Titles in the series: Q&A Company Law Q&A Commercial Law Q&A Contract Law Q&A Criminal Law Q&A Employment Law Q&AEnglishLegalSystem Q&A Equity and Trusts Q&A European Union Law Q&A Evidence Q&A Family Law Q&AIntellectualProperty Law Q&A Jurisprudence Q&A Land Law Q&A Medical Law Q&A Public Law Q&A Torts QUESTION 1 ‘Although equity will not aid a volunteer, it will not strive officiously to defeat a gift’ (per Lord Browne-Wilkinson in Choithram International SA v Pagarani (2001)). Evaluate this statement by reference to decided cases. How to Read this Question Thisisabroadessayquestionon theconstitutionof atrustandtheconsequencesof creation. The focus ofthe question is whether the courtis prepared to relax the Milroy v Lord rule infavourof volunteers inorder togive effecttothe clear intentionofthe transferor. How to Answer this Question Agoodanswer tothisquestionwilldealwiththeprincipleinMilroy v Lordbyreference tostructureddiscussionofthe relevant cases.Themainissue iswhenwouldagiftor trust be fully created and do the courts have a discretion to develop the law in this area? The permutation of legal principles determining this question are required to be discussed as well as the effects of constitution and the ineffectual creation of an express trust or gift. Up for Debate Students areurgedtoreadthejudgmentsinthe controversialdecisionPennington v Waine. In this case, Arden LJ’s view of unconscionability was based onthe discretion of the court and varies with the circumstances of each case. This thatinvolvetheprocessofthetransferofthelegaltitletoproperty.InPennington v Waine, what would have been the position if registration of the shares were declined by the company? If the constructive trust theory is to be maintained, despitetherefusaltoregister thenewowner,thiswouldresultinequitytreating an ineffective transfer as a valid declaration of trust. But in Pennington v Waine thedonorhadnotdeclareda trust,normade agift,norhadshedoneeverything in her power to make a gift, yetthe court decided thatthe transfer was effective in equity. Thefollowingarticlesareinstructiveinorder togetabetterunderstandingofthesubject: J Morris ‘Questions: when is an invalid gift a valid gift? When is an incompletely constituted trust a completely constituted trust?Answer: after decisions in Choithram and Pennington’(2003)6PCB393; M Halliwell‘Perfectingimperfectgifts andtrusts:havewe reachedthe endoftheChancellor’s foot?’(2003)Conveyancer192. Answer Plan The Milroy v Lordtest. Transferor completing everything required of him. No self-declaration following imperfecttransfer. The principle in Re Ralli. Multiple trustees, including the settlor. Trust of a chose in action. Consequences of a trust being perfect. Exceptions to the rule that equity will not assist a volunteer. Answer Structure This diagram illustrates the methods and consequences of creating trusts, including gifts. ANSWER This statement by Lord Browne-Wilkinson highlights two fundamental principles of equity:the notion that equity will not assist a volunteer and thatthere is no policy in equitytodefeataperfectgift.Theseareself-evidentpropositions.However,anumberof landmarkcaseshave striventoperfectgiftswhich,on orthodoxtheory,oughttobe con- sidered asimperfect.1 1 TheprinciplelaiddownbyTurnerLJinMilroy vLord(1862)identifiesthetwomodesof constitutingan express trust.Theonus ison the settlor toexecuteone (or in exceptional circumstancesboth)ofthesemodesfor carryingouthisintention.Thetwomodesofcreating an express trust are: (a) a self-declaration of trust; and (b) atransferofpropertytothe trustees,subjecttoadirectiontoholdupontrustfor the beneficiaries. A settlor may declare that he presently holds specific property on trust, indicating the interest,forabeneficiary.Inthisrespecthesimplyretainsthepropertyastrusteefor the relevant beneficiaries. Clear evidence is needed to convert the status of the original owneroftheproperty tothatofa trustee,seePaul v Constance(1977).Thetestthatis applicable here is the ‘three certainties’ test, i.e. certainty of intention, subject matter and objects. Thealternativemodeofcreatinganexpresstrustinvolvesatransferoftherelevantproperty toanother person (or persons) as trustee(s), subjecttoa validdeclaration oftrust.In this context the settlor must comply with two requirements, namely a transfer (gift or sale)ofthe relevantpropertyor interesttothetrustees complementedwithadeclaration of the terms of the trust. If the settlor intends to create a trust by this method and declares the termsofthe trust,butfails totransfer the property tothe intendedtrustees, it is clear that