the Law of Trusts: Trust Property and Degree of Clarity

University of Nottingham School of Law Trusts: Preliminary Assessment Question 2: “A declaration of trust can be valid only if the subject matter of the trust has been described with sufficient clarity.” Critically comment on the law as it relates to this requirement. The most basic legal concepts are usually the most amorphous that come with explanations very similar to the epitomising ‘the law is the law’ expression. Trust is no different. It is often described, as opposed to defined, and elaborations on the matter often brush aside what it is to consider what it does. One workable explanation for express trust is that it “refers to the legal relationship created by the settlor when assets have been placed under the control of a trustee for the benefit of a beneficiary or for a specified purpose”. Convention on the Law Applicable to Trusts and on their Recognition 1985, Art 2. This statement covers both its formal and substantive requirements. While substantive requirements refer to “the three certainties”, formal elements denote the creation of the legal relationship and the transfer of the assets to the trustee. The express trust relationship is always constituted by means of a declaration of trust in which settlor trusts himself or another person to be the trustee. Similarly, formalities are carried out when the assets are successfully transferred to the trustee’s safekeeping for the purposes of the trust. On the other hand, “the three certainties” are concerned with the existence and the extent, the object, and the subject of the trust relationship. In contrast with the amply clear and structural questions of who are the trustees and do they have the legal title to the land, substantive requirements answer more controversial and functional questions. They focus on finding if and how the creator of the trust utilised the “great deal of flexibility [given to him] as to the terms and operation of the trust” Graham Virgo, The Principles of Equity & Trusts (Oxford University Press 2012) 79. to achieve the ends he desired. These requirements refer to the intention of the settlor or the testator, the subject matter of the trust, and the beneficiaries of the trust. To create a valid trust all three elements need to be “sufficiently” clarified in the declaration of trust. ibid. Therefore, according to Lord Langdale in Knight v Knight, (1840) 3 Beav 148. a creator of trust should use words for imperative effect, describe the subject matter with sufficient clarity, and make certain the objects or persons for whose benefit the trust is established. ibid. The yardstick for sufficient clarity, and therefore validity of the trust, has long been whether the court, if necessary, can control and administer the trust on true construction of the declaration of trust. Morice v Bishop of Durham and another - [1803-13] All ER Rep 451, (1804) 9 Vest 399, (1805) 10 Vest 522. It has been put by Lord Wilberforce that a trust should be vindicated if judges can find “sufficient practical certainty in its definition for it to be carried out, if necessary with the administrative assistance of the court”. McPhail v Doulton [1971] AC 424, 450. In this duty “the court will bend over backwards to construe sense into instruments” Grbich (1974) MLR 643, 650. in an effort to “permit the largest possible degree of autonomy” Simon Gardner, An Introduction to the Law of Trusts (3rd edn, Oxford University Press 2011) 31. to the individual over his property. This drive follows trust’s operation as a facilitative tool and pursues “the liberal vision of the institution of property” which suggests that one is ought to be free in dealing with his property. ibid. As a facility to which people willingly subscribe to dispose with their land and to achieve certain results even after they are capable of scrutinising consequences, “the law has to ensure that [it] can be relied upon to do just that”. ibid at page 139. To this end, judges will strive to uphold a trust if they possibly can. Pearson v Lehman Brothers Finance SA [2010] EWHC 2914 (ch), [245] (Briggs J). However, the Court’s aspiration to uphold trusts is not unqualified as poor drafting, not following legal advice, ambiguity of intention or lack of precision on the creator’s part may leave judges in confusion of what are the elements of the trust. Unclear and equivocal obligations arising under the declaration of trust render the trust invalid. This general rule for sufficient clarity becomes further specified as it applies to each of the certainty requirements. Even though they are distinct elements, they are not exclusive in their operation and often overlap so that insufficient certainty on one part may exacerbate doubts on another part. Mussoorie Bank Ltd v Raynor (1882) 7 App Cas 321. Accordingly, sufficiently described subject matter and identifiable trust property plays a vital role in validation of a trust. In this context, subject matter refers to the property that consists of, not to the exclusion of other property or interest, of trust property; whereas the trust property is the property that is completely and only subject to a trust. As a flexible instrument, trust may be “declared over all kinds of property, including land, money, shares, and chattels, and even intangible property, such as a covenant or a debt”. Graham Virgo, The Principles of Equity & Trusts (Oxford University Press 2012) 87. While this definition covers unlikely items such as tax exempting milk quotas, Swift v Dairywise Farms Ltd. [2000] 1 All ER 320. it does not include future property or expectancies. Re Ellenborough [1903] 1 Ch 697. As Judge Moseley, Q.C. observed, there