EQUITY & TRUSTS LECTURE NOTES

EQUITY & TRUSTS LECTURE NOTES

Week one: introduction, history and nature of equity

What is equity?

Firstly equity is not law, equity is the conscience of the law:

The word equity as it is used in the Australian legal system does not signify any abstract, moral or philosophical notion.

Rather, it signifies the specific jurisprudential notion of equity or fairness and a system of concepts and principles which originated from the English Court of Chancery.

Therefore, equity refers a set of principles that derives from the specific jurisdiction established and exercised by the English Court of Chancery before 1873.

However, to attempt a more detailed definition of equity is not an easy task.

A well-known quote from a classic text on equity reads:

Equity can be described but not defined (MGL, 3)

On the other hand, the reason for equitys existence is clear enough:

Its justification was that it corrected, supplemented and amended the Common Law. It softened and modified many of the injustices in Common Law, and provided remedies where at law they were either inadequate or non-existent. (MGL, 3)

STRICTLY SPEAKING, EQUITY IS NOT LAW IN THE SAME SENSE AS COMMON LAW OR STATUTE. THEREFORE, PLEASE DO NOT REFER TO IT IN YOUR ESSAY OR ANYWHERE ELSE AS LAW.

It is a set of principles developed in Chancery and which forms part of our legal system.

The diagram below shows how the three parts of our legal system interact

Equity developed alongside the common law and many statues draw upon both equity and the common law for their substantive provisions. For example, Australian Consumer Law contains many principles and remedies developed in equity such as misrepresentation, unconscionable conduct and rescission. As you will later learn, there is also interaction between equity and the common law.

The nature of equity

As a general introductory remark, it can be said that equity supplements the general (common) law, although when compared to common law, equity adopts a different approach to administering justice: equity focuses on flexibility and good conscience as opposed to common laws rigid enforcement of precedent and legal rights.

Describing the nature of equity, Lord Cowper in Dudley v. Dudley (1705) Prec Ch 241, 244; 24 ER 118, 119, said that:

. equity qualifies, moderates and reforms the rigour, harshness and edge of the law. [T]he office of equity [is] to support and protect the common law from shifts and crafty contrivances against justice and the law. Equity therefore does not destroy the law, nor create it, but assists it.

Therefore, it can be said that generally equity supplements the general law by intervening in cases where the common law is in some respect deficient.

For example

1. all remedies (apart from common law damages) were developed in equity because damages were an inadequate remedy in particular situations: specific performance, restitution, and rescission are all equitable remedies ALSO

2. common law does not recognise a trust arrangement it only recognises the legal title to the property of the trustee, but not the beneficial/equitable interests of the beneficiaries.

History of equity

It is important to remember that equity operates through two major jurisdictions (or sections). These are:

The inherent, original, exclusive jurisdiction which administers such matters as (inter alia) trusts, fiduciary relationships and deceased estates, which are areas that were administered solely in Chancery; and

The auxiliary jurisdiction, which provides remedies not available at common law, such as specific performance in contract disputes, injunctions, rescission, and rectification (you will study these in Remedies).

The beginning of equity

During the 14th and 15th centuries, the English Court of Chancery developed a distinct body of principles and a separate court which could deal with the petitions addressed to the King (and later to the Kings Chancellor), requesting discretionary relief from harsh or unjust judgments handed down in the common law courts, called the Kings Courts.

The history of equity is divided generally into 3 stages:

the medieval period In the Medieval period of equity, the Lord Chancellor of England, who was, almost without exception an ecclesiastic (generally the Archbishop of Canterbury), held a number of powerful positions, viz:

Head of the Kings Council,

Head of the Chancery (i.e. the office of the Chancellor), and

Keeper of the Great Seal.

For example, Bilal is 10 years old who inherits property from his uncle. Pursuant to common law he is not sui juris (he is not old enough hold legal title to property). Therefore, it is necessary to find someone who can hold legal title to the property and manage it until Bilal turns 18. In a situation like this, the Chancellor would appoint a responsible adult, for example Alfred (women were not regarded as being competent to hold legal title to their property until the nineteenth century) who could look after the estate. Legal title to all of the property would be transferred to Albert, who would manage the property until Bilal became sui juris.

The formative period

The separation between common law and equity, which began to materialize at the end of the medieval period, developed further during the formative period.

A significant event in the history of equity took place in 1529 [1529 1532] when

Henry VIII appointed Sir Thomas More as Chancellor (1478 1535) [author of Utopia; executed 6 July 1535; canonised in 1935 by Pope Pius XI].

The significance of this appointment is that from this time trained lawyers and not ecclesiastics were appointed to the office of Chancellor.

Consequently, Chancery lawyers began examining the doctrinal basis on which the previous Chancellors exercised the equitable jurisdiction and dispensed its remedies from a jurisprudential and conscience-based perspective.

Another event of major importance in the historical evolution of the equitable jurisdiction for the development of equitable doctrine occurred in 1557 when the first reports of Chancery proceedings were published.

The period of systemization

The third period in the historical evolution of equity is marked by the development of classification of rules and principles that are found in equity today.

During the 17th Century, the Lord Chancellors began a systematic classification and development of equitable rules and doctrines. Lord Nottingham (1673-1682) has received the most credit in this area for his contribution to such a development and is often referred to as the father of modern equity for the systematisation he accomplished in equity.

By the end of this period, the overall jurisdiction of the Court of Chancery was much enlarged and included:

Jurisdiction connected with forms of property recognised only in equity (e.g., various types of trusts, equitable interests etc.)

Jurisdiction over contracts not under seal (e.g., equity developed further the remedies of injunction and specific performance)

Jurisdiction to relieve against the rigid operation of the common law (e.g. equity provided relief against penalties, fraud and undue influence)

Jurisdiction over deceased estates

The guardianship of infants

Common Law Equity

Head of Jurisdiction King with Lord Chief Justice Chancellor as Keeper of the Privy (Great) Seal

Courts Kings Bench (felonies/crimes)

Petty Sessions (misdemeanours)

Common Pleas (civil) Chancery in the beginning - not a court as such, more a government department. Later a repartee COURT.

Hearings Judge must follow the law-

A jury of peers are adjudicators of fact Chancellor (and later a judge) alone makes decisions and has total discretion no jury

Pleadings Commencement Issue of a writ

Today: Statement of Claim Presentation to Chancery of a bill or petition

Today: Summons-although complex proceedings may be commenced by Statement of Claim with leave of the court

Remedies Damages Injunction

Specific Performance

Rescission etc

Acts in rem Acts in personam

The judicature system

Equity and common law before the Judicature acts

As mentioned above, equity was originally administered by the court of Chancery only, and not by common law courts.

With the passing of time, as the equitable jurisdiction was being enlarged and the equitable principles were being systematized, procedural shortcomings in the Court of Chancery developed due to insufficient numbers of staff and judges.

As a result of those procedural shortcomings, excessive delays created real problems in the administration of justice in equity. Petitioners had to wait for many years before their case could be heard in the court of Chancery. So notorious were the delays in Chancery that the plot of Charles Dickens novel Bleak House revolves around the characters affected by the case of Jarndyce v Jarndyce, a matter involving a deceased estate which had been running for almost 100 years.

Division between equity and common law before the judicature system

The most significant feature of the division between the courts of law and equity was the (almost complete) refusal of the common law courts to recognise that equitable rights, titles and interests entitled their holders to any relief at common law.

Although common law courts did not recognise equitable rights and defences, courts of equity could not decline to recognise legal rights, titles and interests (the maxim: equity follows the law), because equity was established partly for the purpose of correcting, supplementing and amending such legal rights, titles and interests.

There existed a few categories of cases in which the law would recognise an equitable interest, BUT that did not mitigate the severity of the two general rules that:

(a) the courts of common law refused to entertain actions brought solely for relief against infringements of purely equitable rights, titles and interests, where the infringement was not tortious nor in breach of contract; and

(b) those equitable rights, titles and interests could not be relied on as constituting a defence to a common law claim.

An illustration of the disadvantages of the division between equity and common law before the judicature system is provided by the following example:

In a dispute over a contract for sale of land:

the plaintiff requests specific performance

the defendant denies conclusion of the contract

equity could not decide the disputed legal right (i.e., whether a contract was concluded)

this issue had to go to a common law court

Therefore, if litigants commenced proceedings in the wrong forum or applied for the wrong remedy, they had to start again in appropriate forum.

The judicature Act 1873 (UK) and concurrent procedure

The procedural reforms introduced by the judicature system, aimed at eliminating the disadvantages flowing from the division between common law and equity.

The Judicature Act in England:

abolished the distinction between the old common law and equity courts and replaced them with the High Court of Justice.

provided for the concurrent administration of law and equity in the new English High Court of Justice under a unified code of procedure

brought an end to the old common law system of pleading

The Chancery Division became responsible for dealing with cases that require the application of equitable principles.

Therefore, pursuant to the judicature system, if a matter were commenced in the wrong jurisdiction, it would not be dismissed, but simply be transferred to the appropriate Division of the High Court of Justice.

The judicature system in Australia

All the Australian colonies, with the exception of NSW, were quick to enact statutes modelled on the English Judicature Act.

Qld: Judicature Act 1876

SA: Supreme Court Act 1878

WA: Supreme Court Act 1880

Vic: Judicature Act 1883

Tas: Legal Procedure Act 1903 (extended by the Supreme Court Civil Procedure Act 1932)

NSW: Supreme Court Act 1970 NO ONE KNOWS WHY IT WAS INTRODUCED 100 YEARS LATER

The present statutory equivalents of ss. 24 and 25 in the English Judicature Act of 1873 are found in NSW legislation in:

the Supreme Court Act 1970 ss 57-64 and

the Law Reform (Law and Equity) Act 1972 s 5

s. 5 of the 1972 Law Reform (Law and Equity) Act reads as follows:

In all matters in which there was immediately before the commencement of this Act or is any conflict or variance between the rules of equity and the rules of Common Law relating to the same matter, the rules of equity shall prevail.

The fusion fallacy

See the Kirby Article, 446 451, for an illuminating discussion of this issue.

Fusion fallacy is the term given to the MISTAKEN belief that the Judicature system brought about the fusing or unification of common law and equity. IT IS OF VERY LITTLE PRACTICAL VALUE TODAY.

There was nothing in the Judicature Act 1873 which:

attempted to codify law and equity as one subject matter, or to create a new body of law or which

severed the roots of the conceptual distinctions between law and equity

It is clear from the Parliamentary debates concerning the English Judicature Act that it was intended to bring about administrative reform and to make the administration of Justice less complicated and time consuming and more efficient and effective.

Those who wish to retain the doctrinal purity/clarity of equity:

maintain that the Judicature Act has only procedural character, and

argue that the intention of the Act was not to fuse the principles of the common law and equity into one system of law.

There are two types of fusion which are said to have arisen from the enactment of the Judicature Acts: administrative and substantive fusion.

Administrative fusion

Supporters of administrative fusion hold that the judicature system resulted in the merging of the administration of equity and the common law. There is some practical support for this view, in that the courts are able to apply equitable remedies to common law matters being heard in common law courts. In other words, the two systems could be administered or applied in the same court.

However, although the systems were administered together, their principles remained separate.

Exactly that view of the effect of the Judicature Act was offered in the case of Salt v. Cooper (1880) 16 CH D 545, 549; [1874-80] All ER Rep 1204, (Sir George Jessel MR):

It has been sometimes inaccurately called the fusion of Law and Equity; but it was not any fusion, or anything of that kind; it was the vesting in one tribunal the administration of Law and Equity in every cause, action, or dispute which should come before that tribunal. That was the meaning of the Act. The Legislature did not create a new jurisdiction, but simply transferred the old jurisdictions of the Courts of Law and equity to the new tribunal, and then gave directions to the new tribunal as to mode in which it should administer the combined jurisdiction.

The same conclusion on the effect of the Judicature system has also been reached by the Australian High Court and the NSW Court of Appeal in Felton v. Mulligan (1971) 124 CLR 367, 392, Windeyer J referred with approval to the statement in the classic text Ashburner on Equity [2nd ed., 18] that the two streams of jurisdictions, though they run in the same channel, run side by side and do not mingle their waters. See also the judgments of Spigelman CJ and Heydon JA in Harris v Digital Pulse Pty Ltd [2003] 56 NSWLR 56 and Evans [2.17 2.19].

Substantive fusion

There is far less support for the view that the Judicature System resulted in the fusion or merging of the actual principles of common law and equity. Therefore, whilst it is possible to argue in favour of administrative fusion, it is much more difficult to justify a belief in substantive fusion.

Relevance of a discussion of the fusion fallacy

Although it could be argued that the issue of the fusion fallacy is purely an academic, jurisprudential concern, it does have limited relevance in regard to a number of matters, more particularly, the question of damages.

Traditionally, equity is not a punitive jurisdiction. Unlike the common law, therefore, which could award exemplary (or punitive) damages, any monetary awards made in equity were merely ameliorative in nature. Damages in equity, were therefore referred to as equitable compensation: their objective being restitutio in integrum (to place a person in a position they would have been in prior to the event complained of) or purely as compensation for a loss.

Prior to the Judicature Act, Lord Cairns Act 1858 (21 & 22 Vict c 27), granted the English Court of Chancery power to award damages in lieu of or in addition to an injunction or specific performance:

this originally became s. 32 of the NSW Equity Act 1880 and

finally, s. 9 of the Equity Act 1901

However, that provision did not confer an unlimited power to award damages.

Also note that a plaintiff would not be awarded damages if he/she failed to prove an entitlement to the equitable remedy sought, because the damages would then be

neither in addition to any equitable relief decreed

nor in substitution of any such equitable relief otherwise available.

You will study the issue of equitable damages and Lord Cairns Act in greater detail in LAWS4014 Remedies.

Equity Today:

See the Kirby Article, 451, for a discussion of how equity adapts or arguably no longer adapts to contemporary issues.

Historically, equitys exclusive jurisdiction covered the determination of matters arising from:

The guardianship of infants and lunatics

Uses (trusts)

Deceased estates/succession

Fiduciary relationships

Unconscionable behaviour/transactions.

Today all courts have the jurisdiction to apply equitable principles. In NSW, however, the Supreme Court has an Equity Division which hears matters which do not involve for example, the recovery of damages or a debt, such as:

The enforcement of equitable rights

Applications for injunctive relief

Matters relating to trusts

Equitable remedies for contractual disputes

The administration of corporations

Issues arising from fiduciary relationships.

There are also a number of specialised divisions within Equity. For example:

Admiralty

Commercial/Corporations

Probate and

Protective Divisions

Also, there are a number of statutes that are administered in Equity. The most commonly invoked are:

Property (Relationships) Act 1984 (NSW) (formerly the Defacto Relationships Act)

Succession Act 2006 (NSW) particularly Chapter 3 - family provision sections

Trustee Act 1925 (NSW)

Charitable Trusts Act 1993(NSW)

These pieces of legislation have arisen in regard to

the family provision sections of the Succession Act, from equitys jurisdiction over deceased estates

the PRA, from the application of equitable principles; and

the TA and CTA from equitys historical and exclusive jurisdiction over trusts.

Textbook notes: chapter 1

Equity is fairness and justice, many may argue equity is the overriding goal of all law.

In nicomachean ethics, arstotle contrasted law which was said to be universal in its application, with equity which was seen as a correction of law where it was defective owing to its universality. But aristotle anticipated by lawyers idea of equity in two respect:

equity corrects or supplements the law but does not replace it. The fact that equity modifies the application of the law in specific instance does not impair the legitimacy of the law in those cases where there is no need of equity.

some equitable doctrines can be explained in terms of the dilemma of universality in the law assembly based legal rule of general application can on occasions be exploited for improper purposes. for example, where the law requires some contracts to be in writing equity can modify the writing requirements where its application could cause injustice.

the Australian model of equity taken as a whole does not fit Aristotles notion of equity. instead in common with equity in other common law jurisdictions the model applied is that of institutional equity.

Institutional equity

The essence of institutional equity is the creation of a special court distinct from the courts administrating the general law having the power to modify or correct the general law.

The history of equity in two points

first the paradox of institutional equity is that it is premised on the existence of a court which no longer exists the court of Chancery which administered equity doctrines developed by chancellors and other equity judges.

secondly the quarter Chancery never had or save possibly in the earliest period of the chancellor's jurisdiction any general power to correct a common law rule when the rule cause injustice. equitable interventions is significant in some areas of lower particularly property law but slight in others such as tort law. precisely when equity modifies the law is not deducible by logical proposition.

The emergence of institutional equity mediaeval origins

the real difference between the common law and equity in its formative stage concerned not substantive law but the procedures applied by chancellors to obtain evidence. the failure to comply with the summons would render the defendant liable for contempt of court. evidence was taken by interrogatories one of them (questionnaires) or written depositions. the chancellor did not work with a jury. in practise he collected evidence until he had obtained enough to justify taking action.

The 15th century when these procedures were developed was the period in which users (or trusts) of land were enforced by chancellors. disputes typically arose when the feoffee (trustee) of land, He was bound to hold the land for the benefit of the cestui qu trust (beneficiary), Claim the land for himself. a plum proof of the terms of the trust the chancellor made orders to protect the beneficiaries interest in land. the basic feature of the law of trusts therefore emerged from the orders made by the chancellor to protect the interests of beneficiaries. chancellors enjoyed considerable discretion in making orders. Chancery was a court of conscience in which defendants could be compelled to do whatever conscious required. conscious did not however mean arbitrary justice an chancellors generally followed the practise of their predecessors where there were known.

Competition between common law an equity

Chancery jurisdiction rested on sovereigns prerogative power to administer justice which was challenged by parliament increasingly inclined to test the limits prerogative. The relationship between common law and equity was settled. equity was said to be a gloss on common law, modifying the common law where the enforcement of legal rights was harsh or oppressive but not claiming to be a parallel or rival system of law.

Reform and the at judicature legislation

the enactment of judicature legislation is a landmark inequity but the limits of the legislation need to be kept clearly in mind . The legislation was never intended to fuse or integrate legal and equitable rights. To justify the merger of legal and equitable rights by Reference to the legislation has been described as fusion fallacy. An example of fusion Fallacy Mr assumed that a contract to create a lease enforceable in equity because it has been partly performed by the tenant confers the same rights and imposes the same duties as a common law these created by the execution of a deed. regardless of whether or not it is Fallacy it is certainly a misreading of history the legislation would not have been enacted in the first place if its declared purpose had been to merge the substance of common law and equity.

the reception of equity in Australia

The immediate need of the earliest British settlers in Australia was to establish a stable legal order. The first charter of justice in 1787 created a court of civil judiciature which did not distinguish between common law and equity. when you South Wales act 1823 confired on uni created Supreme Court the power to exercise locally the jurisdiction that the chancellor exercise in England stop the influence of a particular person alatis shaped the administration of equity within the Supreme Court framework as much as any consideration relating to the place of equity within common law system . It was pressure exerted by the state's first equity judge Willis J which resulted in the provision for the appointed of primary judge inequity by the administration of Justice Act 1840 . The identification of a judge as the primary judging equity later the Chief Justice in equity encouraged the growth of an equity bar specialising in matters coming within the judges jurisdiction such as Chancery in England stimulated the creation of a Chancery bar.

The NSW experience was different both because judicial resources permitted equity specialisation and the specialisation in turn reflected the volume of commercial an property litigation in Sydney which ensured a heavy workload for the equity judge.

The judicature legislation in Australia

while most Australian states will content to apply the English system of equity there were some imaginative early attempts to improve on the model the most interesting of these was SA Supreme Court procedure act 1853 enacted 20 years before the English judicature scheme was introduced. It anticipated that legislation by conferring powers on the Supreme Court in any proceedings to make orders are specific performance of agreements or to grant injunctions section A175 went even further in permitting actions at law to be brought to enforce exclusively equitable obligations such as breach of trust.

In NSW the system of separate equity administered in a court applying special equity procedures continued until 1972. It made workable by the enactment of scissors and paste measures which ameliorate the worse defects of a separate system of equity. Judicature legislation was eventually enacted in 1970 and 1972.

the place of equity in modern law: there are two related conclusions that can be drawn from this brief account of the history of equity. first is that the subject matter of equity can only be determined by reference to legal history and it cannot be logically deduced from general propositions. second is the existence of a separate body of equitable principles means that such of Australia private law exhibits a dual character. Large parts of the law including contracts and property law drawn from both common law an equity. Whether the dual system of common law and equity should be preserved in whole or in part in the 21st century is a question that every lawyer and law student interested in rational development of law should consider.

a map of equity

we now turn to the task of describing the existing dual system of common law and equity. The equity students most immediate need is an overview which identifies those areas of private law which are equitable in character.

Equitable remedies

It has been said that inequity right and remedy are indissolubly Connected, and equitable doctrines cannot be properly understood without a good understanding of the remedies available to the successful plaintiff. For example, a claim for breach of fiduciary obligations maybe it acted onto an action for breach of contract in an attempt to compel the defendant to account for gains made or property acquired as a consequence of the breach. Equity claims are remedy driven in the sense that attempts are made to characterise defendants as equitable wrongdoers for the purpose of obtaining a distinctive equitable remedy such as an account of profits or a constructive trust. The number and distinct rimado aims of equitable remedies sometimes referred to as smorgasbord in contrast to the common mode which only makes awards of damages encourages attempts to feed the fact of a case to the criteria of a particular doctrine in order to achieve the Roma dual outcome desired by the plaintiff. If the remedy driving is a success it may result in distortion of fundamental ideas of equity. Generally speaking Australian judges have not permitted basic equitable concepts to be stretched or distorted solely for the purpose of enabling a plaintiff to obtain relief which is unavailable at common law it is however important for you to be aware of the remedies available for all equitable claims an understanding of and equitable relief is the key to understanding equitable doctrines and principles .

Fundamental distinction is made between exclusive jurisdiction and the auxiliary jurisdiction of equity.

The exclusive jurisdiction of equity consists of matters which prior to the judicature Legislation could only be adjudicated upon by Chancery and not find common law courts . They include the enforcement of trustan other traditionary obligations equitable obligations of confidence and the rescission of contracts on equitable grounds such as misrepresentation an unconscionable conduct. Only equitable remedies can be awarded when equity acts in its exclusive jurisdiction . Commonwealth damages are not available although equitable compensation a monetary remedy compensating for financial loss caused by a breach of equitable obligations can be ordered.

equity acts in its auxiliary jurisdiction when it acts in support of legal rights. this most common often occurs when a store or breach of contract has been committed and common law damages are an inadequate remedy for the playing field . The plaintiffs legal rights are then enforced by the award of an equitable remedy. the remedy also specific performance will be granted for example to enforce a contract for the sale of land because damages are as a matter of course considered inadequate to compensate for the breach. Similarly an injunction will be awarded to restrain the Commission of trespass to land because damages will usually be an insufficient remedy. the distinction between exclusive and auxiliary jurisdiction of equity creates a hierarchy of remedies. Only equitable remedies can be awarded in exclusive jurisdictions common law damages are never available. in auxiliary jurisdiction however a court considers whether damages will adequately compensate for the plaintiff's loss and only if the remedy is not adequate will the award of an equitable Remedy be considered. damages for breach of contract are inadequate if a monetary award will not enable the plaintiff to purchase a market substitute for the defendant's performance. the order of specific performance or an injunction compels the defendant to perform his application under a contract or prevent a breach of duty owed by the defendant to the plaintiff. without hierarchy of remedies ought to exist is controversial question which equity students should consider. Opponents of hierarchy argue that the only basis on which any remedy should be awarded is it appropriate nice to do justice on facts of the case. the objective of most common law claims is simple it is to obtain compensation for plaintiffs loss.

