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Parkinson, Patrick --- "Review Essay: Trends in Contemporary Trust Law by A Oakley" [1998] SydLawRw 15; (1998) 20 (2) Sydney Law Review 348


Clarendon Press, Oxford, 1996, xxxix+341pp


Those who are unfamiliar with the contemporary law of trusts could be forgiven for thinking of it as a settled area of law. Some of the great textbooks on trusts such as Underhill are still being published under new editors many decades after the death of their first authors. Thos e books are full of precedents from ages long since past when wealthy families made marriage settlements and elderly men hid their indiscretions under the mask of secret trusts. To read a traditional trusts textbook is to enter the world of a nineteenth century novel. There is talk of precatory trusts, which arise when testators are too polite to express their wishes clearly, spendthrift trusts which allow young heirs to spend their fortunes on wine, women and song while protecting them from the consequences of bankruptcy, and trusts for maintenance and advancement, to ensure that whatever may happen to the father, at least the son will be able to continue playing rugby on the playing fields of Eton.

This important book, edited by Tony Oakley, is about trust law for the twentyfirst century, not the nineteenth. It is a collection of papers given at a conference in Cambridge in January 1996 which brought together leading scholars from Australia, Britain, Canada and New Zealand. The book is not exclusively devoted to the law of trusts. Bob Austin offers an important restatement of the orthodox position on the content of fiduciary duties. Charles Rickett in turn offers a spirited defence of the expansive New Zealand approach to Equity, in an essay on the future of equitable compensation. Anthony Morris examines the law of undue influence, and the future of the rule in Yerkey v Jones [1] as part of an essay on domestic relationships. Most of the papers, however, focus on the law of trusts and trustees.

One of the remarkable features of this book of essays is that so many of the issues discussed are scarcely dealt with in the traditional textbooks which focus on precedent, rather than the law as practiced. An example of a topic which is little discussed in the standard textbooks is the role of the “protector” which is sometimes known in Australia as the appointor, or, in other manifestations, the “guardian”. This is the subject of an excellent chapter by Prof. Donovan Waters. The position of the protector is now a standard feature of offshore trusts and is increasingly to be found in domestic trusts. Yet the legal status of the protector is quite unclear. Protectors have been given a wide variety of different roles by settlors. They might have the power to direct the trustees in any aspect of trust administration, or the settlor may require that certain powers may only be exercised with the protector’s consent. Prof. Waters comments that in the last five years “it is no exaggeration to say that at one time or another the protector has been employed to exercise every administrative and dispositive power associated with the common law concept of express trusts.” Crucially, the protector will usually have the power to appoint and dismiss trustees, and may have the power to add or remove beneficiaries.

Prof. Waters’ chapter elucidates the role of the protector in the modern discretionary trust, and seeks to analyse the nature of the position. He examines issues such as the standard of behaviour required of the position-holder, the accountability of the position-holder and the remedies available to those who might be adversely affected by the actions of the protector, or conversely, who may suffer loss because the protector fails to take action. Prof. Waters addresses these questions by an analysis of the manner in which the law has dealt with powers of appointment, and other such powers which have been vested in a person other than a trustee. This chapter is an outstanding contribution to the literature on trusts. It is doctrinal legal scholarship at its very best: anticipating the problems which will come before the courts, and providing answers, rather than criticising the decided cases afterwards.

Prof. Waters’ chapter raises two issues which are discussed in other chapters also. What exactly is a trust, and what limitations does the inherent nature of a trust impose upon those who purport to create them? Put another way, the question some legal scholars are now asking is whether some modern trusts created for the purposes of tax planning are so far removed from the traditional concept of the trust that they cannot properly be described as trusts at all. Prof Waters considers that such a line of inquiry is unlikely to be productive, at least as far as the issue of protectors is concerned (pp 107–108). He notes (at p108) that “it is increasingly evident that what are the essential attributes of the trust ... is itself an issue.”

Indeed it is. This question is addressed in the opening chapter by Paul Matthews on the non-charitable purpose trust. For Mr Matthews, the answer to the dilemmas of the twenty-first century appears to be to return to the more certain world of the nineteenth. Mr Matthews begins his essay vigorously by pointing out that in the beginning, trusts did not come into existence because animals, or trees in California, complained to the Chancellor that property given to trustees for their benefit was being misapplied. People complained. Of course, legal actions must always be brought by people. The question is whether people ought to be allowed to bring actions to protect animals or trees.