needs to be an identifiable fund to which trust could attach. Hemmens v Wilson Browne (a frim) [1995] Ch 223, 232. One commentator depicted this fundamental element by stating that “a trust without property is like a sea without water”. Patrick Parkinson, ‘Reconceptualising the Express Trust’ [2002] CLJ 657, 659. It is this aspect that distinguishes trust from other “forms of obligation which need not be satisfied out of any specific property”; ibid at page 665. while a contract for consideration will be binding regardless of assets the contractor pledges to pay from, trust only attaches to property so described and identified in the declaration of trust. In this regard, it is important to, first, sufficiently identify the subject matter of the trust obligation. The Texas case of Wilkerson v McClary 647 S.W. 2d 79 (1983) (Texas Ct. App.). showcases how the direction that “a checking/savings account located” at a certain bank could be vague in identifying the subject matter when the said person has more than one accounts in the said bank. Second, it is not always adequate that declaration of trust covers some property as the subject matter since trust property may be required to be identified within the lot as well. It was settled in Palmer v Simmons that indefinite spatial dimensions such as ‘bulk’ could not be taken as adequately descriptive since “as well as not saying which among the relevant collection of assets shall be held on the trust, the settlor has not even said how much of it shall be”. Simon Gardner, An Introduction to the Law of Trusts (3rd edn, Oxford University Press 2011) 141. Cases like Boyce v Boyce (1849) 16 Sim. 476. and Anthony v Donges [1998] 2 FLR 775. further establish the principles on general uncertainty or failure of identifying trust property within the subject matter. In both of these cases, the subject matter was very well established as the two houses and the whole of the estate respectively. The declaration of trust was unclear on the trust property as it was unidentified and there were no means to identify: the sister who was meant to choose a house had died before making a selection and therefore it could not be ascertained which house she would decide on; and minimal part of the estate the testator’s wife might be entitled to under English law for maintenance purposes was found to be unequivocally vague. Consequently, trust in both cases failed for lack of clarity on the trust property notwithstanding the obvious subject matter. In other cases, it was found that trust would be uphold if trust property can be discerned through computation or otherwise. These examples include “anything that is left” Re Last [1958] P 137. and “reasonable income” Re Golay’s Will Trust [1965] 1 WLR 969. that in the first glance does not offer clarity. The court was able to find the trust property in these cases within the established subject matter through finding what would be left after brother’s life interest in the estate and by making an objective assessment of what is a reasonable income respectively. Accordingly, cases above demonstrate that it is not enough that only subject matter be sufficiently described. The requirement falls to whether the trust property is clear or discernable to the trustees and, in their default, to the court. It can be observed that the court accepts a trust as valid only if it is sufficiently clear so it is “guaranteed to be capable of enforcement”. Morice v Bishop of Durham (1804) 9 Vest 399, (1805) 10 Vest 522. Apart from the general rule that trust property should be identified within the clearly described subject matter, further considerations arise when the subject matter consists of non-fungible or intangible assets. Identifying assets declared under trust can be considerably harder or impossible when it is not clear which part of the whole is impressed with the trust. The authority on the heterogeneous assets is Re London Wine Co (Shippers) Ltd [1986] PCC 121. where consignments of wine were stored in bulk in company warehouses after respective purchasers bought them. Although purchasers were issued a ‘certificate of title’ and named the ‘sole beneficial owner’ of the wine they purchased, bottles were not allocated to customers. When company went into receivership the question was whether trust was declared over the wine stored for customers. Oliver J. held that there was no trust since subject matter of the trust was uncertain. That is, trust property within the subject matter was not identified or segregated to be discernable in any way. Although there were enough bottles in stock to meet all the purchases made and therefore all the claims by the customers could be satisfied, there were no indications as to who each unique bottle belonged to. It was explained at the first instance by Colin Rimer Q.C. that bottles of wine were not fungible assets due to a number of factors that could affect their value. “Unsurprisingly, then, [it was established] that an unseparated part of a collection of heterogeneous assets cannot validly be placed on trust”. Simon Gardner, An Introduction to the Law of Trusts (3rd edn, Oxford University Press 2011) 140. Similarly, it is difficult declaring trust over unseparated or unidentified assets belonging to a homogeneous bulk. This point was tested in Re Goldcorp Exchange Ltd. [1995] 1 AC 74. Goldcorp was a company dealing in gold bullion which acquired and stored bullion for clients in bulk. It only kept gold adequate to meet daily requirements of customers instead of storing all the gold ever purchased. Thus, when the company became insolvent there was not enough gold to satisfy customers’ claims and stored gold was