Trusts Distinguished

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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. Textbook Chapter 13 (13.20-13.40), Chapter 14 (14.23-14.26).

Associated Alloys v ACN 001 452 196 (2000) 202 CLR 588 (majority)

Aluminium Industrie Vaasen BV v Romalpa Aluminium [1976] 1 WLR 676 (Roskill LJ)

Barclays Bank v Quistclose Investments [1970] AC 567 (Lord Wilberforce)

Trusts and related concepts

[1]A lawyer may have to choose between a trust and other legal or equitable concepts for holding and managing wealth.

Trust and agency

[2]Trustees and agents both owe fiduciary duties. Differences between trust and agency are:

a) An agency relationship can be created without vesting any property in the agent, whereas title to property under a trust must be vested in a trustee.
b) The agent himself does not have to be party to contracts. A trustee who makes a contract in the administration of the trusts contracts as principal, whereas an agent creates a contract on behalf of the principal, he himself is not a party to the contract with another party.
c) At common law the relationship of principal and agent terminates on the death of either. If a trustee dies, however, the trust is not terminated. Instead, a new trustee is

appointed.

Trust and bailment

[3]A bailment arises when possession of a chattel is transferred by its owner (the bailor) to another (the bailee). The terms of the bailment will determine whether the bailee must use the chattel for the benefit of the bailor (similarly to trustee using trust property for the benefit of beneficiaries) or whether she can use it for her own purposes. A bailment may be contractual or gratuitous.

Both the trustee and the bailee control property which is not beneficially their own. Moreover, neither is an insurer of the property. A trustee will not be liable to compensate for loss of trust without proof of breach of trust and a bailee will not be liable for loss or damage unless the bailment contract states otherwise. A bailee, like a beneficiary, can trace the bailed property or its proceeds into the hands of third parties.

The main differences between trust and bailment are as follows:

a) Trust is equitable, bailment is a common law concept (although fiduciary principles may be applied).
b) A bailor retains ownership of chattel so that a purchaser of bailed property from the bailee cannot obtain good title against the bailor. However, a trustee is capable of transferring property to a third party, even though the transfer may be in equity a breach of trust.
c) Only a chattel can be bailed, whereas the subject matter of a trust can be any property, tangible or intangible, legal or equitable.

Whether the transfer of chattel is characterised as a transfer on trust or a bailment has important practical implications because it will determine whether the recipient obtains good title to the property and if recovery of the chattel is sought it will determine the limitation period applicable to the claim.

Trust and equitable charge

[4]Equitable charge arises where A gives B the right to have property belonging to A made available to secure a payment or other benefit to B.

Both trust and charge create equitable interests in the beneficiary and chargee respectively. In both case the equitable interest will be lost if the underlying property is sold to a good faith purchaser for value without notice of the interest. Both will still be entitled to consideration paid by the purchaser to the trustee or chargor.

a) A trust entitles the beneficiary to equitable ownership of the trust property, whereas the charge confers only a security of interest on the charge.
b) The remedies available for failure to discharge the obligation secured by a charge are more limited than in a trust situation.

c) A chargee can never claim the property subject to the charge by a foreclosure order.

Trust and condition

[5]Property may be given upon condition that the recipient pays a third party a sum if money or performs some other obligation in favour of the third party. It will be a question of construction whether the arrangement creates a trust for the third party, a charge in favour of the third party or whether a gift has been made subject to a condition precedent in favour of the third party (which must be performed if the gift is to be effective).

Re Gardiner[6]

Facts: A will provided that the testator ‘give devise and bequeath all my estate both real and personal unto my son Ivor... subject to my said son paying the sum of $1000 within two years of my death to my son Albert.’
Issue: Gift subject to condition precedent.
Held: When Ivor failed the make the payment within two years, it was held that he forfeited his interest and the estate vested in the testator’s next of kin.

Gill v Gill[7]

Facts: A farm with a homestead was devised to a son on terms ‘that he keep the homestead as a home and provide board and residence for his sisters’ if they were unmarried.
Issue: Gift subject to condition subsequent.
Held: Harvey J held that any failure to observe the condition gave rise to a personal obligation to compensate his sister who was not provided for in accordance with the condition. The term did not create a trust, so the sister had no proprietary interest in the property but breach of the condition gave rise to an award of equitable compensation.