In a very well-researched and interesting essay, Mr Matthews answers in the negative, since in his conception of the trust, there can be no obligation without a correlative right, and in the law of trusts, this means a proprietary right. Equity’s approach to the trust was to ask not who could enforce the obligation but rather, to whom did the trust property belong. Trust law, therefore is situated clearly in the law of property rather than the law of obligations, and there is no place for the purpose trust. He acknowledges that the law of charities is an exception here, but this is because it had ecclesiastical law origins and was only later squeezed into the existing framework of the trust by the Court of Chancery. In Mr Matthews’ view therefore, purpose trusts ought to be regarded as invalid because there is no beneficial owner of the property in whose hands the equitable ownership of the property may be located. All cases which say otherwise are either wrongly decided, should be regarded as anomalous, or ought to be explained away. What prompts Mr Matthews’ reflections are the mutations of the noncharitable purpose trust in certain tax havens. The typical form is that the trustee of a discretionary trust is a private trust company. The shares of that company are then held on a trust for purposes, the purposes being to hold the shares of the trust company, and to enable it to act as a trustee of the trust. Magically, beneficial ownership disappears, which has all sorts of advantages both in terms of tax minimisation and corporate accounting.

This is most certainly an abuse of the non-charitable purpose trust, but the abuse of a concept should not be used as an argument against its proper use. These curious trusts are allowed to exist because the legislatures of these tax havens allow them to exist, and not because the right to create such trusts flows inexorably from the recognition of non-charitable purpose trusts. Such trusts would wither on the vine if legislatures were to deprive them of tax advantages. One might, for example, declare legislatively that the ultimate controller of the trust (for example, the protector or appointor) is deemed to be the owner for the purposes of taxation law and the law governing corporations. A similar result may be reached by judicial decision, as has been the case in Australia where the Family Court of Australia has looked behind the veil of the discretionary trust to make orders against the husband as long as it can locate the ultimate and effective control of the trust in the husband’s hands.[2] Such a prospect is envisaged by Mr Matthews in his closing comments, where he points out that where there is a trust, there is a benefit, and there will be someone who has rights (p31).

The difficulty with Mr Matthews’ view that all trusts ought to have human beneficiaries, unless charitable or otherwise recognised by statute in a tax haven, is that it does not seem to take account of developments in the last thirty years which have obviated such a need. In Commissioner of Stamp Duties (Qld) v Livingston[3] Lord Radcliffe described as a fallacy the notion that “for all purposes and at every moment in time the law requires the separate existence of two different kinds of estate or interest in property, the legal and the equitable.” Rather, equity “calls into existence and protects equitable rights and interests in property only where their recognition has been found to be required in order to give effect to its doctrines.”[4] That it is not always necessary to locate the beneficial interest for a trust to be valid is demonstrated by McPhail v Doulton.[5] In this leading case, and the subsequent case, Re Baden’s Deed Trusts (No 2),[6] consideration was given to the validity of a discretionary trust which listed the beneficiaries as officers, employees and ex-officers or employees of a certain company, together with their relatives and dependants. The Court of Appeal upheld the validity of the trust on the basis of a test established by the House of Lords, and by majority, held that relatives meant ‘descendants from a common ancestor’. Such a definition would include an enormous number of people who are distantly related to employees or ex-employees of the company. It would be impossible to say where the beneficial interest lay in the Baden trust. The question may be answered theoretically, but not practically. The reality is that the trustees in such a situation as this would choose amongst the applicants who applied for grants, and the notion of beneficial ownership in all the potential beneficiaries of their discretion is absurd. The Rule in Saunders v Vautier[7] has no application in such cases.

A further difficulty with Mr Matthews’ argument is that it fails to answer the question convincingly why non-charitable purpose trusts should not be held valid as long as there is someone with a sufficient interest to bring defalcations by the trustees to the attention of the court.[8] Where there is someone who can enforce the trust, what reason of policy can one offer for saying that a settlor should not be able to give money for purposes through a trust mechanism? If the settlor and trustees, as consenting adults having financial intercourse in private, agree that money or property which has been transferred into the names of the trustees should be devoted to a particular cause, and the trust is both workable and enforceable, why should the law not allow them to do so? It is not a sufficient answer to this question that the law will allow them to do so, but will not enforce the obligation, for such trusts may be declared invalid at the behest of the residuary beneficiary following the settlor’s death.