Contract

the common law determines the existence of a contract and the rights and obligations Off contracting party but equity modifies contractual obligations and provides relief first for breeze and whether plaintiffs consent to the agreement has been vititated. the principle areas of equitable intervention are as follows

the creation and modification of employers civil promisee obligation the common law rule of offer and acceptance consideration an intention to create legal relations determine which comments are legally enforceable

setting aside contracts on the ground that a parties concert was vitiated five quote dressed unconscious nabble conduct undue influence mistake misrepresentation and in some cases were a guarantee in entered into without a full understanding of its nature and effects

recitification of the terms of everything contract where they do not conform to the agreement the parties made

assigning the benefit of the performance of contractual obligations in equity

preventing this appropriate release of a plaintiff as a result of the defendants breach of contract

enforcement of the contract or its particular provisions

property

equities principal contribution to property law is the trust which imposes obligations on a title holder of a property to manage the property for the benefit of other individuals or for legally approved purposes such as charitable purposes. apart from trust equitable interventions includes

the recognition and enforcement of equitable titles to property the common law fee simple life estate leads mortgage and can also created as equivalent equitable interest in property

equity also recognises and enforces new interest in property which have no common law counterpart

the creation of special rules governing the assignment of property interests

the recognition and enforcement of property re interest by application of the doctrine of equitable estoppel

the application of special rules known as tracing rules to identify a claimaint its property

equitable intervention in law of the deceased estates

civil wrongs

equity also relieves against the consequences of forms or wrongdoing that are only recognised in equity. the principle equitable wrongs are

breach of fiduciary obligation

Equitable relief is not limited to the fiduciary who has committed the breach of obligation

Breach of confidence

civil procedures

the final category of equitable intervention is equities regulation of civil litigation. the principle application are

contribution

subrogation

Marshalling

The maxims of equity

a peculiarity of equitable legal methods is that some of the principles applied by the court ah encapsulated in maxims which are often recited in judgments applying the principles what are these maxims and what is their status inequity adjudication ?maxims are not equitable principles still less rules an equity and trust problems cannot be solved solely by reference to a maxim in fact maxims are apt to mislead without knowledge of the authorities which give practical application to their content. the maxims expressed in concise form certain policies that inform the application of equitable doctrine . They are no substitute however for the precise application of equitable doctrine to the facts of the case.

in the case of corin v patton For example the application of the maxims that equity will not assist a volunteer this case raised the issue of when equity will give affect to a transfer of property when the transfer is not legally effective because there has not been full compliance with statutory formalities. The principle of not assisting parties who have not provided consideration was held to be irrelevant to the resolution of that issue . Returning to the first question there is no fixed list of maxims and some are more significant than others commonly invoked maxims include the following:

she who seeks equity must be equity a plaintiff claiming equitable relief must perform or be ready to perform her obligations arising out of the subject matter of dispute

he who comes to equity must come with clean hands eh plenty of will be refused equitable relief if his conduct in the transaction in respect of which he is claiming relief has been improper

equity looks to intend rather than to form this maxim is too open to several interpretations one is that a court of equity examines a substance of a court applying common law As well as equity will focus on the substance of a transaction where it has been concealed by its form

equity treats as done that which ought to be done the idea in forming this maxim is that a transaction may give rise to equitable rights even though no legal rights have been created because there has not been compliance with the necessary legal formalities

equity acts in personam the principle significance of the maxim is historical in that all equitable rights were once considered to be personal rather than proper Terry just as the right to performance of a contract in personal

equity follows the law courts of equity recognised legal rights interest Anna states although they will prevent the unconsciousness exercise of these entitlements

equity does not assist a volunteer the word volunteer means in the context where someone who has not provided consideration

delay defeats in equity the impact of claimants delay in bringing an equitable claim

Week one tutorials (answers in textbook)

Why do you think the principles and concepts of equity concentrate upon achieving fairness, ethics and morality?

The goal of law is to provide justice universally.

Why was the application of the common law in the Kings Courts so rigid?

Why was the appointment of Sir Thomas More in 1535 a significant point in the development of equity?

Explain the circumstances and facts of the Earl of Oxfords Case (1615). If James I had decided in the Lord Chief Justices favour, what difference would this have made to modern equity?

Explain the effects of the Judicature Act UK (1873).

the Judicature Act provided that the courts of common law and those of equity should be merged so that any single court could rule on any question, no matter whether it related to principles of equity or to rules of common law.

Can you think of any reason why the Judicature Act was not applied in New South Wales until 1970?

What is a fallacy?

A fallacy is the use of invalid or otherwise faulty reasoning in the construction of an argument which may appear to be a well-reasoned argument if unnoticed.

Why is notion that the Judicature Act fused the common law and equity a fallacy?

The term fusion fallacy is given to decisions where the courts, in considering the effects of the judicature system, have made an error of judgment. The judicature system fused the procedures of common law and equity.it did not change the substantive law. At common law there is only one remedythat is, damages.

Would the substantive fusion of common law and equity in Australian courts disadvantage litigants?

Week two: principles and maxims

Topic:

The maxims of equity

Equitable fraud

Unconscionability

Property in equity

Trusts and constructive trusts

Maxim is a short statement that encapsulates a basic principle.

Equity has 14 maxims

Equity will not suffer a wrong to be without a remedy

Equity follows the law (equity prevails over law)

He who seeks equity must do equity

He who comes to equity must come with clean hands

Equity aids the viligant (or diligant) and not the tardy

Delay defeats equity

Equity is equality

Equity will not assist a volunteer

Equity will not perfect an imperfect gift

Equity looks to the internet rather than to the form

Equity looks on that as done which ought to be done

Equity acts in personam

Whos is first in time takes precedence (qui prior est tempore potion est jure)

1. EQUITABLE PRINCIPLES AND MAXIMS

A. THE MAXIMS OF EQUITY

The maxims of equity are general statements which encapsulate the basic equitable principles and precepts upon which the doctrines of equity are founded.

Maxims seem to have been articulated first in the 17th and 18th Centuries and have been described as a symptom of the hardening of equity during the Systemization period (see notes week 1).

It must be noted that although maxims provide an insight into the nature of equity and exemplify the approach taken by equity in resolving disputes, the maxims are not rules or principles in themselves and cannot give specific answers to specific problems.

In Corin v. Patton (1990) 169 CLR 540, 557, it was stated (Mason CJ and McHugh J) that in relation to the maxim that equity will not assist a volunteer:

Like other maxims of equity, it is not a specific rule or principle of law. It is a summary statement of a broad theme which underlines equitable concepts and principles. Its precise scope is necessarily ill-defined and somewhat uncertain.

The value of the maxims lies in the fact that they reflect certain fundamental ideas and values of the equitable jurisdiction. Some of the maxims may also be raised as defences: for example, the clean hands maxim (see below).

Sometimes, there is an extension of well-recognised and accepted equitable principle to new cases and subject matter or unforeseen circumstances. This factor underlies the flexibility of equity and the wide discretion accorded to judges.

Therefore, judges might refer to equitable maxims in order to demonstrate how a modern decision is based on well-established equitable principles.

The list of existing maxims is not exhaustive or definitive (in the 18th century there were said to be 181 maxims). Although different commentators have argued for or against the existence of certain maxims, the following list contains the maxims that are most widely accepted and recognised.

Equity will not suffer a wrong without a remedy

This maxim has more historical than current significance, although it foes illustrate equitys role as the conscience of the law.

During the early years of equity, the plaintiff would seek the assistance of Chancery on the grounds that he or she suffered a wrong for which no remedy was available at common law so equity had to intervene.

However, this maxim can be slightly misleading in the sense that courts of equity did not invent a remedy solely because the plaintiff had suffered a wrong for which no remedy was available. Rather, the judges attempted to apply one or more of the existing remedies to each individual situation.

Furthermore, wrong probably refers to behaviour which is contrary to law, not morality.

The maxim is not as significant today as in the past, due to:

the development of precedent in equity and

the reluctance of courts to create entirely new equitable rights and remedies.

For an enlightening discussion of equitys contemporary ability to create new remedies, see the Kirby Article, 453 (see Week 1 materials folder).

Equity follows the law

This maxim illustrates the fact that equity recognizes common law and statutory rights, interests and titles, and will enforce them where necessary.

However, as we shall see later, equity will not allow the holder of common law or statutory rights or interests to exercise or enforce those rights in an unconscionable manner.

For example, where a trustee is holds legal title to property, equity recognizes the trustee as the owner in the legal sense, but will nevertheless enforce the equitable rights of the beneficiaries over the trust estate.

Equity, therefore, imposes on the legal owner-trustee certain obligations that require that those legal rights are exercised in a particular way for the benefit of the beneficiaries: DKLR Holdings Co (No 2) v. Commissioner of Stamp Duties [1980] 1 NSWLR 510, 519 (Hope JA).

Also, it should be noted that where there is a conflict between equity and the law, equity will prevail (Earl of Oxfords Case). This principle is enshrined in the Law Reform (Law and Equity) Act 1972 (NSW) s 5.

He who seeks equity must do equity

This is one of the most important maxims of Equity.

This maxim requires the plaintiff to do equity, in other words to act in a conscientious, reasonable and fair manner in all matters related to the issue before the court. It highlights the fact that equity is a court of conscience.

This maxim also emphasizes an important distinction between common law and equity in that equity can offer conditional relief by prescribing that plaintiffs who seek an equitable remedy can only do so on the condition that they fulfil their own legal and equitable obligations arising out of the subject matter of the dispute.

This maxim finds many applications.

For example, a plaintiff seeking specific performance (which is an equitable remedy):

1. must be ready, willing and able to perform his or her own obligations under the contract if the remedy is to be granted and/or

2. must NOT have engaged in any form of conduct which breaches equitable principles e.g. unconscientious conduct.

In other words, doing equity, in the sense of fair conduct, is the price of relief for a plaintiff.

He who comes to equity must come with clean hands

This is an extremely important maxim and is closely linked with the previous maxim. It also acts as an equitable defence which may disqualify plaintiff from receiving equitable relief.

The relevant unclean conduct must bear some relationship (be of sufficient connection) to the dispute, although it need not amount to something legally wrong.

For example, specific performance of a contract will be refused if the plaintiff procured the contract by equitable fraud, such as unconscionable conduct (even if the defendant has not sought to rescind the contract). BUT a remedy will not refuse domeone a remedy just because they have a criminal record.

An illustration of this maxim can be found in the case of Harrigan v Brown [1967] 1 NSWR 342.

Facts: The plaintiff was the manager of a pop group and sought an injunction (an equitable remedy) to restrain the group from employing a rival manager.

Injunctive relief was refused because the plaintiff had failed to keep the accounting books to a good standard (contrary to the agreement with the group), although the breach of contract by the manager was not sufficient to amount to a repudiation of contract.

A plaintiff who has once been guilty of unclean hands is not permanently barred from equitable relief.

Plaintiffs may wash their hands by showing that the misconduct either:

(a) ceased well before the suit was brought to court; or

(b) it occurred by accident and will not recur; or

(c) make an undertaking to the court that they will remediate the wrongdoing see Nelson v Nelson.

This washing may be achieved by the imposition of terms on the plaintiff, as in

Rhodes v Badenach [2000] TASC 160

Facts: The Plaintiff lived in a cottage on part of the deceaseds land for 15 years.

During this time he made improvements to the cottage and the land, acting in the belief that the deceased would devise the cottage to him.

At the same time, the plaintiff was fraudulently receiving unemployment benefits.

The owner of the land died without leaving the cottage to the plaintiff.

The Plaintiff sued for equitable compensation

Held: that the Plaintiff was entitled to an amount of compensation, but conditionally on him repaying all amounts fraudulently received.

In Nelson v Nelson (1995) 184 CLR 538 the High Court gave an explanation as to what constitutes unclean hands in relation to a breach of statute.

Equity aids the vigilant (or diligent) and not the tardy

Delay defeats equity

These two maxims are related and emphasize the fact that equity gives assistance to those who act promptly and diligently, within a reasonable time.

Mere delay has not been regarded as a bar to equitable relief, but equitable relief will be denied when there is undue or unexplained delay, since the court may hold that failure to act promptly indicated to the defendant that the plaintiff acquiesced to the situation.

These two maxims have given rise to the equitable defences of laches and acquiescence.

Equity is equality

Equality here means proportional equality not literal equality.

This maxim has many applications.

For example, in Hemmes; Cameron v Mead [2018] NSWSC 85 (9 February 2018) Lindsay J awarded the ex-nuptial son of the deceased $1.75 million from a fund of $4 million, even though:

there was no testamentary disposition for the plaintiff in the Will

the fund was the only liquid asset in the estate;

the deceased had refused to have contact with the plaintiff,

on the basis that the plaintiffs half siblings had received a financial gift from the deceased prior to his death, the plaintiff had tried repeatedly to see the deceased before his death and the plaintiff had certain financial needs.

Further, equity aims to ensure that if a plaintiff is awarded equitable compensation, it is fair and just compensation vis a vis the defendant, as well as the plaintiff. Equity is not a punitive jurisdiction and does not seek to punish, merely to achieve justice between the parties.

h. Equity will not assist a volunteer

This maxim holds that equity will not make its remedies available to a plaintiff who has not given consideration (value)

For example, a plaintiff will not be granted specific performance of a promise for which no consideration has been paid. In other words, equity will not give something for nothing.

However, the consideration does not need to be actual money, but may take the form of services, goods or even a signature on a deed a formal document..This is an illustration of the maxim below, i.e. that equity looks beyond the form to the intent.

i. Equity will not perfect an imperfect gift

This maxim is closely related to the one above and means that where a donor has made a gift which fails at law or in equity, equity will not render the gift effective unless the rule in Milroy v Lord (1862) 4 De GF & J 264 can be applied. Basically, this rule states that where the donor has done everything that is within her/his power to assign legal property and the assignment fails at law, equity will complete the gift.

Equity looks to the intent rather than to the form

This maxim demonstrates that courts of equity make a distinction between matters of substance and matters of form. The word form refers to the formal statement of the parties rights and obligations as set out in a document. Substance means the intentions of the parties in regard to those rights and obligations.

If a court of equity finds that insistence on the form (for example, a contract) will defeat the substance (the intentions of the parties), then equity will not allow a party to insist on the rights set out in the document, i.e. the form.

There are many applications of this maxim.

For example, where a vendor of land fails to complete on the day fixed for completion, at common law the vendor would be in breach of contract. In equity, however, it will suffice if the vendor is ready to complete within a reasonable time after that day (see Solomons v Halloran (1906) 7 SR (NSW) 32, 42-3 (Street J)).

However, as a qualification to the universal application of the maxim, please note that it would be incorrect to assume that equitys preference for substance over form is unlimited. For example, in the case of Byrnes v Kendle (2011) 243 CLR 253; (2011) 279 ALR 212, the High Court held that in the interpretation of a trust instrument, the court may only make a decision based upon what the document states it cannot take into consideration surrounding circumstances or intentions of the parties.

Further, it is generally accepted that there is no general equitable jurisdiction to construe contracts so as to give effect to the intention of the parties if it is clear that the parties agreed on the form of the contract. (MGL, 112)

Equity looks on that as done which ought to be done

This maxim also finds many applications and is the basis for the remedy of specific performance.

For example, where a contract requires something to be done, equity will proceed as if the thing were already done in order to prevent injustice to one of the parties.

Further, when a person, A, has agreed to take a lease for valuable consideration and the consideration has been paid, if the other party, B, refuses to complete the lease, equity will treat A as if he were a lessee.

This is the doctrine of Walsh v. Lonsdale (1882) Ch D 9; [1881-5] All ER Rep Ext 1690.

However, the applicability of the maxim is limited to circumstances where that which ought to be done can be done.

It would be incorrect to think that equity will regard as done that which no court (of law or equity) would ever order to be done.

Therefore, the maxim finds application in cases where a party would have a right to seek the enforcement of the contract in equity. Accordingly, volunteers are unable to take advantage of the maxim.

For that proposition see: Re Anstis (1886) 31 Ch D 596, 605-6 (Lindley LJ).

(MGL, 114).

Equity acts in personam

At common law, a person who holds legal title to property has rights in relation to that property against the whole world thus, it is said that the common law acts in rem.

For example, if you own a car, you alone hold the legal rights attaching to ownership and if someone infringes those rights, no matter who it is, you can go to common law for a remedy.

In equity, however, equitable rights are only enforceable against a particular person. Thus, it is said that equity acts in personam.

For example, because the proprietary rights of a beneficiary under a trust historically were not recognised under the common law, the only person against whom the beneficiary can take action in regard to an infringement of these rights is the trustee.

m. Who is first in time takes precedence (qui prior est tempore potior est jure)

n. Where the equities are equal the law prevails

Both of the above maxims relate to determining priorities when there are competing interests.

The first states that where equitable interests are equal, the first in time will take precedence.

The second holds that where the merits (i.e. equities) of competing legal and equitable interests are the same, then the legal interest will prevail but only if the legal interest was acquired bona fide for good value and without notice of the prior equitable interest.

We will look at priorities briefly later in the subject. You will also encounter the principles relating to priorities in Property Law.

B. EQUITABLE FRAUD

Fraud in equity is a very different concept from fraud at common law. It is much wider and, as a concept, emphasises the differences between equity and the common law.

Common law fraud requires proof of conscious dishonesty, i.e. there must be an element of mens rea. Therefore, a party alleging fraud must show that some false representation has been made in the knowledge that it was untrue (or at least with reckless indifference to its truth or falsehood: Derry v Peek (1889) 14 App Cas 337. This element of knowing dishonesty restricted common law actions for deceit to a narrow field and a heavy onus was placed on a plaintiff seeking to avoid a contract for fraud at common law.

Equitable fraud, however, includes not only unconscionable conduct, but also any behaviour which is unjust, unfair and which breaches equitable principles.

Thus:

[u]ndue influence is only one of the instances of fraud; and undue influence itself is manifested in a variety of ways but it is still in all cases bottomed in [equitable] fraud:

Symons v. Williams (1875) 1 VLR (E) 199, 216 (Barry J).

Equitable fraud was described by Lord Haldane in Nocton v. Ashburton [1914] AC 932 as follows:

. . . while Equity exercised concurrent jurisdiction in cases of actual fraud, it also had exclusive jurisdiction in cases not necessarily involving intentional fraud. Fraud when used in this wider sense meant, not moral fraud in the ordinary sense, but a breach of the sort of obligation which is enforced in a court of Equity. No actual intention to cheat need be proven. It was sufficient if a person misconceived the extent of an obligation imposed on him or her by a court of equity, the fault being that that person violated, however innocently, an obligation which he or she must be taken by the court to have known.

Facts: Nocton, a solicitor, advised Lord Ashburton to release a parcel of land subject to a mortgage in Lord As favour to assist a building development on the site. The release of the mortgage also had the effect of promoting a second mortgage in favour of Nocton on the same property. This, however, had not been the intention of Nocton when he gave Lord A the advice.

Upon default, Lord As remaining security proved insufficient and he sued Nocton.

On appeal it was held that Nocton had breached his fiduciary duty to Lord A and was liable to indemnify Lord A for the loss. It was immaterial that Noctons intentions in giving the advice were bona fide. The breach of fiduciary duty constituted equitable fraud.

The operation of the principle of equitable fraud stated by Lord Haldane in Nocton v. Lord Ashburton can be seen in both Keech v. Sandford (1726) 25 ER 223 and Boardman v. Phipps [1967] 2 AC 46.

C. UNCONSCIONABILITY

The concept of unconscionability

As we have seen, one of equitys historical roles was to act as the conscience of the law and to prevent injustice by providing remedies not available at common law.

The term unconscionability means against conscience, wrongful and unjust and is used to describe a number of different scenarios.

Firstly. it is used to describe a situation in which a party derives a benefit at the expense of another. For example, A and B live together in Bs house (i.e. B holds legal title). A spends $20,000 on renovating the bathroom. A and B then separate - B refuses to recognise As contribution to the increase in the value of the house. Pursuant to common law, B does have any tight I or to the property. However, in equitable terms, it would be unconscionable to allow B to retain the benefit of As contribution.

Secondly, it is used to describe a certain type of behaviour which is not only against conscience, but also behaviour which results in the wrongdoer gaining an advantage.

Thus, unconscionable transactions are those transactions brought about by wrongful conduct.

For example, A is elderly and frail. She is cared for on a full-time basis by B. B uses her influence over A to persuade A to assign her house to B. A complies and legal title to her house is assigned to B. At common law, the transaction could not be set aside, provided all the legal requirements were complied with. In equity, however, Bs use of her power over A is against conscience and wrongful and the transaction can be set aside.

Despite the importance of the concept of unconscionability, it is not a cause of action in itself. It is, however, the BASIS of a number of causes of action, such as undue influence and unconscionable or unconscientious conduct.

C. THE CONCEPT OF PROPERTY IN EQUITY

[T]he approach traditionally adopted by equity has been to retain flexibility so as to accommodate [] and deal with the almost infinite variety of interests that may arise for consideration by a court of equity: Burns Philp Trustee Co Ltd v Viney [1981] 2 NSWLR 216, 223-4.

The concept of property in equity is different from that at common law. This difference in the nature of property highlights the fact that equity is a separate system of principles and doctrines.

(a) Property at common law

In National Provincial Bank Ltd. v. Ainsworth [1965] AC 1175, 1247-8; [1965] 2 All ER 472, 494, Lord Wilberforce stated that:

Before a right or interest can be admitted into the category of property [at common law] or of a right affecting property, it must be:

definable,

identifiable by third parties,

capable in its nature of assumption by third parties, and

have some degree of permanence or stability.

Thus, at law, property has an almost tangible quality.

For example, if you have bought a new car and have paid the full purchase price from your bank account, you OWN it. This means that you and no one else hold all the legal rights, title and interests in the car.

(b) Property in equity

In equity, however, the concept of property may seem vague and amorphous.

Equitable property or an equitable interest is any interest in real or personal property that is held and has been created pursuant to the application of equitable principles.

For example, your friend lends you $5,000 to help you purchase the car. You put the money in your bank account and then buy the car.

You hold legal title to the car. This is the only interest that will be recognised AT LAW. However, your friend lent you $5,000 so your friend has an interest in the car to the value of $5,000. It is highly arguable that this interest will be recognised and enforced in equity.

A more common example of this is the interest of a beneficiary in the property of an express trust. In an express trust, the TRUSTEE holds the legal title to the property i.e. the trustee owns it. The beneficiaries, however, have an equitable interest in the property that is they have an interest which is enforceable IN EQUITY but NOT AT LAW. (Dont worry too much about the concept of a trust, we will be looking at this in more detail later.)

Traditionally, therefore, equitable interests are enforceable only in equity.

(c) The concept of a TRUST

Although we will be looking at trusts in more detail from Week 7, it is useful to briefly explain the concept of a trust.

A trust is an arrangement whereby one person, the TRUSTEE, holds the legal title to property for the benefit of one or more other people, the BENEFICIARIES. For example, Fred is the LEGAL owner of a house. His name is on the title and his ownership is recognised at common law and by statute. However, Fred is holding the property for the benefit of his niece and nephew, who are minors. Although their equitable interest in the house is not recognised at common law, it is enforceable in equity. Also, equity imposes certain duties upon Fred in his management of the property.

(d) Constructive trust

A constructive trust is an equitable remedy. It is imposed by a court of equity over property that has been acquired in breach of equitable principles e.g. by a fiduciary in breach of their duty. When a constructive trust is imposed, the constructive trustee is subject to all the duties of an ordinary trustee.

Week 2: tutorial questions

1. How did equity originate?

2. How do the origins of equity affect the way it operates today?

3. Is there a conflict between the principle developed from the Earl of Oxfords Case and the maxim equity follows the law?

4. Do you think that allowing a person to wash their hands clean (Nelson v Nelson) is equitable?

5. Why will equity NOT assist a volunteer?

6. Why is the maxim equity looks on that as done which ought to be done still important?

7. How does the concept of equitable fraud differ from common law fraud?

8. Explain the difference between the concepts of property at common law and in equity.

Why is there such a striking difference in the concept of property in the two jurisdictions?Week 3: Fiduciary relationships

A. FIDUCIARY RELATIONSHIPS

1. INTRODUCTION TO FIDUCIARY RELATIONSHIPS

The concept of fiduciary obligations arose out of equitys concern with moral and ethical behaviour, and the importance of ensuring that those placed in positions of power, trust and responsibility do not abuse the position for personal gain (compare to unconscionable conduct). A fiduciary relationship is therefore a relationship of utmost trust and confidence, such as the relationship between a solicitor and client.

The word fiduciary has its origins in the Latin fiducia, which means trust or confidence. In a relationship of trust and confidence, the party in whom trust and confidence is reposed is called the fiduciary. The person relying upon the fiduciary is the principal or object of the duty. A fiduciary must not use his/her position within the relationship in order to receive a benefit for him or herself. The confiding party or principal may seek the intervention of equity to prevent a fiduciary from receiving an advantage because of an abuse of the fiduciary position.

In Maguire v Makaronis (1997) 188 CLR 449, 465; 144 ALR 729, 738 (Brennan CJ, Gaudron, McHugh, Gummow JJ) it was noted that:

Equity intervenes not so much to recoup a loss suffered by the plaintiff as to hold the fiduciary to, and vindicate, the high duty owed to the plaintiff [T]hose in a fiduciary position who enter into transactions with those to whom they owe fiduciary duties labour under a heavy duty to show the righteousness of the transaction.

The rationale for this approach is that it would be unconscionable to allow a fiduciary to profit from his or her breach of duty. Therefore, the question of whether the object of the duty has sustained a loss as a result of the breach is irrelevant.

2. NATURE OF FIDUCIARY OBLIGATIONS

The duty imposed by equity on a fiduciary is extremely strict. In Aberdeen Railway Co v Blaikie Brothers [1854] 1 Macq 461, 471; [1843-60] All ER Rep 249, 252 (Lord Cranworth) it was noted that:

[a] fiduciary will not be permitted to enter into engagements in which he has, or can have, a personal interest conflicting, or which possibly may conflict, with the interests of those to whom he is bound to protect.

It is irrelevant whether there was any intention on the part of the fiduciary to defraud or act contrary to his or her duty (Nocton v Lord Ashburton [1919] 2 KB 822). The relevant question, therefore, is not whether the fiduciary acted wrongfully deliberately, but whether the fiduciary has acted in breach of duty regardless of his or her intention (see Boardman v Phipps below).

Therefore, the position of a fiduciary is one of strict liability.

It has been said that the fiduciary obligation must be one of undivided loyalty: Beach Petroleum v Kennedy (1999) 48 NSWLR 46-7.

In Australia, a fiduciarys obligation does not impose positive legal duties on the fiduciary to act in the interests of the person to whom the duty is owed: Breen v Williams (1996) 186 CLR 71, 113; 138 ALR 259, 289 (Gaudron and McHugh JJ).