held in bulk unsegregated and unidentifiable except for a few customers’. It was not only impossible to discern “what bullion each customer owned but it was also impossible to know what fraction of the total bullion each customer owned”. Patrick Parkinson, ‘Reconceptualising the Express Trust’ [2002] CLJ 657, 672. The question for the Privy Council was whether the gold was held in trust. It was held that no trust arose since customers’ property could not be identified in the bulk. However, it is difficult to understand why fungible assets were treated in the same way as inherently unique wine bottles. One argument is that “the trust can be valid only where the assets in question are both homogeneous and intangible (as shares are, and money, if in the form of the balance in a bank account, but not bullion)”. ibid at no 28. Nevertheless, this argument is countered by tracing reasoning which defeats the distinction between tangible and intangible assets. ibid at page 141. Another argument is that invalidity of trust stems from the facts of the case rather than the interchangeability reasoning. It is asserted that since amount purchased exceeded the gold bullion stored it was never intended that bullions would be declared under trust. ibid at no 30. This analysis aligns better with the Court’s decision and demonstrates an overlap between clarity of intention and subject matter: since Goldcorp’s company practices prevent trust property to be sufficiently identified, the company must not have intended to have the bullions under trust for the customers. An additional argument is that any trust purporting to hold a specific number of bullions out of an identical bulk would be invalid since it would not be known which bullions were held under trust. Trust property can only be capable of computation if declaration of trust refers to a share in the total amount of undivided total and ascertained tangible subject matter. Graham Moffat, Trusts Law: Text and Materials (4th edn, Cambridge University Press 2005) 166. This argument perhaps caused the shaping of the Sale of Goods (Amendment) Act 1995 which statutorily reads tenancy in common mechanism into sales of a particular quantity from a bulk. ibid. Accordingly, purchaser is protected by the legislation from outcomes such as Goldcorp or London Wine. In summary, non-fungible and fungible tangible assets need to be sufficiently identified within the subject matter to be valid trust property. Segregation as a form of identification is desirable since it reinforces the reasoning that the purported creator did, indeed, wish to establish a trust. This principle was stated in Henry v Hammond [1913] 2 K.B. 515. where a dichotomy was demonstrated between “money … that he is bound to keep it separate, … and to hand that money to be so kept as a separate fund to the person entitled to it” and money “he is not bound to keep … separate, but is entitled to mix it with his own money and deal with it as he pleases, and … called upon to hand over an equivalent sum of money”. [1913] 2 K.B. 515, 521. The first relationship is one of trust obligation whereas the latter is one of debtor-creditor. The segregation debate arises quite often in insolvency cases where certain property is claimed to be trust property in an effort to remove it from the general assets of an entity. In weighting factors as to whether the property was held by the insolvent entity under trust, the court employs this dichotomy among other considerations. On the other hand, intangible property has no precondition to be segregated or identified within subject matter to be trust property. The leading authority on the subject is Hunter v Moss [1994] 1 WLR 452. where the Court of Appeal found that a trust for 5 per cent of the share capital of a private company which amounted to 50 out of 950 shares was defined with sufficient clarity. Much like London Wine or Goldcorp, assets in question were not segregated or ear-marked by Mr Moss in any way and it could not be known which 50 shares Mr Hunter was entitled to. However, the court held that proceedings from the sale of shares should be transferred to Mr Hunter on a pro rata basis. The outcome of this case seems hard to reconcile with other purported trusts in which nothing short of readily identifiable trust property was enough. One interpretation is that “the requirement of the appropriation of the trust property from a common stock only applies in the case of tangible property but has no application to intangible property, provided that there is an identifiable bulk from which the property allegedly subject to the trust can be drawn”. Pearce, Stevens & Barr, The Law of Trusts and Equitable Obligations (5th edn, Oxford University Press 2010) 191. However, this explanation conflicts with another case where the court found a purported trust invalid because 3 per cent of the contract price, when not ear-marked, was not sufficiently identifiable as the trust property within the subject matter of the bank account used for payments due under the contract. MacJordan Construction Ltd v Brookmount [1992] BCLC 350. Furthermore, the suggestion that identification is required only when subject matter is not homogeneous fails as fungible assets of Goldcorp were found not to be sufficiently described. In subsequent litigations, inconsistent cases were distinguished from Hunter v Moss claiming that they refer to “the appropriation of chattels and when the property in chattels passes” and “was not concerned with a declaration of trust”. [1994] 1 WLR 452 at 458. Neuberger J., supporting the same reasoning, held that he was bound to follow the precedent in Hunter which could be distinguished from the