Trusts Summer 2019 – module feedback document

Mean mark: 61 %
1st: 15% 2.1: 54% 2.2: 24% 3rd: 3% Fail: 4%
Grade distribution:

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LA3070

The usual caveats for the four essay-style questions apply: depth of analysis is usually
preferable to breadth, and we marked generously those who took their answers in
unexpected directions but could justify doing so – assuming, of course, that they
didn’t completely missed the point! The suggestions below are by no means
exhaustive and their absence from an answer did not necessarily point to a poor mark.
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1. The history of equity’s relationship to law has always been explained by means
of metaphor. In antiquity, Aristotle recommended that law should be flexible
like a measuring rule made of lead. In the seventeenth century, John Selden
complained that equity should not be so flexible as to vary according to the foot-
size of each new Lord Chancellor. What metaphor or metaphors do you think
best describe the modern relationship between common law and equity in the
law of England and Wales, and why?

We expected a few of the usual suspects to be offered in response to this – e.g. a

critique of Ashburner’s metaphor of the two streams running in the same
channel. Gary’s metaphor of the horse and rider (as depicted on the front cover
of his textbook) might also make a showing i.e. common law does most of the
work, but equity takes control by steering where the “horse” might harm if it
simply carried straight ahead according to the strict rule. Credit was given for
demonstration of knowledge and also for imagination of new metaphors. The
final “why?” of the question is important: e.g. do we want a metaphor that
explains in a descriptive way, or one that guides future decisions, or even one
(like Selden’s) that reveals the problems with equitable creativity.
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2. ‘It is sometimes said that the law governing unincorporated associations is

informed by the beneficiary principle, but on closer examination this appears to
be an area of law in which principle has given way to pragmatism’.

Is this statement true according to the decided cases? If it is true, why might that
be?

The first thing to say is that the beneficiary principle is a principle of trust law
and strictly speaking it doesn’t apply where there are no trustees, because in
such a case no beneficiary is needed to control the trustees. So one could
challenge the quote by saying that most donations to UAs are construed to be
absolute gifts and treated as an accretion to club funds (Re Recher / Re Grant).
That said, trust law may still creep in if, as is common, those clubs funds are not
owned outright by all the members but held on bare trust for them by certain
committee members. Those donations that do involve trusts (eg Re Denley) take
the pragmatic step of construing the donation as a trust for the benefit of the
human members or beneficiaries of the association’s purposes, rather than as
trusts for the purposes in an abstract sense. Sometimes the pragmatism
dominates and produces valid donations that don’t seem to fit logically with any
of the orthodox modes of construction (Re Lipinski). As with the previous
question, the “why” must not be neglected. One answer is that in cases like Re
Lipinksi the law is keen that donations for benevolent, but non-charitable,
purposes should not fail merely because they lack charitable status. Another
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 reason may be the need for the law to support donations to clubs and not to be
defeated by the law’s inability to imagine legal agency beyond the narrow
confines of individual legal personality (as of individual humans or incorporated
persons). Very good answers looked beyond the construction of donations to
unincorporated associations at the time of donation to consider also the
distribution of the association’s surplus funds at the time of their dissolution.
The processes adopted on dissolution are avowedly and starkly pragmatic. The
reason for this is obviously to make the best practical response to an unforeseen
or unlooked for pathology. The same things occurs when individuals die – be
they human (eg. Pennington v Waine) or corporate (eg Quistclose).
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3. ‘Like Royal Brunei Airlines Sdn Bhd v Tan [1995] 2 AC 378 before it,
Twinsectra Ltd v Yardley [2002] 2 AC 164, was wrongly decided’.

Discuss.

This topic was well covered in lectures and in revision. The key criticism is that
the Royal Brunei formulation of accessory liability for breach of trust was
mistaken to retain “dishonesty” as a defining ingredient of a stranger’s (third
party’s) personal liability for assisting in a breach of trust. This error was
compounded in Twinsectra where the HL had the opportunity to reject the
Brunei formulation by removing the “dishonest” element, but instead continued
earlier attempts to clarify the meaning of dishonesty. The majority of the HL in
Twinsectra retained dishonesty as an ingredient and therefore felt bound to hold
that the defendant was not liable. This reluctance to fix liability seems to be
based (if not on the particular facts) upon a political reluctance to fix a
professional person (a solicitor defendant in this case) with liability for
dishonesty based on a merely civil standard of proof (i.e. balance of
probabilities). In a minority of one on this issue, Lord Millett was surely correct
to argue for the removal of dishonesty as a defining ingredient. This would
return the law to the spirit of the Victorian case Barnes v Addy, which
emphasized the need to let honest professional persons get on with their jobs
without having to adhere to impossible standards of probity. It would also align
third party civil liability for interference in other people’s trusts with the tort
that governs third party personal liability for interfering in other people’s
contracts. Criminal law tests of dishonesty have never been appropriate to the
latter, and so arguably should have no place in the former.

