"Three Certainties" and Enforcement

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This article is a topic within the subject Equity and Trusts.

Contents

Required Reading

M.W. Bryan & V.J. Vann, Equity and Trusts in Australia (Cambridge University Press, 2012), pp. Ch 14 (14.1-14.22, 14.27-14.56); Ch 15 (15.22-15.24); Ch 16 (16.2-16.4).

Byrnes v Kendle (2011) 243 CLR 253 (Gummow and Hayne JJ)

McPhail v Doulton [1971] 1 AC 424 (Lord Wilberforce)

Introduction

[1] All trusts, whether or not they have to satisfy writing requirements,[2] must be sufficiently certain in order to be enforceable. The certainty requirements are more demanding than those for contracts because trusts can affect the rights of parties who did not agree to, or participate in, its creation (for example, beneficiaries and third parties who do business with the trustee).

An express trust requires “three certainties”:

  1. Certainty of intention: The settlor must have intended to create a trust of their property, as opposed to making a gift or lending it.
  2. Certainty of subject matter: The subject matter (property) of the trust must be specified with reasonable certainty.
  3. Certainty of object: The objects (beneficiaries) of the trust must be sufficiently identifiable.

The certainty requirements are related to each other in the sense that failure to satisfy one of the certainties may cast doubt on whether one of the other requirements has been met. For example, if the subject matter of a trust is uncertain it may also be the case that the settlor did not truly intend to make the recipient of their property a trustee.

When considering other types of trusts, it should be noted that:

  • Charitable trusts are not required to satisfy the requirement of certainty of objects.
  • Resulting and constructive trusts will not satisfy the requirement of certainty of intention because they are judicially imposed rather than created by a settlor.

Certainty of Intention

[3] As noted above, the settlor must have intended to create a trust of their property, as opposed to a gift or loan. The settlor need not use the word “trust”; if a trust is the most appropriate legal mechanism for giving effect to the settlor’s wishes, an inference will be drawn that the settlor intended to create one.

This was discussed in Re Armstrong:[4]

  • Facts: Shortly before his death, a father deposited £1500 for each of his two sons on a two-year term deposit at the bank, the title of the accounts being “George Armstrong in re William Armstrong” and “George Armstrong in re Bernard Armstrong”. When he died before the deposit term expired Herring CJ held that the father had intended to create a trust.
  • Held: A trust had been created even thought the word “trust” did not appear in the titles of the accounts.
    • The father did not intend to make an immediate gift of the money because he intended to collect interest on the accounts.
    • A trust, conferring life interest in the money on the father and remainder on the sons, was the most appropriate method of giving effect to the father’s wishes with respect to the money.

And also in Paul v Constance:[5]

  • Facts: Constance, who was separated but not divorced from his wife, lived with the plaintiff, Mrs Paul. He received damages for a workplace accident and paid the money into an account in his name. At various times Constance said to the plaintiff and others “This money is as much yours as mine”. The account was not actively used and Constance died without making a will. At law, his widow was entitled to all the money in the account.
  • Held: Constance’s intention was to create a trust of money in the account, for himself and the plaintiff as beneficiaries.
    • Constance had never used the word “trust” in his conversations with the plaintiff, but this was irrelevant given “the unsophisticated character of the deceased and his relationship with the plaintiff during the last few years of his life.”

Objective or subjective intention?

Byrnes v Kendle gives authority that intention to create a trust should be determined objectively on the basis of what the parties said, not subjectively on the basis of what they thought they meant.[6]

  • Intention is determined objectively. It is extracted from the words used and is not a subjective intention that may have existed but cannot be extracted from the words used.
  • The settlor in Byrnes v Kendle used explicit words to create the trust, however, in cases such as Paul v Constance (above) where ambiguous words are used, the court must consider whether the settlor’s words and actions have manifested significant objective intention to create a trust.
  • Subjective intention is only relevant when it is alleged that the trust is a sham, or voidable for mistake, misrepresentation, duress, undue influence or unconscionability, or where rectification of the trust instrument is sought on the ground that it does not represent the parties’ actual intentions.

Sham Trusts

Trusts may be created for the purpose of avoiding potential claims of creditors, the Tax Office or Centrelink. The settlor will insist that they no longer beneficially own the property so that it is not available for distribution to his creditors and does not form part of his taxable assets.

  • A trust is a sham where the settlor deals with property otherwise than in accordance with the terms of the trust they created, with the intention of deceiving third parties to the settlor’s real interest in the property.

Midland Bank plc v Wyatt[7]

Facts: Mr and Mrs Wyatt executed a formal declaration of trust over their family home in favour of their children. Soon after, Mr Wyatt put the family home up as security for a bank loan and did not tell the bank about the trust. When the bank sought to enforce its security, the trust was held to be a sham.