no express trust is created.2 The court will not automatically imply a selfdeclarationoftrust: see Richards v Delbridge (1874) andJones v Lock (1865). Theformal requirements,ifany,concerningthetransferofthelegaltitleorequitable titletopropertyvarywiththenatureoftheproperty involved,inaccordancewiththe Milroy v Lord (1862) principle; but if the transferor has done everything required of him totransferthelegaltitletopropertyandsomethinghasyettobedonebyathirdparty, the transfer will be effective in equity: see Re Rose (1952); contrast Re Fry (1946)in respectofthetransferofsharesinaprivatecompany.Theeffectofthisrule(knownas the rule inRe Rose)is that althoughthe transferofthe legaltitle isnot complete,the transferorwillneverthelessholdthelegaltitletothepropertyasconstructivetrustee for the transferee.Indeed,inPennington vWaine (2002),theCourtofAppealdecided thatthedeliveryofthesharetransfer formtothecompanycouldbedispensedwithif itwouldbeunconscionableforthetransferortorecallwhatsheintendedtodonate,the transfer would be effective inequity. Thisnotion of unconscionability was based on analogywiththeprinciple laiddownbythe PrivyCouncil inChoithram InternationalSA v Pagarani (2001). However,the Privy Council in that case had decided that the trust was perfectly created and thus it would have been unconscionable for the settlor to denytheexistenceofthetrust,whereasinPenningtonthedonorhadneitherdeclared atrustnormadeaperfectgiftnorhadshedoneeverythingrequiredofhertomakethe 1 Highlightthe significance ofthe modes of creating an express trust. this test be satisfied? gift. Accordingly, Pennington may be treated as an unjustifiable extension of the Milroy v Lord principle.3More recently in Zeital v Kaye (2010), an element of orthodoxy was reinstated when the Court ofAppeal applied the strict Re Roseprinciple and distinguished Pennington. In Re Ralli (1964), the High Court decided that a settlor may expressly manifest an intention to transfer the relevant property to third-party trustees (transfer and declarationmode) and,prior to completingthe transfer,to declare himself a trustee for the beneficiaries (self-declaration mode). In this event, the trust will be perfect, provided that the third-party trustee acquires the property during the settlor’s lifetime. The court had also decided that it was immaterial how the third-party trustee acquired the relevant property. The mere factthatthe property had reached the hands ofthe intended trustees was sufficient to constitute the trust. The logic of this test extended the Milroy v Lord principle. Moreover, in Choithram International SA v Pagarani (2001), the Privy Council decided that where the settlor appoints multiple trustees, including himself, and declares a present, unconditional and irrevocable intention to create a trustfor specific persons, a failure to transfer the property tothe nominatedtrustees isnotfatal,for his (settlor’s) retention of the property will be treated as a trustee. Trusteeship for these purposes is treated as a jointofficesothattheacquisitionofthepropertybyonetrusteeisequivalenttoitsacquisition by allthe trustees. There was no distinction between a settlor declaring himself to be the sole trustee and one of a number oftrustees. InFletcher v Fletcher(1844),the court construed the subject matter of a covenant(to transfer property on trust) as creating a chose in action, namely the benefit ofthe covenant.Thisintangiblepropertyrightmaybetransferredtothetrusteesontrustfor therelevant beneficiaries, thus perfecting the trust. What is needed to assign such a right or chose is a clear intention on the part ofthe assignor to dispose ofthe chose to the transferee, but it is questionable whether the settlor had the benefit of the covenant. In any event,the Fletcher principle was subsequently restricted in Re Cook (1965)to debts enforceable atlaw, as distinctfrom any other choses in action.4 2 Express the controversial nature of the Pennington rule. 3 TheFletcher ruleishighlycontroversialandoughttobestatedaccompaniedbyits limitations. Where a trustis perfectly created,the beneficiary is given a rightin rem in the trust propertyandmayprotecthisinterestagainstanyone,exceptabonafidetransfereeofthe Common Pitfalls Choithram v Pagarani, Pennington v Waine and Fletcher v Fletcher. legal estate for value without notice. He may bring the claim in his own name and is entitled to join the trustee as a co-defendant. On the other hand, ifthe intended trustis imperfect, the transaction operates as an agreement to create a trust. This involves the lawofcontract,asopposedtothelawoftrust.Anagreementtocreateatrustmayonly