Law-Equity and trust

In re Gulbenkian's Settlements [1970] A.C. 508, as cited by the Lord Wilberforce In re Baden's Deed Trusts (H.L.(E.) p. 451, there was given the clear indication of distinction between the kind of certainty required for powers and that required for trusts. For the purpose of In re Baden's Deed Trusts (H.L.(E.) case it was material to state the exact nature of that distinction. The said case as well as In re Gulbenkian’s Settlement[1970] are the most instructive to our question cases so I will dwell on them making direct conclusions and citing, while also noting the other relevant cases.

In re Baden's Deed Trusts (H.L.(E.)

The appelants, Robert Thomas Mitchell McPhail, Enid May Baden (widow) and Raymond Rostron Baden, submitted that “upon the true construction of a deed dated July 17, 1941, the provisions of clause 9 (a) thereof constituted a power and not a trust”.

It was witnessed that trustees defined should hold property (the fund) “upon trusts therein set forth including a trust”[1] (p. 427) under which income was to be applicable for transfers (grants) at the absolute discretion of the trustees.

For determination whether transfers as a grants or for the benefit of “officers and employees and ex-officers and ex-employees of the company and any relatives or dependants of such persons were (a) valid or (b) void for uncertainty or for any other reason the proceedings” the proceedings were commenced in the High Court by an originating summons dated January 14, 1963.

The summons were heard and the decision delivered that, inter alia, clause 9 (a), which  to be sumbitted below, “constituted a power and not a trust and that on this footing clause 9 (a) was valid”. The Court of Appeal upheld the said decision in favor of a power but held also that the judge had applied the “wrong test for the validity of powers”[2] (p. 429), reffering to the righteous test being stated In re Gulbenkian's Settlements [1968][3].

The most relevant clauses of the deed were as follows:

"6. (a) All moneys in the hands of the trustees and not required for the immediate service of the fund may be placed in a deposit or current account with any bank or banking house in the name of the trustees, or may be invested as hereinafter provided.

"9. (a) The trustees shall apply the net income of the fund in making at their absolute discretion grants to or for the benefit of any of the officers and employees or ex-officers or ex-employees of the company or to any relatives or dependants of any such persons in such amounts at such times and on such conditions (if any) as they think fit and any such grant may at their discretion be made by payment to the beneficiary or to any institution or person to be applied for his or her benefit and in the latter case the trustees shall be under no obligation to see to the application of the money.

(b) The trustees shall not be bound to exhaust the income of any year or other period in making such grants as aforesaid and any income not so applied shall be dealt with as provided by clause 6 (a) hereof.

"10. All benefits being at the absolute discretion of the trustees, no person shall have any right title or interest in the fund otherwise than pursuant to the exercise of such discretion, and nothing herein contained shall prejudice the right of the company to determine the employment of any of officer or employee. ... “

In this case it was crucial to identify whether the provisions of clause 9(a) together with those of the other clauses cited constitute a trust power or a mere power.

In Morice v. Bishop of Durham (1805) 10 Ves.Jr. 522 Lord Eldon held that, “in order to be valid, a trust must be one which the court can control and execute”. As a matter of fact, provisions of memorandum (deed) may empower the trustees and direct (oblige) them to do so – a trust power – or invite them to distribute the fund or a part thereof to all they think fit among the objects – a mere power.[4]

Inland Revenue Commissioners v. Broadway Cottages Trust [1955] case seemed to constitute a true and exhaustive test for validity of power on the basis of the distinction between cases where trustees are given a power of selection and those where they are bound by a trust for selection is drawn.

The provisions of the deed may often be ambiguos as to whether the language is mandatory or the class of beneficiaries is ascertainable.

Judicial statements, for example, 9(a-b), with due redard to the mandatory clause (“shall”), “creates, together with a power of selection, a trust for distribution of the income, the strictness of which is qualified by clause 9 (b), which allows the income of any one year to be held up and (under clause 6 (a)) either placed, for the time, with a bank, or, if thought fit, invested.” [5]

Discretionaly dispositions, which constitute a trust, in fact oblige the disponers to execercise the discretion. In default of that action the court assumes the discretionaly powers and exercises them by itself. That may happen in case of the death of all of the trustees or their failure to fulfill that function.

