Conveyancer and Property Lawyer Perfecting imperfect

Keywords: Declarations of trust; Execution; Gifts; Share transfers; Unconscionability

Cases: Pennington v Waine (No.1) [2002] EWCA Civ 227; [2002] 1 W.L.R. 2075 (CA (Civ Div))

Jennings v Rice [2002] EWCA Civ 159; [2003] 1 F.C.R. 501 (CA (Civ Div))

Milroy v Lord (1862) 4 De G.F. & J. 264

T Choithram International SA v Pagarani [2001] 1 W.L.R. 1 (PC (BVI))

*Conv. 192 Introduction

The law on perfect gifts and perfectly constituted trusts has been tolerably clear since the classic statement of authority by Turner L.J. in Milroy v Lord 1 in 1862:

“ … in order to render a voluntary settlement valid and effectual, the settlor must have done everything which, according to the nature of the property comprised in the settlement, was necessary to be done in order to transfer the property and render the settlement binding upon him. He may, of course, do this by actually transferring the property to the persons for whom he intends to provide and the provision will then be effectual, and it will be equally effectual if he transfers the property to a trustee for the purposes of the settlement, or declares that he himself holds it on trust for those purposes: and if the property is personal, the trust may, as I apprehend, be declared either in writing or by parol; but, in order to render the settlement binding, one or other of these modes must, as I understand the law of this court, be resorted to, for there is no equity in this court to perfect an imperfect gift. The cases, I think, go further to this extent: that if a settlement is intended to take effect by transfer, the court will not hold the intended transfer to operate as a declaration of trust, for then every imperfect instrument would be made effectual by being converted into a perfect trust."

One has to use the words “ tolerably clear" because some exceptions have been articulated by the courts, for example, in Re Rose (dec'd), Rose v IRC 2 and Re Ralli's Will Trusts. 3 Moreover, controversy surrounding the concept of a trust of a chose in action based on Fletcher v Fletcher 4 will not be rendered sterile, as will be explained, by the enactment of the Contracts (Rights of Third parties) Act 1999. A relatively stable area of the law may, however, be thrown into complete disarray by the recent interpretation of the Privy Council's advice in T. Choithram International SA v Pagarani 5 by the Court of Appeal in Pennington v *Conv. 193 Waine. 6 The latter decision appears to give courts of equity an unfettered discretion as to whether a voluntary gift or trust should take effect. The decisive factor from the decision is as to whether a change of heart on the part of a donor of property will so shock the conscience of a court of equity as to render a purported voluntary settlement as effective from the court's perspective. While this writer has continually argued for the recognition of the role of unconscionability in Equity,7 it must be based on principled reasoning. As Robert Walker L.J. said in a recent proprietary estoppel case, Jennings v Rice 8 :

“ It cannot be doubted that in this as in every other area of the law, the court must take a principled approach, and cannot exercise an unfettered discretion according to the individual judge's notion of what is fair in any particular case."

Unfortunately, Pennington v Waine represents the situation of a court according itself unfettered discretion with possibly farreaching consequences for voluntary dispositions of property. This article will examine the potential effect of what appears to be a dramatic change of heart by the Chancery judges.

The usual effect of Milroy v Lord

Milroy v Lord establishes that a voluntary settlement may occur by an outright transfer by way of gift, by way of a transfer to trustees to hold on trust or by a declaration of trust. It is axiomatic from Turner L.J.'s statement of the law that an unsuccessful attempt to achieve a voluntary settlement by one of the three methods will not be construed as a successful attempt via the other methods. The methods of achieving a settlement by transfer will, of course, depend on the type of property involved. Milroy v Lord and Re Fry 9 both concerned unsuccessful attempts to transfer shares. Jones v Lock 10 and Richards v Delbridge 11 concerned ineffective transfers of, respectively, a cheque and a business lease. In both cases the courts refused to construe the ineffective transfers as declarations of trusts. It is worth noting immediately that in all four cases the purported transferor of the *Conv. 194 property had died and there is sufficiently clear evidence that the intention throughout had been to make the voluntary settlement and yet no effective transaction was upheld. Especially pertinent is that the testator in Richards v Delbridge made no attempt to dispose of the business in his will, presumably because he thought he had successfully transferred it to his grandson during his lifetime. Aside from the exception, which developed in Re Rose, Midland Bank v Rose, 12 and which was approved of in Re Rose (dec'd), Rose v IRC, 13 the law was relatively straightforward. The law relating to ineffective transfers where the transferor had covenanted with a trustee or trustees to transfer the property was more problematic. The exception arose where the donors of shares had done all that was necessary for the donees to complete their title. In both cases, the deceased had executed instruments of transfer in the form appropriate to the company's regulations and delivered them with the relevant certificates to the transferees. All that was required was that the directors passed the transfer for registration. Indeed in the second Re Rose case, the transfer had in fact been registered. The issue before the Court of Appeal was as to the date when the transfer was effective, as that was pertinent to the central question of payment of estate duty. The facts of Pennington v Waine 14 are completely distinguishable.

