Any opinions, findings, conclusions or recommendations expressed in this material are those of the authors and do not necessarily reflect the views of LawTeacher.
‘Beneficial’ interest in law of trusts and third-party contracts
Memorandum of Law
The term “beneficial interest” is difficult to define precisely because it consists of a combination of the law of obligations and the law of property. Discuss in detail.
This brief discusses the term “beneficial interest” in the context of two paradigms: (1) the law of trusts, and (2) the law of third-party contracts. A trust is a product of a contract between a settlor and a trustee created generally for the benefit of third parties holding beneficial interests in the property of the trust. The Hague Convention on the Law Applicable to Trusts and on their Recognition provides that the term “trust” refers to the legal relationships created – inter vivos or on death by a person, the settlor, when assets have been placed under the control of a trustee for the benefit of a beneficiary for a specified purpose.”  A third party contract is a contract entered into between two persons for the benefit of a third party. If the promisee breaches the contract, the third party, the person have a beneficial interest, has the right to the breaching party to recover under the contract. The hybrid nature of “beneficial interest” arises from the facts that, under a trust, the “interest” is created by contract [the law of obligations], while concurrently the claim underlying the “interest” is to assets [the law of property].
The term “beneficial interest” is used frequently in legal regimes, both in statutory texts and judicial judgments. However, it is undefined thereby requiring deductive reasoning from case law and other material legal authority to reach a precise definition. Take the case of Goodman v. Gallant where a husband and wife purchased real property solely in the name of the husband with the understanding that the wife would hold a one-half “beneficial interest” in the property. Subsequently, the parties separated, the plaintiff wife remained resident in the real property, and began living with defendant. A few years later, the husband conveyed his share in the property to both plaintiff and defendant as beneficial joint tenants “on trust for sale, with power to postpone sale, and to hold the net proceeds of sale … upon trust for themselves as joint tenants”.  In litigation with defendant, plaintiff claimed she owned three-fourths of the value of the property. Judge Slade quoting Russell LJ stated, “The beneficial joint tenancy conferred on the wife an equitable right or title in respect of the property…. The conferring of the beneficial joint tenancy necessarily and clearly involved these beneficial rights and interests”. Although this case is distinguished by the fact that the conveyance was made in a matrimonial context, nevertheless the transaction demonstrates the interrelationship between contract and property with respect to characterising the wife’s rights as beneficial interests. Following the foregoing, a “beneficial interest” is created by contract giving rise to a claim in property. 
Modern developments indicate that the better view is to treat “beneficial interests” as contractually based interests. Grundmann states, “In principle, the better arguments seem to speak in favour of the … contractual solution. This is so, because equating the beneficial interest to property today still means treating all cases alike. Property law does not have the flexibility to separately ask each group of cases which solution would best further overall efficiency”. By contrast, contract law allows for flexibility in weighing interests and providing solutions to cases. Anglo-American scholarship is in accord. Langbein states:
Get help with your essay today
from our professional essay writers!
Visit www.lawteacher.net to see how we can help you!
Stone and Powell anticipated the modern jurisprudential consensus against deducing outcomes by categorizing something as property (contract). Ernst Weinrib states it well: “[P]roperty is itself merely the label for that crystallized bundle of economic interests which the law deems worthy of protection” Accordingly, “affixing the label of property constitutes a conclusion not a reason. The difficulty is not to supply a label but to identify the protected interest”.
In addition, a trust is created voluntarily by contract and trust law generally consists of default rules that can be displaced by the parties’ agreement. Further, in civil law systems that lack the legal institution of trust, the latter is treated as a type of contract. These arguments support a construction of “beneficial interest” as a product of contract, though the argument is imperfect because the beneficiary of a trust has a “beneficial interest” in property held by the trust. Therefore, the stress on property rights obfuscates the definition.
The argument of whether a “beneficial interest” is a species of the law of obligations or the law of property or of both corresponds to the debate over the legal nature of an investment security. Article 8 of the U.C.C. provides that a “security entitlement” consists of the rights and property interest of an entitlement holder with respect to a financial asset.” Other jurisdictions treat an investment security as a species of contract or property law. The parallel is extended by the functional equivalence of a trustee of a trust and the securities intermediary holding the investment instruments for the entitlement holder. The Hague Convention on the Law Applicable to Certain Rights in Respect of Securities held with an Intermediary” follows an approach similar to Article 8 of the U.C.C., a pragmatic approach reflecting commercial reality, and transcending labels used by various legal systems to characterise a security.
Trust span a wide spectrum including “commercial trusts”, that is, investment funds. By analogy, the best approach to resolve the tension between whether a “beneficial interest” is a property or contract right appears to apply a concept treating a “beneficial right” as a bundle of rights giving the beneficiary entitlements under a trust or contract. Economics of the marketplace ought to prevail over the origins and historical distinctions conferred on the term “beneficial interest”. Otherwise, the debate cannot be settled and a precise definition of “beneficial interest” will evade capture.
In conclusion, the difficulty of finding an unambiguous definition of “beneficial interest” is a product of history and jurisdictional different viewpoints. A “beneficial interest” must bear a relation to property since, if it did not, it would lose its value. It also bears a relation to contract, as in the case of a trust, that is the method through which it comes into existence. The larger question is: is it necessary to have a precise definition since differing legal institutions have settled disputes pertaining to beneficial interests and the protection of third parties.
 John H. Langbein, The Contractarian Basis of the Law of Trusts, 105 Yale L. J. 625, 643-646 (1995).
 Clarke B. Whittier, Contract Beneficiaries, 32 Yale L. J. 790, 792-96 (1923).
 Goodman v. Gallant, 1 ALL ER 311 .
 Stefan Grundmann, Trust and Teuhand at the End of the Twentieth Century: Key Problems and Shift of Interests, 47 Am. J. Comp. L. 401, 406 (1999) (beneficial interests historically were considered a property or quasi-property right, or a restricted right in rem. The German Trust and Treuhand historically followed this view).
 Id. at 411.
 John H. Langbein, supra note 1 at 648.
 Harrison v. Credit Suisse, Judgment of Jan. 29, 1970, ATF II, 96 Entscheidungen des Schweizerischen Bundesgerichtes 79 (Switz.).
 U.C.C. Article 8 (Investment Securities) Sec. 8-102 (17).
 Convention of 5 July 2006 on the Law Applicable to Certain Rights in Respect of Securities held with an Intermediary, at http://www.hcch.net/index_en.php?act=conventions.listing last visited 27 August 2008.
Related ServicesView all
DMCA / Removal Request
If you are the original writer of this essay and no longer wish to have the essay published on the UK Essays website then please.