An example of a fiduciary relationship and the accompanying fiduciary duty, is to be found in the rule in Keech v Sandford (1726) Sel Cas T King 61; 25 ER 223.

Facts: A lease to a property was held upon trust. Upon expiration of the lease, the trustee sought renewal of it for the benefit of his beneficiary. However, the owner of the property refused to renew the lease for the benefit of the beneficiary because of the beneficiarys wild and disruptive behaviour. The trustee then sought renewal of the lease for his own benefit.

The beneficiary claimed that the trustee was in breach of his fiduciary obligations by renewing for his OWN benefit, despite the fact that the landlord did not wish to renew the lease for the purpose of the beneficiary.

Held: by Lord King LC, the trustee held new lease upon the same trust as the old lease, even though the lessor had refused to renew for the benefit of the beneficiary.

The trustee of a tenancy (lease) who obtains a right to renew the tenancy, holds the legal right to renew on constructive trust for the beneficiaries. In other words, the trustee cannot renew lease for his or her own benefit. This is because there arises a conflict between the duty to do his or her best to obtain a renewal for the beneficiary and his or her own interest (known as a conflict of interest). This is an absolute rule for the protection of beneficiaries. Therefore, the trustee held the new lease on trust for the beneficiary.

Upon renewal, an irrebuttable presumption arises that the renewal or new lease is held on trust.

However, in Chan v Zacharia (1984) 154 CLR 178, 201 (Deane J) it was stated that:

[t]he Keech v Sandford doctrine is an irrebuttable presumption . . . for trustee-fiduciaries, but a rebuttable presumption of fact for non-trustee fiduciaries (e.g., business partners).

Thus, in Chan v Zacharia, the Keech v Sanford rule was applied as a rebuttable presumption of fact, because the parties were partners. However, where the fiduciary is a trustee, the rule is applied as an irrebuttable presumption.

The rule in Keech v Sandford extends beyond trustees to other fiduciaries such as agents, executors, business partners, solicitors, and anyone else in a position of trust and confidence.

For example, in Boardman v Phipps [1967] 2 AC 46

Facts: In a deceased estate, one of the assets was a parcel of shares in a company. The estate was fully administered and the asset was held by the former executors as trustees. The trustees were Tom Phipps (not the Phipps in the litigation) who was a child of deceased, the widow and an accountant, Fox. Boardman acted as solicitor to the trust. B, acting as solicitor of the trust, acquired information about the viability of a takeover of the company in which the shares were held. Fox, however, was not happy with management of company. Therefore, together with one of the beneficiaries, Boardman tried unsuccessfully to have Phipps elected to the company board.

Fox suggested acquiring more shares to gain control in the company. B advised the beneficiaries of the trust of these plans and no one objected. However, the trustees could not acquire the necessary shares, since court approval was required. B had approval of 2/3 trustees, the 3rd trustee, the widow, was senile. Phipps and B entered into negotiations with directors of the company as representatives of the Trust. Ultimately, an offer was made for the shares by Phipps and B personally, not in their capacity as trustees, which was accepted by the company.

The takeover was successful and improved the profitability of the company, which in turn increased the dividends paid on the shares held by the Trust, and therefore, benefitted the beneficiaries.

One of the beneficiaries (John Phipps) under the trust applied to equity for an account of profits made by B and Phipps, on the basis that they had breached their fiduciary duties.

Held by the H of L: (by a bare majority: Lords Cohen, Hodson and Borth-y-Guest) the House of Lords found in favour of the plaintiff beneficiary.

The questions were

Did the beneficiaries under the will have any interest in the shares that Phipps and B acquired with their own money? YES

Did beneficiaries have any claim against Phipps and B for the resultant profits? YES

Phipps and B acted honestly, but they were fiduciaries. They had placed themselves in a special position (fiduciary) when they negotiated with the company as representatives of the Trust.

Equitable principles

(1) Phipps, as trustee and B, as solicitor, both owed a fiduciary duty to the beneficiaries. Therefore, they held shares as constructive trustees for the beneficiaries

(2) Phipps and B acted in breach of their fiduciary duties. Therefore, they were accountable for any profits made, minus any money, and the value of the time, skill and effort they put into the enterprise.

RATIONALE: The information about the company acquired by the trustees was Trust property It enabled them to perceive the opportunity for profit. It was irrelevant that the trustees of the Trust were in no position to acquire shares for the Trust There was a conflict between Bs duty and interest.

If a disclosure had been made to, and consent obtained from all the trustees, there would have been no breach. However, consent had not been obtained from the senile widow. Further, informed consent by the beneficiaries was also necessary.

A person who is a fiduciary must not get him or herself in a position where his/her duty to the beneficiaries conflicts with a personal interest. A fiduciary must not use his/her position as an opportunity for personal profit.

3. CATEGORIES OF FIDUCIARY RELATIONSHIP

In Breen v Williams (1996) 186 CLR 71 the High Court held that a doctors refusal to allow patient access to medical records did not amount to breach of any fiduciary obligation.

At 92 (Dawson and Toohey JJ):

There is no precise or comprehensive definition of the circumstances in which a person is constituted a fiduciary in his or her relations with another.

The best example of a fiduciary relationship is that of trustee and beneficiary.

However, there are also other presumed fiduciary relationships. These include:

Agent principal

Solicitor client

Employee employer

Directors company

Partner partner

Accountant client

Mortgage broker - client

It is important to remember that the categories are not closed, and the court may find a fiduciary duty in any relationship, which in the circumstances, evidences the required degree of trust and confidence being placed in one party by another. However, the relationship between health care professional and patient is NOT a fiduciary relationship.

0127000In Hospital Products Ltd. v United States Surgical Corporation (1984) 156 CLR 41, 96-7; 55 ALR 417, 454 Mason J stated:

The accepted fiduciary relationships are sometimes referred to as relationships of trust and confidence or confidential relations The critical feature of these relationships is that the fiduciary undertakes or agrees to act for or on behalf of or in the interests of another person in the exercise of a power or discretion which will affect the interests of that other person in a legal or practical sense. The relationship between the parties is therefore one which gives the fiduciary a special opportunity to exercise the power or discretion to the detriment of that other person who is accordingly vulnerable to abuse by the fiduciary of his position. The expressions for, on behalf of, and in the interests of signify that the fiduciary acts in a representative character in the exercise of his responsibility.

Despite the fact that Mason J note that the principal is vulnerable to the abuse by the fiduciary of his position (above), vulnerability is not a requirement for the finding of a fiduciary relationship.

Fiduciary relationships can arise in a commercial context. In News Ltd. v Australian Rugby Football League Ltd (1996) 139 ALR 193, 311 it was noted that Business relationships clearly can attract fiduciary obligations.

However, the courts have traditionally been reluctant to interfere with the commercial arrangements of parties by imposing fiduciary obligations in a relationship of commercial context. For example, in HPI v USSC (1984):

Facts: There was a commercial agreement between a manufacturer and distributor. HPI entered a contract to act as the agent for USSC in Australia. HPIs role was to buy/distribute/promote USSC products. HPI was at the same time getting ready to set up a rival corporation of its own.

Gradually HPI began to provide its own products, taking over USSC client orders. This was clearly in breach of contract and there was subject to a contractual remedy. However, USSC sought relief for breach of fiduciary duty as well

Held by the High Court: the court must take a close look at the terms of the agreement to see for whose interests HPI was supposed to be acting. The majority held that there was no fiduciary relationship between the parties. USSCs only relief was common law damages for breach of contract

RATIONALE: A commercial arrangement between two commercial parties is entered into with expectations that they will protect their own interests, with intention for both to make a profit. It would therefore be inappropriate to place fiduciary obligations on parties in such a context.

However, in the case of UDC v Brian (1985) the HC found that a fiduciary relationship did exist in a commercial context.

United Dominions Corporation Ltd v Brian (1985) 157 CLR 1

Facts: UDC, SPL (Security Projects Ltd) and B were commercial parties in a joint venture to acquire, develop, sell real estate. The agreement was not yet finalised. The land was owned by SPL, and the finance was to come from UDC funds, secured by a mortgage signed by SPL. The balance of finance was to be provided by joint venturers

The development realised large profit, which was claimed and retained by UDC on the basis of a provision in the mortgage of SPL (collateralisation clause), to the effect that the mortgage was security for any money that had been advanced to SPL. SPL was also indebted to UDC in respect of other projects. The collateralisation clause, then unbeknown to Brian, charged the joint venture property with the repayment of the money advanced by UDC to SPL from time to time. B was never informed of the existence of the collateralisation clause. B claimed that the clause breached fiduciary obligations owed to B by UDC and SPL.

Held: The High Court found in favour of B on the basis that UDC could not rely on the collateralisation clause when the share of Brian in the profits of the joint venture project were being computed.

RATIONALE: SPL and UDC owed fiduciary duties to B. UDC could not rely on a cross-collateralisation clause to claim surplus of profits, because this would mean that it was looking after its own interests instead of the venture as a whole. The collateralisation clause was obtained in breach of those fiduciary duties.

Business partners are fiduciaries, but, this does not mean that all joint ventures of commercial parties will be of a fiduciary character. Generally, parties entering into a contract do not thereby acquire fiduciary duties one to the other. In this case, however, each party was under a fiduciary duty to refrain from pursuing/obtaining/retaining any collateral advantage in relation to the proposed project without the knowledge and informed consent of the other participants.

The UK Court of Appeal recently considered whether bitcoin developers owe fiduciary duties to owners of their bitcoin to protect the bitcoin from theft Tulip Trading Ltd v Bitcoin Assoc for BSV [2023] see Head Note in Essential Readings. What are your views?In the Kirby Article (457 459), His Honour criticises the reluctance of Australian courts to expand the scope of fiduciary relationships beyond proprietary interests to include the broader, indeterminate field of personal rights and obligation (459). He gives the example of the Canadian courts which have adopted a broader scope and imported fiduciary duties into the relationships of medical practitioner/patient and parent/child (457). His Honour believes that to a large extent, in Australia, equitys principles increasingly appear historical: frozen in time . . .. (459.

4. THE SCOPE AND CONTENT OF FIDUCIARY RELATIONSHIPS AND

FIDUCIARY DUTIES

1. The relationship between the parties must be examined to ascertain the scope of the fiduciary obligation owed by the fiduciary.

Boardman v Phipps [1967] 2 AC 46,127 (Lord Upjohn)

Hospital Products Ltd v USSC (1984) 156 CLR 41, 102 (Mason J).

The existence of a fiduciary obligation does not determine the relationship completely.

That comes from the circumstances surrounding the relationship. In News Ltd v Australian Rugby Football League Ltd (1996) 139 ALR 193, 312, it was held that a relationship between rugby league clubs and the NRL, of which they were members, was not fiduciary. Thus, whether or not what the fiduciary does is within the scope of the relevant fiduciary obligation is a question of fact in each case.

For example, in Consul Developments v DPC Estates (1975) 132 CLR 373; 5 ALR 231 the High Court held that there was nothing to stop an employee of a solicitor from entering into the business of property development in competition with his employer who also happens to be involved in a similar business. However, the employee could not compete in the legal field of employment, but he could compete in another area.

2. The position of company directors

All company directors owe fiduciary obligations to their companies and, under certain, very limited circumstances to the shareholders. These obligations are now enshrined in the directors duties provisions of the Corporations Act 2001 (Cth).

Regal (Hastings) Ltd v Gulliver [1967] 2 AC 134

Facts: The facts involve an opportunity of which the company was unable to take advantage, because of insufficient funds. Therefore, the directors of RH decided to form subsidiary, intending that the RH hold all shares in the subsidiary and that the subsidiary to acquire a lease of two theatres in neighbouring town.

The directors subscribed personally 3,000 in shares of subsidiary to raise the necessary paid-up capital of the subsidiary 5,000. The directors made a profit from the shares issued personally to them.

RH was taken over and the new controllers of RH argued that old directors had breached their fiduciary obligations by acquiring shares personally.

Held by the House of Lords unanimously: Irrespective of whether or not RH could have purchased the shares, the directors were liable to RH for the profit they made.

At 153 (Lord Macmillan):

The sole ground on which it was sought to render [the directors] accountable was that, being directors of the plaintiff company and therefore in a fiduciary relation to it, they entered in a course of their management into a transaction in which they utilised the position and knowledge possessed by them in virtue of their office as directors, and that the transaction resulted in a profit for themselves. The point was not whether the directors had a duty to acquire the shares in question for the company and failed in that duty. They had no such duty. We must take it that they entered into the transaction lawfully, in good faith and indeed avowedly in the interests of the company. However, that does not absolve them for accountability for any profit which they made, if it was by reason and in virtue of their fiduciary office as directors that they entered into the transaction.

The former directors acquired shares in the subsidiary only by reason of their capacity as directors of RH, and therefore the fact that they were acting bona fide and in the interests of the company, they were still in breach of their fiduciary duty. The shares were therefore held on trust for RH.

3. Particular classes of application / categories of fiduciary obligations

(a) Benefits derived to the exclusion of another renewal of leases the rule in Keech v Sandford

Chan v Zacharia (1984)

Facts: A partnership of two doctors was carried out on leased premises. The Lease was for a 3-year term plus an option to renew for 2 more years (by notice given not later than 3 months before expiry of first term). In the third year of the lease, the partnership terminated and wound up, because one of the partners could not agree to the joint exercise of the option. The remaining doctor took the new lease for his own benefit.

Held by the HC: The lease was an asset of the partnership (see Keech v Sandford). Therefore, the appellant was bound to account in the winding up of the partnership as a constructive trustee for any benefit he received from the new lease. The two doctors were business partners and therefore in a fiduciary relationship.

Deane J. distinguished two aspects of the fiduciary obligation:

the fiduciary not to get in a situation where his personal interest conflicts with the fiduciary obligation (i.e. avoidance of conflict: substantial possibility of conflict)

the fiduciary must account for any profit obtained by use of his fiduciary position or knowledge

In Boardman v Phipps [1967] 2 AC 46, 124, Lord Upjohn was of the view that the possibility of conflict must be a real sensible possibility before the fiduciary will be held accountable.

(b) Fiduciary enters transaction with person to whom he owes the duty

In McKenzie v McDonald [1927] VLR 134, the plaintiff, who was a widow, wanted to sell her farm and purchase a house in Melbourne. The real estate agent persuaded her to swap properties. The swap involved a gross under-valuation of the plaintiffs property and an over-valuation of defendants property.

It was held by the court that there is a general principle that a fiduciary may not deal with those to whom he owes duty, except in cases of informed consent. To get consent, agent should have ensured that the client was properly informed as to the value of the properties.

There is also a general principle that the rule against a fiduciary allowing a personal interest to conflict with the fiduciary duty applies, except if person to whom duty is owed consents. However, it must be fully informed consent (Boardman v Phipps)

Bribe cases [improper profit by the fiduciary]

The principles relating to making an improper profit applies to agents and employees. In Reading v R [1949] 2 KB 232; [1949] 2 All ER 68 (Court of Appeal); [1951] AC 507; [1951] 1 All ER 617 (House of Lords), just after the end of World War II, Reading, a sergeant in British Army, was stationed in Egypt. R used his position to allow trucks to go through security points in the streets of Cairo, transporting and selling contraband goods (liquor), in return for bribes.

It was held by the House of Lords that this was an improper use of his position, and therefore a breach of fiduciary duty owed to the Crown. R was accountable to the Crown for the full amount of the bribes received.

5. THE RULE IN BARNES v ADDY

When a fiduciary acquires property in breach of their fiduciary duty, an account of profits and a constructive trust is held to be the appropriate remedy. However, what happens in regard to third parties who have dealt with or assisted the trustee or the fiduciary in the commission of the breach?

If a third party has purchased legal title to the property for good value, bona fide and without notice of the interest of the beneficiary or principal, there is no liability.

However, when the third party has been involved in some way in the fiduciarys breach, either through receipt of the property or by assisting the fiduciary, the situation is more complex. A third party does not owe a fiduciary duty to the beneficiary or principal. The third party has not taken on any obligations of the trust or the fiduciary, nor has the beneficiary/principal placed any trust/confidence/dependence on the third party.

This problem is addressed by the rule in Barnes v Addy.

Barnes v Addy (1874) 9 Ch App 244

Facts: A trustee, acting under a power in the trust deed, appointed K as sole trustee of part of the trust property, which was held on trust for the wife and children of X. Both the trustees solicitor and of the solicitor of X had warned him that K was unreliable and untrustworthy.

However, the respective solicitors nevertheless prepared the necessary documents. The trust funds entrusted to K were lost.

Held: The solicitors could not be made liable for the loss. No funds had passed through their hands, and there had been nothing fraudulent or dishonest in their actions.

Lord Selborne LC stated the basis for the liability of third parties as a constructive trust of the property:

[The responsibility of a trustee] may no doubt be extended in equity to others who are not properly trustees, if they are found either making themselves trustees de son tort, or actually participating in any fraudulent conduct of the trustee to the injury of the cestui que trust. But, on the other hand, strangers are not to be made constructive trustees merely because they act as agents in transactions within their legal powers, transactions perhaps of which a court of equity may disapprove, unless those agents receive and become chargeable with some part of the trust property, or unless they assist with knowledge in a dishonest and fraudulent design on the part of the trustees.

Categories of knowledge

In Baden Delvaux v Societe Generale [1992] 4 All ER 161, Gibson J set out five categories of knowledge that are relevant to the decision to impose liability upon a third party:

actual knowledge

wilfully shutting of eyes to the obvious (Nelsonian knowledge)

wilfully and recklessly failing to make such inquiries as an honest and reasonable person would make

knowledge of circumstances which would indicate the facts to an honest and reasonable person

knowledge of circumstances which would put a reasonable person on inquiry

1) and 2) are treated as actual knowledge both at common law and in equity

3) is treated as equivalent to actual knowledge.

4) is a type of constructive knowledge/notice: Consul Development P/L v. DPC Estates P/L (1975) 132 CLR 373, 398, 412 (Gibbs and Stephen JJ).

5) is the traditional formulation of constructive notice in equity. It is a purely equitable concept.

There has been controversy as to whether all five categories of knowledge in Baden would satisfy the requirement of knowledge for the imposition of third party liability in cases of knowing receipt or whether just actual knowledge (1) should be the criterion.

For example, in Nelson v Larholt [1948] KB 339; [1947] 2 All ER 751:

Facts: A bookmaker accepted cheques from a punter who was also an executor. The cheques used by the punter to pay his debts were printed with the name of the estate.

Held: The bookmaker was liable as constructive trustee for the estate because of what a reasonable person would know from the facts. He should have known that the cheques were not the personal cheques of the punter. This is behaviour amounts to the wilfully shutting of ones eyes or category 2 in Baden

The concepts of notice and knowledge should not be confused. Knowledge involves some want of probity, for example, shutting ones eyes to the obvious, or wilfully/recklessly failing to make such inquiries as an honest/reasonable person would make. The concept of notice on the other hand, involves merely having a suspicion. For example, categories 4) and 5) from Baden.

It has been argued that since the recipient of trust property gets the full advantage of the breach of trust, liability should be strict: Koorootang Nominees P/L v ANZ Banking Group Ltd [1998] 3 VR 16.

This approach is said to be consistent with the underlying rationale for receipt liability being restitution for unjust enrichment. El Ajou v Dollar Land Holdings [1993] 3 All ER 717 per Millet J

In Polly Peck International v Nadir (No. 2) [1992] 4 All ER 769, 777 Scott LJ noted that:

Liability as constructive trustee in a knowing receipt case does not require that the misapplication of the trust funds be fraudulent. It does require that the defendant have knowledge that the funds were trust funds and that they were being misapplied. Actual knowledge will obviously suffice. The various categories of mental state identified in Badens case are not rigid categories with clear and precise boundaries. One category may merge imperceptibly into another.

2. The two limbs of the Rule in Barnes v Addy

(a) Knowing receipt the first limb of the rule

Strangers who receive some part of trust property become chargeable with that property (hold the property on constructive trust) if it was received with knowledge that the property had been transferred in breach of trust.

If this happens, the plaintiff/ beneficiary must prove that the defendant:

has received trust property

knew that it was trust property and

knew of circumstances which made the transfer of the trust property in breach of trust.

The question arises as to what degree of knowledge is necessary for third party liability under the rule.

The weight of authority is that actual or constructive knowledge (i.e., 1 4) will suffice to establish liability:

Consul Development Pty Ltd v DPC Estates Pty Ltd (1975) 132 CLR 373, at 410 per Stephen J and [1974] 1 NSWLR 443, 459 ( Jacobs P).

Belmont Finance Ltd v Williams Furniture (No. 2) [1980] 1 All ER 393, 412 (Goff LJ).

Baden Delvaux v Societe Generale [1992] 4 All ER 161

In The Bell Group (in liq) v Westpac Banking Corp (No 9) (2009) 70 ASCR 1, it was held that the Bank was liable under the first limb of the rule because it had:

required a restructuring of the loans to the company

on much harsher terms than the previous securities

knowing that the directors would be in breach of their fiduciary duty by agreeing to the terms and

called in the securities when the company went into liquidation.

In Australia categories of knowledge 1 4 are required to attract liability of a third party under the first limb of the rule.

(b) Knowing assistance the second limb of the rule

Essential elements of the liability

existence of a fiduciary duty (as trustee or otherwise)

a dishonest and fraudulent design by the fiduciary/trustee

assistance by third party in that design

[assistance in the design] with knowledge that a dishonest and fraudulent design is being implemented

Until recently, there was some confusion in Australia as to the degree of knowledge required by a third party to attract liability for knowing assistance. On the one hand there are the English authorities, which apply the 5 categories of knowledge as set out in Baden. Further, the Privy Council case of Royal Brunei Airlines v. Tan [1995] 2 AC 378 held that a person who dishonestly procured or assisted in a breach of trust or fiduciary obligation was liable in equity to make good any resulting loss. This added a further element of dishonesty to the equation.

Two cases in Australia served to clarify the position to be taken in Australia (to some degree). These are:

Consul Development Pty Ltd v DPC Estates Pty Ltd (1975) 132 CLR 373 and

Farah Construction Pty Ltd v Say-Dee Pty Ltd [2007] HCA 22; (2007) 81 ALJR 1107.

Consul Development P/L v. DPC Estates P/L (1975) 132 CLR 373

Facts: A solicitor (Walton) controlled a number of companies engaged in the purchase, development and sale of land, including DPC. Grey was the manager of these companies and was precluded by his service agreement from dealing in real estate on his own account

Grey's duty was to find suitable properties for purchase by the companies.

Walton employed Clewes in his legal practice as a clerk. Clewes ran a family company (Consul) which was also engaged in property development.

Grey and Clewes entered into an arrangement that Consul should purchase properties found by Grey and that Grey and Consul should share the profits on sale. Grey had told Clewesw that DPC was not interested in the projects for lack of finance.Plaintiff argued:

that the properties purchased by Consul were held on constructive trust for the Plaintiff (DPC); and

that constructive notice is sufficient to attract the liability of a third party.

At first instance, Hope J. dismissed the Plaintiffs claims, but this decision was reversed on Appeal. NSW CA upheld DPCs appeal

Hutley JA (Hardie JA agreed) that Consul was constructive trustee for the plaintiff of the property acquired and was therefore liable to account for profits

Per Jacobs P (dissenting):

Receipt cases: actual or constructive knowledge of the existence of the trust is sufficient.

Assistance cases: something more is required. Actual knowledge of the fraudulent design is necessary so that defendant can truly be described as a participant in that fraudulent activity of the trustee.

Therefore, on the facts Clewes should not be held to be constructively on notice that Grey was in breach of his fiduciary obligation simply because further inquiries could have been made and were not made.

In cases of receipt, no question of dishonest or fraudulent design enters the subject matter.

Consul Developments appealed successfully to the High Court.

Held: (Barwick CJ, Gibbs and Stephen JJ; McTiernan J dissenting):

The appeal would be allowed because:

Neither his employment as Ws articled clerk nor any other circumstances placed C in a fiduciary relation to the plaintiff/respondent company; a fortiori the appellant company (Consul) owed no fiduciary duty to DPC.

(Barwick CJ and Stephen J, approving Jacobs Ps dissenting judgment in the NSW Court of Appeal):

As to whether constructive knowledge of a stranger will suffice, there is a difference between the person receiving trust property and the person who is made liable even though he is not actually a recipient of trust property in that in the first place knowledge actual or constructive of the trust is sufficient, but in the second place something more is required and that something more appears to be the actual knowledge of the fraudulent or dishonest design so that the person concerned can truly be described as a participant in that fraudulent or dishonest activity. If a defendant knows of facts which themselves would, to a reasonable man, tell of fraud or breach of trust the case may well be different, as it clearly will be if the defendant has consciously refrained from inquiry for fear lest he learn of fraud. But to go further is to disregard equitys concern for the state of conscience of the defendant.

Clewess belief that the Walton group was in financial difficulties and therefore not interested in purchasing the properties, which belief was supported by objective sources independent of Grey, relieved him of any obligation to make further inquiries.

On the facts, as Clewes knew them to be, Greys conduct involved no breach of fiduciary duty.

