Trusts- Basics

Relevant Statute:
1.
Judicature Acts 1873/1875
2.
Common Law Procedure Act 1854
3.
Chancery Amendment Act 1858

The Definition of a Trust

trusts is a device in which rights (personal or proprietary) are held by one person on behalf of
another

some trusts are created by court. These are constructive trusts.

person creating the trust: settlor

person holding rights: trustee

person for whom those rights are held: beneficiary

Lord Coke's Definition
"a confidence reposed in some other, not issuing out of land but as a thing collateral thereto, annexed in
privity to the estate of the land, and to the person touching the land, for which cestui sue trust has no
remedy but by subpoena in the Chancery."
Sir Arthur Underhill's Definition (in Underhill and Hayton, Law of Trusts and Trustees)
"an equitable obligation binding a person (called a trustee) to deal with property (called trust property)
owned by him as a separate fund, distinct from his own private property, for the benefit of persons (called
beneficiaries or, in old cases, cestuis que trust) of whom he may himself be one and any one of whom
may enforce the obligation."

Why create a trust?

interested recipient of rights could be incapable of managing them (ex. children)

flexibility

enjoyment of rights can be split on a plane of time

Principal Uses of Trusts Today
1.
To enable property, particularly land to be held for persons who can not hold it themselves. The
legal title to land can not be vested in a minor, but it can be held on trust for one. Legislature has adopted
this, providing that a purported conveyance of a legal estate in land to a minor operates as declaration
that the land is held in trust for that minor.
2.
To enable persons to make provisions for dependants privately. Most obvious examples:
provisions made for an illegitimate child for mistress. These provisions can be made during the persons
lifetime without publicity. A will becomes a public document once probate is obtained and can then be
inspected by the public. A trust created other than by will will however not be public provided the person
making it either settles property on intended beneficiaries during his lifetime or creates a secret trust in his
will.
3.
To tie up property to benefit persons in succession. A gift of property to trustees to hold on trust
for the parent for life, and after, the children. This ensures that the person ultimately entitled at least
receives any assets derived from the property.
4.
To protect family property from being wasted. A person may feel that a gift of money would be
quickly spent.
5.
To make a gift in case of future circumstances that have not yet arisen and are not known yet.
6.
To minimise incidence of income tax, capital gains tax and inheritance tax.

7.
To enable two or more persons to own land.
8.
To facilitate investment through unit trusts and investment trusts. Objective is to enable small
investors to acquire a small stake in a large portfolio of investments to spread risk across a substantial
range of stocks and shares.
9.
To enable companies to raise finance from investors on the security of debentures and bonds.
10.
To make provision for causes or for non-human objects. For example furtherance of education or
maintaining an animal.
11.
To protect the environment.
12.
To provide pensions for retired persons and their dependants.
Courts will in certain circumstances infer the existence of a trustee- beneficiary relationship where the
owner of the property has intentionally carried out some other transaction (resulting trust)
or
Courts can impose a relationship of trustee and beneficiary as a result of some type of misconduct by the
person who is held to be the trustee (constructive trust).
Constructive Trusts

Case: Chase Manhattan v Israel- British Bank (1981) Ch 105

claimant mistakenly paid US$ 2,000,000 to defendant bank

personal liability at common law on defendant to repay wasn't useful do claimant because of
subsequent insolvency of defendants.

rights held by trustee on trust for others don't form part of estate available for distribution to
creditors in the event of trustee's insolvency, so claimants argued for a trust.

Goulding J held that there was a trust, so that the rights came out of the insolvent estate.

Case: AG for Hong Kong v Reid (1994) 1AC 324

in breach of equitable duty of loyalty to the crown, Reid (active director of Public Prosecutions in
Hong Kong) took about HK$ 12,000,000 in bribes.

used money to purchase titles to land in New Zealand

the Crown had good personal claim to value of the bribes, but wanted a trust of the land titles.

this was denied by the lower courts but the Privy Council held that reid was indeed a trustee of
those titles in its favour.
Juridical Effect of Creating a Trust

Case: DKLR Holding Co (No.2) Ltd v Commissioner of Stamp Duties (1982) 149 CLR 431
A company, 29 Macquarie (No. 14) Pty Ltd; was registered proprietor of a title to land.

they arranged with DKLR Holding Co. (No. 2) Ltd for the latter to hold the title in trust for the
former once a change in registration was effected.

whether ad valorem stamp duty was payable on the document effecting the registration of DKLR
as a proprietor.

