Obligation English Law

It has been said many times, and bears repetition, that the trust imposes one of the most powerful forms of obligation in English Law. It is to be expected, therefore, that the imposition of a trust on the recipient or holder of property is not to be achieved lightly. The trustee will have onerous duties to perform and is amenable to the coercive jurisdiction of the court at the suit of the beneficiaries. Moreover, certainty as to the nature and extent of the trust property and the interests of the beneficiaries is no less crucial. How else can a trustee administer the trust property in the manner required by the terms of the trust. The importance of these matters has long been recognised and is now summed up by the principle that a trust cannot exist without the ‘three certainties’ (Knight v Knight (1840)). According to Lord Eldon in Wright v Atkyns (1823), the validity of a trust depends on ‘first, that the words must be imperative… secondly, that the subject must be certain…and thirdly, that the object must be certain as the subject’. In short, there must be certainty of intention (or words), certainty of subject matter and certainty of objects.

Certainty of intention means that the person who is attempting to establish the trust must make it clear by the words he uses that the holder or transferee of the property is under a mandatory legal obligation to carry out the wishes of the settlor in so far as the law allows. However, as ‘equity looks to the intent rather than the form’ (Re Williams (1897)), no particular form of words or magic formula is required to impose a trust on the holder of property. The word ‘trust’ us a technical expression imposing an obligation on the trustees. However, the difficulty arises when alternative expressions have been used by the intended settlor. This issue becomes one of construction of the words used and the surrounding circumstances, including the conduct of the settlor, to determine whether a trust was intended or not. What is required is an intent to require the holder of property to carry out the settlor’s wishes as opposed to a mere moral or honourable obligation. Consequently, words expressive of a mere hope or desire (precatory words) do not disclose a sufficient intention to create a trust unless, on the whole construction of the gift, this is the intention of the settlor (Lambe v Eames (1871); Re Conolly (1909)), although a settlor’s use of words which have previously been held to establish a trust is good evidence of certainty of intention (Re Steele (1948). Indeed, other factors may count for or against the imposition of a trust, as where the care which the settlor has taken (or not taken) to mark out the trust property or define its objects reflects on his intention to establish a trust in the first place (Re Kayford Ltd (1975)). As ever, the matter is one of construction and, in some cases, even use of the word ‘trust’ will not impose a trust at law, as where the word was intended to denote a political not a legal obligation (Tito v Waddell (No 2) (1977)). Necessarily, the circumstances in which a court will accept that there is sufficient certainty of intention to place a legal obligation on the holder of property to carry out the settlor’s wishes will vary from case to case. In the recent case, Duggan v Governor of Full Sutton Prison [2004] The times, 13 February, the Court of Appeal decided on policy grounds that a trust was not intended of prisoner’s money handed over to the Governor on arrival at the prison. If there is not sufficient certainty of intention, the holder or recipient of property will be absolutely entitled to it and may use it as he or she wishes, either in conformity with, or contrary to, any hope or desire that the settlor may have expressed when transferring the property.

Certainty of subject matter is an equally vital element in the formation of a trust. As noted previously, if the property which is said to be the subject matter of the trust or the interests of the alleged beneficiaries under the trust are not certain, the ‘trustee’ cannot possibly perform the duties which the settlor has imposed upon him. At the outset, however, it is important to note that the subject matter of a trust may be uncertain in two distinct ways: first, the actual property may not be clearly defined or definable, and, secondly, the interests of the beneficiaries may not be defined or definable. First, Sprange v Barnard (1789) illustrates the former point, where a settlor left some shares to X ‘and all that is remaining’ after X’s use in trust to A and B equally. Clearly, the subject matter of the trust for A and B was uncertain, as there was not certainty as to what would be left after X has made his decisions. Likewise, cases where tangible property belonging to several persons has been amalgamated and a trust is alleged over a certain number of those items will not result in a trust at law because the precise property is not identified, as in Re London Wine Co (Shippers) Ltd (1976), where alleged trusts over specific cases of wine failed because there had been no separation of the trust property from other stock in the company’s warehouse (quaere whether the Sale of Goods Act 1995 has changed this). Of course, if the ‘trust property’ were separated or clearly marked, there would be no problem, nor, possibly, if the subject matter of the trust was expressed as a fixed proportion (say, one fifth) of the total property and not as a certain specific number of items. However, as more recent authority shows (Hunter v Moss (1993)), an alleged trust over a specific amount of intangible property (such as a number of shares in a company) which, by definition, are indistinguishable from other property of the same type in the hands of the alleged trustee is not void for uncertainty of subject matter because any person calling for the execution of the trust would know, with certainty, whether the trust has been performed. This has been confirmed by Holland v Newbury (1997), where the intangible nature of the property (shares) was the clear reason for being able to distinguish from London Wine. Of course, such a justification (certainty of execution) could apply to tangible property (provided each specimen was identical to the others) and perhaps the ‘clear execution’ test should be adopted for all forms of trust property, be it tangible or intangible. The rigour of this aspect of the requirement of certainty of subject matter is also mitigated by the principle that the subject matter can be rendered certain by construction of the document or an external determinant. So, in Re Colay (1965), a trust of ‘reasonable income’ was held to be certain as ‘reasonableness’ was an objective limitation that could be decided by the court. Such a benevolent construction of a trust instrument is typical of a court of equity and is not surprising when it is appreciated that uncertainty of subject matter normally will cause a resulting trust in favour of the donor (assuming that certainty of intention did exist). In special cases, as where the court interprets the disposition as an absolute gift to the donees subject to a specific trust of part of it for some limited object, the failure of the specific trust for uncertainty of subject matter will allow the original donees to keep the property absolutely and not hold on resulting trust (Hancock v Watson (1902)).