Those judicial statement, namely, the mandatory clause (“shall”), though may not compell the disponers to exercise the discretion, denote (or, in convenient way, “state”[6]) that the court construes a discretionary disposition as constituting a trust and a trust in itself contains an implied trust for the objects of discretion in default of the “disponers exercising the discretionary power.” The ways in which that implied trust operate may vary. As Lord Wilberforce emphasized, assuming “that the test of validity is whether the trust can be executed by the court, it does not follow that execution is impossible unless there can be equal division.”[7]

There are far less ambiguities, as to distinction between trust powers and powers, in discerning whether the settlor intended to confer a discretional powers upon the trustees and direct them to execute those powers or, instead, he confered a discretional powers with a view for them to appoint the beneficiaries and not care further than, “as to the distinction, if any, between trusts and bare powers in favour of a class of persons when the court has to consider whether a disposition fails by reason of uncertainty.”[8]

So, let us consider both instances of ambiguity turning to the real as well as imaginary situations relevant to the discusssion. I will avail myself of the opportunity to take use of the imaginary situations, which may have some connections to Benjamin order (In re Benjamin [1902] 1 Ch. 723).

Suppose the settlor bequethed a sum to his only grandchild through establishing a board of trustees. At the moment of his (settlor’s) death the sum be paid to the beneficiary in full. But unfortunately the trustees cannot make out whether the beneficiary dead od alive himself ( say, whether he predeceased the settlor or his whereabout is unknown). The trustees apply to the court with a view to have an inquiry directed and the doubt resolved.

The trustees are bound by the law to carry out a  in-depth inquiry because they are designated so ( to have the power of execution) by the settlor and otherwise would be qualified to maladministate the trust. In this case the board of trustees turned to the court by their own will to prompt the execution of the settlor’s intention.

Suppose, the inquiry appeared not to dispel doubts. In this case either the fund will be put on hold or judge may “make a Benjamin order (In re Benjamin [1902] 1 Ch. 723) and pay out the fund on the supposition that J. S. predeceased the testator”[9] with a  reservation of the beneficiary’s right to recoup himself if he is able to trace the fund in the hands of those who received it. This example illustrates that if the language of the deed is mandatory enough to qualify the trastees as having trust power the latter are obliged to, plainly speaking, find the EXACT beneficiary and execute the trust. If, as in our case, the legatee cannot be find this in no way can invalidate the gift itself.

If, in another case, the testator bequeathed"all my grandchildren living at my death in equal shares", the trustee are bound to draw a list of all eligible legatees and, to effectively execute the will of testator, that list should be full. Be there any doubts on the part of trustees, they also should apply to the court to execute the will. As in the preceeding case, here the gift is not invalidated by the incompleteness of the list and, as a rule, the court assumes the responsibility of that legacy distribution according to its powers in each of the cases.

The deed concerned in the Gulbenkian case [1970] A.C. 508 gives rise to a mere power and to the uncertainties towards the field of beneficiaries which endanger the validity of that mere power.

“It is agreed between the parties that the discretion to the trustees in clause 2 (i)[10] to pay all or any part of the income of the trust fund at their absolute discretion to one or more of the persons therein mentioned to the exclusion of the other or others or to apply it for their maintenance, support or benefit is a mere or bare power or a power collateral, as it is sometimes called. It is not a trust power: the trustees [in this case] have no duty to exercise it in the sense that the court has any power to compel the trustees to exercise it or to exercise it itself if the trustees refuse or neglect to do so. In so far as the power is not exercised by the trustees or if it is void for uncertainty, the income falls to be held upon the trusts declared by clause 2 (ii).”[11]

The resulting trust which arises in default of the execution of the trust by the trustees acting as a mere power is in no way compatible with an implied trust which is contained in trust deed as regard trust powers. In the former case, funds be returned to the settlor ( or, as Lord Wilberforce said, that “it remains in the settlor”[12]) or be held by the trustees on behalf of the settlor for the time being as in Gulbenkian case [1970] A.C. 508 “if the said Nubar Sarkis Gulbenkian (the beneficiary) were then dead." (in 2(ii)). In the latter case, funds are put on implied trust which in default of the will or by the reason of maladministration is executed by the court either by the fashion of ‘relations cases’

( Mosely v. Moseley (1673) Fin. 53, Clarke v. Turner (1694) Free.Ch. 198 and Warburton v. Warburton (1702) 4 Bro.P.C. 1), where there were “indications which acted as pointers or guides to the trustees and enabled the court to substitute its own discretion for that of the trustees.”[13] or by applying the “equity is equality” principle, thus substituting its own discretion with  disclaiming the right to exercise a trust power and giving the fund equally.