Insisting that all purpose trusts must be charitable or otherwise invalid places a great deal of pressure on the law of charities to accommodate such purposes. To the extent that other consequences flow from charitable status such as tax advantages or rating exemptions (and this varies from one jurisdiction to another), this distorts the sensible allocation of such benefits and exemptions within the community. The present law also leaves curious anomalies. It is perhaps only in England that a trust to promote fox-hunting could be upheld[9] while a trust to campaign for the prohibition of fox-hunting would probably have been declared invalid.[10]

Prof. Hayton offers another version of the essence of a trust. In an important essay on the irreducible core content of trusteeship, Prof. Hayton examines the extent to which a settlor may restrict beneficiaries’ rights and trustees’ potential liabilities by generating “his local law for his autonomous trust” (p48). His answer is that settlors have great freedom in fashioning the trust in any way they choose as long as it is not repugnant to the very trust relationship which they are purporting to create, or otherwise uncertain, administratively unworkable or contrary to public policy. Here again, we strike the question about what is essential to the trust relationship and cannot be dispensed with by the settlor in drafting the terms of the trust.

Prof. Hayton believes that it is of the essence of the trust that there must be ascertained or ascertainable beneficiaries who can enforce the trust, but, unlike Mr Matthews, it is not essential to his argument that these beneficiaries have the equitable ownership of the property between them. They may be discretionary beneficiaries, whose right it is only to put their case to the trustees for the exercise of a discretion in their favour. In Prof. Hayton’s view, the essence of the trust is a relationship of accountability:

The essential ingredient of trusteeship is the duty to account which affords the beneficiaries a correlative right to have the court enforce the trustees’ fundamental obligation to account. (pp49–50).

It follows, according to Prof. Hayton, that it is essential to the trust relationship that the trustees must take reasonable steps to let the beneficiaries know of their rights, even if they are only beneficiaries under a broadly stated discretionary trust, for unless people realise they are beneficiaries, they cannot hold the trustees to account. But is this so? Consider the case of a settlor who establishes a private discretionary trust by which the trustees agree to make anonymous donations to people who fulfil certain specified criteria which comply with the requirements for certainty of objects. The trustees might, for example, make anonymous awards from a list of those people nominated by the Archbishop of Sydney as worthy of a reward for their devoted service to the Church or the wider community. Would such a trust fund be struck down as invalid because the potential beneficiaries would not be aware of the existence of the trust, nor of its identity and precise terms even after being a recipient of its largesse? And if so, why is it that the law should not allow a generous settlor to make anonymous donations to the selfless while allowing the use of trusts for so many less worthy causes and less deserving beneficiaries? One answer to this is to argue that in such a case the trustees have only dispositive powers, not duties, but often such analyses (which have been popular also in relation to the Quistclose trust)[11] endeavour to resolve a doctrinal problem by resort to a legal fiction. If the terms of the trust are clear in stating that the trustees have a duty to select and only a power to accumulate, then it is not legitimate to reinterpret those clear intentions as giving rise to a different kind of legal structure.[12]

Another response to the problem is to argue that the settlor is unwise to create a trust where there is a greater danger of misappropriation of moneys by the trustees than in more traditional trusts. However, the trust fund may be protected by a variety of means without there being an accounting to the beneficiaries. There might, for example, be accountability to the settlor as part of the contract between paid trustees and the settlor; or to the appointor.

Some of Prof. Hayton’s other views on the irreducible core of trusteeship are similarly based more on rational deductions from principle than upon authority. The premise is that the trust has certain essential characteristics which settlors are not at liberty to depart from even by express provision in the trust instrument.

Again, the question which must be asked is why it is that the law should prohibit settlors from creating trusts which differ from the trust concept as traditionally understood? If settlors wish to create trusts which give them the power to exempt a trustee from liability, or exclude the beneficiaries from the right to inspect accounts, while creating another prospect for accountability through other means, should the law step in to declare the trust invalid? May it do so if the trust looks like a traditional trust in all other respects, fulfils the criteria for the establishment of a trust, such as the certainty requirements, and is in all other respects a perfectly workable form of dealing with property? The argument about essences begs the question again of what the public policy interest is in holding that such purported trusts are invalid. Is it to protect the beneficiaries? In most cases of private family trusts, they are volunteers. Is it to prevent fraud? Equity is alert to prevent fraud when complaint is made to the court, but not otherwise. For example, there is no rule against sole trustees.

