Various Aspects of Law of Trusts & Equity
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Law of trusts was developed by part of equity. It is a body of principles created by the Courts of Chancery. Objectives of these principles were to rectify the strictness imposed by the provisions of common law. Further trust was an additional term to the law of property. This term is a situation in which legal title of property is held by one person but he or she is eligible to use this right for the benefit of another person. It is recognized a split between the beneficial and legal ownership. In general terms equity can be defined as collection of principles which are intended to complement principles of common law. Functions of equity is to mitigate the unfair or unjust impact due to rigid principles of common law. Main objective of equity is provide assurance of fairness. It is often at the expense of certainty in the law. Present report will include description of various aspects of law of trusts and equity. Discussion of the provisions will be linked to the case scenario of Hunter v Moss  1 WLR 452. It is a English trusts law case from the Court of Appeal. This case study was focused on the certainty of subject matter which is mandatory for the formation of trust.
English trust law
English trust law is focused on the formation and protection of funds of assets. These asset funds are usually held by one person for the benefit of another person. Trusts are formed on the basis of English law of property and obligations. It is developed by the parties because claimants were dissatisfied from the court proceeding with the common law courts in the case of property disputes. In general context trusts are created by settlor for beneficiaries. Settlor is a person who provides property to one or more trustees who use the assets on behalf of beneficiaries. Similar to the provisions of contract law there is no requirement of formality of formation of trust until and unless it is required by law [Convention on the Law Applicable to Trusts and on their Recognition 1985, Art 22.]. For the protection of Settlor, reasonable degree of certainties is demanded by the English trust law that trust was intended to be formed. Such requirement is imposed for the enforceability of terms of trusts [Gordon, K. ‘The Certainties of Trust Vol. 158 (2006) Taxation Magazine]. Further it is also required by the court of law that for which assets trust was formed and which people will be beneficiaries of the trust. Formation of trust can be expressed or it can also be resulting and constructive. These trusts are formed through the automated operations of law for the prevention of unjust enrichment and for rectification of wrongdoings. Although resulting and constructive are not identical to expressed trust because it is merely formed to protect the rights of individual.
Trustees owe range of duties and obligations to the beneficiary. If duties and obligations are not described in the trust deed than trustee is required to avoid such actions which can lead to conflicts in interests of parties. Affairs of trusts is required to be managed with reasonable skills and care and all the act of parties should be consistent with terms of trusts.
Principles of the equity and trust law is as follow
Trust fund must be separately identifiable
As per the traditional principle of law property of trust should be separately identifiable from the other properties. For this case of Re London Wine Co. (Shippers) Ltd. (1986) Palmer's Co. Cas. 121 can be referenced. In this case court said that bottles of wine is not separately identifiable as a property of trust thus formation of trust was not valid. Decision held in this case is not consistent with the general policy of insolvency law[ Gordon, K. ‘The Certainties of Trust’Vol. 158 (2006) Taxation Magazine.]. Similar case is cited in situation of *Re Goldcorp[  1 A.C. 74]. In this case likely decision for segregation of property was provided. Westdeutsche Landesbank Girozentrale v Islington [ LBC UKHL 12]is leading case precedent of the resulting trust. In this case decision was made by court of law that no proprietary equitable claim will be accepted without specification of the trust property.
Principle for intangible or exchangeable property
In exception to the general rule that “property of trust should be separately identifiable in the discussed subject matter of trust” further consideration is provided is subject matter is comprises of intangible or fungible assets. Identification of declared assets will be comparatively complex if it is not clarified that which part of the entire assets is affected by the trust. If assets is part of heterogeneous property than segregation is mandatory[ Pettit, P. H. (2012). Equity and the Law of Trusts. Oxford University Press.]. However if assets is homogeneous than validity of trust will not solely determined on the basis of certainties in subject matter[ Langbein, J. H. (2005). Questioning the Trust Law Duty of Loyalty: Sole Interest or Best Interest?. Yale Law Journal, 929-990.]. Stiff exception will be applicable in case scenario only if assets are homogeneous and intangible in nature for examples shares or money or bank balance. In the case of Hunter v Moss[  1 WLR], court of appeal held that a trust for 5% of the share capital of the private company was defined in specified clarity. Although particular shares were not ear-marked by Mr Moss in any manner due to this it was not clarified that Hunter is entitled for which fifty shares. By applicability of the exception to the general rule court held that share will be transferred on the basis of pro rata. Outcome of the cited case was typical to reconcile with decisions of other cases where trusts were declared invalid. Thus interpretation was made by the common law that requirement of specification of trust property will only be applied in situation of common stock.