The arrangements under which Grey participated with the appellant company did not constitute a bribe by the latter, in that

G was at all times the initiator;

on the evidence there was no general promise of profit sharing, but three separately negotiated agreements; and

those arrangements subjected G to important obligations and potential liabilities.

Held also, (Gibbs J): It does not seem to be necessary to prove that a stranger who participated in a breach of trust or fiduciary duty with knowledge of all the circumstances did so actually knowing that what he was doing was improper

For knowing assistance what is required is actual knowledge of the breach of trust, or wilful shutting of ones eyes to the obvious, not constructive knowledge.

Thus, actively participating in fraudulent conduct, or being actively involved in setting up the machinery attracts liability, but merely failing to stop someone or standing by is not assistance.

Q:What constitutes assistance? A: If, without the acts of the third party, the breach of duty by the fiduciary could not have occurred or been implemented:

it may be essential action or simply part of a chain of events

no need to inevitably lead to loss (from Baden)

irrelevant if it is done with intention to make a profit, if in fact it involves a breach of duty

This line of reasoning was followed in Farah Construction Pty Ltd v Say-Dee Pty Ltd (2007) 230 CLR 89 and the High Court confirmed that Consul Developments was a correct statement of the principles underlying knowing assistance in Australia.

REMEMBER: although many of the cases refer to trustees and trust property, the rule also applies to dealings by third parties with fiduciaries in beach of their duty.

Diagram of Rule in Barnes v Addy

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6. THE DEFENCE OF INFORMED CONSENT

1. The only way a fiduciary may escape liability for conduct that amounts to a breach of fiduciary duty is by obtaining the informed consent of the party to whom the duty is owed to the relevant action/conduct of the fiduciary.

In order for the consent to be informed, the fiduciary must disclose all the relevant circumstances to the principal. Further, the disclosure must be of all material facts/information that could affect the decision to give consent.

It is a factual question, whether informed consent has been given and it may be necessary that the confiding person obtain independent skilled advice (Maguire v Makaronis (1997) 188 CLR 449, 466-7).

The fiduciary cannot induce in any way the decision of the other party to grant the consent, which must be freely given.

2. Who must give the consent?

In Boardman v Phipps [1967] 2 AC 46 the House of Lords the unanimous consent of all of the trustees is necessary where a solicitor was planning to perform an act which placed him in a situation of conflict of interest..In Regal (Hastings) Ltd v Gulliver [1967] 2 AC 134, the House of Lords held that for a director to escape liability for breach of fiduciary duty, it was necessary to obtain the consent of the company through a resolution of shareholders at a general meeting of the company.

7. REMEDIES FOR BREACH OF DUTY

The fiduciary obligation arises in the exclusive/original jurisdiction of equity and equitable remedies will apply.

These are as follows:

injunction to restrain breach (if plaintiff acts quickly enough, available without proof of damage)

if an action is brought in time (before restitution becomes impossible) rescission of the impugned transaction will be available: McKenzie v McDonald

when a fiduciary profits from improper use of his position or through conflict of interest, account of profits and constructive trust will be available, e.g., Boardman v Phipps: constructive trust for beneficiaries.

Usually, if a plaintiff can identify the property in the hands of the defendant a proprietary remedy will be available.

A defaulting fiduciary who causes loss to a beneficiary must make good the loss via equitable compensation. For example, in Nocton v Lord Ashburton the House of Lords held that damages were not awarded for equitable fraud, but equitable compensation, which are the restitution of what the plaintiff lost.

Note: You will study the above remedies in detail in Remedies.

B. CONFIDENTIAL INFORMATION

The notes below are a summary ONLY. You must read the relevant Chapters in Bryan and Vann for a more complete understanding of this topic.

What is confidential information?

In certain circumstances, equity will impose an obligation of confidentiality upon a person who receives confidential information, even in the absence of a contractual relationship between the parties.

Confidential information is information which:

is in the possession of an individual, group or legal entity;

has an element of secrecy- i.e. must not be disclosed to a third party;

has novelty, ingenuity or uniqueness.

It is also arguable that the information must have some value or significance to the person who communicates it.

29210185039000Therefore, the range of what constitutes confidential information is extremely broad. For example: know-how or a process; Ansell Rubber Co Ltd v Allied Rubber Industries Pty Ltd [1967] VR 37 (manufacturing rubber gloves): a design for a product; Peter Pan Manufacturing Corp v Corsets Silhouette Ltd [1963] RPC 45; [1964] 1 WLR 96 (womens underwear): illegally taped phone conversations: Francome v Mirror Newspapers Ltd [1984] 2 All ER 408.It is important to distinguish confidential information from material protected by intellectual property legislation. Confidential information will not necessarily be covered by patent or copyright laws.

Confidential information must be capable of identification- i.e. what is it that is confidential? It must therefore be specific and not general, so that the court is able to identify the exact information which was wrongfully disclosed.

In Wright v Gasweld (1991) 22 NSWLR 325, 324 (Kirby P), it was suggested that when assessing whether confidentiality has been breached, the court should look at:

1. the skill and effort expended to acquire the information;

2. how well guarded the information is and to whom it was made available;

3. was it made absolutely clear to the defendant that the information was confidential;

4. do the usages of industry support the confidentiality of such information.

Relationships in which the duty of confidentiality applies

The application of the principles of confidentiality is not limited to specific categories of relationship to which the principles of confidentiality apply.

Naturally, all fiduciaries have a duty of confidentiality, in both the broader sense and in the narrower sense of confidential information. Therefore, solicitors, directors, trustees etc all have a duty to maintain as confidential any information communicated to them by the object of the duty. Further, there are other professions which impose a duty of confidentiality as part of professional ethics, for example, doctors, other healthcare workers and social workers. However, the type of confidential information discussed in this section goes beyond mere confidences, and relates to often valuable and sensitive material.

Employer/employee

The most common relationship in which the issue of confidentiality arises is that of employer/employee. An employee owes a fiduciary duty to an employer, but not necessarily a duty of confidentiality. Whether such a duty exists depends upon the circumstances. In Faccenda Chicken Ltd v Fowler [1984] ICR 589, 598 599, the three types of information received by an employee in the course of employment were reviewed by the court. These three types are:

information which is trivial or in the public domain;

information which is valuable and which the employee must treat as confidential for the duration of the employment, but may use after the termination of employment;

trade secrets of the employer which the employee cannot use or disclose at any time.

Category 1 is not confidential. Category 2 information may be protected from disclosure after the termination of employment pursuant to a confidentiality agreement. Category 3, trade secrets, will always be protected.

Wright v GasweldFacts: W was employed by Gasweld, which was an importer of products from Taiwan. The company had 4 preferred suppliers, with whom the manager dealt personally. In 1985 W was sent to Taiwan to visit the suppliers on behalf of Gasweld. Before he left he was required to sign a confidentiality agreement, pursuant to which he agreed not to disclose the name of the suppliers to any third party.

W left Gasweld in 1988 and set up his own business in competition to Gasweld and using Gaswelds Taiwan suppliers. Gasweld sought an injunction to restrain W from using the suppliers.

Held: At first instance, Hodgson J allowed the application and granted an injunction which prevented W from using the information for four years from the date of his termination of employment. W appealed to the NSW SC of Appeal. Hodgson Js decision was upheld. The C of Appeal noted that while the names and contacts of all suppliers in Taiwan were a matter of public record, the fact that these particular suppliers were reliable was not public knowledge. This was therefore, commercially valuable information and came within category 2.

Although an employee may be subject to a confidentiality agreement after the termination of employment, the employer must set a limit to the period of time during which the information remains confidential. Also, the agreement must be express and not implied; Casale v Artodemus (Aust) Pty Ltd [2007] NSWCA 172.

Customer lists can cause difficulties in regard to confidentiality. Although the names on a customer list are in the public domain, it takes considerable time and effort to compile the list and to identify potential customers. Therefore, if an employee uses a list of clients for his own benefit after the termination of employment, he will arguably be in breach of confidentiality. It is not a defence to assert that the employee had memorised the list, since it is the names on the list, not the means by which the list is stored, which gives it the confidential status.

Moreover, customer lists are regarded as being part of the goodwill of the business of the employer, and are therefore a type of property; Koops Martin v Dean Reeves [2006] NSWSC 449 (29 May 2006).

Breach of confidentiality

Breach of the duty of confidentiality will occur when there is an actual or apprehended unauthorised use of the information. Thus, a party in receipt of confidential information may not use it in any way which might be detrimental to the provider. However, to sustain a claim for breach of confidentiality, it is arguable that it is not necessary for the provider to prove detriment. However, when the information is commercially sensitive, some form of detriment usually follows from its use.

In determining whether confidentiality has been breached, the court will generally use the reasonable person test.

Remedies

Injunction

Restitution

Damages (if breach of contract or tort)

Delivery up

Defences

Public interest: such as disclosure of criminal activities, practices which may be injurious to health.

Change of position: If the defendant believes that he or she has the right to use that information and has changed their position/expended funds on the basis of this belief.

Laches and acquiescence

Tulip Trading Fiduciary duties

Tulip Trading Ltd v Bitcoin Association for BSV[2023] EWCA Civ 83England and Wales Court of Appeal (Civil Division)Lord Justice Lewison, Lord Justice Popplewell, Lord Justice BirssEquity - fiduciary duty - digital currency - appellant, owner of bitcoin with high total value held at two addresses on blockchain - private keys lost in a hack - appellant could not access its assets - appellant brought claim contending defendant developers which controlled and ran relevant bitcoin networks, should recognised as new ad hoc class of fiduciary, owing fiduciary duties to true owners of bitcoin cryptocurrency - appellant seeks injunction to require developers to act - definition of a fiduciary was set out inBristol and West Building Society v Mothew[1998] Ch 1 - developers are people who it is clearly arguable have undertaken a role which at least bears some relationship to the interests of other people, that is to the owners of bitcoins - categories in which fiduciary relationships can be identified are not closed; albeit that it is exceptional for fiduciary duties to arise other than in certain settled categories -Al Nehayan v Kent[2018] EWHC 333, [2018] 1 CLC 216) - duty which is said to arise in these circumstances is to introduce a code update which will transfer that bitcoin into a safe account controlled by the true owner or which will safeguard that bitcoin in some other way - whether developers who run bitcoin networks be recognised as a new ad hoc class of fiduciary - obligation of undivided loyalty - even if a change was only for the benefit of one owner that does not preclude it being in accordance with the relevant fiduciary duty - whether fiduciary duties owed should extend to implementing the necessary software patch to solve appellants problem and safeguard appellant's assets from the thieves - consideration that relationship could include duty to act to introduce code so that owner's bitcoin can be transferred to safety in circumstances alleged by appellant - conclusion is not that there is a fiduciary duty in law in the circumstances alleged by appellant, only that the case advanced raises a serious issue to be tried - appeal allowed.

TUTORIAL QUESTIONS

What is a fiduciary relationship?

They are relationships between people, generally in commerce where one owes an absolute duty of trust and confidence to another. (one of the principles of equity with duties of trustees)

Why do you think that in Australia medical practitioners are held NOT to be fiduciaries?because money is not involved. All do with property, money, advising about money and property, handling money and property. With health care have duty of care to their patients which is common law. You cant have a doctor with a fiduciary patient. They were acting for. The best interest of the company however on paper shows it benefits-the-directors.

Can you think of a situation in which one might be regarded as a fiduciary?

With a company

In Regal (Hastings) Ltd v Gulliver [1942] All ER 378, the directors were held to be in breach of their fiduciary duty, even though they had acted in what they believed to be the best interests of the company. Why?

They buy out controlling interest shares in their own capacity. So the cinemas started making money and it was like having 2 cinemas to coordinate.

Can you think of any other relationships which could be classified as fiduciary?

Solicitors/clients, physician/patient, priest/parishioner, parent/child, partner/partner, director/corporation and principal/agent relationships, trustee/beneficiary, mortgage broker/client,

Are the categories of fiduciary relationships envisaged by Australian courts frozen in time?

There are not frozen in time because unlike common law.

Fiduciary relationships develop in two general ways: 1) formally, such as those specifically created by contract or legal proceeding and 2) informally, such as those implied in law due to the moral, social, domestic, or personal relationship between the parties.

Rosie is a member of the semi-professional Rydalmere Rangers womens AFL team. The coach and manager refuse to allow her to play for the last 6 weeks of the season because of concussion issues. This means that Rosie does not earn the full fee for the missed games. She consults Bazza Murphy, a law student at WSU, who tells her that by refusing to let her play, the Club is in breach of its fiduciary duty to her. Is Bazza correct?

No because the club only has duty of care. Equity works with personam. You can only take cause of action against certain person. You cant take action to third party unless they have been involved in the fiduciary.

How is the concept of unconscionability demonstrated in the rule in Barnes v Addy?

Firstly there was a receipts of trust property, second the receipt was in breach of the trustees duties and finally the recipient knew that the transfer to them would amount to a breach.

(a) What is knowing receipt?

Strangers who receive some part of trust property become chargeable with that property (hold the property on constructive trust) if it was received with knowledge that the property had been transferred in breach of trust.

What is knowing assistance?

The third party helps actual knowledge for example breach of trust.

What is the difference between them? See: Farah Constructions Pty Ltd v Say-Dee Pty Ltd (2007) CLR 89.

Only need the first 3 of knowledge elements

Fraudulent

Explain the concept of informed consent.

10. What is the difference between confidential information and material, such as publications and patents, which is covered by intellectual property legislation?

11. Is it necessary for a fiduciary relationship to exist for a breach of confidentiality to arise? Give reasons for your answer.

PROBLEM QUESTIONS

1. FIDUCIARY RELATIONSHIPS

1. In December 2019, Dwayne Smith, Abby Normals 16 year old nephew, started up a punk rock band, the Bovver Boys. At first, the band rehearsed in Dwaynes parents garage, but after a few weeks and numerous complaints from neighbours, they were told by Dwaynes father to either find somewhere else to rehearse or disband the band.

Since the band already had a number of gigs booked for 2019, the latter was not an option. Dwayne told his Auntie Abby about his problem and Abby told him she could perhaps help. The following day, Abby took Dwayne to see a real estate agent she knew, Jack Spratt, in Enmore and asked him to find suitable premises for band rehearsals. Jack took them to see a single storey, dilapidated shop in Erskinville, situated between a pub and a night club. Dwayne liked the premises, and since the rent was only $50.00 per week, agreed to take it. However, since he was only 16, he was not old enough to hold the lease in his own name. Abby, after some thought, agreed to take the lease in her name and hold it on trust for Dwayne. The lease was signed on 28 February 2019 and was for 3 years, with two options (rights) to renew for a further 3 years each.

For a number of years, Dwayne and the Bovver Boys were quite successful and played all over Australia to packed houses. Abby renewed the lease in 2022 for a further 3 years. However, in 2022 the bass player and drummer left for bigger and better things!! By December 2022, Dwayne was reconsidering his future.

At the end of January 2023, Jack Spratt contacted Abby and told her that the landlord did not want to renew the lease for a further 3 years, since he was going to refurbish the property and let it for a higher rent. Also, there had been numerous complaints about the noise made by the band during rehearsals, and on a number of occasions, the police had been called to the premises because of the disorderly behaviour of the band members. Abby contacted Dwayne and told him the bad news. Dwayne was philosophical and said that he was considering disbanding the band anyway!

Abby had also been doing some thinking, and the following day, rang Jack Spratt and negotiated to take a lease of the shop on her own account, once it had been refurbished. She had been thinking of opening a hairdressing salon and thought that the shop would be a perfect location. Her hairdressing salon opened just after Easter in 2023.

Meanwhile, when Dwayne found out from his Mum that his dear Aunt Abby had opened a salon in the shop, he was very unhappy about it and goes to see Bazza Murphy, a local solicitor, as to his rights.

Advise Abby of her liabilities, if any, to Dwayne. In regard to Dwayne, would your answer be different if Abby had leased the shop two doors away for her salon?

2. In early 2022 Abby was appointed to the board of a small company, Cuddly Co., which manufactures toy koalas. For a few months she and the other three board members have discussed the possibility of expanding the business. However, the company is not as successful as it could be because of the competition presented by a rival toy company, Skippy & Joey, which manufactures toy kangaroos. In December 2022 the board learn that a majority shareholder of Skippy & Joey wants to sell their shares. Abby and two of the other board members discuss the situation and agree that it would be beneficial to Cuddly Co if it could obtain a majority shareholding in Skippy & Joey. The problem is that Cuddly Co. does not have sufficient funds to buy the shares, nor can it raise sufficient borrowings. Abby, who has a about $200,000 left from her Lotto winnings (after opening the hairdressing salon), suggests that the directors buy the shares themselves and later, when Cuddly Co becomes more financial, sell the shares to the company. They cannot get the opinion or approval of the third board member because he is trekking in the Gobi Desert and cannot be contacted. Abby and the two other directors go ahead and buy the shares.

In March 2023 Cuddly Co is taken over by Barbies House, a large, multinational toy company and Abby and the other three directors resign from the board. Meanwhile, Skippy & Joey becomes increasingly successful and the share price rises, making Abby and the other two directors a substantial gain on their initial investment.

In early April, the new management of Cuddly Co. commence legal proceedings against Abby and the two other former directors, claiming an account of profits on the Skippy & Joey shares.

Advise Abby of the chances of success of Cuddly Co.s legal action.

In regard to Cuddly Co., would your answer be different if all four directors had approved the share purchase?

3. CONFIDENTIAL INFORMATION

Paris MacDonald worked as a demonstrator for Marilyn Muskrat in Marilyns cosmetic company, Marilyns Make-up Pty Ltd. In March 2022, as she was passing Marilyns office, Paris overheard a conversation between Marilyn and Albert, the chief chemist. The import of the conversation was this:

Albert had discovered a revolutionary, non-toxic formula to create artificial nails up to 7 cms long. The formula is cheap and the resulting nails will last ten times longer than other products on the market. They went on to discuss the idea of applying for a patent, once the product had been tested.

Paris, who always wears false nails, was most impressed by this information. Later that day, when everyone but Paris had left the building, Paris sneaked into Marilyns office, located the written formula and photocopied it.

That night, she met Roy Rogers for dinner and told him about the formula. He told Paris that it would be extremely valuable and represented a chance for them to make some big money.

The next day, Paris handed in her notice to Marilyn. Meanwhile, Roy incorporated Nails from Paris Pty Ltd, with himself and Paris as directors. Over the next few weeks they established a small manufacturing business, which produces false nails based on the formula developed by Albert for Marilyns Make-up. In December 2022, the first batches of Nails from Paris began to be distributed to beauty outlets.

Marilyn first became aware of the new nails produced by Nails from Paris in early January 2023 and realises that the nails have been made using the formula developed by her company. Marilyns Make-up has not yet applied for a patent over the formula. After making inquiries, Marilyn discovers that it was her ex-employee Paris, who must have obtained the information.

In March 2023 Marilyn seeks your advice as to whether there is anything she can do to prevent Paris using the formula.

Existence of a Fiduciary Relationship

Accepted Categories: The following are the main accepted categories cases are all in your prescribed textbooks and will be discussed in the lecture:

partners,Chan v Zacharia (see alsoPartnership Act 1892 (NSW))

trustees and beneficiaries,Keech v Sandford

agents and principals,McKenzie v MacDonald

employees and employers,Warman v Dwyer

directors and companies,Regal (Hastings) Ltd v Gulliver

solicitors and clients,Nocton v Lord Ashburton

bankruptcy trustees and creditors.

NOTE - Health care professionals do not owe fiduciary duties to their patients

2. Factual or non-standard categories

In fact, most case law is concerned with novel facts to ascertain whethernon-standard fiduciary relationships(outside the abovementioned accepted categories) have fiduciary characteristics.

Hospital Products Ltd v United States Surgical Corporation (1984)156 CLR 41 (SB, 10.3.1a)

Breen v Williams (1996) 186 CLR 71(SB 10.3.3b,10.5a)

Joint Ventures: United Dominions Corporations Ltd v Brian Pty Ltd(1985) 157 CLR 1 (SB, 10.3.2a)

CBA v Smith(1991) 42 FCR 390 (SB, 10.5.2c)

See also:Habib v Cth (No 2)[2009] FCA 228Habib v Cth (No 2) [2009] FCA 228 - Alternative Formats[1][8], [11][12], [35][58]

Scope of fiduciary relationships

Scope is defined as "the subject matter over which fiduciary obligations extend". Fiduciary princoples only regulate those activities of a fiduciary which fall within its scope.

Hospital Products Ltd v United States Surgical Corporation(1984) 156 CLR 41 (SB, 10.3.1a)

Breen v Williams(1996) 186 CLR 71 (SB 10.4a)

Birtchnell v Equity Trustees, Executors and Agency Co Ltd(1929) 42 CLR 384Grimaldi v Chameleon Mining NL (No 2)[2012] FCAFC 6 [249-270]Week 4: unconscionable conduct

Key Cases

***Aboody v Ryan [2012] NSWCA 395 (4 December 2012)

* Johnson v. Buttress (1936) 56 CLR 113

Bank of NSW v Rogers (1941) 65 CLR 42

*Bester v. Perpetual Trustee Co Ltd [1970] 3 NSWLR 30

Yerkey v. Jones (1939) 63 CLR 649; [1939] ALR 62

Garcia v. National Australia Bank (1998) 194 CLR 395; 155 ALR 614

* Blomley v Ryan (1956) 99 CLR 362

***Commercial Bank of Australia v. Amadio (1983) 151 CLR 447

*** Louth v Diprose (1992) 175 CLR 621

*****Kakavas v Crown Melbourne Ltd [2013] HCA 25; (2013) 298 ALR 35

UNCONSCIONABLE CONDUCT

So far, we have looked briefly at two underlying concepts in equity: equitable fraud and unconscionability in the general sense. Unconscionable conduct is a breach of equitable principles because it occurs when one person exerts influence or exploits the disability of another for their own benefit. It therefore constitutes equitable fraud.

Equity recognises two categories of unconscionable conduct:

undue influence and

unconscientious or unconscionable conduct.

Undue influence occurs when a person, who is in a position of trust, authority and/or confidence vis a vis another, exploits the influence or power derived as a result of this position to persuade the other to enter into a transaction. In such a situation, the will power of the weaker party is overborne by the person with the influence i.e. the weaker party has no free will.

Unconscionable/unconscientious conduct occurs when a person exploits the disability or disadvantage or weakness of another to persuade them to enter into a transaction.

For unconscionable conduct to occur:

the actions of the disadvantaged/weaker party, even if independent and voluntary,

must be the result of a mental and/or physical weakness and/or the disadvantageous position in which he or she is placed and

the other party unconscientiously takes advantage of that position on a predatory manner see Kakavas v Crown Melbourne Ltd [2013] HCA 25; (2013) 298 ALR 35.

It should be noted that undue influence and unconscionable conduct are not mutually exclusive. They may be pleaded together or in the alternative.

A UNDUE INFLUENCE

Undue influence is a form of unconscionable conduct. It is important to remember that to constitute undue influence, the will or independence of mind of the weaker party are overborne by the influence of the stronger party.

It is also important not to confuse undue influence with breach of fiduciary obligations. Although both undue influence and fiduciary obligations arise from relationships of trust and confidence, fiduciary obligations primarily arise from commercial, financial and/or professional situations and there is no necessity for one party to be weaker than the other. However, undue influence and breach of fiduciary duty are not mutually exclusive. For example, a solicitor may use their influence to persuade a client to enter into a transaction which is beneficial to the solicitor, but disadvantageous to the client. This would be both a breach of his/her fiduciary duty AND undue influence.

There are two types of undue influence:

presumed undue influence

actual undue influence

(i) Presumed Undue Influence

The complainant has to show that there was a relationship of trust and confidence between the complainant and the wrongdoer of such a nature that:

the will of the complainant was overborne by the wrongdoer; and

it is fair to presume that the wrongdoer abused that relationship

to induce the other party to enter into the impugned transaction.

Also, it is necessary to show that the relationship between the parties comes within one of the presumed categories.

a) Establishing the Presumption

There are a number of classes of relationship that attract the presumption. These include:

Solicitor/client

Trustee/beneficiary

Doctor or other health care professional/patient

Parent/child

Spiritual leader/ follower

Guardian/ward

For example, in Bank of NSW v Rogers (1941) 65 CLR 42

Facts: Ms Rogers was an elderly spinster. As a young woman and after the death of her parents, she had lived with her uncle, Gardiner. Although intelligent, she relied upon him for advice, particularly in relation to financial matters. In 1930, Gardiner became embroiled in financial difficulties and persuaded Ms R to mortgage almost all of her property as security to the bank for Gardiners debts. The bank manager knew that she was emotionally dependent upon Gardiner, but did not suggest that she receive independent advice. The bank eventually called upon the security and Ms R applied to equity to have the transaction set aside on the grounds of undue influence.

Held: Although Ms R had been foolish and imprudent, she was emotionally dependent upon Gardiner and he had used this dependence for his own ends. Further, not only did the presumption operate against Gardiner, but also against third persons who benefitted from the transaction and who were aware of the situation between the parties.

However, the categories of influence are not closed.

See: Union Fidelity Trustee Co of Australia v. Gibson [1971] VR 573

McCullough v Fern [2001] NSWC 406

(b) Rebutting the Presumption

Undue influence is a presumption and may be rebutted by evidence to the contrary. Therefore, the wrongdoer (i.e., the dominant party) bears the onus of rebutting the presumption. Factors which may rebut the presumption are independent legal advice (Bester v. Perpetual Trustee Co Ltd [1970] 3 NSWLR 30) or the fact that the transaction was fair and reasonable.