earlier cases on the grounds that it concerned shares and not chattels. [1997] 2 BCLC 369, 381-384. There remains one further explanation for this seemingly structurally unsound distinction in Hunter v Moss that stands on more pragmatic and utilitarian grounds. In contrast with cases that are pitted against Hunter v Moss, there is no insolvency action in the case which suggests that the court did not need to consider the third party aspect. The question put to the court was, in effect, whether Mr Moss could break the initial promise he made to Mr Hunter with impunity since it is highly likely that subject matter of the trust was not sufficiently described in the declaration of trust. The court did not have to consider the injustice that could be inflicted upon creditors or unsecured debtors or scrutinise the decision’s effects on the market as a whole. Therefore, it is possible that the court might have sought to shelter Mr Hunter from the unjust consequences of Mr Moss retracting from his initial intention to establish a trust by establishing a logically sound principle that is ultimately hard to reconcile with precedents. Graham Moffat, Trusts Law: Text and Materials (4th edn, Cambridge University Press 2005) 166-167. It could be just that the Court sought to do justice rather than establish a rule for market efficiency. However, even this explanation does not explain why the case was not confined to its facts but was made to stay as criticisms pile regarding lack of protection for creditors and allowing ring-fencing for intangible properties. Alastair Hudson, Equity and Trusts (6th edn, Routledge-Cavendish 2010) 106. All in all, express trust as an equitable obligation promises significant flexibility to the individual in dealing with his property. For its faultless operation the three certainties must be fulfilled along with other formalistic requirements. Validity of the trust depends on sufficiently clear description of these three elements of which certainty of subject matter is one. Accordingly, trust may only be declared over existing property while it is indifferent about type of property. Firstly, subject matter must be identified with sufficient certainty. Secondly, trust property must be identified with sufficient clarity within the subject matter. This general rule is less stringent when the asset in consideration is intangible and fungible property like shares. In which case, the trust will be uphold even without segregation or elaborate identifications within subject matter. However, if subject matter consists of tangible and heterogeneous assets some form of identification such as segregation is desirable if not required for discerning the trust property. This dichotomy has been criticised for not being particularly convincing since differences in dealing with chattels and intangibles are overcame with the tracing reasoning. One plausible explanation for this anomaly has been that the court’s focus was away from the third party dimension which caused it to arrive to a seemingly logically robust reason which was remote from the precedents. But perhaps we are applying our minds to the wrong issue: this “spurious” Alastair Hudson, Equity and Trusts (6th edn, Routledge-Cavendish 2010) 106. dichotomy between intangible and tangible property could be overcome by wording the requirement of certainty for trust as a requirement for certainty of obligation. Patrick Parkinson, ‘Reconceptualising the Express Trust’ [2002] CLJ 657. Against this new requirement purported obligations to segregate, differences in requirements for tangible and intangible trusts, and complex rules regarding identification of subject matter and the trust property would be reshaped into a simple question of what are the obligations of trustees. The answer to that question would not only reveal the trust property with sufficient clarity but would also set out the beneficiaries and the intention of the creator of the trust. It would be infinitely more helpful and practical for the court to seek out the reality of the situation as a court of Equity rather than force facts and circumstances into predetermined forms as a court of Common Law. Bibliography: Cases: Anthony v Donges [1998] 2 FLR 775 Boyce v Boyce (1849) 16 Sim. 476 Grbich (1974) MLR 643 Hemmens v Wilson Browne (a frim) [1995] Ch 223 Henry v Hammond [1913] 2 K.B. 515 Hunter v Moss [1994] 1 WLR 452 Knight v Knight (1840) 3 Beav 148 MacJordan Construction Ltd v Brookmount [1992] BCLC 350 McPhail v Doulton [1971] AC 424 Morice v Bishop of Durham and another - [1803-13] All ER Rep 451, (1804) 9 Vest 399, (1805) 10 Vest 522 Mussoorie Bank Ltd v Raynor (1882) 7 App Cas 321 Pearson v Lehman Brothers Finance SA [2010] EWHC 2914 Re Ellenborough [1903] 1 Ch 697 Re Golay’s Will Trust [1965] 1 WLR 969 Re Goldcorp Exchange Ltd. [1995] 1 AC 74 Re Harvard Securities [1997] 2 BCLC 369 Re Last [1958] P 137 Re London Wine Co (Shippers) Ltd. [1986] PCC 121 Swift v Dairywise Farms Ltd. [2000] 1 All ER 320 Wilkerson v McClary 647 S.W. 2d 79 (1983) (Texas Ct. App.) Statutes and Conventions: The Sale of Goods (Amendment) Act 1995 The Convention on the Law Applicable to Trusts and on their Recognition 1985 Books: Gardner S, An Introduction to the Law of Trusts (3rd edn, Oxford University Press 2011) Hudson A, Equity and Trusts (6th edn, Routledge-Cavendish 2010) Moffat G, Trusts Law: Text and Materials (4th edn, Cambridge University Press 2005) Pearce, Stevens & Barr, The Law of Trusts and Equitable Obligations (5th edn, Oxford University Press 2010) Virgo G, The Principles of Equity & Trusts (Oxford University Press 2012) Articles: Parkinson P, ‘Reconceptualising the Express Trust’ [2002] CLJ 657 10