Prof. Hayton writes as if there is in some way a public interest in the accountability of trustees and the preservation of the trust property. I would argue that this is a private matter only. It is entirely for the person who is choosing to dispose of his or her money. If the beneficiaries are volunteers, then they have no cause for complaint. If they are not volunteers, then consumer protection policies and principles may need to apply, as in contributory pension trusts. But otherwise, there is an argument that the law should not interfere. Most settlors and testators, perhaps, would want to ensure that the trustees are held accountable and that the beneficiaries have appropriate remedies for dealing with breaches of trust. This may indeed be the reason why the trust device is deemed suitable. However, if settlors choose to dispense with the traditional safeguards of the trust concept, the law should not prohibit them from doing so. The settlor may of course be unwise. He or she may giving to beneficiaries less of an interest, or at least a less certain and secure interest, than is traditionally the case under trust instruments. But if that is what the settlor chooses to do, is this any concern for the courts? The law does not prohibit gambling, which for some people is a form of behaviour far more reckless than that of any settlor. Again, it does not void insurance policies if the insured leaves the car keys in an unlocked car or goes out for the evening leaving a house unlocked and the jewellery in full view. These are regarded as matters in which there is no public interest, nor any legitimate state concern in protecting the vulnerable from exploitation, for the law is little concerned in how people spend their money nor in how carefully they secure it from the possibility of fraud or theft.

Argument about the “essence” of the trust, if there is one, will no doubt continue. It raises interesting questions which have not been dealt with before. Hitherto, there were a few well-known requirements for the validity of a trust – the three certainties, the beneficiary principle, administrative workability, legality – and as long as these were satisfied, the trust was valid. There may of course, be a question about whether a trust was intended, or rather, whether some other form of ownership, obligation or security interest, was meant to be created instead. However, this is not an issue about invalidity but rather about classification. Prof. Hayton raises the question whether other requirements are also central to the trust. If there are such requirements, based upon the notion of an irreducible core content of trusteeship, then the further question arises whether clauses included in the trust instrument which would have the effect of ousting fundamental aspects of trusteeship would render the whole trust invalid, or be struck out individually as being repugnant to the trust, or lead a court to conclude that despite the language of trust, another legal structure has been created, or perhaps the settlor has not divested himself or herself of beneficial ownership.

I would prefer the courts not to get into debates about the essentials of the trust beyond the traditional requirements but rather to deal with issues that arise either by a classificatory response (describing what purports to be a trust as something else entirely), or by examining the consequences of finding that there is a trust in any given context. Once unorthodox trusts are deprived of their beneficial consequences by robust interpretation or by bold judicial activism which looks beyond forms to the substance, such problematic trusts will no doubt disappear.

The issues raised in the essays by Mr Matthews, Prof. Hayton and Prof. Waters give some indications of the extent to which the most basic issues about the law of trusts are now being debated. Tony Oakley takes these debates further by considering a number of developments which give an indication of the way in which the law of trusts is being liberalised from its former constraints. He discusses the significant judgment of Target Holdings v Redferns[13] in which Lord Browne-Wilkinson, for the House of Lords, distinguished between “traditional trusts” and more modern forms of the trust, stating that it is “wrong to lift wholesale the detailed rules developed in the context of traditional trusts and then seek to apply them to trusts of quite a different kind.”[14] This recognises clearly that the historic rules regarding trusts are not necessarily applicable to all kinds of trust, and that those rules may be modified in particular circumstances. It is the first major indication that English courts are prepared to abandon an intellectual framework which assumes the basic homogeneity of trusts across the great spectrum of their uses. Lord Browne-Wilkinson’s speech raises many questions, however. When is a trust deemed “traditional” for the purposes of the application of the traditional rules? If those rules are deemed not to apply, what rules will be put into place and on what basis of legal principle? The breakdown of the traditional, monolithic concept of the trust is to be welcomed, and was suggested by this reviewer some years ago.[15] Its implications, however, are far-reaching.