Held: The Wyatts had not intended to act on the trust deed, executing it only in case it was later needed to defeat creditors. The Wyatts had no real intention to benefit their children.

What intention has to be proved?

An intention to create a trust is an intention to impose on a property owner an obligation to apply the property for the benefit of an identified beneficiary or recognised charitable purpose, not to deal with the property as an absolute owner.

  • In Re Armstrong the court was satisfied that the father did not intend to be an absolute owner of the term deposits but had imposed an obligation on his executor to have them applied for the benefit of his sons after his death.
  • In Paul v Constance, Constance had imposed an obligation on himself to apply half the property for the benefit of the plaintiff.
  • An obligation should be contrasted with a discretion, based on distinctions between trusts and powers.

Precatory trusts

Husbands would sometimes leave their wives property upon their deaths, indiciating how he wanted it to be applied with “words of prayer” (precatory words) such as “hoping” or “in full confidence” that she would use the money to maintain and educate their children.

  • Trusts at this time (in the 19th Century) were economic devices for spreading investment income among the family. Equity judges construed wills so as to promote this objective.
  • Later, strict rules of construction have held that the wife would not be held to be a trustee unless the obligation was clearly imposed: Williams v Williams [1897] 2 Ch 12.

Intention to create an immediate trust

A settlor must intend to create a trust which takes effect immediately.

  • In the case of a trust created by deed or will, it must come into effect from the date when the document creating the trust takes legal effect.
  • A trust can take effect immediately even where a settlor settles property on trust for himself for life (inter vivos trust), with remainder to his children after his death.
  • In Harpur v Levy[8] a deed of trust executed in August 1997 was expressed to come into effect in 1 October 1997. A majority of the court held that no trust had been created because the settlor had not expressed a clear intention to create an immediately operative trust.
  • Exception: A contract to create a trust in the future will, if valuable consideration has been provided, be enforceable by the intended trustee unless there is a bar to specific performance, such as lack of clean hands or delay.

Contract and trust: question of certainty of intention

  • Trust developed within the context of family trusts, where the beneficiaries were typically volunteers – they had not provided consideration for their beneficial interests.
  • Nowadays, trusts are often created in commercial contexts such as superannuation and management investments.
  • Whether a contract creates a trust is determined objectively, conforming to principles in trust and contract law.
  • In Shortall v White[9] the plaintiff agreed to pay the defendant $20,000 in return for the defendant’s agreement to hold 200,000 shares in a public company for her. The defendant argued that he never intended to create a trust for the plaintiff. The court held that the circumstances surrounding the transaction showed that the defendant objectively intended to create a trust.
  • A trust enables the doctrine of privity in contract to be avoided in case where a contracting party has promised to hold a benefit of the contract on trust for a third party.

Certainty of Subject-Matter

The subject-matter of a trust must be certain if the trust is to be enforceable which creates several distinct issues:

a) The subject-matter of a trust must be legally recognised property.
i. It can be real or tangible personal property, such as land or a painting, or intangible property such as a patent or the right to enforce a debt (which is a chose in action).
ii. It can be legal or equitable property.
iii. It cannot be an expectancy such as the expectation of receiving property under a will or as a beneficiary of a trust because of uncertainty.
b) The quantum, or amount, of property to be held on trust must be clearly defined. In Palmer v Simmonds the testator left the “bulk of my estate” to be held on trust. The trust failed because the word “bulk” did not clearly indicate how much of the testator’s property was to be held on trust.
i. This does not mean that the subject-matter of a trust will be uncertain just because it cannot be precisely quantified, for example, in a typical family trust a testator may settle his property on trust for his widow for life, with remainder to their children after her death. During the widow’s lifetime the children’s interest cannot be precisely valued.
ii. The subject matter of a trust can be certain even if the quantum of property is to be assessed by a trustee, provided the criteria applied by the trustee can be objectively assessed. For example, in Re Golay’s Will Trust[10] the term “reasonable income” fell under this category.
iii. In Hunter v Moss[11] the English Court of Appeal held that a trust is sufficiently certain if the trust properly consists of a percentage or fraction of fungible property (property which is interchangeable with property of the same description, such as coins or shares of the same class).

In Re Goldcorp Exchange Ltd, a company sold unascertained gold bullion to customers for future delivery. The Privy Council held that no title to the bullion had passed to the customers and no valid trust had been created. Until the bullion had been segregated from the bulk and appropriated to each customer’s contract, title remained with the company.

Certainty of Objects

The object of a trust must be identifiable. This “certainty” has produced difficulties in recent years due to the proliferation of discretionary trusts.