DKLR argued that only nominal duty was payable, since al that would be received by them was a
bare legal estate with 29 Macquarie retaining the equitable interest.

this argument was rejected in the New South Wales Court of Appeal and High Court of Australia

Hope JA in the above: the absolute owner in fee simple doesn't hold two estates (legal and
equitable). He only holds legal estate with all rights and incidents attached.

equitable estate is an interest in property, but its essential character still bears the stamp which its
origin placed upon it.

where the trustee is the owner of legal fee simple, the right of the beneficiary, although annexed
to land, is a right to compel legal owner to hold and use rights which the law gives him in accordance with
obligations which equity has imposed upon him

in this case the trustee has at law all right of the absolute owner in fee simple, but he isn't free to
use those rights for his own benefit in the way he could if no trust existed.

(this was in (1980) 1NSWLR 510 at 519)

as a result, 29 Macquarie didn't retain an equitable interest. Their equitable interest only arose on
the transfer, the tax was therefore payable.

Brennan J in the High Court: equitable interest isn't carved out of a legal estate but may be
imposed upon it.

it may be convenient to say that DKLR took only the bare legal estate, but that is merely to say
elliptically that 29 Macquarie transferred to DKLR the property in respect of which DKLR had declared
that it would be a trustee.

Charter of 29 Macquarie's interest was DKLR's declaration, not memorandum of transfer.

DKLR's declaration wasn't moved by transfer to it of the property to be held on the trust declared.

(this is in (1982) 142 CLR 431; 474)

Case: re Transphere Pty Ltd (1986) 5 NSWLR 309

metaphor by McLelland J: interest of beneficiary is "engrafted" onto the right held by the trustee.

where a legal owner holds property on trust for another, he has at law all the rights of an absolute
owner but the beneficiary has the right to compel him to hold and use those rights which the law gives him
in accordance with the obligations which equity has imposed on him by virtue of the existence of the
trust.

although this right of the beneficiary constitutes an equitable estate in the property, it is engrafted
onto, not carved out of the legal estate.
Equity
the trust device is only recognised by equity, not the common law

rules of equity, prior to the passing of the Judicature Acts 1873-75, were administered by Court of
Chancery.

every High Court Judge is empowered to administer the law of equity and the common law today.

for the sake of convenience, many actions that would've been heard in a court of equity are now
assigned to the Chancery Division (High Court)
Conflicts between Law and Equity
Case: Earl of Oxford's Case (1616)
where the rules of common law and equity conflict, the rules of equity prevail.

this is to be found today in s.25(11) of the Supreme Coourt of Judicature Act 1873
Case: Walsh v Lonsdale: effect of the Judicature Act
landlord agreed in writing to grant tenant lease of a mill for seven years

agreement provided that rent was payable in advance if demanded

no grant by deed of the lease (required for lease exceeding three years at common law) was
made.

tenant entered, paid rent quarterly, not in advance.

he came into arrears. Landlord demanded a year's rent in advance.

it wasn't paid, landlord distrained.

tenant brought an action for illegal distress.

action failed.

distress would've been illegal at law, because no seven year lease had been granted, yearly legal
tenancy which arose because of entering into possession and payment of rent didn't include provision for
payment of rent in advance.

in equity, agreement for the lease was as good as a lease: tenant was liable to pay a year's rent
in advance, distress was lawful.
Maitland in Equity- A course of Lectures (1909):
"at every point, equity presupposes the existence of common law (...). Equity without common law would
have been a castle in the air, an impossibility."