Other essays in the book deal with a range of problems which are not adequately addressed in the contemporary legal literature on trusts. Dr Derek Davies argues convincingly the case for the abolition of the presumptions of resulting trust and advancement. The Hon. Sir Robert Walker examines the law of trusts in the context of pension funds, a most important area of practice, but not of traditional doctrinal theory. Mr Justice McPherson of the Supreme Court of Queensland offers an interesting discussion of the law concerning self-dealing trustees. Sir William Goodhart, in an essay on trusts law for the twenty-first century argues that any lawyer who does not displace the Trustee Investments Act 1961 (UK) by giving wide investments powers in the trust instrument is guilty of professional negligence. He asserts that the law ought to provide a satisfactory infrastructure for the operation of trusts, but currently fails to do so, resulting in a substantial gulf between law and practice.

John Glover’s essay on the taxation of trusts raises a number of interesting issues about whether such trusts arise from the events which give rise to the claim of constructive trust, or from such later time such as the date of judgment of the court. This matter, which a few years ago was considered settled, was thrown into doubt by Deane J’s remarks in Muschinski v Dodds[16] which indicated that judges have a discretion to determine the time at which the constructive trust arises and may decide only to impose the constructive trust from the date of judgment.[17] John Glover considers the case, inter alia, of a man who embezzled more than a million dollars from his employer but then paid tax on the interest accruing from his investment of the money.[18] When he was caught, he sought to overturn his tax assessments for the relevant years on the basis that he was a constructive trustee of the money and therefore it did not belong to him. Burchett J agreed. There is something rather curious about the phenomenon of a criminal succeeding in persuading a court to impose a constructive trust upon him so that he can gain a financial benefit.

Contemporary trust law is a turbulent field. Sometimes the law experiences a period of turbulence on the way to a new paradigm. At other times, the turbulence arises because doctrines have been allowed to drift from their historic and conceptual moorings. Both phenomena may be seen in the current law and in the debates which are canvassed in this book. It remains to be seen whether a new paradigm will emerge for the trust, or rather perhaps, a recognition that there are a number of different paradigms, so that at last a new picture of order will emerge from the chaos.

[*] Faculty of Law, University of Sydney
[1] [1939] HCA 3; (1939) 63 CLR 649.
[2] Ashton and Ashton (1986) FLC 91–777; Stein and Stein (1986) FLC 91–779; Davidson and Davidson (1991) FLC 92–197.
[3] [1964] UKPC 2; [1965] AC 694.
[4] Id at 712.
[5] [1970] UKHL 1; [1971] AC 424.
[6] [1973] Ch 9.
[7] [1841] EngR 629; (1841) 4 Beav 115; 49 ER 282. This rule provides that where all the beneficiaries are adult and have full legal capacity, they may call for the legal estate to be vested in them, thereby winding up the trust. This has been applied in the context of discretionary trusts, but in the circumstances where the class of beneficiaries was closed, and there was no power to accumulate income: Sir Moses Montefiore Jewish Home v Howell & Co (No 7) Pty Ltd [1984] 2 NSWLR 406.
[8] Re Denley’s Trust Deed [1969] 1 Ch 373.
[9] Re Thompson [1934] Ch 342.
[10] Such a trust could not be upheld as charitable because it involves campaigning for legislative change. Unless a further exception were allowed to the rule against non-charitable purpose trusts on the basis of an analogy with Re Thompson, (supra) the trust would be declared invalid as a non-charitable purpose trust.
[11] Barclays Bank v Quistclose Investments [1970] AC 567.
[12] Cf McPhail v Doulton [1970] UKHL 1; [1971] AC 424; Contrast Re Gulbenkian’s Settlement Trusts [1970] AC 508.
[13] [1995] UKHL 10; [1996] AC 421.
[14] At 435.
[15] Parkinson, P, “Chaos in the Law of Trusts” [1991] SydLawRw 18; (1991) 13 Syd LR 227.
[16] [1985] HCA 78; (1985) 160 CLR 583.
[17] Id at 615: “In particular, where competing common law or equitable claims are or may be involved, a declaration of constructive trust by way of remedy can properly be so framed that the consequences of its imposition are operative only from the date of judgment or formal court order or from some other specified date”.
[18] Zobory v FCT [1995] FCA 1226; (1995) 129 ALR 484.

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