of reciprocal transactions, and that C
could therefore trace into the D’s account even though it appeared as though D had made a
payment before receiving the C’s property
Known as ‘backwards tracing’ – debt is discharged seemingly before C’s property reached D but
where C’s property was necessary to fund that acquisition
Irrelevant which order the payments are made
Loss of the right to trace does not die, it means loss of the right to trace against one particular item
of property, not necessarily the end of the tracing process if there is another substitute item of
property elsewhere

Lowest intermediate balance
-

-

Situation where property is taken away from a mixed fund and new property is subsequently added?
Rule is that C has only a right to claim the lowest intermediate balance of that property (Roscoe v
Winder [1915])
C will be entitled to trace into only the lowest value of the property held between the date of its
misapplication and the date of the claim being brought bcos that is the largest amount which could
have possibly be said to have resulted from her contribution to the mixture originally
Any money paid into the account after it reached its lowest level could not be said to have derived
from the trust

Tracing through electronic bank accounts
-

In law, electronic bank accounts are seen as the bank owing the amount of money in the account to
the depositor
Intangible
But English lawyers continue to think of money as tangible property (which is correct) but poses
problems here
Current English law – if account goes overdrawn or the money is spent, that money disappears (Lord
Browne-Wilkinson in Westdeutsche Landesbank)
Fails to recognise that the value of that account is still held in some way by the owner
Ironic given purpose of the law of tracing is straightforwardly to recognise that property rights may
continue to exist even though the original property itself is beyond reach
Trusts and remedies

Two principal remedies are
i)
ii)

the Charge (Re Tilley’s Will Trusts [1967])
Constructive trust (Westdeutsche [1996])
-

Also see, resulting trust, equitable compensation, lien (keep property until debt owed by person is
discharged) and subrogation

Structure is as follows
-

First, tracing process is done in accordance with the principles considered above;
Second, having identified the property which is to be the subject matter of the claim, C seeks to
impose a trust or some equitable remedy over that property
Courts impose whichever remedy seems appropriate in the circumstances

What form of remedy would be most appropriate: a charge, a lien or a constructive trust?

-

Onus on C to claim most appropriate remedy
Charge only arises in equity and entitled C to seize property and seek court order to sell it if D does
not pay C whatever is owed under terms of charge
Lien entitles C to take physical possession of property and retain that property until D pays C it is C is
owed
Constructive trust entitles C to an equitable proprietary interest in the traced property
Constructive trust is likely to be sought where property is of use to C or is intrinsically valuable

Constructive trust recognised in response to equitable tracing claims
Basis on which a constructive trust will be used as a remedy in a tracing claim
-

Appropriate where there is identified and separate property capable of being held on trust for C as a
result of the tracing process
Generally, a constructive trust is imposed in circumstances where D deals with property knowing of
some factor which affects her conscience
HOL in Westdeutsche held there will not be a constructive trust without D having knowledge of some
factor which affects her conscience

Thus, the requirements for the imposition of a constructive trust as a result of an equitable tracing claim are
as follows:
i)
ii)
iii)

-

Pre-existing equitable interest (for equitable tracing claim)
Identifiable property which can be subject matter of the trust
D acted unconscionably with knowledge that her actions were unconscionable

Can constructive trust be imposed further to an ETC so as to protect the C’s property rights in
circumstances in which D’s conscience may not have been affected (Allen v Rea Brothers [2002])
Yes

Charges and liens in tracing
Equitable charges
-

Gives C proportionate right in a fund of property equal to given value, without need for C to separate
property within that fund as would be required for creation of trust
Only take effect in equity, not law
Can be fixed over specific property or otherwise (known as floating charge)
Court more likely to order fixed charge to freeze fund held by D, with each C to a beneficial share of
that fund entitled to a specified proportion of it
Charge offers means of granting security over property to C without need for formalities necessary
for a trust