The facts in Bester are similar to those in Rogers:

Facts: Ms B lost her mother at the age of 12 and her father when she was 18. She was to receive a substantial inheritance from her father, and two of her uncles, on of whom was a solicitor, persuaded her that it would be in her best interests if she settled her estate on them and received a small income in return. The deed of settlement was drafted by one of the uncles. Although she was asked if she had any questions by an independent solicitor, she was not given any advice. After the death of one of her uncles, and twenty years after the assignment of property she obtained legal advice that she had grounds to have the transaction rescinded. She immediately applied to the court to have the settlement set aside.

Held (Street J): That the plaintiff had established the existence of a special relationship of influence in the circumstances surrounding execution of the Deed (paternal element in loco parentis), thereby establishing the presumption of undue influence

The presumption of undue influence was not rebutted, although there was neither common law fraud nor personal advantage on the part of the defendant. There was not sufficient independent advice and such advice as Ms B received did not allow for a comprehensively informed choice

Further, the transaction was categorized as improvident (careless, thoughtless, failing to provide for future needs).

This case is also authority for the defence of laches [pronounced lay-chees] - time begins to run only after the plaintiff becomes aware of their right to claim a remedy.

What constitutes undue influence and the knowledge of third parties were discussed in Barbaro v Millington [2007] ACTCA 1 Butterworths BC 200700250.

In this case Ms M had been persuaded by her de facto partner, Buser, to sign a guarantee for a loan to enable him pay off his debts to the plaintiff, Barbaro. Buser told Ms M that if she did not sign the document, Buser would be killed.

Issue: Whether the defendant, Ms Millington, had signed a deed as a result of coercion from her de facto partner, Mr Buser, and whether in the circumstances, this coercion was sufficient to render it equitable to set the deed aside.

unless there was evidence to warrant a finding that the plaintiffs or either of them (or Mr Phillips as their agent) knew or ought to have known that the defendant was executing the deed under the undue influence or coercion of Mr Buser, then although she may have found the threats believable and reasonably believed them, her belief that they had been made could only vitiate the transaction insofar as the Plaintiffs (Mr Barbaro in particular) had made such a threat or was aware that Mr Buser would represent that it had been so made [70].

Note: The vitiating factor was duress, which provides grounds for the court to order rescission.

Spousal guarantees: a wifes special equity

A special case arises when the wife of a debtor is guarantor and the husband has exercised influence over the wife to procure her agreement to the contract with the creditor. Although the relationship between husband and wife does not give rise to presumed undue influence, there may be circumstances in which the wife can obtain relief against a husband in regard to a guarantee given by the wife over property in which she has an interest.

For example, in Yerkey v. Jones (1939) 63 CLR 649; ([1939) ALR 62, it was held that a wife need not prove actual or constructive notice (by the third party) of the undue influence. In other words, the conduct of husband binds the bank, independently of agency or notice.

See -Garcia v. National Australia Bank (1998) 194 CLR 395; 155 ALR 614

Held: It would have been unconscionable for the respondent to enforce the guarantee against the appellant as:(a) the appellant did not understand the purport and effect of the transaction;(b) the appellant was a volunteer because she did not obtain any financial benefit from the transaction;(c) the respondent was taken to have understood that, as a wife, the appellant may have reposed trust and confidence in her husband in matters of business and therefore should have presumed that the husband may not have fully and accurately explained the purport and effect of the transaction to the appellant; and(d) the respondent took no steps to explain the meaning and effect of the transaction to the appellant or to ascertain whether the effect of the transaction had been explained to her by a competent, independent and disinterested stranger.

Caveat: the concept of a wifes special equity was developed at a time when wives generally occupied an un-equal position in a marriage. Today, the situation is, on the whole, very different, and husband and wife are considered to be equal partners. In order to assess a claim of a wifes special equity, therefore, the court will examine all of the circumstances surrounding the marriage, including any relevant educational and cultural factors.

(b) Actual Undue Influence

In addition to the settled categories of influence, a party may seek to set aside a transaction by proving that the other party had come to occupy or assume a position of ascendancy, power of domination over him or her. In such an instance, the subordinate party had taken a position of dependence or subjection: Goldsworthy v. Brickell [1987] Ch 378, 401

In Bank of Credit and Commerce International SA v. Aboody (1989) 1 QB 923 it was held that the requirements for proving actual undue influence are:

dominant party has capacity to influence the other;

the influence is actually exercised;

the exercise of influence is undue; and

the relevant transaction was the result of the exercise of influence.

The defences against actual undue influence are the same as for the rebuttal of presumed undue influence.

B. UNCONSCIONABLE DEALINGS/UNCONSCIENTIOUS/UNCONSCIONABLE CONDUCT

There is a broad category of situations in which equity will intervene to set aside a transaction where it would be against good conscience (unconscionable) for the bargain to be enforced. Where one party to a transaction takes advantage of another party in a predatory manner, the transaction will be regarded as unconscionable or unconscientious.

Equitys principles relating to such dealings arose from the treatment by the courts of equity of what were known as catching bargains. These were transactions, usually loans, made by unscrupulous money lenders to desperate, indebted (usually) young men. The terms included outrageously high interest rates and repayment of the debt only when the young person inherited an estate, usually from their father. Such transactions were set aside because the money lender had acted in a predatory manner and taken advantage of the borrowers desperation.

The jurisdiction has long been established in equity to extend the principles generally to circumstances in which:

(i) a party to a transaction was under a special disability in dealing with the other party with the consequence that there was an absence of any reasonable degree of equality of bargaining power between them, and

(ii) the disability was sufficiently evident to the stronger party to make it prima facie unfair or unconscientious that he or she procure, or accept, the weaker party's assent to the impugned transaction in the circumstances in which the stronger party procured or accepted it.

Where such circumstances are shown to have existed, an onus is cast upon the stronger party to show that the transaction was fair, just and reasonable: the burthen of showing the fairness of the transaction is thrown on the person who seeks to obtain the benefit of the contract Blomley v Ryan (1956) 99 CLR 362, 4289.

Examples of special circumstances necessary to raise the issue of unconscionability were set out in Blomley v. Ryan, 405 (Fullagar J):

The circumstances adversely affecting a party, which may induce a court to either refuse its aid or to set a transaction aside, are of great variety and can hardly be satisfactorily classified. Among them are poverty or need of any kind, sickness, age, sex, infirmity of body or mind, drunkenness, illiteracy or lack of education, lack of assistance or explanation where assistance or explanation is necessary. The common characteristic is that they have the effect of placing one party at a disadvantage vis--vis the other.

And in Commercial Bank of Australia v. Amadio (1983) 151 CLR 447, 462; 46 ALR 402, 413 (Mason J):

some characteristic which seriously affects the ability of the innocent party to make a judgment as to his own best interests.

For example, in Blomley v Ryan, the defendant had been an alcoholic.

In Aboody v Ryan [2012] NSWCA 395 (4 December 2012), the NSW Court of Appeal warned against any attempts to narrow the categories of disability as set out in Blomley and Amadio.

Facts: Mr Ryan (the respondent -born in 1917) was an elderly widower with three children: Jennifer (married to Anthony Aboody), Lorraine and John. Although he was estranged from Lorraine and John, he had a genuinely close relationship with Jennifer and her husband (the two appellants). After the death of Mrs R, Jennifer spent the time caring for her father.

Mr R was in poor physical and mental health and suffered from the delusion/obsession that if the Australian Labor Party won the 2007 Federal election, he would lose both his property and his pension. His response to this belief was to express the wish to transfer his home at Iluka to Jennifer and her husband.

In January 2007 Mr R transferred his interest in the property to Jennifer and her husband for no consideration, i.e. it was a gift. During the initial proceedings, it was alleged by the appellants that Mr R had received independent advice.

In January 2009, after reconciling with his two other children, Mr R changed his mind about the transfer and requested a re-conveyance of the property. The appellants refused to comply. Mr R commenced proceedings to set aside the gift on the basis of unconscionable conduct and also sought relief pursuant to the Contracts Review Act 1980 (NSW).

The primary judge, Slattery J, set aside the transaction.

Held on appeal: (Allsop, P: Bathurst CJ and Campbell JA concurring)

The appeal was dismissed, on the basis that the respondent had proved that the transaction was secured through unconscionable conduct. The frail physical and mental states of the respondent were well known to the appellants. The Court went on to warn against narrowing the categories of what constitute a disability or disadvantage. This may be considered ironic in view of the High Courts decision in the case of Kakavas, discussed below.

The governing principles in relation to relief against unconscionable dealings are to be found in Blomley v Ryan . . .

and in Amadio [62].

...one should always be careful not to dwell over-technically or textually on individual expressions of general principal of normative values rooted in the remedying of injustice. It is general principle, not a precisely expressed rule that operates. The principle is wide, and the danger in further textual definition (as opposed to exemplification or illumination) is that inaccuracy or undue restriction may be brought about [63].

However, it is arguable that in the decision of Kakavas v Crown Melbourne Ltd [2013] HCA 25; (2013) 298 ALR 35, the High Court narrowed the application of the principles relating to unconscionable conduct.

Facts: Mr Kakavas was a pathological (compulsive) gambler who played for very high stakes. In late 1998 he was excluded from gambling at Crown because of a conviction for fraud. Mr Kakavas claimed that the fraud was committed to support his gambling habit. Between 1998 and 2004 he continued to gamble at other casinos in Sydney, on the Gold Coast and in Las Vegas. During this time Mr Kakavas also became an extremely wealthy and successful property developer.

From 2004 he began to apply to Crown Melbourne for the revocation of the exclusion order. The management of the casino were aware of his gambling addiction. When it discovered that Mr Kakavas had been flying to Las Vegas and playing for extremely high stakes there, Crown agreed to begin negotiations with him for the revocation of the order. Mr Kakavas requested certain concessions and preferential treatment by the casino, which Crown granted.

In 2008 Mr Kakavas commenced proceedings against Crown in the Supreme Court of Victoria based upon the claim that Crown had acted unconscionably.

Held by the High Court on appeal from the SCV C of A: even though Crown was aware of Mr Kakavass disability (ie that he was a pathological gambler), it had not acted unconscionably.

The basis for this decision appears to be (inter alia) as follows:

1. The Court characterised Mr Kakavas as a high roller, i.e. someone who gambles with very high stakes (during the period between June 2005 and August 2006 he had turned over $1.479 billion, losing $20.5 million in the process).

2. He was a wealthy and successful businessman, who was able to negotiate with Crown for special treatment. He was therefore in the view of the Court- able to act in his own best interests.

3. In negotiating with Mr Kakavas and revoking the exclusion order, Crown was merely acting in the ordinary course of its business. In order to constitute unconscionable conduct there must be an element of predation in the stronger partys conduct. The High Court did not consider Crowns conduct to be predatory.

The Court noted that had Mr Kakavas been an impoverished widow on a pension, it might have held that Crown had acted unconscionably.

It therefore appears that the High Court has restricted the application of the principles of unconscionable conduct to situations in which the weaker party not only suffers from a disability of which the stronger party is aware, but must also be socially disadvantaged in other ways.

Moreover, the fact that the stronger party was acting in the ordinary course of business offers a potential defence to unscrupulous businesses and raises the question as to where the ordinary course of business ends and predatory conduct begins.

Also, contrast Kakavas with Louth v Diprose (1992) 175 CLR 621, in which a wealthy and successful solicitor develops an obsession for a client. He gives the client money and even buys her a house. She rebuffs his attentions. Eventually his ardour cools and he asks for the title to the house. She refuses. He commences proceedings for recovery, pleading that she unconscionably took advantage of him. The HIGH Court found that Louth the woman had unconscionably taken advantage of Mr Diprose, who was unable to look after his own interests because of his infatuation.

E. DEFENCES TO UNDUE INFLUENCE AND UNCONSCIONABLE CONDUCT

The onus of proof initially falls upon the plaintiff to establish a sufficient degree of disadvantage, and then shifts to the defendant to prove that the transaction was just and reasonable (Amadio; Aboody, [63]). In the light of Kakavas, above, it may also be possible for a defendant to argue that in entering into the transaction with the plaintiff and despite the fact that it was aware of the plaintiffs disability, it was merely acting in the ordinary course of its business.

Alternatively, the defendant may raise the equitable defences of:

Laches [ pronounced lay-cheese] (delay)

Acquiescence

Independent advice legal or other relevant professional

In regard to independent legal advice, the lawyer advising the plaintiff must be independent in the true sense of the word and must not have any form of relationship or connection to the defendant. For example, in Aboody, the Court of appeal held that the advice received by Mr R was NOT independent, because the solicitor:

Signed the transfer on behalf of the appellants;

Reported back to the appellants after he had advised Mr R and

The solicitors fee was paid by the appellants.

Moreover, the Court pointed out that even if the advice had been independent in fact, the appellants were aware that, because of his obsession with losing his home and pension, the legal advice would not have changed Mr Rs decision to effect the transfer [30].

See also Bester v Perpetual Trustee Ltd.

D. REMEDIES

Rescission

Refusal of specific performance or any other remedy requested by the stronger party: see Blomely v Ryan

UNDUE INFLUENCE AND UNCONSCIONABLE CONDUCT

COMPARATIVE TABLE

UNDUE INFLUENCE Must Show Characteristics Rebuttal Remedy

presumed Pre-existing relationship of trust and confidence presumed categories not closed The free will of the influenced party must be overborne action not voluntary.

Lack of independent advice *independent advice

*laches

*influence of 3rd party Rescission

actual Relationship of ascendancy and dependence As above As above As above

UNCON.

CONDUCT Pl. under a special disadvantage or disability of which the defendant was aware Will of the pl. not overborne BUT the def exploits the disadvantage/disability for own benefit.

Predatory conduct *as above

*the transaction was fair and reasonable Rescission or refusal of specific performance

TUTORIAL QUESTIONS

1.What are the major differences and similarities between undue influence and unconscionable conduct?

Commercial Bank of Australia v Amadio (1983) Deane J; Undue influence looks to the quality of the consent or assent of the weaker party, whereas unconscionable dealing looks to the conduct of the stronger party in attempting to enforce or retain the benefit of a dealing with a person under a special disability in circumstances where it is not consistent with equity or good conscience that should do so. The inner quality of power.

Why can they be pleaded together or in the alternative?

Explain the difference between undue influence and breach of fiduciary obligations. Can you think of an example that illustrates your answer?

Rogers vs bank

What is the difference between presumed and actual undue influence?

Presumed undue influence is a presumption from the court (similar to judicial notice)

5. In addition to the categories of presumed undue influence given in the notes, can you think of any relationships which might give rise to actual undue influence?

6. Why might it be difficult to invoke the principle in Yerkey v Jones (1939) today?

7. In Aboody v Ryan [2012], why do you think the NSWSCCA warned against narrowing the categories of disability or disadvantage?

8. Was this warning heeded by the High Court in Kakavas v Crown Melbourne (2013)?

9. Do you think that being able to successfully pursue a profession or run a business should preclude a person from pleading unconscionable conduct? Give reasons for your answer. See both Kakavas and Louth v Diprose (1992).

10. Can you think of any situation in which independent legal advice would NOT constitute a defence to a claim of unconscionable conduct? In

11. Can you think of any remedies for undue influence and unconscionable conduct other than rescission and refusal of specific performance?

PROBLEM QUESTION

Peter Pooter is an elderly farmer in his mid-seventies, who has lived all his life on the family farm at Bringelly. He inherited the farm, free of all other interests, from his parents in 1979.

Peter received very little education, is functionally illiterate and can only sign his name. He also suffers from a number of serious health conditions, including arthritis, arteriosclerosis, alcoholism and mild dementia. His only relative is a niece, Muriel Pooter, who lives in Parramatta and who visits Peter once or twice a month.

In March 2020, Peter employed Roy Rogers as a live-in farmhand. Roy, never one to miss a potential opportunity, begins ingratiating himself with Peter. He helps Peter with his banking and correspondence, including his BAS for GST. Roy also drives Peter to and from his doctors and to do his shopping at the local bottle shop, and cooks all of Peters meals. Every Saturday during the footy season, Roy buys a carton of beer, which he shares with Peter while they watch the NRL on the television.

Gradually, Peter becomes totally dependent upon Roy and often says to his doctor and Joe at the bottle shop that Roys like a son to me, I dont know what Id do without him. When Muriel comes to visit, Roy is very polite to her and she thinks that hes a very nice young man.

In October 2022, Roy reads in the local paper that the council is planning to re-zone all of the land around Bringelly for residential development. The re-zoning would include Peters farmland. Sensing the crystallization of his opportunity, Roy rings up his old school friend, Barry (Bazza) Murphy. Bazza has almost finished his law degree and is doing his PLT at a firm of solicitors in Fairfield.

Roy explains the situation to Bazza, who gives him some advice and says words to the effect that:

If you get the old boy to agree to sell you the land, Ill look after all of the paperwork and conveyancing for 25% of any profit you make when you re-sell the property.

The next Saturday evening, Roy produces two bottles of scotch instead of the beer, and encourages Peter to drink as much as he wants. Roy then persuades Peter to sell him the farm. Part of the agreement is that Peter will be able to live on the farm for as long as he wants after the sale. The property is worth $2m as farm land, Peter agrees to sell it to Roy for $1m, in consideration for being able to continue living on the farm.

The following Wednesday, Roy takes Peter to the bank to collect the title documents, which are stored in a safe deposit box, and then to see Bazza. Bazza has prepared all the necessary documents for the sale (including the memorandum of transfer) which Peter signs.

In order to raise the deposit, Roy has borrowed $150,000 from his old Mum, Edna. He also persuades her to guarantee the mortgage from the bank, to fund the balance of the sale price. Edna, like Peter, is unsophisticated and uneducated. She is also dotingly fond of her son and does not want to upset him, so agrees to provide her house as security for the loan. Roy takes her straight to the bank. The bank manager does not ask any questions, but merely produces the necessary documents and shows Edna where to sign.

In late November 2022, the day after the completion of the sale of Peters property, Roy tells Peter that he has to move out. Peter turns up on Muriels doorstep in a very distressed sate and tells her that hes rich but homeless. He then describes to Muriel how he came to sell the property. She is upset, because she had hoped that Peter would leave it to her in his will, since she is his only relative.

Roy has constantly defaulted on the mortgage repayments and by early March 2023, the bank are threatening to enforce the security against Edna.

1. Advise Muriel whether there are any grounds for setting aside the sale of the farm.

2. Advise Edna whether there is any way to prevent the bank from enforcing the security over her home.

3. For an extra brownie point what is the nature of Muriels interest in Peters property?

For Peter

Elements of undue influences

Independences of peter on Roy

Element of unconscionability

Sees Roys friend who is a lawyer

Peter doesnt get legal advice so both

Plead actual undue influence and unconscionability

For Edna

He talks his mum into getting a loan

Undue influence

Parent and child actual undue influence

Important cases and why Summary

Kakavas v crown

Appeal dismissed with costs.

Equity Unconscionable conduct Where appellant gambled at first respondent's casino and lost $20.5 million Where appellant diagnosed as suffering from condition known as "pathological gambling" Where appellant subject to "interstate exclusion order" underCasino Control Act1991(Vic) Whether gambling transactions affected by unconscionable dealing Whether appellant suffered from special disadvantage making him susceptible to exploitation Whether first respondent had sufficient knowledge of any special disadvantage.

Appellant relies on upon the standards of personal conduct compendiously

[15]

"the 'conscience' which is an element of the equitable jurisdiction came to be regarded, and has so continued to the present day, as a metaphorical term, designating the common standard of civil right and expediency combined, based upon general principles and limited by established doctrines, to which the court appeals, and by which it tests the conduct and rights of suitors, a juridical and not a personal conscience."

[18]

The invocation of the conscience of equity requires "a scrutiny of the exact relations established between the parties" to determine "the real justice of the case" HYPERLINK "http://www8.austlii.edu.au/cgi-bin/viewdoc/au/cases/cth/HCA/2013/25.html?stem=0&synonyms=0&query=Kakavas%20v%20Crown" l "fn11" [11]. Where an appeal is made by a plaintiff to the standards of equity embodied in theAmadioprinciple, the task of the courts is to determine whether the whole course of dealing between the parties has been such that, as between the parties, responsibility for the plaintiff's loss should be ascribed to unconscientious conduct on the part of the defendant HYPERLINK "http://www8.austlii.edu.au/cgi-bin/viewdoc/au/cases/cth/HCA/2013/25.html?stem=0&synonyms=0&query=Kakavas%20v%20Crown" l "fn12" [12]. InLouth v Diprose HYPERLINK "http://www8.austlii.edu.au/cgi-bin/viewdoc/au/cases/cth/HCA/2013/25.html?stem=0&synonyms=0&query=Kakavas%20v%20Crown" l "fn13" [13], Deane J explained the basis on which the conscience of equity is engaged to apply theAmadioprinciple:

"The intervention of equity is not merely to relieve the plaintiff from the consequences of his own foolishness. It is to prevent his victimization".

The High Court held that no relief is available for unconscionable dealing or for unconscionable conduct under s 51AA of the Trade Practices Act 1974 (Cth) (now s 20 of the Australian Consumer Law), which is the self same thing unless the party alleged to have acted unconscionably actually knew of the victims relative special disadvantage and preyed upon him or her. This note questions whether, in relation to a doctrine that has traditionally been understood to implement a legal policy of protecting the transactionally vulnerable from victimisation, the law relating to unconscionable dealing/conduct in Australia ought to be limited to disciplining nakedly exploitative conduct and nothing less.

Week 5: Property in equity

Key Cases

The Trustees of the Estate Mortgage Fighting Fund Trust v FCT (2000) 102 FCR 15

Latec Investments ltd v Hotel Terrigal Pty Ltd (in liq) (1965) 113 CLR 265

DKLR Holdings (No 2) Pty Ltd v. Commissioner of Stamp Duties (1980) 1 NSWLR 510

*Livingston v. Commissioner of Stamp Duties (Qld) (1960) 107 CLR 411 (HC)

Commissioner of Stamp Duties (Qld) v. Livingston [1965] AC 694; [1964] 3 All ER 692 (Privy Council)

*Official Receiver in Bankruptcy v. Schultz (1990) 170 CLR 306; 96 ALR 327

Heid v. Reliance Finance Corp Pty Ltd (1983) 154 CLR 326

**Norman v. FCT (1963) 109 CLR 9

Milroy v. Lord (1862) 4 De GF & J 264; 45 ER 1185

*Corin v. Patton (1990) 169 CLR 540

**Shepherd v. Commissioner of Taxation (1965) 113 CLR 385

NATURE OF PROPERTY

The concept of property is different in equity from that at common law. This difference, which arises from the nature of property in the two jurisdictions, highlights the fact that equity is a separate system of principles and concepts. In relation to property in equity:

[T]he approach traditionally adopted by equity has been to retain flexibility so as to accommodate and deal with the almost infinite variety of interests that may arise for consideration by a court of equity: Burns Philp Trustee Co Ltd v Viney [1981] 2 NSWLR 216, 223-4.

Property at common law Property in equity

In relation to the identification of property at common law, in National Provincial Bank Ltd. v. Ainsworth [1965] AC 1175, 1247-8; [1965] 2 All ER 472, 494, Lord Wilberforce stated that:

Before a right or interest can be admitted into the category of property [at common law] or of a right affecting property, it must be:

Definable

Identifiable by third parties

Have some degree of permanence or stability

Thus, at law, the concept of property has an almost tangible quality.

For example, if you have bought a new car and have paid the full purchase price from your bank account, you OWN it. This means that alone you hold all the legal rights, title and interests in the car.

Therefore, all property both real and personal - at common law, irrespective of its nature, is OWNED: i.e. someone, somewhere holds legal title to it. This legal title to the property persists/exists until the property is destroyed.

In equity, however, the concept of property is vaguer and more amorphous.

Equitable property or an equitable interest is any interest in real or personal property that is held and has been created pursuant to the application of equitable principles.

For example, your friend lends you the $5,000.00 to help you purchase the car. You put the money in your bank account and then buy the car.

You hold legal title to the car. This is the only interest that will be recognised AT COMMON LAW. However, your friend lent you $5,000 so your friend has an interest in the car to the value of $5,000. It is highly arguable that this interest will be recognised in equity.

A more common example of this is the interest of a beneficiary in the property of an express trust. In an express trust, the TRUSTEE holds the legal title to the property i.e. the trustee owns it. The beneficiaries, however, have an equitable interest in the property that is they have an interest which is enforceable IN EQUITY but NOT AT LAW. Dont worry too much about the concept of a trust, we will be looking at this in more detail later in the semester.

Furthermore, unlike legal title, an equitable interest can be created or extinguished. For example, when a trust is determined (terminated) and the trust property is distributed to the beneficiaries. The beneficiaries then acquire the legal title formerly held by the trustee.

Traditionally, equitable interests are enforceable ONLY in equity.