Although we anticipated that students would focus on the dishonest assistance

issue, as this was common to the two cases, credit was also given to students
who chose instead to analyse other elements of the decisions, eg what
Twinsectra has to say about Quistclose trusts.
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4. ‘It should be enough for charitable status that an organisation has exclusively
charitable purposes. Any requirement to demonstrate public benefit beyond this
should be abolished.’

Discuss.

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 This was the opportunity for an open-ended critique of the public benefit
requirement that enabled students to draw on a range of different issues that we
covered in the lectures. Issues that were typically explored included, but were
certainly not limited to: the appropriateness of having different public benefit
tests across what were the four Pemsel heads; the rule against political purposes
and the fragility of the various justifications given in Bowman and NAVS – we
covered this in detail in the lectures and also looked at the contrasting position
in Australia and NZ with Aid / Watch and Re Greenpeace; the extent to which a
charity’s activities, rather than the purposes to which they are directed, ought to
be of relevance to charitable status, again covered in detail in the lectures; the
problem of fee-charging and whether the Upper Tribunal was right to say that
the poor cannot be excluded in the ISC case. Some stronger answers explored
the relationship between charities and the wider third sector, and considered
whether it would be desirable to extend Charity Commission-style regulation, or
tax relief, to other third sector bodies that fail the public benefit test but
nevertheless provide socially valuable services. Not all answers thought to
make the obvious but important point that, despite flaws in the current law, if
there were no public benefit requirement at all then a private firm whose
purposes fell under a head of charity would be able to avail itself of all the
benefits of charitable status despite maximising profit for its shareholders!

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LA3070 Continued

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LA3070
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5. Tessa died recently after a short illness. [This alerts the candidate to donation
mortis causa as a possible issue]. She left a valid will in which she appointed her
brother, Edgar, to be her executor [this alerts the candidate to Strong v Bird as a
potential issue] in which she left her entire estate to the British Heart
Foundation, a registered charity. [will trusts to a charity are validly constituted
by proper testamentary form and will bind all assets except to the extent that
donations had been completed inter vivos so as to remove assets from the
deceased’s estate prior to death]

Four months ago, Tessa took the following steps:

a) She told [oral, therefore no possibility of immediate gift by deed] her niece,
Nessa, “As it is your 21st birthday, I am giving you all my shares in Bigbux
plc.” The next day, Tessa telephoned her broker (who held all Tessa’s public
company shares on a bare trust for her) and told the broker to transfer the
Bigbux shares to Nessa. [like the instruction in Pennington v Waine, or if
anything a little stronger in terms of intent] Nessa was so thrilled at the
thought of her impending wealth that she immediately gave up her job as a
medical receptionist. [this is detrimental reliance by Nessa that is certainly
stronger than the reliance successfully relied upon by the nephew in
Pennington. In short, these facts seem to present an even stronger case for
perfection of the gift than did the facts of Pennington. If the donation is not
successful, the asset will pass on residue to the charity under the will]. As a
direct result of the broker’s negligence, the shares had still not been
transferred at the date of Tessa’s death. As a bonus point, some students
considered the possibility that if the gift was not perfected (the dubious
reasoning in Pennington must be acknowledged) then Nessa might be able
to recover compensation from the agent and therefore acquire the intended
gift (in cash, not shares) indirectly through tortious damages (eg. White v
Jones).