Liens
-

Right to take possession of another person’s property until such time as that other person makes
payment of a debt or some other obligation
Lien is only a right to detain that property and not a right to sell it
If C wishes to sell it to recover money owed by D then must apply to court for permission to do so
At law and equity

Subrogation

-

Powerful remedy
Explained by an example
If Arthur’s money was used by Brian to pay off a debt which Brian owed to Colin, then equitable
subrogation would permit Arthur to insist that Brian owed that same debt to Arthur
Useful in tracing claims when original property has been dissipated or cannot be traced
Boscawen v Bajwa [1996]

Choice of remedies
Equitable doctrine of election
-

No double recovery of loss (Tang v Capacious Investments [1996])
C chooses which remedy they wish to pursue

Choice of equitable remedies
-

Depends on circumstances
Nature of property will be important
Where property subject to tracing claim is capable of being separated from other property so that it
could form the subject matter of a trust, a constructive trust may be the most appropriate remedy
If not segregated, not possible to impose trust over that property bcos subject matter of that trust
would not be separately identifiable
Then a charge or a lien would suffice
Defences

Change of position
Basis of the defence
-

D who has received property and, on the faith of the receipt of that property, suffered some change
in her personal circumstances

“Where an innocent defendant’s position is so changed that he will suffer an injustice if called upon to repay
or repay in full, the injustice of requiring him so to repay outweighs the injustice of denying the plaintiff
restitution
...
[2002]
-

Previously, doctrine of estoppel by representation had operated only as a rule of evidence to the
effect that a C would have been entitled to retain the whole of a mistaken payment
COA here held that the doctrine of estoppel by representation operated on equitable principles such
that it was possible to operate without any strict rule requiring that D be entitled to retain the whole
of the payment

-

Where court found retention of whole of payment unconscionable, possible to limit D’s entitlement
to rely on estoppel only to extent that it had suffered detriment

Part 13 Revision Notes
-

-

-

Quistclose trust is where in the event of a loan contract, the intention of the parties is that if the
borrower goes into insolvency, the loan monies are deemed to have been held on trust for the
lender
QC trust enables lender to acquire a protection against the borrower’s insolvency by inserting a
clause into the loan contract which provides that the borrower may use the loan for a specified
purpose only
If borrower uses monies for some other purpose, then a trust is imposed over the monies for the
benefit of the lender

Barclays Bank v Quistclose HOL [1970]
-

R, who were a limited company, were provided with funds by means of a loan from Q
Done to pay a dividend
Barclays Bank, banker for R, bank was told of the situation by letter (expressly)
Informed the bank of the loan from Q to R
Letter also stated the reasons why R required the funds (pay dividends)
New separate account set up
Funds from Q put into account by means of a cheque
R liquidated after receiving funds
Went into liquidation before dividends were paid
Bank wanted to set off money owed by R against the new money in the account
Held that Q provided funds for a particular purpose, consequence was that trust was created in favour
of Q when the purpose of paying the dividends could not be carried out
Barclays bank were not permitted to combine and set off credit against overdraft of R’s trading
account
Set off not allowed here bcos two accounts owned by two different people
One was trust account in favour of Q, not R’s account, and the other R’s trading account
Look at lord Wilberforce’s judgement
He held that primary purpose was loan to pay dividends, if that could not be carried out then secondary
purpose would arise, which would be a trust for the benefit of the lenders (interpreted as a resulting
trust)

‘If primary purpose has not been carried out the question arises if a second purpose, I
...
payment to the
lender has been agreed, expressly or by implication
...
Freeman Matthews Treasure Ltd [1984]
- High court
- FM asked CR to conduct survey
- In Carrying out this work, FM would act as principal, and be reimbursed on regular basis by CR as part
of its annual theme