  • For a discussion on the distinctions between bare powers of appointment and trust powers, see Chapter 13.
  • A trustee may have an obligation to apply the trust to specified beneficiaries or they may have a discretion to apply to trust to beneficiaries among a specified class.
    • A general power of appointment allows the trustee to apply the property to anyone, including themself.
  • A special power empowers the trustee to appoint members of a class specified by the settlor, such as the settlor’s relatives or dependants.
  • A hybrid power entitles the trustee to appoint anyone except members of a specified class.
  • It is also important to distinguish between fixed trusts and discretionary trusts (or trust powers). A fixed trust is one where the share or interest of each beneficiary is specified in the trust instrument, whereas in a discretionary trust, the share (if any) is determined by the trustee.
  • It is essential to consider the validity of the trust obligations and powers separately because the tests for determining certainty of objects may differ and because courts must be satisfied that trusts are workable if trustees are obliged to administer them.

Powers and certainty

As per Re Gulbenkian’s Settlement Trusts, a special power of appointment will be valid if the trustees can say with certainty that any given individual is or is not a member of the class of objects of a power. This is known as the ‘criterion certainty test’. It also applies to hybrid power, which will be valid if the members of the excluded class of beneficiaries satisfy the criterion certainty test.

Conceptual and evidential uncertainty

(Sometimes referred to as linguistic or semantic uncertainty). Re Gulbenkian’s Settlement Trusts distinguished between conceptual and evidential uncertainty:

  • A power which is conceptually uncertain is invalid, since insufficient information has been given to allow the trustee or the court to exercise the power. The example of a trust “for my old friends” was given.
    • One method of overcoming conceptual uncertainty is for the trust instrument to provide that the opinion of a third party is to resolve the dispute. This power may be explicitly conferred on a trustee.
  • In Re Tuck’s Settlement Trusts, a will which required the beneficiary to be of the Jewish faith and married to “an approved wife”, with any disputes being resolved by a chief rabbi, was upheld.
  • Evidential uncertainty will not cause a power to fail. Application can be made to the court, if necessary, to resolve any ambiguity. Examples of evidential uncertainty include criteria of ‘residence’, ‘employed’ and ‘care and control’.

Fixed trusts

A fixed trust is only valid if the identities of all the beneficiaries are known. This is known as list certainty: at the time of distribution, the trustees must be able to draw up a list of all the beneficiaries entitled to a share of the trust property. If the existence or whereabouts of a beneficiary is unknown, their share can be paid into court until the uncertainty is resolved.

Trust power (discretionary trust)

The criterion certainty test (for determining objects) determines whether a trust power is valid, rather than list certainty.

In the leading case of McPhail v Doulton:

Facts: The settlor executed a trust for the “benefit of any officers and employees or ex-officers or ex-employees of Matthew Hall and Company or to any relatives or dependants of any such person in such amounts at such times and on such conditions (if any) as [the trustees] think fit.” After the settlor’s death, the validity of the trust was challenged by his next of kin.

Held:

a) The instrument created a trust power and not a bare power.
b) The test of certainty for trust powers was the criterion certainty test.

The trust power would have failed if list certainty was required since it was impossible to draw up a list of potential beneficiaries. Large employment welfare trusts such as this are only likely to be upheld if they are not subject to list certainty.

Status of the criterion certainty test in Australia

In Horan v Jones, the NSW Court of Appeal expressly applied McPhail v Doulton to trust powers.

Re Blyth[12]

Controversial application of the criterion test.

Facts: the testator established a trust “for such organisations... as in the Public Trustee’s opinion are working for the elimination of war and... such organisation... formed for the purpose of raising the standard of life throughout the world.”

Held:The first condition was ascertainable but the second one was held to be too uncertain.

  • Where a settlor has created two distinct trusts, the failure of one trust for lack of certainty of objects will not cause the failure of the other.
  • However, where a trust power is created, the trustee having discretion to select among two groups of beneficiaries, and one group is uncertain, the whole trust fails because the intention of the settlor would be defeated if the power was enforced for only one group.
  • Thomas J severed the valid part of the trust power (relating to organisation working to elimate war) from the invalid part (the uncertain clause relating to raising the standard of life). The trust power was enforceable for the former purpose but not the later. The decision was inconsistent with previous authority.

Administrative unworkability

It is unclear whether Australian law applies an administrative workability test.

The objects of the trust may make it administratively unworkable if:

a) The beneficiaries do not constitute a coherent class (per Wilberforce J in McPhail v Doulton).
b) The beneficiaries are too numerous to have their claims properly considered (R v District Auditor ex parte West Yorkshire Metropolitan Council).

A bare power will not be void due to administrative unworkability because trustees have a discretion to exercise their power but are not required to exercise it by distributing trust money, they are only required to consider doing so.