We also rewarded reference to s 53(1)(c) and the fact that this would have
been be a Vandervell-style merger of the legal and equitable titles and so
outside the statute, though since the transfer never happened we did not
mark down those who omitted this.

b) Tessa told Edgar in front of witnesses that she wanted Edgar to have her
large collection of arts and crafts furniture, including a dining table and
fitted library shelves, on her death. As she said this, she knocked on the
furniture saying, “but touch wood I won’t die any time soon”. There are
three possibilities here: 1) inter vivos immediate transfer of large or
immovable chattel. In Re Cole Harman LJ accepted that, if chattels are
numerous or bulky, there may be ‘symbolical delivery’. He gave the
example of the donation of a church organ, ‘where the donor put his hand
upon it in the presence of the donee and accompanied his gesture with words
of gift”. The problem is that an inter vivos donation must be accompanied
by a present and immediate intention to give. It won’t work if the intention
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 is to give at some future date. 2) Strong v Bird – the appointment of Edgar
as executor might seem to open up the possibility of fortuitous perfection of
the gift along the lines of Strong v Bird, but again the intention to give must
be not only present but continuing. On the present facts it is arguable that
Tessa’s intention to give does not bite until she dies, at which point the
furniture will have already passed to charity under will so that her intention
to give will have no asset to bite. 3) Donatio mortis causa. The donation is
made shortly before Tessa’s death and Edgar will speculate that she knew
this and made her donation in contemplation of her imminent demise. This
argument is unlikely to succeed. The words “I won’t die any time soon”
indicate that she did not expect to die of her illness in the near future, if
indeed she was ill or aware of the illness when she made the gesture. In
conclusion, there seems to be no effective donation and it will remain in her
estate to pass to the BHF charity.

c) Tessa, who was a long-time trustee of a charitable art foundation, wrote to

the other trustees to say, “I intend to donate my garden statue, by the
sculptor Barbara Hepworth, to the foundation’s art collection to be held on
trust by the foundation from now on”. The statue was still in Tessa’s garden
on her death.

These facts are intended to mirror Choithram v Pagarani. By the letter,

Tessa seems to evidence a present and immediate intention to give the
statute to the foundation. However, she has not done everything within her
power to transfer the asset and neither did she intend to constitute herself
trustee of the statue for the foundation. The pragmatic Choithram
compromise solution is to hold that she transferred the statute from her own
absolute ownership to herself as one of the trustees of the foundation, so that
on her death the other trustees of the foundation would take by right of
survivorship to hold on trust for the foundation.

Advise Edgar whether the attempted dispositions in (a) to (c) were effective
and, if not, what will happen to the property.

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LA3070 Continued

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LA3070
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6. The will of Josie Jones, the celebrated artist, contains the following provisions:

“I hereby leave:

(a) £30,000 to my trustees to be shared amongst the regulars of my Tuesday

night painting class;

Issue here is conceptual certainty of objects, but the preliminary question is

what sort of trust is it? In the absence of any indication of discretion then on the
basis that ‘equity is equality’ this looks to be a fixed trust, in which case
Broadway Cottages requires us to be able to draw up a complete list of
beneficiaries. It may be that we can – if e.g. the class has a fixed membership
and everyone turns up every week – but it seems unlikely, in which case this
will fail and the £30,000 will go to Paulette as residue.

If there is something else written in the will to indicate discretion then a

discretionary trust would require the ‘is or is not test to be met’. Applying
McPhail v Doulton and Stamp LJ’s strict minority view in Baden (No 2) we’d
have to say that if there are any members of the class whose regular status is
debatable then the class would be conceptually uncertain, but applying Megaw
LJ’s majority approach in Baden (No 2) there may well be a ‘substantial’
number of people who do fall in the class and save the trust even if there are
also some whose status is unclear. If the latter, then the effect is that the trust
would be valid despite the level of uncertainty, but this would be self-correcting
as trustees should only distribute to those who definitely fall within the class lest
they face a breach claim.

We were generous to those who missed the ‘equity is equality’ point and just
treated it as a potential discretionary trust, as many answers slipped up on this
point.

(b) £50,000 to my husband, David, who knows that my wish is for him to use
this to fund his PhD in art history;

An outright gift to David; Josie’s wish that he spends it in a particular way

would not restrict how he can spend the money.

(c) my ten most valuable sketches to my trustees to hold for my old friend,
Sally;

Issue here is conceptual certainty, but of subject matter not objects. Most
answers queried how we interpret ‘most valuable’ – is it monetary value or
sentimental?
Suprisingly few considered that ‘sketch’ is also uncertain – what counts as a
sketch? Is it any rough drawing? How rough? Or a sketch in the sense of a
preliminary study? Some students pointed out that it is also unclear whether

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 Josie means sketches that she produced herself, or sketches she may have
purchased by other artists.