Pennington v Waine

Mrs Crampton intended to transfer 400 shares, which she owned, to her nephew Harold. To this effect she consulted with a partner of the relevant company's auditors and signed a transfer form. The form was kept on the company's file and was never delivered to the company or to Harold. Mrs Crampton also wanted Harold to be a director of the company and Harold signed a consent form agreeing to this and she countersigned it. The partner wrote to Harold informing him that nothing further was required. The company's articles required, amongst other provisions, which included a right of pre-emption, that directors were required to hold one share in the company. Subsequently, Mrs Crampton executed a will, which did not include the 400 shares. The issue before the court after her death was whether the shares were in her residuary estate or whether they were held on trust for Harold absolutely. The Court of Appeal held that delivery of a share *Conv. 195 transfer form could be dispensed with in some circumstances. Here, it would have been unconscionable for Mrs Crampton to have recalled what was clearly intended as a gift once Harold had signed the director's consent form. Moreover the partner's letter to Harold could be construed as meaning that he and Mrs Crampton had become agents for Harold for the purposes of submitting the share transfer form to the company. Mrs Crampton held the legal title in the shares on trust for Harold and thereafter he would have been entitled beneficially to the shares. Arden and Clarke L.JJ. were strongly influenced by Lord Browne- Wilkinson's observations in the Choithram case. Arden L.J. proceeded on the basis that a principle which animates the answer to the question whether an apparently incomplete gift is to be treated as completely constituted is that a donor will not be permitted to change his or her mind if it would be unconscionable, in the eyes of equity, vis-à-vis the donee to do so. Clarke L.J. took a similar line. He said that he did not think that the conclusion fell foul of the principle that the court will not convert an imperfect gift into a declaration of trust. He said that Lord Browne-Wilkinson:

“ … highlighted the contrast between the maxim that equity will not aid a volunteer and the maxim that it will not strive officiously to defeat a gift. It seems to me that if equity refuses to aid Harold on the facts of this case, it will prefer the former maxim to the latter, whereas all the circumstances of the case lead to the conclusion that it should give effect to the gift which Ada intended." 15

It is suggested not only that the Choithram case was not open to interpretation in this way but also that Pennington v Waine is completely irreconcilable with all the earlier authorities. Indeed it seems that Arden L.J. and Clarke L.J. were well aware of this. Arden L.J. said that the principle that equity will not assist a volunteer at first sight looks like a hard-edged rule of law not permitting much argument or exception which led to harsh and seemingly paradoxical results but that equity had tempered the wind to the shorn lamb. She said that the cases do not reveal any consistent policy consideration behind the rule that equity will not perfect an imperfect gift. She concluded that the objectives of the rule obviously include that donors do not by acting voluntarily act unwisely in a way that they would regret. According to her, that policy objective is furthered by permitting donors to change their mind at any time before the transfer becomes completely constituted and is a paternalistic objective, which can *Conv. 196 outweigh the respect to be given to the donor's original intention as gifts are often held by the courts to be incompletely constituted despite the clearest intention of the donor to make the gift.

One can deduce from this that the paternalistic objective prevailed in the earlier case law and is now going to be superseded by an objective of effectuating rather than frustrating a clear and continuing intention of the donor. This is wholly contrary to the earlier cases and both Arden L.J. and Clarke L.J. acknowledged that the ratio of the decision in Re Rose, Rose v IRC was that delivery of the share transfers was required. Clarke L.J. frankly admitted that the circumstances of the case could make bad law. Whilst admitting that the Court of Appeal decision produced a fair outcome, it certainly does make bad law. Not only had Mrs Crampton failed to effect delivery of the shares, but also the company's regulations had not been complied with. The argument in respect of the partner's letter to Harold was, therefore, also irrelevant. I shall return to Arden L.J.'s description of policy objectives since they probably do have a significant role in relation to covenants to settle. First, it is necessary to explain why the Court of Appeal's analysis of the Choithram case was wrong.