The difference between the former and the latter, namely, between the effects of the trustee’s reluctance to exercise a trust or a mere power, respectively, on the subsequent disposition of the funds might be considered as a principle difference between a trust power and a mere power, which springs from the provision of the deed. Whereas the “wording” of the deed, namely, the mandatory indication, may, with a certain degree of certainty, qualify the deed as constituting a mere power or a trust power, the legal implications stemming from the “wording” are accountable of the principal differences between them as regard the powers of the court.

The secrecy of the provision of memorandum, namely, the discretion criteria, much referred to in “Trust adminisaration: secrecy and responcibility” by Derek Davis, is accountable for the fact that discretion may only be executed by trustees under the condition of that secrecy preserving; in the case of the breach of secrecy the effective exercise of a trust power is compromised. Moreover, the absolute discretion conferred to the trustees by the settlor is hardly capable of exercising by the court unless some indicators as to how that discretion should be exercised ( “to the most reputable of my sons by the time of my death”) are given, as in the cases with ‘relations cases’.

The court often can neither satisfy the claims submitted by “a person claiming to be an object of bare power”[14] or even trust power, guided by secret provisions, nor disclaim a bare power of the trustees and exercise that power itself.

Thus, the test of validity of powers is called to help the court in its diminished position to acertain whether the court might positively interfere, in the case of trust power, which amounts to saying whether the class of object of the power (objects of discretion) is ascertainable for the court to discharge the duty primarily conferred upon trustees, or, in the case of a mere power, whether the trustees acting in that capacity are themselves capable of appointing the beneficiaries of the trust, which amounts to saying whether it can be affirmatively stated that “any given individual is or is not a member of the class”[15]

The first test called "complete ascertainment" test was proposed in Broadway Cottages case [1955] Ch. 20 where it was stated that the “whole range of the objects should be ascertained or capable of ascertainment”. The second originated from In re Gestetner Settlement [1953] Ch. 672 but was upheld and more clearly enunciated by Lord Upjohn in In re Gulbenkian’s Settlement[1970].

Thus, as regard the distinction of a mere power and a trust power relevant to the question of ascertainability, the principle difference between the said which seems to  address the powers of the court in each of the cases gives way to the “distinction between the kind of certainty required for powers and that required for trusts”[16], which is a focus of the study.

It is almost obvious that a mere power requires a less certainty of the objects of discretion than a trust power does. Indeed, it is not necessary to know of all the objects in order to appoint to one of them.[17]. In the case of trust power, there is an essential risk to distribute among the known objects that is to take a narrower class than settlor meant and directed, means to step aside from settlor intention. This seems to be a main stumbling block and a reason to still apply "complete ascertainment" test to the trusts. Suprisingly, that essential risk may lead to overstating the survey obligations of a trust power.

“But just as, in the case of a power, it is possible to underestimate the fiduciary obligation of the trustee to whom it is given, so, in the case of a trust (trust power), the danger lies in overstating what the trustee requires to know or to inquire into before he can properly execute his trust. The difference may be one of degree rather than of principle: in the well-known words of Sir George Farwell, Farwell on Powers, 3rd ed. (1916), p. 10, trusts and powers are often blended, and the mixture may vary in its ingredients.”[18]

There can be two ways out of this dilemma of the different test applied to a trust power and a mere power which, in fact, diminishes the ‘margin of validation’ of trust powers. First, the court may state the two test (that applied to trust powers and that applied to mere powers) as regard the validity of trust power and see whether the provision of the deed might be considered to provide the level of certainty of the objects of discretion which complies with EITHER of the tests, which will practically mean application of the mere power test (Gulbenkian’s Settlement), as one which is more general, in cases involving trust powers.