Nature of property for the formation of trust fund
Property for which trust is formed should be in accordance with the statutory provisions. Property for trust can be tangible or intangible in nature but should not prejudice to the interest of beneficiaries. Case of Don King Productions v. Warren[  2 All E.R. 608 ] can be referenced for the nature of property for the formation of trust fund. This case was based on the partnership trust in which it was said that property considered should be appropriate else it will invalidate the objectivity of trust.
Different approach in commercial law
If there is commercial transactions between parties then different approach will be applied. According to the provisions of Sale of Goods Act 1979, s 20A provides exception to the sale of a specified quantity of unspecific goods[ Graham Virgo, The Principles of Equity & Trusts. (Oxford University Press 2012) 79. 3. ibid.]. For the applicability of this section following conditions are required to be satisfied-
1.Goods should be identical part of the bulk which should be identified either in the contract or through the subsequent agreement formed by the parties.
2.Price should be paid by buyer whether partial or full which are subjected to the nature of contract.
This exceptions were applied in the case of Re Wait  1 Ch 606 and Re Staplyton  1 WLR 1181 to provide appropriate just to the client.
Case: Hunter v Moss  1 WLR
In this case scenario Moss was the director and founder of Moss Electrical Co Ltd and he was owner of 950 shares of the company (total number of available shares was 1000 shares). He said to his finance director (Hunter) that he could have 50 of these shares as an employee in September 1986[ Othman, A. H. A., Meera, A. K. M., & Aziz, H. A. (2015). Micro-Economic Determinants of NAV of Islamic Equity Unit Trust Funds in Malaysia: An ARDL-Bounds Tasting]. For another 900 share Moss does not make any statement or trust. However he does not execute gift of 50 shares due to the tax concerns and from the risk of turnover. Basically Moss had changed his mind for the transfer of shares and he was giving merely excuses[ Sitkoff, R. H. (2004). An agency costs theory of trust law.]. Due to this Hunter claimed on the Moss for the transfer of 50 shares which was promised by him as an employer. In this case there was two main issues i.e.
- Whether language used by Moss for transfer of shares is appropriate for the formation of trust
- Second issue was created that trust was not able to satisfy three certainties due to the absence of segregation of shares.
(Three certainties- It is legal rule in English Trust Law based on the formation of valid express trust. As per this rule, instrument of trust must represent the object, subject matter and certainty of intention. It can be defined as clear statement in which testator of donor must show their interest for the formation of trust. It can be in any language[ Gardner S, An Introduction to theLaw of Trusts (3 rd edn, Oxford University Press2011)]. Trust can be formed by parties without using the word trust)
In this case application of provisions of three certainties will be as follow-
Certainty of intention- Donor should have clear thought for the formation of trust. In this case precedent, Moss had changed his mind for the transfer of shares and he was giving merely excuses thus intention of Donor was missing[ Slovic, P. E. 2000. The perception of risk. Earthscan Publications].
Certainty of subject matter- As per this factor, property for which trust is created should be identifiable. General rule for applicability of this factor is that property for the trust should be separated from the other property. If there will not be clear segregation then formation of valid trust will not succeed.
(In the case scenario of Re London Wine Co, claim was made by creditors on bankrupt wine trading company for the bottles of wine for which payment was made by them. In this case the main issue was certainty of subject matter that bottle was not identifiable. Thus Oliver J held that subject matter of the trust is a part of homogeneous production units thus along with the interest of beneficiary attached property should also be identifiable).
Certainty of object- Beneficiaries of the case must be identifiable. In the selected scenario beneficiary was Hunter.
By considering all the crucial facts of the case, court held that all the shares were identical in nature. However absence of segregation will not invalidate the trust formed by the parties. For the present case, Re London Wine Co (Shippers) Ltd was considered as standard case. It was because subject matter of the situation was potentially different as all the shares of the entity were homogeneous in nature[ Eden, P. ‘Beneficial Ownership of Shares: the Implications of Re HarvardSecurities’ Vol. 16 (2000) Corporate Rescue and Insolvency Journal.]. Still High Court Colin Rimer QC (Deputy High Court Judge) insisted that approval of Rollestone v NatioΑlastair Hudson, Equity & Trusts (8th ed. Routledge, 2015) pdfnal Bank of Commerce in St. Louis should be considered for the present case. In the cited case Supreme Court of Minnesota held that segregation of property is not required in such situations.