T. Choithram International SA v Pagarani

Thakurdas Choithram Pagarani (hereafter “ TCP" ) was an extremely wealthy man. He was also, as described by Lord Browne-Wilkinson, “ outstandingly generous in his charitable giving" . TCP intended to leave his wealth to charity by setting up a foundation to serve as an umbrella organisation to the charities which he had already established and which would receive most of his assets when he died. At the end of 1991 it was discovered that he was suffering from cancer. On February 17, 1992 he executed the foundation trust deed. Immediately after signing the trust deed TCP said words to the effect that he gave all his wealth to the trust. On TCP's death, a grant of letters of administration to his estate was obtained by one of the trustees of the foundation trust. The issue before the Privy Council was whether one of a larger body of trustees could vest trust property in himself by way of declaration in such a manner as to give effect to the trust even though there had been no transference of the trust property into the names of all of the trustees. Consideration was also given to the rule in Strong v Bird. 16 On the evidence, the Privy Council *Conv. 197 concluded that TCP was referring to his wealth in the British Virgin Islands. Lord Browne-Wilkinson, delivering the advice of the Privy Council, concluded that there was no breach of the principle in Milroy v Lord. He said that the foundation had no legal existence apart from the trust declared by the foundation trust deed. Therefore, the words “ I give to the foundation" could only mean “ I give to the trustees of the foundation trust deed to be held by them on the trusts of the foundation trust deed" . Lord Browne-Wilkinson went on to say that there could in principle be no distinction between the case where the donor declared himself to be sole trustee for a donee or a purpose and the case where he declared himself to be one of the trustees for that donee or purpose. In both cases, his conscience was affected and it would be unconscionable and contrary to the principles of equity to allow such a donor to resile from his gift. TCP's relevant property was vested in the trustees of the foundation. No conclusion was necessary, therefore, on the Strong v Bird point.

As Lord Browne-Wilkinson acknowledged, this was an unusual case since the method used by TCP did not fall squarely within either of the methods normally stated as being the only possible ways of making a gift to trustees on trust. These methods were stated by Lord Browne-Wilkinson as being:

“ (a) by a transfer of the gifted asset to the donee, accompanied by the intention of the donor to make a gift; or

(b) by the donor declaring himself to be a trustee of the gifted property for the donor."

TCP's words made no reference to trusts. Lord Browne-Wilkinson fully accepted the proposition that the courts would not give a benevolent construction to ineffective transfers as taking effect as if a donor had declared himself a trustee for the donee but accepted that the facts were novel and raised a new point. Nevertheless, it was held that there was no breach of the principle in Milroy v Lord. It is in this entirely novel context that Lord Browne-Wilkinson opined that although equity would not aid a volunteer, it would not strive officiously to defeat a gift. This obiter dictum was applied completely out of context in Pennington v Waine, where the facts were very far from novel and indeed mirrored closely the circumstances in some of the previous cases where the potential donees had died having demonstrated a continuing intention to transfer property. Moreover, as a matter of construction of the whole circumstances as well as the words used, the Privy Council held that there was a declaration of trust not, as Arden L.J. suggests, a constructive trust. Leave to *Conv. 198 appeal was refused in Pennington v Waine and so we are left in the realm of unfettered judicial discretion and it remains to be seen what impact the change in policy objectives will have in relation to covenants to settle.

Covenants to settle

There is some force in saying that the competing policy objectives as enunciated by Arden L.J. are already at play in the law relating to covenants to settle property with trustees, where the transfer of property never takes effect. The paternalistic objective behind the maxim that equity will not assist a volunteer almost always prevails where a live settlor changes his or her mind and does not want to transfer the property as covenanted to do so, see, for example, Re D'Angibau, 17 Re Plumptre's Marriage Settlement, 18 Re Ellenborough, 19 Re Pryce, 20 Re Kay's Settlement Trust 21 and Re Cook's ST. 22 On the other hand, but with one exception, the objective behind never striving officiously to defeat a gift may be seen as the rationale behind the finding of a trust of a chose in action in Fletcher v Fletcher, 23 the rule in Strong v Bird 24 and the doctrine of donatio mortis causa. In all three scenarios we are dealing with deceased parties whose intention to transfer by way of trust or gift was always clear. The exception in Re Ralli's WT 25 seems to fall within the concept of unconscionability as expressed in Pennington v Waine but in an even more extreme form because Buckley J. did not seem to be concerned with the covenantor's intention but with the fact that the personal representatives of the covenantor were unable to show that the trustee could not conscientiously withhold the property from them. Is it now the case that a court of equity will not allow people to go back on their covenants because, as per Pennington v Waine, it would be appropriate to prevent the donor from acting in a manner which is unconscionable? Indeed one could argue that there is a very much stronger case for doing so on the basis that it is unconscionable per se to renege on binding *Conv. 199 legal agreements, thereby upholding the pacta sunt servanda doctrine. This would clearly be an attractive proposition for next of kin to a marriage settlement who are volunteers.