CATEGORIES OF EQUITABLE INTEREST

1. IMPORTANCE OF IDENTIFICATION OF EQUITABLE INTERESTS

CAVEAT: One of the problems that arises in studying equitable interests and assignments is not the difficulty of the concepts involved (which are VERY straightforward), but the confusion caused by the use and misuse of the terminology. For example, the term equitable interest is used in various texts as a generic term to describe all categories of equitable interest AND also specifically to describe an equitable PROPRIETARY interest.

Provided you study the required readings, you will soon be able to determine in which sense the term equitable interest is being used.

It is, however, essential to identify the nature of an equitable interest in order to determine:

Priorities, when there are competing equitable interests;

The nature of any litigation which may be necessary to defend or pursue those interests;

Whether the interests are transmissible or assignable;

If so, what are the formal requirements for a valid assignment of that type of property in equity; and

The obligations, if any, under revenue and other statutes: eg stamp duties, bankruptcy, taxation or conveyancing. For example, in The Trustees of the Estate Mortgage Fighting Fund Trust v FCT (2000) 102 FCR 15, the Federal Court, per Hill J, had to determine who paid the tax on the income from a $90 million trust fund: the trustees or the beneficiaries, pursuant to s95A of the ITA Act. There were 2 trustees and approximately 60,000 beneficiaries. The answer depended upon the nature of the interest held by the beneficiaries. Because they each held a personal equity which could be enforced in equity, the beneficiaries were individually liable to pay the tax in accordance with their interest (aliquot share).

2. EQUITABLE INTERESTS, MERE EQUITIES & PERSONAL EQUITIES

There are three (3) categories of equitable interest:

Equitable proprietary interest

Mere equity

Personal equity

(a) Equitable proprietary interests

Equitable proprietary interests occasionally referred to as equitable interests - are rights in equity that are proprietary in nature because they give the holder rights that can be exercised directly against the property which is the subject of the interest. In other words, the holder of the interest has a proprietary claim, enforceable in equity, against specific property.

Examples of equitable proprietary interests include:

the interest of a beneficiary in the assets of a fixed express trust;

the interest of a business partner in the assets of a partnership;

the interest of a plaintiff in assets declared by the court to be held by the defendant on constructive or resulting trust pursuant to the application of equitable principles.

The strongest equitable proprietary interest is that of a beneficiary under a fixed express trust, where the trustee holds the trust property for the beneficiary absolutely: DKLR Holdings (No 2) Pty Ltd v. Commissioner of Stamp Duties (1980) 1 NSWLR 510

(b) Mere Equity

A mere equity is usually defined as a right ancillary or prerequisite to the recognition of an equitable interest: Latec Investments (1965) 113 CLR 265, 277-8; [1966] ALR 775, 780-1 (Kitto J). It may have proprietary characteristics for some purposes but not for others. The word mere is misleading in that it suggests that the equitable interest is of little or no importance. However, this is far from the case.

Examples of mere equities include:

the right to claim an interest in property pursuant to the principles of proprietary estoppel (covered in Week 6)

the right to claim a constructive trust over property, pursuant to equitable principles laid down, for example, in Barnes v Addy (1874) LR 9 Ch, and by the High Court in Muschinski v. Dodds (1985) 160 CLR 583; 62 ALR 429 and Baumgartner v. Baumgartner (1987) 164 CLR 137; 76 ALR 75.

the right to set aside a transaction on the grounds of unconscionable conduct (covered in Week 4). For example, the right of a transferor to have a transaction set aside which was induced by undue influence or unconscionable conduct, or the equity of a mortgagor to set aside an improper sale by a mortgagee (see Latec Investments v. Hotel Terrigal Pty Ltd (1965) 113 CLR 265).

Thus, a mere equity is the right to seek a remedy in a court of equity. The mere equity may become an equitable proprietary interest if the court declares that the property subject to litigation is held on constructive or resulting trust. The court may then order that the defendant transfer legal title or part of it - to the plaintiff.

For example, A applies to a court of equity claiming that B had used unconscionable conduct to induce/persuade her to transfer Blackacre to him. As a result she seeks a declaration that B holds Blackacre for her on constructive trust. At the time of the application, A has a mere equity.

The court decides in favour of A, and declares that B holds Blackacre on constructive trust for A: A now has an equitable proprietary interest. The court also orders that B must transfer all right, title to and interest in the property to A. When this has been done, A will hold legal title to Blackacre..c) PERSONAL EQUITABLE RIGHT OR PERSONAL EQUITY

A personal equity refers to the right of the holder to seek a remedy against a specific person in a court of equity.

A personal equity does not attach to property, i.e. it is not a proprietary interest: National Provincial Bank v. Ainsworth [1965] Ac 1175, 1238; 2 All ER 472, 488 (Lord Upjohn). It is simply the RIGHT to claim an equitable interest.

It may constitute grounds for an action specifically against another person but does not relate to particular property (e.g., Gross v. Lewis Hillman Ltd [1970] Ch 445).

Examples of personal equities:

(1) A defendants personal equitable obligation to compensate plaintiff for the defendants failure to keep a promise in return for which defendant has received a benefit

For example, in relation to a gift subject to an equitable personal obligation: the donee of the gift has an obligation relating to the enjoyment of the property after he has accepted it from the donor; the donees personal obligation may be enforced in equity by the donor, who has no rights in rem in the property, but does have a personal right (in personam) against the donee (for the donees failure to keep the promise); see Muschinski v. Dodds (1985).

(2) The rights of a beneficiary under a discretionary trust.

(3) The right of a residual beneficiary in an unadministered deceased estate.

The Livingston litigation: Livingston v. Commissioner of Stamp Duties (Qld) (1960) 107 CLR 411 (AHC);

Commissioner of Stamp Duties (Qld) v. Livingston [1965] AC 694; [1964] 3 All ER 692 (Privy Council; see Viscount Radcliffes judgment)

Facts: Mrs Coulson lived in NSW. When she died she had a one third interest in the residual estate of her first husband, Mr Livingston. This estate was un-administered at the time of her death and comprised, inter alia, of real estate in both NSW and Qld.

The one third interest in the late Mr Ls estate passed to Mrs Cs estate on her death.

The Qld Commissioner of Stamp Duties claimed that death and stamp duties were owing on Mrs Cs interest in her husbands estate in Qld.

Issues: There were two major issues to be decided by the court:

were duties payable to the Qld government if the estate was administered in NSW; and

what was the nature of Mrs Cs interest in the estate of Mr L. If it were proprietary in nature there would be duty payable when the interest passed from Mr Ls estate to hers.

Held: (By the HC) that Mrs C had no proprietary interest which was taxable on her death. The Comm of Stamp Duties appealed to the Privy Council, who upheld the HC decision, noting that the only right that Mrs C had to Mr Ls estate was the right to seek assistance from a court of equity for the due administration of the estate. In other words, it was a personal equity and not proprietary in nature.

THUS:

The beneficiarys right in an un-administered deceased estate is not an equitable proprietary interest, it is a personal equity only;

A personal equity is merely the right to go to a court of equity to seek a remedy against the executor or administrator of the estate. It is not an assignable right. However, it is capable of transmission by will: Re Leighs Will Trusts [1970] Ch 277; [1969] 3 All ER 432; see also: Official Receiver in Bankruptcy v. Schultz (1990) 170 CLR 306; 96 ALR 327

In relation to the beneficiarys right to pursue remedies against third parties,

a beneficiary can recover assets from third parties that had been wrongfully withheld from the estate;

In the context of a priority dispute, because the right is not proprietary but only a personal equity, it cannot compete with other legal or equitable proprietary interests and, thus, the priority issue does not arise.

Equitable Interests

Comparative Table

Type of Interest Nature Effect Examples

Equitable Interest

(Equitable Estate:

Beneficial Interest) Proprietary Confers right in property Rights of beneficiaries under an express trust

Mere Equity NOT proprietary merely ancillary or prerequisite right Confers right to apply to court of equity for a remedy which may later result in a proprietary interest being granted Right of applicant in equity for declaration of a constructive trust

Personal Equity Nothing more than a right to seek a remedy in Equity Cannot give rise to equitable proprietary interest Rights of beneficiaries under a discretionary trust or unadministered deceased estate

3. DUALISM OF LEGAL & EQUITABLE ESTATES

Livingston ( PC) [1965] AC 694, 712 (Viscount Radcliffe):

[I]t would be incorrect to assume that for all purposes and at every moment of time the law requires the separate existence of two different kinds of estate or interest in property, the legal and the equitable. Equity in fact 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.

In other words, the law does not require the separate existence of two separate interests (i.e., legal + equitable) in property at all times. The holder of legal title to property has only a legal interest, NOT a legal and equitable interest.

An equitable interest in property can only come into existence if it is created. For example, if A, the owner, declares that she is holding the property on trust for B, the beneficiary, OR if it is created by the court as result of the declaration of a constructive or resulting/implied trust (dont panic we will look at these types of trusts later in the semester).

Also, an equitable interest can be extinguished. For example, if a trust is determined (terminated), the interests of the beneficiaries in the property disappear.

The diagram below illustrates a legal interest in (i.e. ownership of) property where the owners title is not affected by an equitable interest.

153826979375OWNERSHIP LEGAL TITLE

OWNERSHIP LEGAL TITLE

23666823219451677409816199PROPERTY: legal interest only

PROPERTY: legal interest only

The second diagram shows the interests in property held on trust

PRIORITIES BETWEEN COMPETING INTERESTS

You will also study priorities in Property Law.

Priorities refers to the principles that apply to the resolution of disputes between parties who have competing interests in property

In resolving any priority dispute, we must identify:

the nature of the competing proprietary interests (i.e., legal or equitable);

the point of time at which the interests were acquired/created.

(a) Competing legal interests

Priority given to the legal interest which was created first.

(b) Competing equitable interests

General principle: Where there is a competition between equitable claims/interests, it must be determined which is the better equity.

The general principle in resolving a dispute between competing equitable interests, where their respective merits are equal is: priority in time of creation is considered to give the better equity: see Latec Investments v. Hotel Terrigal, 276 (Kitto J).

That test was also adopted by Mason and Deane JJ in Heid v. Reliance Finance Corp Pty Ltd (1983) 154 CLR 326, 341.

onus of proof for the better equity is on rhe holder of the later interest

assessing where the better equity resides, a court must have reference to :the nature and condition of the respective equitable interests;

the circumstances and manner of acquisition of these interests; and

the whole conduct of the parties

[Rice v. Rice (1853) 61 ER 646, 648 (Kindersley V-C])

(c) Postponing conduct

Priority may be given to a later interest if the holder of the earlier interest has:

(i) given to a third party the indicia of title/absolute ownership: or

(ii) failed to register their own interest; and

(ii) placed the new title holder in a position to register transfer of title, thus, enabling the him to hold out to the whole world that he holds the title free of any other interests.

Therefore, the holder of any subsequently created interest, such as a mortgage or charge, will have priority over the first interest.

Abigail v. Lapin (1930) 44 CLR 166 (HC); [1934] AC 491 (PC):

Breskvar v. Wall (1971) 126 CLR 376; [1972] ALR 205 (Barwick CJ):

Heid v. Reliance Finance Corporation Ltd (1983) 154 CLR 326; 49 ALR 229.

(d) Competition between Equitable and Legal interests

Prior legal and subsequent equitable claims

General rule: The holder of the prior legal interest will have priority.

Prior equitable and subsequent legal interests

General rule: The later legal interest will prevail only if the legal interest is acquired:

for valuable consideration,

in good faith (bona fide), and

without notice of the earlier equitable interest.

Onus of proof is on the purchaser of the later legal interest: Attorney-General v. Biphosphated Guano Company (1879) 11 Ch D 327, 337.

ASSIGNMENTS IN EQUITY

1. INTRODUCTION

Definition: an assignment is:

the immediate transfer of an existing proprietary right from the assignor to the assignee inter vivos (for value or as a gift): Norman v. FCT (1963) 109 CLR 9, 26 (Windeyer J).

An equitable assignment is simply the recognition in equity of the transfer of property even though some prescribed method of assignment in law (e.g., registration) has not been completed

Terminology used in this topic:

Assignment transfer disposition/disposal

Assignor transferor disponor donor

Assignee transferee disponee doneeWhen there is an issue regarding the validity of an assignment in equity, all other things being equal, the courts will give effect to the true intention of the person dealing with the property (equity looks to the intention rather than to the form). Thus, when the assignment of property fails at law, it may still be a valid assignment in equity.

In certain instances, equity will not demand strict compliance with certain applicable statutory provisions that impose legal formalities for the assignment of property at law: William Brandts & Sons v. Dunlop Rubber Co [1905] AC 454, 461 (Lord McNaughten).

The presence of valuable consideration in the purported assignment is another important consideration: Tailby v. Official Receiver [1888] 12 App Cas 523; [1886-90] All ER Rep 486: Norman v. FCT (1963) 109 CLR 9.

2. MATTERS RELEVANT TO THE ASSIGNMENT OF PROPERTY IN EQUITY

In dealing with a case concerning the equitable assignment of property, it is useful to approach the issue by reference to the following questions:

What is the nature of the property? Is it legal or equitable?

Is the relevant property capable of being assigned?

Have the necessary legal or equitable requirements been completed?

3. ASSIGNABILITY OF PROPERTY

(a) There are certain types of property that are not assignable either at law or in equity.

(i) Contracts for personal services

Nokes v. Doncaster Amalgamated Collieries Ltd [1940] AC 1014; [1940] 3 All ER 549

Peters v. General Accident and Life Assurance Corp Ltd [1937] 4 All ER 628

(ii)Bare rights to litigate

A bare right to litigate is not the same thing as a chose in action, in fact, it is not really a right in the strict sense of the word, merely an opportunity to go to court, if a person so wishes.

For example, a debt is a chose in action and can be assigned. The outcome of a suit to recover the debt is fairly certain.

On the other hand, circumstances giving rise to a defamation suit merely confer a bare right to litigate, because the person with the opportunity to sue may decide not to commence proceedings and, if they did, the outcome of the litigation would be uncertain. Glegg v. Bromley [1912] 3 KB 474

4. ASSIGNMENTS OF LEGAL PROPERTY IN EQUITY WHEN THE ASSIGNMENT HAS FAILED AT LAW

As you have probably realised by now, when property is unassignable at law, or where an assignment of legal property fails at law (for example, there is no compliance with the statutory requirements), the assignment may be valid in equity.

(a) Property which cannot be assigned at law

In addition to the three types of property mentioned above, at common law you cannot assign:

(i) Part of a chose in action such as a debt. For example, if someone owes you $500, you cannot validly assign part of that to another person at common law.

(ii) Future property

However, both of these may be assignable in equity provided that certain conditions are fulfilled. These are discussed below.

Also, where the legal requirements for a transfer of property at law have not been fulfilled and the assignment has failed, it may be possible for the assignment to be effective in equity.

In order to determine whether a failed legal assignment is effective in equity, it is necessary to be aware of the requirements for assignment imposed by law for the particular type of property.

Therefore, it is important to be able to identify the type of property in question and the legal method required in order to transfer that property at law:

For example:

Torrens title land

Registration of instruments (e.g., of a executed memorandum of Transfer): ss. 40-42 Real Property Act

s. 23C(1)(a) Conveyancing Act: writing requirement.

Shares (distinct chose in action): a transfer of shares usually requires registration in the companys share register, as per the stipulations present in the Constitution of the relevant company.

Other choses in action (e.g., debts)

The method for transferring choses in action at law is prescribed by s.12 Conveyancing Act 1919 (NSW)

If there is a legal method prescribed for the assignment of the particular type of legal interest and that method:

has been completed, the effect is to transfer the legal ownership (i.e., full title) to the assignee and there is no necessity to seek the assistance of equity

has not been completed, the assignment is not a valid assignment at law, BUT, nonetheless, an equitable proprietary interest may have been transferred in equity.

In other words, a purported transfer of legal property (which must comply with the legal requirements for transfer given the nature of that property) may be effective in equity even though the specified legal method has not been completed/satisfied, provided that some form of consideration has been given.

5. VOLUNTARY ASSIGNMENT OF LEGAL PROPERTY

(a) The Rule in Milroy v. Lord

When the voluntary assignment (no consideration given) of legal property has failed at law, it may be possible that equity will effect the assignment, thus conferring an equitable proprietary interest on the donee. This may take place according to the rule in Milroy v. Lord (1862) 4 De GF & J 264; 45 ER 1185.

Facts: Medley executed a deed purporting to voluntarily assign 50 shares to a trustee, Lord, to hold on trust for a third party, the beneficiary Milroy. The shares could only be assigned by a transfer which was registered in the shares register of the company (a bank).

Medley never executed the transfer, but he had earlier given power of attorney to Lord which empowered Lord to transfer the shares for him. Three years later, Medley died and Lord handed the share certificates to the executor of Medleys estate. The plaintiff beneficiaries claimed that a new trustee should be appointed so that they could retain their beneficial interest. They succeeded at first instance, but an appeal by Lord was upheld in the Court of Appeal (Chancery).

In this case, Turner LJ established two rules for effective voluntary assignments of legal property in equity:

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; and

if a settlement is intended by the assignor to be effected by a particular mode or form (e.g., direct assignment, declaration of Trust, or direction to trustee) the court will not give effect to it by applying another form. An imperfect assignment will not, for example, be held to be a declaration of trust.

Medley therefore had not done everything that was necessary in order to transfer the property.

What does the expression everything necessary mean? There has been a welter of judicial debate as to the implications of the phrase.

In Anning v. Anning (1907) 4 CLR 1049 which involved the voluntary assignment of a chose in action, the Australian High Court gave three different interpretations of Milroy v. Lord

Isaacs J held that nothing short of full completion of the legal requirements (set out in statutory provisions) for transfer will suffice for an equitable assignment

Higgins J, on the other hand, stated that if donor has done everything in his power to comply with the legal requirements then equity will effect an equitable assignment

Griffith CJ held that if the assignor/donor did everything necessary he had to do himself to comply with legal requirements then equity would effect an equitable assignment

The uncertainty was finally resolved in Corin v. Patton (1990) 169 CLR 540, which dealt with a gift of land.

Facts: Mr and Mrs P were the joint tenants of land in NSW. Mrs P was terminally ill and did not want her husband to succeed to her tenancy (doctrine of survivorship) but wanted her share to go to her children on her death. Before her death she executed three documents: a memo of transfer in registrable form in favour of her brother, who was to hold the property on trust for the children, a deed in which the brother declared that he held the land on trust for the children and her will.

The property was subject to a mortgage and the bank held the certificate of title.

The transfer was not registered before Mrs Ps death, nor had she provided her brother with a direction to the bank to release the title, nor had she obtained the agreement of her husband to alienate her share of the tenancy necessary for joint tenancies.

At trial, on appeal to the NSW Court of Appeal and later further appeal to the High Court it was held that the purported assignment had been ineffective.

Held: the High Court held that if the intending donor of property has done everything which is necessary for him to have done to effect a transfer of legal title, then equity will recognise that gift. So long as the donee has been equipped to achieve the transfer of legal ownership the gift is complete in equity. Mrs P had not done everything within her power to effect the transfer.

Thus, if the donee wishes to voluntarily assign real property which is subject to a joint tenancy he must obtain the written agreement of the other title holder to both the assignment and the release of the title documents for registration.

It is also important to remember that although equity confers an equitable proprietary interest in the property on the transferee, the transferor retains legal title.

6. EQUTIABLE ASSIGNMENT OF PART OF A CHOSE IN ACTION

Part of a chose in action is legal property which is UNASSIGNABLE at common law.

In both Norman v. FCT ( 1963) 109 CLR 9 and Shepherd v. FCT (1965) 113 CLR 385 it was held that part of a chose in action was assignable in equity if there existed evidence of the intention by the assignor to immediately bind himself, as opposed to a mere revocable mandate;

In other words, the relevant test is

intention;

immediate;

irrevocable.

Shepherd and Norman established that the best way to evidence the existence of an immediate, irrevocable intention is to execute a deed assigning the relevant interest (e.g., half a debt). If the Deed is properly executed, there is no need for consideration to be paid (since intention is paramount) or notice to be given to the debtor, since the assignment of a part of chose in action falls outside s.12 Conveyancing Act requirement of notice. However, if no Deed has been executed or if there is no writing which provides evidence of the intention that the disposition be immediate and irrevocable, consideration must be given if the assignment is to be valid in equity.

7. ASSIGNMENT OF FUTURE PROPERTY, AN EXPECTANCY AND A MERE EXPECTANCY

CAVEAT: Some textbooks use the terms future property and expectancy interchangeably. They also refer to the person who will receive the future property as having an expectancy or expectation. This can cause considerable confusion. In order to determine whether the text is referring to future property or an expectancy, you should ask the question: does the person KNOW HOW MUCH they will receive? This distinction will become clearer when you have read the sections below.

(a) Future property cannot be assigned at law but may be assigned in equity.

FUTURE PROPERTY is property which:

the assignor holds a PRESENT right to collect the property at some time in the future,

but the assignor does not have title to the future property at the time of the assignment and

it is a fixed amount or is specified in some way:

and will definitely be received.

Examples of future property:

interest due to be paid on a fixed term loan

bank interest on a savings account

instalment repayments of a debt.

In the three examples above, the assignor has a present legal right to receive the interest or instalments which can be enforced at law, eg, for breach of contract. The payments, which are the future property, will be made at some time in the future.

The right to receive future property and the property itself may be assigned at equity without consideration (voluntarily) (Norman and Shepherd).

Future property must be distinguished from an expectancy and a mere expectancy.

(b) Under an EXPECTANCY, the holder has a right to receive SOMETHING at some time in the future, but the something may or may not eventuate.

Only the RIGHT to receive the expectancy is assignable voluntarily (Shepherd), NOT the expectancy itself.

THE SUBSTANCE (actual property) OF AN EXPECTANCY CAN BE ASSIGNED ONLY FOR CONSIDERATION (Norman).

For example:

royalties due on intellectual property

dividends on shares

interest on a loan repayable at will

interest of a residual beneficiary in a deceased estate

(c) Under a MERE EXPECTANCY, the person who is expecting to receive the property has NO EXISTING RIGHT to receive it.

A MERE EXPECTANCY CANNOT BE ASSIGNED IN EQUITY, NOT EVEN FOR CONSIDERATION BECAUSE THERE IS NOTHING TO ASSIGN.

For example:

an interest under the will of a person who is still alive

the interest of a beneficiary under a discretionary trust

(d) The distinction between future property, expectancies and mere expectancies is illustrated by the cases of Norman v. FCT ( 1963) 109 CLR 9 and Shepherd v. FCT (1965) 113 CLR 385.

Norman v. FCT (1963) 109 CLR 9:

Facts: The assignor, Norman, purported to assign to his wife moneys which would otherwise be payable to him. The assignment was voluntary i.e. without consideration. The assignment stated that he was assigning:

all his right title and interest in interest due on a loan repayable by the borrower at will, and

all his right title and interest in and to all the dividends which might be declared on certain shares in public companies

Held: Both the interest due on the loan and the dividends were expectancies or possibilities which could not be assigned without consideration.

In regard to the loan, the loan could be repaid at any time by the borrower, without notice, and therefore was only an expectancy, since future interest may never come into existence.

In regard to the dividends, the voluntary assignment was ineffective because a dividend is not a debt until it is declared, and is only a possibility, i.e. an expectancy

In Shepherd v. Commissioner of Taxation (1965) 113 CLR 385:

Facts: Shepherd had invented part of a castor wheel. He granted a licence to a distributor to manufacture the gadget in return for payment of royalties of 5% of the gross sale price of the item.

Later, Shepherd purported to assign to his wife by deed his right, title and interest in 90% of his income from the licence for 3 years. The FCT claimed that Shepherd must pay tax on 100% of the royalties because the assignment was ineffective.

Held: that the assignment WAS effective because what Shepherd had assigned was NOT the royalties themselves, BUT the right to receive them, which is a chose in action.

Kitto J drew an analogy between a tree (the existing right to receive royalties) and its fruit (the payment which might accrue to Shepherd under the contract).

Therefore, if Norman had assigned his RIGHTS to the dividends and interest, the assignments would have been effective.

In determining whether property is future property, an expectancy or mere expectancy,

ASK:

1. Is there a present, enforceable right to receive property? If YES, it is either future property or an expectancy. If NO, it is a mere expectancy.

2. When the right crystallises, does the holder of the right KNOW what they are going to receive for example, how much? If YES, it is future property. If NO, it is an expectancy.

The table below summarises the difference between the three types of property.

TYPE PRESENT RIGHT TO RECEIVE? SPECIFIC AMOUNT PAYABLE? ASSIGNMENT

Future property Yes Yes May be assigned VOLUNTARILY

Expectancy Yes No The amount to be received is uncertain The RIGHT to receive may be assigned voluntarily BUT the property may

ONLY be assigned with consideration

Mere expectancy NO NO CANNOT BE ASSIGNED

Discretion trust - can make decision and stuff like which beneficiary gets income or no income or more income.

Express trust - isany trust created volitionally by a settlor (also known as trustor or grantor) in express terms, and usually in writing.

Right to receive (chose in action)

Case: Norman

Expectancy consideration

Case: Sheppard

Future property

Mere expectancy- means the will can be changed at any time

PROBLEM QUESTIONS

EQUITABLE PROPERTY

Paris MacDonald, after her unfortunate experiences with Roy Rogers, decided to invest her small savings in a business selling plastic flowers. She did not incorporate her business, which is now in financial difficulties. Paris is told by her accountant that she may have to file for bankruptcy.