On the basis of following appeals court held that there is valid trust between Hunter and Moss. Further leading judgement was provided by the judicial person that trust is valid because fulfilment of terms of employment is mandatory for all the parties. In addition to this decision given in Re London Wine Co (Shippers) Ltd is too old to consider it in the present scenario. Further conclusion was given that there is no tangible difference between the shares of the company as these are not segregated by the owner.
This case is significant as it is commonly cited in the cases related to trust of intangible and identifiable property. On the basis of this case it is a statutory fact that it is not necessary to segregate identical property. If trust is formed for the tangible property such as land or materialistic thing then identification will be easy and appropriate[ Hansmann, H., & Mattei, U. 1998. Functions of Trust Law: A Comparative Legal and Economic Analysis, The. NYUL Rev., 73, 434.]. However if trust is formed for intangible property and there is no difference in units for the consideration of trust then segregation will not be essential. Further validity of trust will not solely determine on the basis on the fact that there is particular specification for trust property.
Situation if exceptions were not applied
If trust was created by Hunter and Moss for tangible property such as transfer of machinery or any other tangible benefit then it will be held invalid by the court of law. It is because in that situations facts of case Re London Wine Co. (Shippers) Ltd. [ (1986) Palmer's Co. Cas. 121]will be applied instead of MacJordan Construction Ltd v Brookmount Erostin Ltd[  BCLC 350]. Further if shares were classified by Moss in various categories such as right shares, bonus shares, general shares etc[ Convention on the Law Applicable to Trusts and on their Recognition 1985, Art 22.]. then also exception will not be applied in this case scenario because in that situation factor of uniformity will be eliminated from the situation.
Difficulties and recommendations
Provisions of the certainty in the subject matter is not appropriate for all the case scenarios because sometimes it can be unfair to the parties. For example in the present cited case Moss was making excuses and he changes his intention for the transfer of shares. It is unfair for the hunter as he is not entitled to avail the benefit[ Equity and Trusts (6th edn, Routledge-Cavendish 2010) 106.]. This issue can be resolved by implementing provisions of benefit where there is lack of segregation in the contract but there is proper intention of parties. It should be reconciled with the basis individual rights. For example in the situation of transfer of property if payment is made by the party but there is lack of clarification than either payment should be repayable or property should be transferred. Decision of the court should be just for the both of the parties.
From the above discussion and explanation of case scenario it can be said that objective of Equity and trust is to rectify the strictness imposed by the provisions of common law. Utility of equity is to extenuate the unfair or unjust impact due to rigid principles of common law. Main objective of equity is provide assurance of fairness. However it is often at the expense of certainty in the law. In the cited case in report “ Hunter v Moss[  1 WLR 452]”, exception to the general rule is applied that property of trust should be separately identifiable in the discussed subject matter of trust. Through the application of the exception court held that share will be transferred on the basis of pro rata. Outcome of the cited case was typical to reconcile with decisions of other cases where trusts were declared invalid. Due to this issue interpretation was made by the common law that requirement of specification of trust property will only be applied in situation of common stock. If trust was formed by parties for property i.e. intangible in nature then trust will be held invalid by the court of law. Because in that situations facts of case Re London Wine Co. (Shippers) Ltd. (1986) Palmer's Co. Cas. 121 will be applied instead of MacJordan Construction Ltd v Brookmount Erostin Ltd[  BCLC 350].
Books and Journals
- Pettit, P. H. 2012. Equity and the Law of Trusts. Oxford University Press.
- Convention on the Law Applicable to Trusts and on their Recognition 1985, Art 22.
- Eden, P. 2000. Beneficial Ownership of Shares: the Implications of Re HarvardSecurities. Corporate Rescue and Insolvency Journal.
- Gardner S, An Introduction to theLaw of Trusts (3 rd edn, Oxford University Press2011) .
- Gordon, K. 2006. The Certainties of Trust. Vol. 158. Taxation Magazine.
- Graham Virgo, The Principles of Equity & Trusts. (Oxford University Press 2012) 79. 3. ibid.
- Hansmann, H., and Mattei, U. 1998. Functions of Trust Law: A Comparative Legal and Economic Analysis, The. NYUL Rev.
- Langbein, J. H. 2005. Questioning the Trust Law Duty of Loyalty: Sole Interest or Best Interest?. Yale Law Journal.