The point may appear to be moot given the introduction of remedies to a third party for whose benefit a contract has been entered into by the Contract (Rights of Third Parties) Act 1999.26 The Act does not, however, cover all exigencies. Aside from the basic fact that, in any event, the Act only applies to covenants entered into at least six months after the date of Royal Assent, which was September 11, 1999, there are other situations which might lead to an argument based on Fletcher v Fletcher. 27 Section 2 of the Act provides that:

“ 2 (1) Subject to the provision of this section, where a third party has a right under section 1 to enforce a term of the contract, the parties to a contract may not, by agreement, rescind the contract, or vary it in such a way as to extinguish or alter his entitlement under that right, without his consent, if--

(a) the third party has communicated his assent to the term to the promisor"

This is quite obviously premised on the fact that the third party knows he is to benefit. If not, as was the case in Fletcher v Fletcher and other equity cases, such as Standing v Bowring, 28 then presumably a settlor can resile from the covenant unless an argument based on Fletcher v Fletcher can prevail to establish a trust of the covenant. Take yet another scenario, S covenants with T1 and T2 that at his death his executors will transfer £100,000 to them to be held on trust for A, B and C as beneficial joint tenants. A dies before S, having during his own lifetime severed his interest under the covenant by, for example, assigning his interest, in the proper manner, to his wife. If there is a Fletcher v Fletcher type of trust then A had an interest, which he could sever and settle. If not, then it is much more arguable as to whether A has an interest under the Act which could be severed and B and C take to the exclusion of the wife. There may well be other lacunae, which this writer has not identified. The upshot of all of this is that we seem from Pennington v Waine to have a completely new maxim of equity “ equity will not assist a volunteer unless it would be unconscionable to do so" . To be fair to the Court of Appeal in Pennington v Waine, the judges were striving to reach a fair outcome and one can discern from Arden *Conv. 200 L.J. that there was a consciousness that all was not as it should be. At p.231 of the judgment, Arden L.J. says:

“ Nothing in this judgment is intended to detract from the requirement that a donor should comply with any formalities required by the law to be complied with by him or her, such as in the gift of shares, the completion of an instrument of transfer or, in the case of a gift of land, the requirements of s.2 of the Law of Property (Miscellaneous Provisions) Act 1989 or, in the case of a gift of chattel, deliver of the chattel." Unfortunately, this constitutes a petitio principii. There was absolutely no authority prior to this case to suggest that requisite formalities would be complied with by, without more, the completion of an instrument of transfer of shares. The case represents unfettered judicial discretion and lest I be misunderstood in my conception of the vital role of unconscionability in the law, I shall return to a principled application of unconscionability in Jennings v Rice, in which, as noted above,29 Robert Walker L.J. insisted that the law must take a principled approach.

Jennings v Rice

Jennings v Rice concerned a claim by way of proprietary estoppel, in far from unusual circumstances nowadays, whereby an elderly person had procured services on the faith of informal assurances that the services would, ultimately, be rewarded by generosity in a will. The action in proprietary estoppel was not really in issue in the case, rather it was the equity required to do justice in the case. The deceased, Mrs Royle, died intestate as a childless widow at the age of 93. The claimant had undertaken various services for her, including acting as a principal carer during the latter stages of her life. Mrs Royle had made various vague assurances as to what the claimant would receive under her will, which left the claimant with the expectation that he would receive the house and furniture valued at £435,000. Mrs Royle's estate was sworn for probate at £1.258 million. At first instance, the claimant had been awarded £200,000 and in his appeal it was contended that he should receive either Mrs Royle's entire estate or the £435,000 representing the house and furniture. In considering the case the Court of Appeal had to decide whether or not to satisfy the claimant's minimum expectation of £435,000. The appeal was dismissed. Aldous and Robert Walker L.JJ., with both of whom *Conv. 201 Mantell L.J. agreed, reviewed the case law in detail in order to determine the principles which might need to be considered in proprietary estoppel cases. Referring to Lord Scarman in Crabb v Arun District Council, 30 Robert Walker L.J. said that the minimum equity to do justice to the claimant does not require the court to be constitutionally parsimonious but does recognise that the court must also do justice to the defendant. He went on to explain that the minimum equity arises not from the claimant's expectations alone, but from the combination of expectations, detrimental reliance and the unconscionablity of allowing the benefactor or the deceased benefactor's estate to go back on the assurances. On that basis he rejected the notion of a detailed computational approach of what the claimant might have earned in the way of arm's-length remuneration for his services. Although he noted that the going rate for live-in carers can provide a useful cross-check in the exercise of the court's discretion, he considered that the computational approach placed too much emphasis on detrimental reliance at the expense of the other factors to achieve the minimum to do justice. Having acknowledged that in some circumstances of proprietary estoppel the minimum necessary to do justice will be quite straightforward, he concluded that:

“ It would be unwise to attempt any comprehensive enumeration of the factors relevant to the exercise of the court's discretion, or to suggest any hierarchy of factors. In my view they include, but are not limited to … (misconduct of the claimant as in J Willis & Sons v Willis [1979] Ch. 261 or particularly oppressive conduct on the part of the defendant as in Crabb v Arun DC or Pascoe v Turner [1979] 1 W.L.R. 431). To these can be safely added the court's recognition that it cannot compel people who have fallen out to live peaceably together, so that there may be a need for a clean break; alterations in the benefactor's assets and circumstances, especially where the benefactor's assurances have been given, and the claimant's detriment has been suffered, over a long period of years; the likely effect of taxation and, (to a limited degree) the other claims (legal or moral) on the benefactor or his or her estate. No doubt there are many other factors which it may be right for the court to take into account in particular factual situations." 31

The factors, which were enunciated by the Court of Appeal, followed from a principled analysis by Aldous L.J. and Robert Walker L.J. of the circumstances of the previous case law. A similar review of proprietary estoppel itself had been undertaken *Conv. 202 by Robert Walker L.J. in Gillett v Holt. 32 There was no such analysis of the Choithram case in Pennington v Waine with the result that the dictum of Lord Browne-Wilkinson was taken and applied out of context.


One can, as I have already noted, readily sympathise with the Court of Appeal in Pennington v Waine. I am sure that everyone would agree that the outcome was fair. Unfortunately, I am also sure that everyone would agree that the outcome in Re Vandervell's Trusts (No.2) 33 was also fair. The legacy of that case has haunted law students in examinations ever since. The legacy of Pennington v Waine may be even greater if the courts use their discretion to give effect to ineffective transactions where it would be unconscionable not to do so. Many varied transactions could conceivably fall into this category. It is not at all obvious that Lord Browne-Wilkinson's remarks in respect of equity never striving officiously to defeat a gift was intended to elevate that notion into a maxim of equity and, if we are left with a maxim that equity will not assist a volunteer unless it is unconscionable not to so, then we are left with a very unruly beast.

Senior Lecturer in Law, City University.

Conv. 2003, May/Jun, 192-202

1. 4 De G.F. & J. 264; 45 E.R. 1185; [1861-1973] All E.R. Rep. 783.

2. [1952] Ch.499.

3. [1964] Ch.288.

4. (1844) 4 Hare 67.

5. [2001] W.L.R. 1.

6. [2002] 4 All E.R. 214.

7. M. Halliwell, Equity and Good Conscience In A Contemporary Context (London, Old Bailey Press, 1997).

8. [2002] W.T.L.R. 367 at 382.

9. [1946] Ch.312.

10. (1865) L.R. 1 Ch.App. 25.

11. (1874) L.R. 18 Eq. 11.

12. [1952] Ch.499.

13. Above n.2.

14. Above n.6.

15. Above n.6 at 243.

16. (1874) L.R. 18 Eq. 315.

17. (1880) 15 Ch.D. 228.

18. [1910] 1 Ch.609.

19. [1903] 1 Ch.697.

20. [1917] 1 Ch.234.

21. [1939] Ch.239.

22. [1965] Ch.902.

23. Above n.4.

24. (1774) L.R. Eq. 315.

25. Above n.3.

26. Contracts (Rights of Third Parties) Act 1999 (c.31).

27. Above n.4. For the controversial issues surrounding Fletcher v Fletcher see R. Meagher and J. Lehane, “ Trusts of Voluntary Covenants" (1976) 92 L.Q.R. 425.

28. (1885) 31 Ch.282; [1881-5] All E.R. Rep. 702.

29. Above n.8.

30. [1976] Ch.179, 198.

31. Above n.8 at 385.

32. [2000] 3 W.L.R. 815.

33. [1974] Ch.269.

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