beenforcedinequitybynon-volunteers.Theruleisthat‘equitywillnotassistavolunteer’ and ‘equity will not perfect an imperfect gift’. To obtain an equitable remedy,the claimantis required to establish that he has furnished consideration, see Pullan v Koe (1913). Valuable consideration refers either to common law consideration in money or money’s worth or marriage consideration in equity. The persons who are treated as providing marriage consideration are the parties to the marriage and the issue of the marriage, including remoterissue. In conclusion, Lord Browne-Wilkinson’s statement is vindicated by a number of exceptional cases including Ralli, Fletcher, Pagarani and Pennington. QUESTION 2 In2010,Alfred,incontemplationofhismarriagewithBette, covenantedwithTimto transfer £50,000 tohim to be held on trustfor Bette for life, remainder to any ofthe children ofthe marriage absolutely. The marriage duly took place.A few months laterAlfred madeabargainwithhisfather-in-law,Freddie,thatinconsiderationof receiving10,000 shares in Cashflow Ltd (a private company), Alfred will settle his yacht, Orca, on trustfor Bettefor life, remainder toherbrother,Charlie,absolutely.Alfreddulyexecutedanother covenantwithTimtosettlehisyacht,OrcaontrustforBettefor lifewithremainderto Charlie. Alfred failed to make any transfers to Tim in accordance with the covenants althoughhehasbeenregisteredasthenewownerof10,000sharesinCashflow Ltd. In 2012, Bette died leaving a son, Donald. Alfred still refused to transfer any of the properties to Tim in respect ofthe covenants. In2013AlfredmetEdeanddecidedtospendhisdecliningyearswithher. Itisatthispointofananswertoanexclusionclausequestionthatmanystudents issue of‘reasonableness’. Aim Higher Inattemptingquestionsontheconstitutionoftrusts,studentsoughttoadopta certainties;theremedies,ifany,availabletoaclaimantwhowishestoenforcean agreementtocreateatrust;theexceptionstotherulethatequitywillnotassista volunteer; and the statutory formalities, if any, that are applicable to the transaction. In February 2014 Alfred died. Amongst his personal effects was a will, executedin January 2014, which declared that all his property was to be distributed to Ede. Ede was also appointed executrix ofAlfred’s will. Advise Donald, Charlie, Freddie, Tim and Ede as to theirrights, if any, in the above transactions. [Ignoreanyapplicationsunder theInheritance(ProvisionforFamilyandDependants)Act 1975.] How to Read this Question This problem question raises issues on the enforcement of covenants to create trusts. Material issues in this question are whether Bette’s son, Donald, her father, Freddie and brother,Charlie aswell asTim,the covenanteemayenforce the agreementtocreate trusts. How to Answer this Question We are toldthatAlfredfailedtotransfer the relevantproperties.Are the trustsofthe covenantsperfect? Ifnot, are the claimants volunteers?The statusof eachofthe claimants is required to be analysed to ascertain whether the nature of the remedies each may have against Albert’sheir. Answer Structure This diagramindicates therequirements forthecreationof anexpress trust, notes its effect and lists the remedies that may be available to a claimant. ANSWER Alfred executed two covenants with Tim on separate occasions to transfer £50,000 and theyacht,Orca,tohimtoholdonvarious trusts,butfailedtotransfer theproperties.Two questions arise in these circumstances: whether the covenants create trusts of the relevantproperties in favourofthe intendedbeneficiaries; alternatively, whether the covenants are enforceable as agreements to create trusts. The testfor creatingaperfecttrustwas laiddown byTurner LJin Milroy v Lord (1862).This involvesthesettlor,Alfred,choosingoneoftwomodesofcreatingthetrust: (a) a transfer of property to the trustees, subject to a direction to hold upon trust for the beneficiaries; or (b) a self-declaration of trust. Applyingthis testtothe factsoftheproblem,we havebeeninformedthatAlfredfailedto transfer the relevant properties (£50,000 and the yacht) to Tim, the intended trustee.5 Thus,it would appear thatthe intended trustis imperfect. Further,the court will not automatically imply the second mode for creating an express trust as laid down in Milroy v Lord,namely,aself-declarationoftrust,inorder toconstituteAlfredatrustee: see Richards v Delbridge(1874).Thereasonfor theruleisthat,despitethetransferor’sintentionto benefit anotherbymeans of a transfer (whether ontrustor not),the transferoroughtnot to be treated as a trustee if this does not accord with his intention, for otherwise all imperfect trusts will become perfect