Yesterday, Paris learned that she is the sole residual beneficiary of the un-administered estate of her wealthy but charitable grandmother, Georgia, who died last week whilst on holiday in Mount Isa.

Bazza Murphy told Paris that if she files for bankruptcy, then all of her equitable property rights will vest in the Official Receiver.

Paris wants to know if this is true and whether she would lose any entitlement from her grandmothers estate if she decides to file a debtors petition.

Advise Paris.

EQUITABLE ASSIGNMENTS

Frederick (aka Frodo) Baggins is a wealthy, but world-weary writer of crime fiction. In late 2022, he decides that he is going to enter a monastery as a novice and intends to divest himself of all of the worldly possessions he does not give to the religious order. He and his sister Nelly are joint tenants in a property in the beachside suburb of Rivendell.

In early 2023, two days before he is due to be admitted into the monastery, he makes the following purported dispositions of some of his property in writing:

I give 50% of the royalties on my best-selling novel Criminal Intent to my literary agent, Henry Reader, in return for the $2,000 I borrowed from him last week at the races.

I give 30% of the debt of $5,000 owed to me by Roy Rogers to my cousin Alison.

I give my share of the house at Rivendell to my dear friend Perry Took, and I ask my sister Nelly to agree to the transfer of my interest.

Frodo signs the bottom of the paper, places it in an envelope and addresses it to his sister. The next day, Frodo suffers a stroke and is rushed to hospital, where he remains in a coma.

Nelly will need to administer Frodos financial affairs and apply to the NSW Public Trustee and Guardian to be made manager of Frodos estate. For the purposes of administration of his assets, Nelly wants to know which of the purported assignments are valid. Advise Nelly.

Week 5 tutorial questions

What is property? Common law property tangible and equitable property can be intangible and created and removed.

What is the difference between an equitable proprietary interest and a mere equity?

3 types of equitable interest, first equitable proprietary interests (directly from property), second mere equity and third personal. They indicate the priorities (is where one interest is higher than another interest)

Mere equity is a strong equitable right and its not like proprietary interests. Gives rights in personam against certain person and can even lead to proprietary interest. It gives you right to go to court which is an equitable cause action. Gieomili v Gieomili right to go to court, this case is an example.

Personal equity right

This is the weakest of all equitable rights

Its doesnt attach to property

You cant claim property

Why does the residual beneficiary of a deceased estate have only a personal equity?

It is a right to claim some type of interest

(usually find it interest of beneficiary)

Authority shoots

Explain the concept of dualism of estates.

Property dualism describes a category of positions in the philosophy of mind which hold that, although the world is composed of just one kind of substancethe physical kindthere exist two distinct kinds of properties: physical properties and mental properties.

we can say that property dualism is a position that attemptsto preserve the reality of mental properties while also giving them a foothold in the physical world.

Creator or settlor or testator

Milroy v Lord

This is the transfer of share

What is meant by a better equity? A borrows $500,000 from B. He tells B: Ill pay you back $10,000 a month. You can have a mortgage over my unit as security. A and B sign a document to this effect. A retains the certificate of title to the property and B does not register his interest.

A then goes to the Which Bank and borrows a further $800,000 from the Bank. The loan is secured by way of a mortgage and takes possession of the certificate of title. The unit is valued at $1 million. In the event of A defaulting on his repayments, who has priority, B or the Bank?

What is the difference between property assignable in equity and at law?

What are the requirements for the assignment of part of a chose in action in equity?

Is it possible to assign part of a chose in action at common law? Give reasons. Explain the concept of an expectancy. Why cant a mere expectancy be assigned? What type of property is a lottery ticket? The right to receive property

Consideration as in the price of ticket

It is expectancy because it is not a future property

Week 6

Estoppel in equity

Key Cases

* Must read

*****Crown Melbourne Ltd v Cosmopolitan Hotels (Vic) P/L (2016) 333 LR 384 Available in Week 6 file

***Caringbah Investments Pty v Caringbah Business and Sports Club Ltd (in liq) [2016] NSWCA 165 (18 July 2016) Available in Week 6 file

*Central London Property Trust Ltd v High Trees House Ltd [1947] KB 130

*Foran v White (1989) 168 CLR 385; 88 ALR 41

Hughes v Metropolitan Railway (1877) 2 App Cas 439

Legione v Hateley (1983) 152 CLR 406; 46 ALR 1

***Waltons Stores (Interstate) Ltd v Maher (1988) 164 CLR 387; 76 ALR 513

**Giumelli v Giumelli (1999) 196 CLR 101; 161 ALR 473

**Commonwealth of Australia v Verwayen (1990) 170 CLR 394; 95 ALR 321

*Saleh v Romonous [2010] NSWCA 274; (2010) 79 NSWLR 453

** Sidhu v Van Dyke (2014) 251 CLR 505; 308 ALR 232; 88 ALJR 640

A. INTRODUCTION TO THE CONCEPT OF ESTOPPEL

Estoppel is:

a doctrine which

prevents (STOPS) a person

from denying or changing their mind about

a position or action they have taken and/or a statement they have made

upon which another person has relied

to their detriment

The term estoppel literally means to stop.

Please note that estoppel is RAISED in proceedings, like a sword or a shield.

Estoppel is generally raised to prevent a party from acting inconsistently with her/his earlier representations.For example:

estoppel may be raised to prevent the insistence on strict legal rights under a contract; or

it may be raised to preclude a titleholder from asserting legal rights over property, or

to preclude a titleholder from a denying a claim to an interest in property.

The central notion of estoppel is reflected in a number of common law and equitable doctrines and can arise from a range of different situations and can operate in a variety of circumstances.

Estoppel is used only as a DEFENCE at common law (a shield). In equity it may be used either as a defence OR as a cause of action (a sword). You might remember estoppel from Contract Law.

For example: On 17 March 2022 Joan and Rami enter into an agreement whereby Joan will lend Rami $20,000 to purchase a new car. Rami will repay the loan in full on 1 August 2020. The agreement is typed up, both sign and it is witnessed by Mary.

On 1 August 2022 Rami sends Joan an email which states:

Many apologies but cant pay the full amount today.

Joan replies: Thats OK pay me back when you can.

On 1 September 2022 Joan commences proceedings in the Local Court to recover the debt from Rami. What can Rami do? Using estoppel as a defence because of the email saying pay when you can.

B. THE DIVERSITY OF EST0PPEL

As may be gathered from the above, estoppel can be used in a number of different situations, both commercial and domestic.

Estoppel can be classified in many ways.

FIRST, there are two broad categories of estoppel:

(i) The common law estoppels of record, which include:

estoppel by judgment (including the doctrine of res judicata),

prevents any party to litigation from denying in any subsequent litigation between that party and another party to the original litigation, anything decided as between the parties by judgment in that first matter

issue estoppel;

prevents a party from raising issues of fact or law necessarily determined as between the parties by some judgment, decree or order in earlier proceedings.

estoppel by deed

parties to a deed are estopped or prevented, as between themselves, from denying any allegation of fact made in the deed.

NOTE: For the purposes of this subject, you do not need to study estoppels of record.

AND

ii) estoppel arising from conduct

The term estoppel by conduct covers a number of different types of estoppel applied at both common law and in equity. However, there is neither a clear nor precise categorisation of the various estoppels. These overlapping categories, therefore, can create confusion. For example, estoppel by representation is recognised both at common law and in equity.

SECOND, there is the BROADER division of estoppel into COMMON LAW and EQUITABLE ESTOPPEL

In Discount Finance Ltd v Gehrigs NSW Wines Ltd (1940) 40 SR (NSW) 598,602-3, Jordan CJ attempted to list the categories of the different types of estoppel, and in addition to the estoppels by record, he listed the following:

There is common law estoppel, which, if a person does an act, affecting someone else, which he is entitled to do only if a certain state of things exists, prevents him from asserting, as against the other, that when he did it that state of things did not exist. There is estoppel by representation, which prevents a person who, by a representation of fact, has led another to alter his position, from denying that the fact is as represented. In all these cases, estoppel is a rule of evidence which, in the given circumstances, prevents a person, as a matter of law, from denying or from asserting, as the case may be, the existence of some fact, irrespectively of whether it really exists.

Jordan CJ went on to distinguish between:

common law estoppel: based upon the actions of the party against whom the estoppel is raised; and

estoppel by representation: based upon representations by the party, against whom the estoppel is asserted, inducing action in another.

Jordan CJs judgment was handed down in 1940, before High Trees (see below) and Waltons. Today there are at least two other forms of estoppel, in addition to those mentioned by Jordan CJ, which are examples of equitable estoppel, these are:

promissory estoppel (High Trees estoppel)

proprietary estoppel (includes estoppel by acquiescence and estoppel by encouragement)

THEREFORE, it is probably most useful to categorise estoppel into either common law estoppel or equitable estoppel

Common law estoppel

At common law, in addition to the estoppels of record, there is what is sometimes called estoppel in pais (on the country) or common law conventional estoppel. This includes:

ordinary common law estoppel in pais or by conduct, which is founded upon the actions of the party against whom it is asserted, rather than on representations made by that party. Common law estoppel stops a person from denying an assumption which has formed the legal basis of a relationship between him/her and another, or which that person has adopted against another by the assertion of some right based on it: Legione v Hateley (1983) 152 CLR 406, 430 (Mason and Deane JJ).

estoppel by representation, which prevents a person who by a representation of existing fact has led another to alter his or her position, from denying that the fact exists as represented. Estoppel by representation is said to have emerged later than common law estoppel in pais, having its origins in Chancery. An estoppel by representation at common law can only arise from a representation as to an existing fact and when a legal relationship exists between the parties: Jorden v Money (1854) 10 ER 868

In BOTH forms of common law estoppel, above, there must be a legal relationship (a legally enforceable agreement) between the parties.

Equitable estoppel

In equity, the categories of estoppel are:

estoppel by representation, which has the same elements as the common law version described above.

promissory estoppel, sometimes referred to as equitable or High Trees estoppel: Central London Property Trust Ltd v High Trees House Ltd [1947] KB 130.

proprietary estoppel which includes:

(i) estoppel by encouragement

(ii) estoppel by acquiescence

NB: Common law estoppel and equitable estoppel by representation are rules of evidence and, therefore, OFTEN DESCRIBED AS A SHIELD. In equity, however, estoppel can be used to establish rights in property which can be enforced in equity. It is therefore sometimes described as a SWORD, because it can be the basis for a cause of action: see Giumelli. We will look at this aspect of estoppel later in this topic.

C. ESTOPPEL BY REPRESENTATION AT COMMON LAW AND IN EQUITY

Historical development

Estoppel by representation developed first in equity, and was then taken into the common law. In earlier cases, it was not necessary for the representation by action or words to be supported by either consideration or detriment to the reliant party. Further, the representation could be one of future intention or present factFor example, in Hammersley v de Biel (1845) 12 Cl & Fin 45; 8 ER 1312:

Facts: A father induced a suitor to marry his daughter by promising that he would leave the suitor an amount of money in his will.The young man married the girl, but when the father died, the son-in-law discovered that he had been left nothing in the will. He commenced proceedings against the executor of the estate claiming enforcement of the promise and alleging that the executor was estopped from, denying the statement of intention made by his father-in-law.

Held by the House of Lords: The fathers estate was liable to pay the son-in-law the promised legacy. The plaintiff had acted to his detriment and this, and the statement of intention, sufficed to bind the father (and later his estate).. However, later in the 19th century, three limitations were imposed upon estoppel by representation:

a) the House of Lords confined estoppel by representation to representations of existing fact, rather than intention or some future matter;

b) held that at common law, estoppel was limited to defensive use (as a shield) only; and

(c) there must be a legal relationship/binding agreement between the parties.

2. Elements of estoppel by representation today

As noted above, estoppel by representation is recognised both at common law and in equity.

In Discount Finance Ltd v Gehrigs NSW Wines Ltd (1940) 40 SR (NSW) 598, 603 it was described as follows:

estoppel by representation, prevents a person who, by a representation of fact, has led another to alter his position, from denying that the fact is as represented.

It appears that estoppel by representation has the same attributes at common law and in equity. These attributes were described by Jordan CJ in Franklin v. Manufacturers Mutual Insurance Ltd (1935) 36 SR (NSW) 76, 82:

The type of estoppel which became definitely established in the common law by the case of Pickard v. Sears estoppel by representation depends upon different principles. In order that this type of estoppel may arise, it is necessary that:

(1) by word or conduct

(2) reasonably likely to be understood as a representation of fact (see below);

(3) a representation of fact, as contrasted with a mere expression of intention, should be made to another person, either innocently or fraudulently,

(4) in such circumstances that a reasonable man would regard himself as invited to act upon it in a particular way,

(5) and that the representation should have been material in inducing the person to whom it was made to act on it in that way

(6) so that his position would be altered to his detriment if the fact were otherwise than as represented.

3. Elements of estoppel by representation

(i) Fact v lawThe references by Jordan CJ in Franklin v Manufacturers Mutual Insurance Ltd (1935), to representations of fact (rather than fact or law) do NOT now represent the modern doctrine of estoppel.

In Foran v White (1989) 168 CLR 385, 435; 88 ALR 413, 448 (Deane J):

[T]he distinction between a representation of fact and a representation of law is, in the context of the principles constituting the doctrine of estoppel by conduct, essentially illusory unless one subscribes and I do not to the view that law has no factual existence at all.

(ii) Existing fact v future intention

Although the validity of the third point in Jordan CJs statement in Franklin v Manufacturers Mutual Insurance Ltd (1935) [i.e., the requirement of an existing fact, rather than a mere expression of future intention] has been challenged, the position, as stated by Jordan CJ in Franklin v Manufacturers Mutual Insurance Ltd (1935), has been the generally accepted in relation to estoppel by representation. This is the view derives from Jorden v Money (1854) HL Cas 185; 10 ER 868; [1843-60] All ER Rep 350 in which it was decided that estoppel cannot arise from a representation of future intention: rather, a statement of fact is necessary.

Therefore, estoppel by representation should be distinguished from promissory (High Trees) estoppel discussed below. (iii) Defensive useThe view came to be adopted that estoppel by representation was a rule of evidence and would not itself support a cause of action: Low v Bouverie [1891] 3 Ch 82; [1891-94] All ER Rep 348 (Bowen LJ) Thus, the party seeking to rely on estoppel could not use it as a cause of action. It was used defensively against an assertion by the other party of his/her rights and operated to exclude him/her from reliance upon the facts from which his rights sprang. Foran v White (1989) 168 CLR 385, 450; 88 ALR 413, 459: Commonwealth v Verwayen (1990) 170 CLR 394, 500; 95 ALR 321, 396-397.

4. Effect of estoppel by representationOnce estoppel by representation has been raised and accepted by the court, the party against whom an estoppel by representation is applied, cannot resume his/her former position and assert his/her former legal rights.A possible rationale for this position is as follows: the detriment suffered by the representee would usually be such that it could be remedied only by permanent exclusion of the representors claim.

For example, in Klement v Pencoal Ltd (2000) Q ConvR 54-546; [20, 00] QCA 152

Facts: A principal revoked an agents authority. The agent subsequently forged principals signature on transfers of realty and personalty. The principal learned of the forgeries, but did not inform transferee prior to settlement. The transferee paid the purchase price to the purported agent.Held: the principal was estopped from contending that the sale was a nullity.

5. Influence of the law of contract on estoppel by representation

As noted above, in the late 19th century there were attempts by the House of Lords to restrict the application of estoppel by bringing it into line with principles of contract law and thereby provide more certainty of outcome in commercial transactions.

Jorden v Money (1854) HL Cas 185; 10 ER 868; [1843-60] All ER Rep 350

Facts: Money owed money to Jordan. Money was engaged to marry and so Jordan promised not to enforce the debt. Five years later Jordan sued Money for the debt Held by the House of Lords: Estoppel by representation is confined to statements of fact, not intention. Therefore, Jordan was free to change her mind because no consideration had been paid for the promise and there was no legal relationship (contract) between the parties.Therefore, at common law, representations of intention could be enforced only in contractual relationships and common law estoppel (estoppel in pais) operated only in regard to statements of facts. It was merely an evidentiary rule and used only defensively in that it estopped a party from bringing evidence which contradicted the earlier statement

This form of estoppel was called common law estoppel because it was only at common law that it was confined to representations of fact, since it was not long after Jorden v Money (which applied only in the common law courts) that equity began creating exceptions, and making inroads into common law estoppel by representation.

D. A QUANTUM LEAP: PROMISSORY ESTOPPEL IN EQUITY1. An equitable exception to the rule against the enforcement of non-contractual promises arose in the decision in Hughes v Metropolitan Railway (1877) 2 App Cas 439. However, it should be noted that there was an existing legal relationship between the parties, in line with the decision in Jorden, above.

Facts: A landlord brought a successful action in ejectment against his tenant, alleging forfeiture of the lease for failure to repair upon a relevant notice.

Then, the tenant successfully stayed the judgment upon the ground that it was inequitable for landlord to enforce the covenant to repair on the grounds that he had started negotiations for sale to the tenant of the reversion, whilst the notice to repair was running. The point was that it was on the basis of those negotiations, and the apparent waiver of the covenant, that the tenant failed to obey the notice.

Held by the House of Lords: 448 (Lord Cairns LC):

[I]f parties who have entered into definite and distinct terms involving certain legal results certain penalties or legal forfeiture afterwards by their own act or with their own consent enter upon a course of negotiation which has the effect of leading one of the parties to suppose that the strict rights arising under the contract will not be enforced, or will be kept in suspense, or held in abeyance, the person who otherwise might have enforced those rights will not be allowed to enforce them where it would be inequitable having regard to the dealings which have thus taken place between the parties.

Although Hughes was decided in 1877, it was not until 1947 that equitable estoppel broke away from the common law restriction of representations as to present facts: Central London Property Trust Ltd v High Trees House Ltd [1947] 1 KB 130; [1956] 1 All ER 256. In fact, promissory estoppel is sometimes called High Trees estoppel after the case that is regarded as the foundation of the modern doctrine, The importance of High Trees cannot be over emphasised!

In this case, Lord Denning produced one of his most controversial and durable creatures, a doctrine which he applied in many cases and has become known as High Trees estoppel.

Pursuant to High Trees estoppel, where representations are concerned with the exercise of rights arising or which will arise in the future from presently subsisting contractual relations between the parties, if the reliant party acts in reliance upon these representations, the representor is bound by the representations.

Thus, promissory estoppel operates where a party to some pre-existing legal relationship, gives some assurance or makes some representation that rights available under that relationship will not be enforced in the future, thereby causing the other party to act in reliance on that assurance. The first party will be estopped from reverting to his/her original position at will.The emergence of this new kind of estoppel was criticised by academic writers as an attack on the doctrines of consideration and privity of contract.(For references, see MGL, (546, fn 7).

The doctrine of promissory estoppel has been accepted and applied by the Australian High Court in:

Legione v Hateley (1983) 152 CLR 406; 46 ALR 1

Waltons Stores (Interstate) Ltd v Maher (1988) 164 CLR 387; 76 ALR 513

Giumelli v Giumelli (1999) 196 CLR 101; 161 ALR 473

Sidhu v Van Dyke (2014) 251 CLR 505; 308 ALR 453

Also, in the NSW Supreme Court Court of Appeal there is:

Saleh v Romanous [2010] NSWCA 274; (2010) 79 NSWLR 453

Caringbah Investments Pty Ltd v Caringbah Business and Sports Club Ltd (in liq) [2016] NSWCA 165 (18 July 2016)

2. Promissory estoppel in Australia

NB. In High Trees there was a legal relationship between the parties.

Therefore, Waltons Stores v Maher is arguably the most important decision on estoppel made by the High Court to date because it

established that promissory estoppel can exist where there is no pre-existing legal relationship

Waltons Stores (Interstate) Ltd v Maher (1988) 164 CLR 387; 76 ALR 513

Facts: Waltons, a chain of department stores, were negotiating with the Mahers over a lease of land. The solicitor for the Mahers sent to solicitor for Waltons an executed lease by way of exchange. Soon after this exchange the Mahers began the demolition of an existing building and the construction of a new building to the specifications of the Waltons. When the new building was about 40% completed, the solicitor for Waltons said it was unwilling to proceed with the exchange of the lease and denied the existence of a contract between the parties.

Held by the High Court: the subject matter of promissory estoppel is not confined to pre-existing contractual rights provided the six probanda set out in the judgment are satisfied.

One of the most recent cases involving promissory estoppel is Saleh v Romanous (above):

Facts: The vendor of a block of land gave a pre-contractual promise to the purchaser that if a certain event did not occur, the purchaser would have the right to rescind the contract. The promise was not included in the contract. The event never eventuated and the purchaser purported to rescind the agreement and claimed the return of the deposit.

Held on appeal: that although a pre-contractual statement cannot be enforced as a collateral contract, it can be enforced as promissory estoppel. Further, the Court of Appeal noted that promissory estoppel is a means by which equity will protect one contracting party from the unconscionable conduct of the other.

In Crown Melbourne Ltd v Cosmopolitan Hotels (Vic) P/L [2016] HCA 26 (20 July 2016) the High Court discussed whether a pre-contractual statement could be interpreted by a reasonable person as conveying the assurance that a lease would be renewed. It appears, therefore, that the test as to whether promissory estoppel can be raised depends upon how the reasonable person would interpret a statement. Also, Keane J, at first instance, provides an excellent distinction between promissory and proprietary estoppel.

E. EQUITABLE PROPRIETARY ESTOPPEL

1. Nature of proprietary estoppel

A person is estopped from insisting on some proprietary right after having encouraged another to act to his detriment by some representation of benefit, or having acquiesced in such action and was aware of the mistaken belief under which the first party was operating. This applies even if there is no legally enforceable agreement between them. An early example of proprietary estoppel is to be found in Hammersley v de Biel, discussed above. However, this was decided before the House of Lords and courts of appeal in the UK attempted to restrict the application of estoppel.

Proprietary estoppel may give the representee a permanent proprietary interest in the subject property, which can be protected by right of action.

Proprietary estoppel can therefore be used as a SWORD as well as a SHIELD.

Further, the representation may be one of fact or intention and there need not be a subsisting legal relationship between the parties (see Waltons above).

However, proprietary estoppel is confined to representations in relation to real property

Proprietary estoppel encompasses:

estoppel by encouragement (the active, positive form of proprietary estoppel); and

estoppel by acquiescence (the passive form)

Giumelli v Giumelli (1999) 196 CLR 101; 161 ALR 473

Facts: A son, Robert G alleged that one of the promises made to him by his parents was that if he continued to work on their property rather than work for his father-in-law, the land would be subdivided to create a lot for him, title to which would be transferred into his name. In reliance upon this promise, the son built a house on the property. He later remarried and left the property. His parents refused to transfer the title of the land into his name.

Held by the High Court: That the son had relied to his detriment upon the promise made by his parents. However, the remedy he obtained was pecuniary relief by reason of a promissory estoppel, rather than a constructive trust over the property, as he had claimed.The High Court distinguished between constructive trusts and equitable estoppel in that the equitable claim was founded upon the assumption induced by the representation upon which there had been detrimental reliance. On the other hand, a constructive trust was the remedial response to that claim only if there were no other appropriate equitable remedy. In Giumelli, because of the breakdown in the family relationship and other factors, there was no other appropriate remedy.

2. As noted above, both estoppel by acquiescence and estoppel by encouragement are types of proprietary estoppel in that they may, in certain circumstances, be used to confer rights upon the party seeking to raise the estoppel.

See also Sidhu v Van Dyke (2014) 251 CLR 505; 308 ALR 232; 88 ALJR 640

(a) The acquiescence cases

If a land owner A, stands by and deliberately allows B to improve As land in the mistaken impression that it belongs to him, then equity will not allow the true owner, A to profit by that mistake: Ramsen v Dyson (1866) LR 1 HL 129Thus, equity binds an owner of property who, by their lack of action, induces another person to expect that an interest in the property will be conferred on him.Fry J in Willmot v Barber (1880) 15 Ch D 96; [1881-5] All ER Rep Ext 1779, set out the requirements of the principle in Ramsden v. Dyson:1. the party must be mistaken as to his rights (e.g., as to the ownership of the land)

2. that party must spend money or do some act on the faith of the mistaken belief;

3. the other party must know of his own rights; and of the mistake made; and4. must encourage the activities either by direct action or by remaining silent without asserting his legal rights.

Hamilton v Geraghty (1901) 1 SR NSW Eq 81

Facts: The defendant was the true owner of land, but C mistakenly believed himself to be the owner and instructed builders to build a house there. The defendant, knowing of Cs mistake stood by and allowed the builders to build house. When the house was completed, C was unable to pay the builders.The builders administrator, as plaintiff, took over Cs rights in the land and sued the defendant in equity for a declaration that the land was to be charged with payment to plaintiff of the amount expended on the building Held by the NSW Full Court: the plaintiff was successful on the grounds that the requirements of Ramsden v Dyson were satisfied. The true owner, by her silence, allowed detriment to be incurred and increased. She could not be allowed to profit by that mistake.The basis of these cases is the fraudulent conduct of the true owner in remaining silent or acquiescing whilst the mistaken party expends money or effort. It is the duty of the true owner to be active and state his adverse title and it would be dishonest for him to remain wilfully passive in order afterwards to profit by the mistake of another which he might have prevented (Equity assist the vigilant not the tardy.)