Note:
equity is not synonymous with fairness/justice.

it is a system of rules in the same way the common law is/has a system of precedent. The legal
method used is the same.

equity did start out as a response to common law injustices, it became a coherent set of rules
whose content doesn't change with the judge.
Case: Cowcher v Cowcher (1972) 1 WLR 425
parties were husband and wife who contributed to the purchase of a fee simple title to a family
home.

whether there was any basis for altering co-ownership shares each spouse would normally
receive based upon proportions each contributed to its purchase: court held that there wasn't.
reasons for rejecting the argument that equity is synonymous with "fairness":

Bagnall J: justice must be determined according to law which can be attained by applying rules
and principles acquired over time, not on the basis of general considerations of fairness (particularly in
respect of property rights)- otherwise no lawyer could safely advise their client.

it might be unfair for Mrs Cowcher to receive a smaller share of the title than her husband
considering everything she did for him, but there was no basis in the law of trusts to grant her a larger
share for that reason alone.
Two Cases: Barclay's Bank Ltd v Quistclose Investments Ltd (1970) AC 567
a company to which money had been lent was said to hold that money on trust for the lender until
it had been used for the purpose of the ban.
and

re Kayford (1975) 1 WLR 279

a company was held to have established a trust of the advance payments of its customers, which
it would hold on trust until those customers' orders of goods had been filled.
finding of a trust in these two cases meant lender and customers were able to claim the return of
the full amount of the loan and their pre-payments respectively when the companies became insolvent.
the trust arrangement ensured that they weren't merely ordinary creditors of the companies.
whether the law of truss should recognise such arrangements, as they arguably undermine the
statutory regime of insolvency.
Comparison with other legal concepts: Agency/Bailment/Contract/Debt
trust is not the same as agency, bailment, contract and debt.

trust can be used in combination with many of these legal devices, particularly trust and contract;
trust and agency; trust and debt to generate different legal arrangements
Agency
trustee is not by virtue of his office an agent of the beneficiary

when trustee enters into contract in his rose as trustee, he alone incurs liability to perform

agent can however be a trustee

Bailment
depends on location of your title, right to exclusive possession
if vested in a person, they will be trustee of that right
if right is kept to oneself, and only possession of the painting is handed over, the transaction is
one of bailment, not trust
basic rule: nemo dat non quod habit (no one gives what he doesn't have)
Contract
no clean distinction between trust and contract

contract is a source of rights

trusts are a way of holding rights

contract is essentially a consensual institution

some terms might be dictated by law, but no one is forced to be a contracting party.

majority of trusts are settlor created but some are forced upon unwilling parties as in Chase
Manhattan and A-G for Hong Kong v Reid
Debt
relationship between trustee and beneficiary is not one of debtor and creditor

trustee doesn't owe the value of the rights he holds to the beneficiaries
Judicature Acts 1873/1875
fusion of Chancery and common law courts

abolished separation of Queen's Bench, Exchequer, Common Pleas, Chancery, Probate, Divorce
Court, Court of Admiralty

created Supreme Court of Judicature with High Court, divided into Divisions (Queen's Bench,
Chancery, Probate, Divorce and Admiralty (later: family:

Admiralty jurisdiction assigned to Queen's Bench.

Probate (other than non-contentious and common probate business) assigned to Chancery)

Each Division exercises legal and equitable jurisdiction

for administrative convenience, cases are allocated according to general subject matter.
Trusts "in the higher and lower sense"

Tito v Waddell (No.2) (1977) Ch. 106

Megarry V.-C.: "litigation on a grand scale"

small island Banaba, a Crown Colony in the Pacific where phosphate was discovered and
royalties for mining paid to the islanders

as time passed, Banabans sought increases in royalty payments, some of which were paid but
considerably lower than they claimed for.

They made various claims of political and international nature but failed

they brought proceedings, claiming the rates of royalties payable in respect of certain
transactions were less than the proper rates.

thus, the Crown as the responsible authority was subject to a trust or fiduciary duty for the benefit
of the islanders (or predecessors) and was liable for breach of duty.

whether there was such a trust/ fiduciary duty? ->

although the word "trust" had sometimes been used with reference to Crown and agents, this
didn't create a trust enforceable in court (trust in the lower sense). It was a governmental obligation not
enforceable by court (trust in the higher sense).

a "trust in the higher sense" can only be discharged under direction of the Crown. Crown can be
persuaded to honour governmental obligations (e.g. international pressure), but they're not enforceable
by courts.

although some ordinances impose statutory duties on the Crown, they don't impose fiduciary
obligations.

if a duty is imposed by statute to perform certain functions this statue doesn't as a rule also
impose fiduciary obligations. It has to be shown that such obligations are actually imposed.