There is a red herring with Sally being described as an old friend – some weaker
answers tried to argue that this indicates a lack of certainty of object,
misunderstanding Brown v Gould and Re Barlow’s WT.

(d) my brushes and canvases to my assistant, Paulette, to distribute one brush

and canvas each to any of my fans who would like them;

A series of gifts subject to a condition precedent, the condition being that the
recipient demonstrates that they are a fan of Josie Jones. So long as at least one
person can do this then it is conceptually certain, as per Re Barlow’s WT, which
seems very likely to be the case here (e.g. owners of her artwork, the president
of her fan club, etc).

(e) whatever is left to belong to Paulette absolutely.”

The residue goes to Paulette. Some weaker answers misunderstood and said
that ‘whatever is left’ is conceptually uncertain.

Josie has just died. Discuss the validity and effect of the above provisions.

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LA3070 Continued

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LA3070
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7. Michael is the inventor of the Cloud-Velo, a flying bicycle.  He has no interest in
running a business and so leaves everything other than the building of the Cloud-
Velos to his business partner, David. In 2014, David was approached by the local
council, which placed an order for 10,000 Cloud-Velos as part of its green
transport initiative.  David and Michael agreed to sell these for £200,000 but,
unbeknownst to Michael, David negotiated a higher price of £250,000.  He used
the extra £50,000 to buy himself a Rolex watch, which is now worth £60,000.  

Partners owe each other fiduciary duties and so this is a clear secret profit
obtained in breach of the duty of loyalty. There is no debate to be had about
whether David’s liability is personal or proprietary, as on any analysis the £50,000
was an asset belonging to the partnership, and so Michael can trace into the watch,
which David holds on constructive trust for both of them.

In 2016, David was approached by the directors of Ultron Cloth Ltd, the supplier
of the unique material that Michael uses to build the wings of the Cloud-Velos.
He learned that Ultron Cloth was in serious financial difficulty and the directors
told them that if he and Michael wanted to ensure the continued supply of material
they should consider buying the company.   David sent his lawyer, Zadie, to
negotiate with the current shareholders but ultimately decided that he and Michael
couldn’t afford to purchase the company.  Zadie decided to buy the company with
her own money.  She has since turned its fortunes around, trebling the company’s
value.

This invokes Boardman v Phipps, but answers ought to have recognized that we
probably need to know more facts and there are some subtle differences. Zadie
certainly owes a fiduciary duty to David as his lawyer, but was she representing
just him or, as seems more likely, the partnership? If the former then of course
she does not owe Michael a fiduciary duty, unless the relationship is fudged as it
was in Boardman insofar as the HL suggested there was a fiduciary link between
the solicitor and the beneficiaries, rather than between the solicitor and the
trustees. If she does owe a fiduciary duty to Michael, did she find out special
information about how the company was run a la Boardman? Even if not, as
Ultron Cloth is a Ltd not a plc it seems unlikely this was an opportunity she would
have come upon were it not for her fiduciary position. Better answers noted that
of course David may have given fully informed consent to her purchase on behalf
of the partnership, given that Michael leaves the decisions to him, in which case
there is no breach.

If it is a breach, should she have to disgorge all profits from the company for so
long as she owns it, subject presumably to a Boardman-style deduction for her
work making it profitable? CA dicta in Murad, drawing on Oz case Warman v
Dwyer, hints that a future court may be willing to approve a profit-sharing
arrangement if part of the profit can be attributed to efforts of a fiduciary acting in
good faith even if causally linked to a breach of duty.

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 In 2018, David engaged Simone as their overseas agent.  Simone entered into an
agreement, governed by English law, with a French city council under which she
would receive a £500,000 commission in return for arranging the purchase of
100,000 Cloud-Velos.  Having purchased the bicycles last month, the city council
has just paid Simone her commission.