The second way in which the ‘subject matter’ of the trust must be certain concerns not the property itself but the extent of the beneficiaries’ interests in that property. For example, in Boyce v Boyce (1849), a trust of two houses (obviously certain per se) failed because one of the two beneficiaries was given power to choose which property she desired and, having failed to do so, the second beneficiary was unable to take any interest under the trust. Admittedly, however, this type of uncertainty is unusual, since it is rare for the extent of the beneficiaries’ interests to go undefined or to be undefinable (but see recently Re Challoner Club Ltd (1997)) and in many cases the trustees are given power to determine each beneficiary’s share under the umbrella of a discretionary trust.

The last of the three certainties, and perhaps the most important, is the need for certainty of objects. This is another way of saying that the beneficiaries under the trust must either be named individually or be described by reference to a class description that is itself certain in scope. An example of the former is where property is given on trust in equal shares ‘for my children A and B’, and an example of the latter is where property is given on trust ‘equally between my children’. In the former case, the objects of the trust are necessarily certain as they are named individuals, and in the latter case, the objects of the trust may be certain provided that it is possible to say with certainty who the children of the settlor actually are. This appears straightforward enough, but it is a crucial feature of the validity of a trust since failure to specify certain objects will mean that the trust fails and the property will be held on resulting trust for the settlor or the testator’s estate.

Unfortunately, this simple picture of the certainty of objects rule can become clouded when trying to determine whether certainty of objects exists in practice. In simple terms, problems with certainty of objects arise in relation to three distinct concepts. First, there are ‘fixed trusts’, being trusts where the trustees have no discretion as to whom benefits under the trust are to be given or in what shares: both the share and the right of the beneficiaries to that share are fixed by the settlor. In cases such as this, the test for certainty of objects, where the objects are defined by a class description (for example, ‘to my children in equal shares’) is that it must be possible to draw up a complete list of all the objects: viz, the number of all the beneficiaries must be known because otherwise the property cannot be distributed equally (IRC v Broadway Cottages Trust (1955)). In the recent decision of OT Computers v First National Tricity Finance Ltd [2003] EWHC 1010, the Hight Court decided that the expression ‘urgent suppliers’ used by the claimant company in an attempt to protect its suppliers was void. The expression was considered to vague to satisfy the test for certainty of objects. Secondly, there are discretionary trusts (confusingly also known as ‘trust powers’), being trusts where the trustess have a duty to distribute the trust property, but a discretion as to whom within a particular class shall actually benefit and in what shares. An example is where property is given on trust ‘to such of my children and in such proportions as my trustees shall decide’. For discretionary trusts, the test for certainty of objects is less strict than that for fixed trusts because the trustees do not actually have to know the identity of every beneficiary, as not every person within the class of beneficiaries will benefit from the trust. Consequently, the test for certainty of objects for a discretionary trust is whether it is possible to say with certainty whether any given individual is, or is not, a member of the class. There is no need to compile a complete list (McPhail v Doulton (1972)). The third concept where certainty of objects is relevant is not a trust at all: it is a power of appointment. A power of appointment is a power given to a person (who may or may not be a trustee) to distribute property among such persons within a named class as the person exercising the power (donee of the power) chooses, in such shares as he chooses, or not at all. It differs from a discretionary trust in that a donee of a power has no duty to distribute the property at all and may legitimately make no selection. The test for certainty of objects of powers is the same as that for discretionary trusts, despite the fact that one is mandatory and the other voluntary (McPhail v Doulton (1972)).

It will be appreciated, then, that, as far as certainty of objects is concerned, it is necessary first, to identify exactly what the settlor has created (fixed trust, discretionary trust or power), and then to apply the relevant test for certainty of objects to it. However, it is not always easy to make this initial and important distinction and this only complicates the practical application of the certainty rules. Indeed, even for certainty of intention and certainty of subject matter, we have seen that there is considerable flexibility in the court’s approach: the former is largely a matter of construction and defects in the latter can cured by a court taking a sympathetic view of the donor’s instructions.