Second, it can be stated that for the purpose of certain cases requiring a complete ascertainment of all possible objects is not relevant to the principles laid down in Morice v. Bishop of Durham, 10 Ves.Jr. 522 (that a trust fails if the object is insufficiently described or if it cannot be carried out) be fully applied. This approach requires the revivation of the pre- Broadway Cottages Trust powers of the court.

In the latter case in was stated that trust is void for uncertainty unless all the members of the class are known because it involved an equal devision of the income in default trust power exercise; thus, there can be no equal devision unless the number of parts or eligible bewneficiaries is known. But suppose, the court would prefer mechanism other than giving equal shares, for example, discretion akin to that exercised in ‘relations cases’(say, Brown v. Higgs, 8 Ves.Jr. 561)

Conclusion:

In our case, to render a trust power valid it is not necessary to ascertain the whole range of the objects of discretion. The involvement of equal distribution (of income as in Broadway Cottages Trust ) perspective is underlying that requirement.

The law does not clearly designate the neccessity of the ascertainable [class of] beneficiaries or, in other words, the capacity to ascertain the whole range of the objects of discretion.

First, if the deed provides some kind of guidance to how, with regard to objects of the discretion, that discretion ought to be executed ("most reputable for the family that the heir-at-law should have it."( In Clarke v. Turner, Free.Ch. 198), the trust power should not be rendered void for uncertainty or unprecise wording ("my worthy friends and acquaintance" in Richardson v. Chapman, 7 Bro.P.C. 318, as stated by Lord Wilberforce[19])

Second, if, by some kind of reason, the neccessity of equal distribution, which is deemed to be the pillar of "complete ascertainment" test, does directly conflict with the intention of the settlor and in default of the trust power exercise, the court, which is upon to execute the trust power, will do so in the manner best calculated to give effect to the settlor's or testator's intentions, namely, by designating the beneficiary even in absence of the whole range of the objects of discretion.

Although the statistics may report the said cases to be rare and, to say, not contemporary, it can be said that their mere existance renders neccessity of the ascertainable [class of] beneficiaries as superficial by nature (though, the number of the cases as regard trust powers which take avail of the "complete ascertainment" test far exceeds that of cases which ignore the said test).

References:

The following cases has been mainly referred to:

Morice v. Bishop of Durham (1805) 10 Ves.Jr. 522.

Inland Revenue Commissioners v. Broadway Cottages Trust [1955] Ch. 20; [1954] 3 W.L.R. 438; [1954] 3 All E.R. 120, .A.

Gulbenkian's Settlements, In re [1970] A.C. 508; [1968] 3 W.L.R. 1127; [1968] 3 All E.R. 785, H.L.(E.).

In re Baden's Deed Trusts [1971] AC 424

Vandervell v. I.R.C. [1967] 2 A.C. 291 (HL)

In re VANDERVELL'S TRUSTS (No. 2)

Other references:

“Trust administration: secrecy and responsibility” by Derek Davis, St. Catherine College.

[1] In re Baden's Deed Trusts (H.L.(E.), p. 427

 [2] In re Baden's Deed Trusts (H.L.(E.), p. 429

[3] In re Gulbenkian's Settlements [1968],p. 521 [4] In re Baden's Deed Trusts (H.L.(E.), p. 429 [5] In re Baden's Deed Trusts (H.L.(E.), p. 450 [6] In re Baden's Deed Trusts (H.L.(E.), p. 435 [7] In re Baden's Deed Trusts (H.L.(E.), p. 451 [8] In re Baden's Deed Trusts (H.L.(E.), p. 439 [9] In re Baden's Deed Trusts (H.L.(E.), p. 434 [10] In re Gulbenkian's Settlements [1968], p. 521 [11] In re Gulbenkian's Settlements [1968],p. 521 [12] Vandervell v IRC [1967], p. 329 [13] In re Baden's Deed Trusts (H.L.(E.)), p. 443 [14] In re Baden's Deed Trusts (H.L.(E.)), p. 441

[15] In re Gulbenkian’s Settlement[1970], Lord Upjohn, p. 521 [16] In re Baden's Deed Trusts (H.L.(E.)), p.453 [17] Gestetner Settlement [1953] Ch. 672, p.684 [18] In re Baden's Deed Trusts (H.L.(E.)), p.449 [19] In re Baden's Deed Trusts (H.L.(E.)), p.451