Problem Question on Equity and Trusts

Melvyn is a farmer. He trades as “Hill Farm Ltd”, a company with a share issue of 1000 shares that are all owned by Melvyn. He has 300 cattle and 100 sheep. Melvyn’s son, Rhys is 16 years old. Since he was only 2 years old, Rhys has been helping on the farm and Melvyn hopes that one day Rhys will join him in running the farm. On Rhys’ sixteenth birthday, Melvyn said to him “Now lad, I want to start giving you some responsibility on this farm. From now on, we will look on 10 of these sheep in my flock as yours, and one day you shall have the profit from them”. However, the sheep were kept together as one flock and Rhys has continued to help on the farm, helping to care for them all. Two weeks ago the farm was struck with an outbreak of Bluetongue, a viral disease that affects sheep. Most of the sheep have died and now only 10 remain.

(a) Advise Melvyn as to the legal and equitable ownership of the 10 remaining sheep.

(b) Supposing Melvyn had said “100 of my shares” instead of “10 of these sheep in my flock”, who would be the legal and equitable owner/s of the shares in Hill Farm Ltd.?

Melvyn has created an express trust towards Rhys. Express trusts are created deliberately by the settler and, as a general rule, may be created by deed, will, writing or orally. The overwhelming majority of trusts are expressly created. In this case the trust has been created orally.

The owner of the legal interest cannot be a trustee of the trust property until aware of the facts alleged to affect his conscience. In order to establish a trust there must be identifiable trust property. Once the trust is established, a trust beneficiary has an equitable proprietary interest in the trust property enforceable against subsequent holders other than the bona fide purchaser of the legal interest. “A purported trust will be void if the property intended to form the subject matter of the trust obligation cannot be clearly defined”

We must also analyse the fact of unsegregated assets. Watt says “A flock of sheep might be described as an apparently homogeneous mass, because the constituent parts, although practically indistinguishable, are substantially different”. There can be problems in ascertaining, identifying and locating what the settlor was referring to. Locating and identifying are examples of ‘conceptual’ or ‘linguistic’ uncertainty, whilst locating is an issue of evidential uncertainty. “A trust of ‘the bulk of my jewellery’ will fail upon grounds of ‘conceptual’ or ‘linguistic’ uncertainty, because the language that the settlor has employed is incapable of being understood and applied with any certainty. How is a court to establish how much jewellery constitutes ‘the bulk’? The very concept is uncertain. The settlor might have had in mind bulk by weight or by number of pieces or by value”

The UK case of Knight v Knight stated that for the validity of trusts there must be the subsistence of three certainties. These are certainty of intention, certainty of subject matter and certainty of objects. I will now explain these one by one in relation to the question.

Certainty Of Intention

From the deed constituting trust, it must be certain that the intention of the settler is that of creating a trust and not something else. For example, it must be clear that the settler constitutes a trust and not a donation. Melvyn creates an express trust, not a donation. In the past, the Courts were more lenient to accept ambiguous wording as constituting trust. For example, in the “Tribe” case, the Court accepted wording such as “in full confidence” as constituting a trust. However, there was a change of course. In the case of Re Adams and the Kensington Vestry, it was held that “in full confidence” does not create a trust. Thus, now the propensity seems to be that a trust only arises when it is certain that that was the settlor’s intention. Our Courts might be faced with a case of oral trust where there is no certainty of intention. Our law expressly states that in such a case, the contract would be deemed to be one of authorisation. However, if evidence is brought before the Court showing that the intention of the settler was to establish a trust, then a trust relationship would be upheld. As it mentions in Wright v Atkyns “the words must be imperative, the subject must be certain, and the object as certain as the subject”.

Certainly Of Subject Matter

The courts have traditionally held that unless there is certainty of subject-matter, no trust relationship would subsist. For example in the Simmonds case it was held that the phrase “the bulk of my residuary estate” was not certain enough for a trust relationship to subsist. However, in Re Golay it was held that to “enjoy one of my flats during her lifetime and to receive a reasonable income from my other properties” was enough certain to constitute trust. It was upheld as the trustees could select and decide the matters. There is the problem of whether the subject matter can be distinguished from other assets which are not subject to the trusts. The Courts have dealt with this according to the nature of the subject matter involved. For example, in Re Goldcorp, the Court held since the bullion subject to trust was not separated from the other, then there was no trust relationship. On the other hand, in Hunter v Moss, both certainty and identification are mentioned. Here the owner of 950 identical shares in Moss Electrical Co Ltd had orally declared a trust of 50 shares in favour of the plaintiff without indicating which of the 950 shares were to form the subject matter of the trust. The defendant argued that there was no certainty as there was no identification of the 50 shares. The Court of Appeal referred to the need for certainty of subject matter and held that a declaration of trust in respect of a specific number of shares in a named company was sufficiently certain “without any further identification of their numbers”. The rule in Hancock v Watson states where a property has been left to a beneficiary as an absolute gift subject to a trust which has failed, then the beneficiary takes the property absolutely.

Unsegregated Assets

In Re London Wine Company wine bottles were to be held on trust not separated from other bottles. Oliver J held there was no ascertainment. Orders could have been fulfilled from any source, not necessarily existing stocks. There was no trust for there was no certainty of subject matter. As Oliver J put it in Re London Wine:

‘I cannot see how, for instance, a farmer who declares himself to be a trustee of two sheep (without identifying them) can be said to have created a perfect and complete trust…And it would seem to me to be immaterial that at the time he has a flock of sheep but of which he could satisfy the interest… the mere declaration that a given number of animals would be held upon trust could not … without very clear words pointing to such an intention, result in the creation of an interest … at the time of the declaration”

In Re Goldcorp ordinary commercial relationships, where the parties act independently in their own interests, are not fiduciary relationships. The Privy Council refused to recognise the existence of any fiduciary relationship between a company which had sold gold bullion for future delivery, and its customers. One effect of the lack of a fiduciary relationship between the parties was that the customers were unable to trace in equity.

B – shares are different so don’t have to be segregated.

Certainty Of Object

This relates to the fact that there must be certainty regarding who the beneficiaries are. The classic case on the subject is McPhail v Doulton where it was established that in the case of a discretionary trust, there is certainty of object if you can determine whether any given person is a beneficiary or not. In this case the words used were “my relatives and dependants of staff”. The Court held that there was conceptual certainty.

Bibliography

1.  

Hanbury & Martin, Modern Equity (Eighteenth Edition) Jill E Martin

Sourcebook on Law of Trusts (Second Edition) Mohamed Ramjohn