-

FM had financial problems, CR and FM reached informal agreement whereby a special separate
account would be set up at bank where FM operated its trading account
This new account was to be used to receive the yearly fee from CR and was specially created to ensure
that the various creditors of FM would be paid for their advertising work which had benefitted CR
Shortly after, CR transferred funds into new account
FM then went into voluntary liquidation
This was at the same time the cheques drawn in this account in favour of the various 3 rd parties were
sent to them, these cheques were not banked however
Held that CR provided funds for a particular purpose, so that 3rd parties would be paid
Fund were held to be on a resulting trust for CR due to the failed purpose

The Twinsectra v Yardley model
-

Lord Millett set out another explanation of the Quistclose trust
Whereby the lender retains an equitable interest in the property through the transaction
A solicitor permitted loan money to be used by his client in breach of the express terms of a loan
contract
This analysis should have the effect of enabling a party to a commercial transaction to retain their
equitable interest in property by way of a resulting trust
Lord M upheld theory of QC being a resulting trust
Ownership of the money in equity remains with the lender even if possession of the money is passed
to the borrower, such that the borrower must return possession of the money to the lender

Examples of Quistclose trusts on the authorities
Twinsectra v Yardley [1975]
-

-

Money lent by T to Y
Clause in contract specifying what monies would be used for
Y’s solicitor was also required to give a formal undertaking to T as to proper use of money
First solicitor replaced by 2nd, L, who paid away the monies in accordance with Y’s instructions; which
were in breach of both the terms of the loan contract and of the terms of the undertaking which the
first solicitor had given and by which L had agreed to be bound
Y unable to then pay loan, T wanted to recover loss
Lord Millett held that here was a Quistclose trust because the contract limited the use of the monies

Templeton Insurance Ltd v Penningtons Solicitors LLP [2006]
-

Another straightforward example of a QC trust where money was lent to be used for a specific
purpose and if not, to be returned to the lender

Outright transfers of the loan moneys mean there is no Quistclose trust
-

No QC if monies are transferred outright to borrower, without any obligation for monies to be used
for a specific purpose

Categorising the Quistclose trust
The issue
-

Problems is explaining nature of rights of the lender, rights of the borrower, and time at which those
rights come into existence

-

Significant about QC is that it will be imposed even where parties have been silent as to precise
construction of the contract

Resulting trust
Argument for a resulting trust
-

-

First reason given by Wilberforce in Barclays Bank, is that the QC transfers the equitable interest in
the loan monies back to the lender on resulting trust
This suggests that title in the loan moneys passes away from the lender to the borrower, under
Wilberforce’s ‘primary trust’, before going back to lender on resulting trust when the ‘secondary
trust’ comes into existence after breach of contract
Lord Millett agreed with resulting trust, gave different explanation

-

That lender retained ownership of the equitable interest in the loan monies throughout the life of
the transaction

-

So instead of property jumping back and forth between borrower and lender, the resulting trust
would be recognising that the lender had some equitable ownership of the loan monies until the
borrower used them for their proper purpose

Arguments against a resulting trust: the equitable interest comes into existence too late
-

Issues as to when the lender receives/retains/acquires an equitable interest
Retention, not a transfer?

Express trust
-

-

QC trust analysis as an express trust;
Lender lends monies to borrower (contract)
Contract is not that lender intends to transfer outright all of the interest in the loan monies bur
rather contains an express contractual provision which stops the borrower from using the money for
any purpose other than that specified
Lender’s rights would under express trust would come into existence from the moment that the loan
contract was created
This analysis has not yet been upheld in an English case

Constructive trust
-

-

On basis that it would be unconscionable for the lender to assert title to that money if it was not
used for the purpose for which it was lent
Principle argument against the imposition of a constructive trust is that the equitable interest of the
lender appears to exist before the borrower seeks to perform any unconscionable at in relation to
the property
As Lord Browne-Wilkinson in Westdeutsche Landesbank v Islington LBC [1996] states, a constructive
trust only comes into existence when the trustee has knowledge which affects her conscience



---