This is a straightforward application of Cedar Capital. Simone was always going

to be required to hand over any secret commission but whereas once there may
have been an argument re whether her liability would be personal or proprietary –
this was not the diversion of the property of her principals and so the question, in
the language of Sinclair Investments, would have been whether she had taken
advantage of an opportunity that was properly that of her principals – the SC in
Cedar Capital says that a constructive trust is always available for breaches of
fiduciary duty, a la A-G of HK v Reid, on the basis of simplicity and justice. But
of course is it a secret? Better answers again noted that David may have given
fully informed consent to her commission on behalf of the partnership, in which
case there is no breach.

Michael has just learned the above facts and is concerned that David, Zadie and
Simone have each profited at his expense.

Advise Michael.

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LA3070 Continued

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LA3070
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8. Frank is the sole trustee of three trusts, Fish, Chips and Salt. He withdrew
£100,000 from the Fish trust bank account and transferred it into his own bank
account, which already contained £40,000. The following day he transferred
£100,000 from the Chips trust into the same account. He then made the
following withdrawals in order:

(i) £40,000, which he spent on his son’s school fees;

(ii) £100,000, which he used to pay off the mortgage on his house, which he
co-owns with his wife, Doreen;

(iii) £1,000, which he gave to his son, Simon, as a gift. Simon thought this
was odd as his father had only recently complained that money was tight,
but he used the £1,000 to purchase a book of lottery tickets at a local
fundraising event, winning £5,000;

(iv) £60,000, which he used to buy shares in Gudstuff plc, now worth
£120,000.

Frank then transferred £39,000 from the Salt trust into the same account. He
made one subsequent withdrawal:

(v) £78,000, which he used to buy shares in Badchoice Ltd, now worth
£39,000.

Frank has just been declared bankrupt with no money left in his bank account.

Advise the beneficiaries of the three trusts.

Assuming that the school fees have been dissipated, these are obviously the
least desirable assets to trace into and so we’ll use Hallett, Oatway and Shalson
v Russo etc to cherry-pick and resolve the uncertainty against Frank to say his
own money was spent on this. Some weaker answers reached the right answer
through the wrong reasoning, allocating Frank’s money to the school fees using
FIFO, which brought marks down.

As for dividing the remaining assets up between the beneficiaries of the 3 trusts,
we are not told what sort of bank account it is so students should consider both
options.

If it is a current account, FIFO and Clayton’s Case is still the default rule even if
the courts are quick to depart from it, and an answer that ignores FIFO
completely could not score very highly:

 100,000 from Fish goes into the mortgage; we can use subrogation to
bring it back to life. Fish beneficiaries get the right to be repaid secured
on the home (Boscawen). Effect on Doreen as an innocent third party is
irrelevant (Primlake).

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  £1,000 from Chips goes to Simon. If the £5,000 is still around then
prima facie the Chips beneficiaries can exert ownership of this. Query
how the court would respond if Simon as an innocent recipient could
show that he would otherwise have used his own £1,000 to buy the
tickets anyway – Hayton and Mitchell argue that in such a case Chips
should be limited to a lien for £1,000. But is Simon actually an innocent
recipient? If not then we might also have an alternative personal claim
based on receipt, useful if the money has since been spent, but it seems
unlikely: specific knowledge of the source of the money is not needed
but Simon’s state of mind doesn’t suggest it would be unconscionable to
deny a claim (Akindele).
 £60,000 from Chips goes into the shares in Goodstuff. Beneficiaries can
claim outright ownership and enjoy all the profit.
 £39,000 is left in the account from Chips when £39,000 is paid in from
Salt. All the money goes into the Badchoice shares, and the two sets of
beneficiaries must share the losses as they will be limited to a co-
ownership claim as per Foskett.

Query whether this is an appropriate outcome. We are not told what sort of
trusts they are – e.g. investment funds, family settlements. If the latter, they
would never have been intended to be mixed with other funds and so my view
is that the courts would find it hard to disapply Clayton’s Case and go for a
pro rata split. If the former, then the courts might disapply FIFO, as in Barlow
Clowes and more recent cases like Framjee, and go for a proportionate split –
all the assets remaining split between the 3 trusts. The best answers then
queried whether a proportionate split is necessarily fairer given the mixed
chronology of investment, particularly given that on the facts Salt’s money
could only ever have been spent on the Badchoice shares, and considered the
possibility of convincing a court to adopt the rolling charge approach despite
its rejection in previous English cases.

If it is a deposit account then its straight to the proportionate split approach,

followed by the possible rolling charge argument.

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LA3070 End

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