Trust and contract

[8]Contracts can create trust-like arrangements but in most cases they will be unenforceable by the third party (who was intended to receive a benefit) under the doctrine of privity of contract. furthermore, the promisee (trustee-like party) cannot recover more than nominal damages for breach because they have suffered no loss.

The position changes if A and B intend B to receive the benefit of A’s contractual performance on trust for C.

Trust and debt

[9]Where a loan has been made the borrower becomes the absolute owner of the money lent, subject to a contractual obligation to repay the loan or to perform some other obligation specified in the loan agreement.

  • The borrower is free to spend the money however they like even if the parties assume that the loan will be used for a specific purpose.
  • In the event of the debtor’s bankruptcy the lender is an unsecured creditor, entitled only to share rateably with the debtor’s other creditors such of the debtor’s assets as are available for distribution among the unsecured creditors.

When a trust has been created, the trustee holds only legal title to the trust property, the equitable title being held by the beneficiary.

  • The trustee is not free to spend the money as they wish but must keep it separate from their own money and apply it only for the purposes of the trust.
  • In the event of the trustee’s bankruptcy the money will not be divisible under among the trustee’s creditors but will continue to be held on trust for the beneficiary.

In recent years some loan contracts have been drafted in such a way that the agreement creates an enforceable trust as well as a contract. These are known as Quistclose trusts (after the leading case of Barclays Bank Ltd v Quistclose Investments Ltd).[10]

  • Under a Quistclose trust money is lent on terms that it is only to be applied for a purpose specified by the lender and should be segregated from the borrower’s own funds.
  • An express or implied term of a Quistclose trust is that if the money is not applied for the specified purpose it will be held on trust for, and returned to, the lender.
  • If the money is not applied for the purpose or the funds are misapplied, the lender can invoke the remedies available to a beneficiary of a trust to recover it from the borrower or from a third party recipient.

The co-existence of contract and trust: the Quistclose trust

[11] Barclays Bank Ltd v Quistclose Investments Ltd[12]

Facts: Rolls Razor Ltd, which was in financial difficulties, had declared a dividend payable to its shareholders. Quistclose, a finance company, agreed to lend Rolls Razor £209,000 for the sole purpose of paying the dividend. Quistclose paid the money into a special account opened by Rolls Razor at Barclays Bank. The bank was Rolls Razor’s principal creditor. Before the dividend could be paid Rolls Razor went into liquidation. The bank claimed the right to set off the money in the special account against Rolls Razor’s overdraft. It would be entitled to exercise this right unless the money was trust money and the bank had notice of the trust.
Issue: Co-existence of contract and trust.
Held: The court held that the loan was made on condition that it be used for a specified purpose. Rolls Razor was not able to obtain beneficial title to the loan. The bank was aware of the terms of loan and therefore was not entitled to apply the money to reduce Rolls Razor’s overdraft. Lord Wilberforce saw no inconsistency in holding that a contract was also enforceable as a trust.

The Quistclose trust has been recognised in other case where money has been lent on terms that the borrower is not to become the beneficial owner.

  • In Twinsectra Ltd v Yardley,[13] a solicitor received money from a lender under a contract which provided that the ‘loan moneys will be utilised solely for the acquisition of property on behalf of our client [the borrower] and for no other purpose.’
    • Lord Millen stated that “the question in every case is whether the parties intended the money to be at the free disposal of the recipient.”
  • Gummow J noted that Quistclose lending arrangements can be rationalised in terms of a number of equitable structures and he saw Lord Wilberforce’s characterisation in the Quistclose case as “indicative of an express trust with two limbs rather than an express trust in favour of the shareholders.”

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 218.
  2. Textbook, pp 218-9.
  3. Textbook, pp 219-20.
  4. Textbook, pp 220-1.
  5. Textbook, pp 221-2.
  6. [1971] 2 NSWLR 494.
  7. (1921) 21 SR (NSW) 400.
  8. Textbook, pp 222.
  9. Textbook, pp 222-4.
  10. [1970] AC 567.
  11. Textbook, pp 232-5.
  12. [1970] AC 567.
  13. [2002] 2 AC 164.
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