It has been suggested that administrative unworkability should be confined to invalidating attempts to create hybrid trusts because such trusts may not be able to sensibly exercise discretion. Apart from these cases, trusts which satisfy the test of certainty of objects should not be invalidated on the ground of unworkability if the trustees consider they can administer them.

Capricious trusts and powers

An unsettled question is whether a trust or power will be void if the class of beneficiaries has been selected capriciously by the settlor.

  • A trustee is under a duty to consider exercising discretion in good faith and upon proper consideration of all relevant factors. The duty may be hard to fulfil if the beneficiaries have been selected capriciously.
  • It is suggested that capriciousness should not be recognised as an independent ground for invalidating trusts or powers because it necessarily involves second-guessing and interfering with a settlor’s intention.

Certainty of objects and trustee’s duties

  • McPhail v Doulton emphasised that trustees of discretionary trusts are under a duty to survey the class of beneficiaries and inquire into the needs and qualifications of any beneficiary to whom an appointment of trust money was being considered.
    • Trustees must adopt a strategy for selecting beneficiaries, for example, by dividing them into categories of beneficiary and selecting individual beneficiaries in each class.
  • Trustees exercising a special or hybrid power also come under a duty to survey a range of objects of the power, although it is less extensive.

Executing a trust power

A court may have to distribute trust property if the trustee fails to do so.

  • The court’s aim is to give effect to the settlor’s intentions, although uncertainty may frustrate these intentions.
  • In McPhail v Doulton, the previously applied principle of equal division of trust property in the event of default by the trustees was rejected. A settlor’s intention in creating a trust power is not to benefit the beneficiaries equally, it is actually to authorise unequal treatment of the beneficiaries, whether on the basis of need, qualifications or some other criterion.

If the trustee fails to exercise their discretion, the court may give effect to the settlor’s intentions by:

a) Appointing new trustees.
b) Authorising a representative class of beneficiaries to prepare a distribution scheme.
c) If the settlor’s basis for distribution is clear, by distributing the trust property itself.

The same orders can be made if trustees to fail to consider the exercise of a power.

Trusts and public policy

A properly constituted trust may fail because it offends against the public policy of the law or a statutory provision.

Grounds of public policy which invalidate contracts will also invalidate trusts, for example:

a) Trust which undermine the criminal law. A trust to commit a legal wrong is void for illegality. For example, in Thrupp v Collett, a trust to pay the fines of convicted poachers was void.
b) Trusts prejudicial to the status of marriage. Trusts to promote divorce come within this prohibition but one created as part of a divorce settlement or upon termination of a de facto relationship will enforceable provided that it does not infringe the provisions of the Family Law Act 1975 (Cth).

The ‘rule against perpetuities’:

  • The rule against remoteness of vesting and the rule against indestructible trusts combined to limit the duration of private trusts.
  • Most Australian jurisdictions have modified these durations legislatively – NSW has replaced the common law perpetuity period with a statutory period of 80 years from the date when the disposition takes effect.
  • The most important statutory limitations on the operation of trusts relate to bankruptcy law. These are discussed on the textbook’s companion website.

A valid trust for a purpose

Charitable or public trusts differ from other express trusts in several important features.

  • They are trusts for a purpose rather than for the benefit of identified or identifiable individuals. The settlor must have intended to create a trust for a valid charitable purpose.
  • As there is no person with sufficient standing to see the trust performed, locus standi is given to the Attorney-General.
  • The usual rules relating to the establishment of trusts, such as the “three certainties” apply otherwise.
  • A charitable trust can run indefinitely.
  • Once the fund has been applied for a charitable purpose it cannot be returned to the settlor even if the original charitable purpose has ceased or is no longer needed.
    • The court can apply the doctrine of cy-près and direct a charitable usage that is as near as possible to the original charitable purpose.
  • Charitable trusts are treated differently than other trusts under income-tax legislation. State and Federal legislation grants exemptions from levies such as income tax and local government rates and allows tax deductibility in respect of donations made to charitable institutions.

End

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References

Textbook refers to M.W. Bryan & V.J. Vann, Equity and Trusts in Australia (Cambridge University Press, 2012).

  1. Textbook, pp 226-7.
  2. For example, trusts which involve the transfer of land.
  3. Textbook, pp 227-32.
  4. [1960] VR 202.
  5. [1977] 1 WLR 527.
  6. (2011) 243 CLR 253.
  7. [1995] 1 Fam Law R 697.
  8. [2007] VSCA 123,
  9. [2007] NSWCA 372 [30].
  10. [1965] 1 WLR 969.
  11. [1994] 1 WLR 452.
  12. [1997] 2 NSWLR 376.
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