(b) The encouragement cases

Dillwyn v Llewelyn (1862) 4 De G G & J 517; 45 ER 1285; [1861-73] All ER Rep 384Facts: A father encouraged his son to take possession and build on fathers land. The father signed an instrument intended to operate as a voluntary conveyance, but which was not under seal. Therefore, it was ineffective as a deed to convey land. The son spent money to build the house and occupied the land. The father, assuming that land belonged to son, left all his estate to other people. When he died, the executors claimed the land for the estate.

Held by the House of Lords: the son was entitled to the land. Equity, in this instance was able to perfect the imperfect gift because of sons detrimental reliance upon the assumption;If the father had changed his mind during his lifetime, he would have been estopped from claiming the house as fixture on the land.Thus, equity binds the donor of property where, after the making of an imperfect gift, the donor induces the donee to act on the assumption that the imperfect gift is effective or on the expectations that it will be made effective.Plimmer v Mayor of Wellington (1884) 9 App Cas 699; [1881-5] All ER Rep Ext 1320Facts: Plimmer built a jetty on Wellington harbour for the disembarkation of people. It was built on public land, but with encouragement of government. When the jetty was resumed by statute for public purposes, Plimmer was entitled to statutory compensation for loss of an estate or interest in land. However, the local council rejected the claim on the basis that Plimmer had no claim, since title to the land was held by the state.

Held by the Privy Council: Plimmer had an estate in the land. Plimmer had an equitable proprietary interest because the governments encouragement had created in him a reasonable expectation of an irrevocable license to remain on the land.

Estoppel by encouragement was also discussed in a more recent case, dealing with a domestic relationship.

Sidhu v Van Dyke (2014) 251 CLR 505; 308 ALR 232; 88 ALJR 640

Facts: Sidhu and his wife purchased a property in rural NSW. Van Dyke married Sidhus brother-in-law and moved into a cottage on the property. Sidhu and Van Dyke began to have an affair and VD divorced her husband. She remained in the cottage on the property, paid below market rent for it, carried out repairs to the cottage at her own expense and also worked on the rest of the property without remuneration.

S told VD many times that he intended to subdivide the property and that he would give her the cottage, after obtaining the consent of his wife. He repeated this assurance in writing. On the basis of the assurance that she would get the cottage, VD did not seek a property settlement from her ex-husband nor did she seek employment in the local area. She continued to work on the farm.

The relationship between S and VD came to an end in 2006. VD moved away from the property and S and his wife refused to convey the cottage to her.

VD commenced proceedings in the NSW Supreme Court claiming estoppel by encouragement on the basis that she had relied to her detriment upon Ss promises to convey the cottage to her. At first instance found only detrimental reliance to a very limited degree. VD appealed to the NSW SC C of A, which upheld her appeal.

Sidhu appealed to the High Court.

Held; the High Court affirmed the NSWSCCA decision, stating that equitys intervention is based upon the conduct of the representee (VD) as induced by the representor (S). Reliance upon a representation is a fact not an imputation. To establish estoppel by encouragement, it is not necessary that the conduct of the representor should be the sole inducement operationg on the mind of the representee.

It is not the breach of promise, but the promisors responsibility for the detrimental reliance by the promisee which makes it unconscionable (emphasis added) for the promisor to resile from his pr her promise 649 (ALJR) (French CJ, Kiefel, Bell and Keane JJ).

The remedy in the encouragement cases is to reverse or avoid detriment to the plaintiff. not necessarily to enforce the representation (depending on the facts of each case).

F. AFTER WALTONS - LATER DEVELOPMENTS IN EQUITABLE ESTOPPEL IN AUSTRALIAIn some cases, judges of the High Court of Australia have questioned the boundaries between the categories of estoppel.

In Waltons Stores v Maher (1988), Mason CJ and Wilson and Brennan JJ argued for the merger of proprietary estoppel and High Trees estoppel into a single principle of equitable estoppel.

But in Commonwealth of Australia v Verwayen (1990) 170 CLR 394; 95 ALR 321

Deane J sought to distinguish estoppel by conduct (including promissory estoppel) from proprietary estoppels.

Facts: Verwayen was a member of the Royal Australian Navy serving on board HMAS Voyager when it collided with HMAS Melbourne in 1964. V took proceedings against the Commonwealth for personal injury in 1984. The Commonwealth admitted liability and agreed not to invoke limitation of actions legislation and not to rely on case law which limited the capacity of a member of the armed forces to recover damages for the negligence of another member of the armed forces.

Subsequently, the Commonwealth both denied liability and decided that both defences should be raised. It obtained leave to amend its pleadings.

V then argued that the Commonwealth had waived the right to any such defences and/ or that the Commonwealth was estopped from raising them.

Issue: What remedy? [to reverse the detriment OR to enforce the promise?]

Held by the Court of the Supreme Court of Victoria (by majority): the Commonwealth was estopped from resiling from a promise not to plead the limitations point. The Commonwealth appealed to the High Court.

Held by the High Court: (Deane, Dawson, Toohey and Gaudron JJ - Mason CJ, Brennan and McHugh JJ dissenting): 4-3 dismissed the appeal: That the Commonwealth was estopped from raising both the defence of statute of limitations and seeking the protection of limited liability.

The exact direction of the development of the doctrine is still uncertain. It is uncertain whether there is one doctrine of equitable estoppel which encompasses both proprietary AND promissory estoppels, or whether the two remain distict principles.

However, in real terms and despite the copious amount of both academic and judicial comment on the matter, the issue is of jurisprudential rather than practical value.

Perhaps the fact that in the later considerations by the High Court of estoppel in equity (Giumelli and Sidhu), no comment was made in regard to whether there were one or two doctrines, underlines the fact that this is an academic rather than practical issue.

G. FUSION OF COMMON LAW AND EQUITABLE ESTOPPEL: ANOTHER FUSION FALLACY

1. One fused doctrine of estoppel?

There have also been suggestions that rather than the existence of the various, discrete categories of common law and equitable estoppels, there is really only one unified doctrine which encompasses both common law and equitable estoppels.

In Foran v White (1989) 168 CLR 385; 88 ALR 413, both Mason CJ and Deane J: suggested that common law estoppel and equitable estoppel have been fused into one over arching doctrine.

Similarly, this suggestion was proposed in Commonwealth v Verwayen (1990) 170 CLR 394; 95 ALR 321. However, in this same case McHugh J (501) stated that:

The purpose of both the common law and equitable doctrines is to avoid or prevent a detriment to the party asserting the estoppel by compelling the opposite party to adhere to the assumption upon which the former acted or abstained from acting: (Grundt v Great Boulder Pty Gold Mines (1937) 59 CLR 641 at 674.) But because the common law doctrine of estoppel in pais is a rule in evidence, it operates to preclude the party estopped from denying the assumption of fact whenever it is necessary to do so for the purpose of determining the rights of the parties. On the other hand, because the equitable doctrines create rights, they preclude the party estopped from denying the assumption of fact (or law) only as long as the equitable right exists. Once the detriment has ceased or been paid for, there is nothing unconscionable in a party insisting on reverting to his or her former relationship with the other party and enforcing his or her strict legal rights.

2. The Elements of the Fused Doctrine

In Commonwealth v Verwayen Mason CJ and Deane J attempted to formulate a single overarching doctrine or a general doctrine of estoppel by conduct which was not accepted by Dawson J and McHugh J.

The differences of opinion which deprive Commonwealth v Verwayen of any clear ratio decidendi continued in Rogers v The Queen (1994) 181 CLR 251; 123 ALR 417 in which it was decided that issue estoppel concerned with matters of fact or law necessarily decided by an earlier judgment, decree or order is only applicable in civil proceedings.In Waltons Stores v. Maher, the High Court (majority) recognised a form of equitable estoppel by representation that is both

(i) a cause of action, and

(ii) available in cases involving representations as to intention and other future matters

The principal distinction between equitable estoppel and common law estoppel is the requirement at common law that there be a representation as to an existing fact, whereas equitable estoppel will apply where the representation or the assumption on which the plaintiff operates includes matters of future intention or conduct

The unification of equitable and common law estoppel has NOT been achieved. The majority decisions of the majority of the High Court have expressed a preference for the maintenance of the traditional distinction between equitable and common law estoppel: see Verwayen (1990) CLR 428-9 (Brennan J), 453-6 (Dawson J), 499-502 (McHugh J).

Further, neither Giumelli v Giumelli (1999) nor Sidhu v Van Dyke (2014) addressed the question of a fused doctrine of estoppel, even though both cases would have presented perfect opportunities to do so. In fact, the issue was ignored in both, suggesting that it is no longer a judicial hot topic

Therefore, as with the fusion fallacy and the Judicature Acts, the question as to whether there has been fusion of various forms of estoppel is of PURELY academic interest. In practice, at some stage it is usual to mention the TYPE of equitable estoppel being raised as a basis for the cause of action. When estoppel is being raised as a defence, however, it is normally asserted that the defendant is estopped from relying upon whatever act, statement or document the defendant was seeking to use.

Summary of categories of estoppel

Note: Common law estoppel is used in commercial situations ONLY whilst equitable estoppel may apply in both commercial and domestic/non-commercial; situations.

COMMON LAW ESTOPPEL

Estoppel by record

Estoppel by conduct/representation/ in pais/common estoppel

Used in commercial situations where a legal relationship exists between the parties.

The representation/conduct must refer to existing legal rights and/or obligations

Used as a defence (SHIELD).

EQUITABLE ESTOPPEL

Note: Equitable estoppel is a generic term for ALL categories of estoppel in equity.

By representation

As for common law estoppel above (Hughes v Metropolitan Railways)

Used as a defence (SHIELD)

Promissory estoppel High Trees estoppel

Before Waltons Store v Maher

Used in commercial situations where there is a legal relationship between the parties

The representation is about FUTURE legal rights or obligations

Used as a defence.

After WaltonsUsed in commercial situations

NO legal relationship between parties is necessary BUT

There must be a representation as to the creation of future relationship OR a promise not to exercise rights in the future (Commonwealth v Verwayen)

NB the 6 probanda (requirements)

May be used as a cause of action to create legal rights (SWORD)

Proprietary estoppel

Note: arguably Waltons style promissory estoppel (above) is also a type of proprietary estoppel in that legal rights are created.

- By encouragement

No legal relationship required between the parties

Applicable in domestic situations where there is trust between the parties (Sidhu v Van Dyke)

Party A encourages Party B to act in a certain way in return for a promise in regard to future rights (Giumelli; Hammersley v De Biel)

B relies upon the encouragement/promise and acts to his/her detriment

Used as a cause of action (SWORD).

- By acquiescence

No legal relationship between the parties

Party A stands by and allows Party B to act upon a mistaken belief as to his/her legal rights

Part A knows of Bs mistake but says nothing

B acts to his/her detriment and A profits from Bs actions

Used as a cause of action (SWORD) to either create legal rights OR to receive equitable compensation for the detriment suffered.

2. TUTORIAL QUESTIONS

1. What is estoppel?

2. How can estoppel be categorised?

3. Compare the cases of Hammersley v De Biel (1845) and Jordan v Money (1854).

4. What effect did the decision in Jordan v Money have upon the development of estoppel?

5. What are the elements essential for estoppel by representation?

6. Explain the importance of Lord Dennings judgment in High Trees (1947).

7. Why do you think that academic writers criticised the High Trees decision?

8. What is the significance of the decision in Waltons v Maher (1988)?

9. How does the decision in Waltons exemplify the role of equitys auxiliary jurisdiction within our legal system?

10. Which type of estoppel should be raised in the following situations:

(a) X and Y enter into a commercial lease of a shop. X, the landlord, tells Y that if she repaints the shopfront, she will not be obliged to pay the first 4 months rent. Y paints the shopfront, but 6 months later X commences proceedings to recover the first 4 months rent.

(b) Paris tells Peter that if he looks after her garden for 6 months, at the end of this period she will transfer to him the ownership of her Rolls Royce, in lieu of wages. There is no written agreement between them. Peter keeps Paris garden in beautiful condition, but at the end of the 6 months Paris refuses to transfer the ownership of the Rolls Royce.

11. Has there been a fusion of:

(a) common law and equitable estoppel; AND/OR

(b) all categories of equitable estoppel?

Give reasons for your answer.

PROBLEM QUESTIONS

1. Dee Velo Pty Ltd is a company which is in the business of undertaking development and redevelopment of land for commercial and industrial purposes. In September 2020, Dee Velo enters into an agreement with Fidelity Trustee Ltd, a property trust which invests in commercial and industrial complexes. The development agreement provides that Dee Velo will redevelop a large warehouse complex at Smithfield. This was recorded in an enforceable contract between the parties.

In addition to the construction work, Dee Velo also agreed to find tenants for the units and negotiate the terms of the leases. Dee Velo will be remunerated for this according to a formula which provides the company with a rental bonus for every $1 in rent agreed with the tenants over $150 per square metre per year. This payment is in addition to the agreed development fees. This was not recorded in a contract but was contained in a number of emails between Fred Basset, De Velos CEO and Ces Lion for Fidelity.

Once the project is underway, Dee Velo begins negotiations with Polar Freeze Ltd, a multinational frozen foods company which is commencing operations in Australia and wants warehouse space for its products. Polars major requirement is an enormous freezer unit (approx 250m x 150m). The warehouse itself will be a refrigerator and will therefore have very specific and unusual construction requirements. De Velo spends 6 months in negotiations with Polar, incurring costs in travel and time for its executives, legal fees for draft agreements to lease and, more importantly, in engaging the service of refrigeration engineers to design and construct the warehouse. The total cost for Dee Velo in securing the Polar tenancy and developing the freezer unit was in excess of $450,000.

However, Dee Velos directors are not concerned about the costs, since they have calculated that the rental bonus on the freezer unit will come to over $4 million.

Polar signed the lease of the premises in December 2021. The whole development is completed in February 2019 and Polar moves into its premises in early March 2022. On 20 March 2022, Fred sends Fidelity the final invoice for:

1. the cost of developing the freezer unit

2. the bonus due on the rental of the unit.

Fidelity refuses to pay the amount on the basis that it was not part of the original agreement.

Advise Fred and Dee Velo

2. In early 2021, Hilary Clanton and Donald Rump began a romantic liaison. Donald is married to Betty who is unaware of the affair but Hilary is single.

In late 2021, Donald and Betty purchase Greenacres, a large pastoral property near Bathurst in NSW. In addition to a large 5 bedroom house and farm buildings, there is also a small cottage on the property.

In January 2022, Donald says to Hilary:

If you move into the cottage and renovate it, and hep on the farm, Betty and I will transfer the title of the cottage and the land around it into your name.

Hilary accepts the proposition and moves into the cottage in late January 2022.

Hilary renovates the cottage at her own expense, works on the farm every day and also helps to renovate the large house. In early November 2022, the relationship between Donald and Hilary ends and Hilary moves out of the cottage to rented accommodation in Bathurst.

On 28 March 2023, she sends Donald a letter asking Donald to make good his promise to transfer the title of the cottage into her name. On 20 April 2023, Donald responds that: Betty and I no longer want to sub-divide our property.

Advise Hilary.

Case list

Jemili v jemili

Week 7 express trusts

Key Cases

* Must read

* Korda v Executor Trustees (SA) Ltd (2015) 255 CLR 62; (2015) 317 ALR 225 (available in week 7 folder in Module 7)

* Commissioner of Stamp Duties v Jolliffe (1920) 28 CLR 178

Re Golays Will Trusts [1965] 2 All ER 660

West v. Weston (1998) 44 NSWLR 657

Re Badens Deed Trusts; McPhail v Doulton [1971] AC 424

* Re Gulbenkians Settlements (1970) AC 508

Bacon v Pianta (1966) 114 CLR 634

**Byrnes v Kendle (2011) 243 CLR 253; [2011] HCA 26 (3 August 2011)

Barclays Bank Ltd v Quistclose Investments Ltd [1970] AC 567

Legislation

Trustee Act (NSW) 1925

Succession Act (NSW) 2006, s 43

NATURE AND CREATION OF EXPRESS TRUSTS

PART 1

DEFINITION AND HISTORY OF TRUSTS

1. Definition

A trust is an arrangement in relation to property, either real or personal, whereby one person, the trustee, holds the legal title to the property for the benefit of another, the beneficiary.

Thus, the trustee holds the legal title or ownership of the property at law, whilst the beneficiary has an equitable beneficial interest enforceable in equity.

The trustee is in a fiduciary relationship to the beneficiary. In fact, the obligations and duties of a trustee are the most stringently enforced by equity.

There are various types of trusts which may be divided into two major categories:

express trusts: those trusts created by individuals for specific reasons, such as charitable, fixed, discretionary, hybrid and testamentary trusts;

and

remedial trusts: those trusts created or declared by the court as remedies, i.e. resulting (implied) trusts and constructive trusts.

2. A very BRIEF history of trusts

The arrangement we call a trust developed from the early medieval use of land, when a practice developed whereby land would be transferred (conveyed) to feoffees to use (trustees) to be held by them to the use (benefit) of the cestui que trust (beneficiaries). The purpose of this arrangement was originally to avoid feudal taxes and/or to remedy the situation where a minor inherited property pursuant to the rules of primogeniture in disposition of land upon death.

Initially the cestui held no estate and the use was binding only in honour. However, it came to be used as a means for holding the property of orphaned minors until they attained their majority and Chancery, in its original jurisdiction, began to impose obligations upon the trustee.

By the 15th century, therefore, the Chancellor began to enforce the use as an obligation binding the conscience of the feoffees (trustees) and the rights of cestui were treated as an estate/interest in land. The Statute of Uses 1535 operated to control uses and in the 17th century, Chancery, under the direction of Lord Nottingham LC (1673), enforced uses (trust) involving rights recognised in equity alone. Lord Nottinghams decisions established the trust along modern lines.

3. The three indicia of a trust

The three indicia or essential elements of a trust are:

(a) The legal title is vested in (held by or in the name of) the trustee. A trustee may be an individual, several persons or a corporation.

(b) There must be a cestui que trust or beneficiary, who may be a person or purpose, one or many, alive or unborn. The beneficiary does not need to know of the creation of the trust. A trustee may be a beneficiary, but not the sole beneficiary. For example, X may hold property on trust for herself and Y as beneficiaries. Also, a beneficiary may disclaim the trust.

(c) A personal obligation is attached to the property and breach of the obligation/duty attracts proprietary remedies in equity. In an express trust a beneficiary has both personal and proprietary remedies against the trustee. Personal remedies enable the beneficiary to seek in personam orders against the trustee. For example, ordering:

the trustee to do something to prevent further breaches;

the trustee to personally account for losses suffered by the trust or

the removal of the trustee

Proprietary remedies enable the beneficiary to secure or retrieve any of the trust property which is wrongfully used, taken or lost by the trustee.

4. Modern functions of the trust

(i) Succession: a trust may be created by will to:

govern the relationship between executor and legatee during the period of administration and distribution of the estate; and/or

create an arrangement for holding property bequeathed to minors and/or for the long term benefit of other legatees.

This type of trust is a testamentary trust.

(ii) Family finances: a trust may be created by will or settlement inter vivos to provide for the future financial security of family members. Also, a trust may be used to protect property from the risks associated with or arising from the business activities of a family member.

(iii) Family finances: a protective trust (Trustee Act 1925 (NSW) s.45). For example, where a person lacks legal competence to hold property in their own name i.e. is not sui juris.

(iv) Public purposes: a charitable trust and trusts of the property of charitable foundations.

(v) Financial planning: pensions and self-funded superannuation trusts.

(vi) Business: a trust of business assets may be formed as an alternative or in addition to incorporation for partnerships and joint ventures.

All of the above are express trusts and require careful planning.

There are also remedial trusts, imposed by the court.

A constructive trust will be imposed over property by the court for a breach of fiduciary duty or in situations in which it would be unconscionable to allow a person to retain the legal title to property free of the equitable interest of another.

A resulting trust will be imposed where there has been a failure of the beneficial interest or the provision of money to purchase property. You will be studying resulting trusts in week 12and constructive trusts in 200756 Remedies.

B. DISTINCTION BETWEEN TRUSTS AND OTHER LEGAL RELATIONSHIPS

It must be remembered that because a trust is NOT a legal entity (like a corporation) it cannot hold property in its own right. All LEGAL rights to property of the trust vest in the trustee.

To gain further understanding of the nature of trusts it is necessary to compare the trust with other legal and/or equitable relationships that bear some similarity to a trust, but which are not trusts.

i) Trust fiduciary obligation

A fiduciary has a fundamental obligation to act in the best interests of his principal and not to put himself in a position in which his duty conflicts or may possibly conflict with his interest, unless his principal gives his informed consent after full disclosure

Whilst all trustees are fiduciaries, not all fiduciaries are trustees. For example, company directors are not trustees: Re International Vending Machines Pty Ltd [1962] NSWR 1408 (Jacobs J), comparing the company director with the Trustee

A trustee always holds property for the benefit of the beneficiary.

ii) Trustee executor

An executor is like trustee in that he or she owes a fiduciary duty to the legatees of a will. However, although after probate the executor holds legal title to the deceaseds estate, she or he does not become a trustee. An executor will only become a trustee if, for some reason there has been a delay in the distribution of the assets (the executors year) AND the court thinks it appropriate to appoint the executor as trustee of the estate. Commissioner of Stamp Duties (Qld) v Livingston [1965] AC 694

iii) Trust bailment

Bailment is a common law concept. A bailor delivers chattels to the care of the bailee subject to a condition that they be returned to bailor, when the purpose of the bailment has been carried out. The bailee obtains only possession of the property, not legal or equitable title to it.

v) Trust agency

Agency arises when person (agent) has an express or implied authority to act on behalf of another (principal), usually in a contractual arrangement. Equitable consequences have been superimposed on this common law relationship, so that the agent is treated as a fiduciary.

However, an agent does not hold legal title to the principals property, although he/she may have the right to sell it on the principals behalf. An agent can bind his/her principal to a contract.

PART 2

EXPRESS TRUSTS

DEFINITION OF AN EXPRESS TRUST

1. An express trust is a trust created by the express or deliberate intention of one person (the settlor or creator) whereby property is held by a trustee (either the settlor or another person) for the benefit of others (the beneficiary or beneficiaries).

Express trusts may be either private or public. They may also be fixed, with little or no discretion being given to the trustees, or discretionary, in which the trustees have the discretion to determine certain aspects of the trust, such as the beneficiaries entitlements and/or how the trust property should be invested. A hybrid trust arises when the trustee has both fixed duties and discretions.

The person who creates an express trust inter vivos is called the settlor. Where a trust is created by will (testamentary trust), the person creating it is the testator. The term creator is used in a general sense to indicate someone who creates a trust but the type of trust is not specified.

The categories of express trusts are as follows:

Private express trusts:

Fixed

Discretionary

Hybrid

Testamentary

Public express trusts:

Charitable

Purpose (for example, for a public but non-charitable purpose)

Quistclose Trusts

Unit trusts

2. Brief description of the categories of express trust (excluding charitable and purpose trusts)

Fixed: The terms of the trust clearly state the duties and obligations of the trustee and the specific entitlements of the beneficiaries. Thus, the trustee must use trust property and distribute the trust income strictly in accordance with the terms of the trust deed. The beneficiaries know exactly what their entitlements are.

Discretionary: A type of express trust: pursuant to the trust deed the trustee has absolute discretion as to whether any income from the trust is distributed and if so, to which, if any, beneficiaries. The beneficiaries may belong to a nominated class eg all of the children of X who attain the age of 18. The trustee has a special power of appointment, i.e. the power to select, from time to time, which beneficiaries may benefit. Beneficiaries have no proprietary interest in the property of a discretionary trust merely an unassignable personal equity. See the judgment of Young CJE in Global Custodians Ltd v Mesh and Ors [1999] NSWSC 626 (25 June 1999).

There are two types of discretionary trust. First, there is an exhaustive discretionary trust, pursuant to which the trustee is obliged, by the terms of the trust instrument, to make a distribution to the beneficiaries. He or she may have the discretion to choose which beneficiaries receive a distribution and/or how much they receive. It is called exhaustive because notionally the income from trust property is distributed every year. Second, there is a non-exhaustive discretionary trust, in which the income from trust property may be accumulated and the trustee is not obliged to make a distribution from the trust property.

Hybrid: A hybrid trust arises when the trustee has fixed obligations as well as some discretions. For example, she or he may have the duty/obligation to distribute all of the income from the trust property to the beneficiaries. However, she or he may also have the discretion to decide how much or what proportion of the income each beneficiary will receive.

Testamentary: This type of trust is created in a will. The testator leaves property to be held on trust for a beneficiary by trustees named in the will. These are the testamentary trustees. For example: I appoint my sister Janice and brother Fred as my testamentary trustees. All moneys held in BSB/Account number at the Which bank is to be held on trust by them for my niece Mia. Note: only those gifts specifically stated to be held on trust constitute a trust. A testamentary trustee is not the same as an executor (see above).

Quistclose trusts

Quistclose trusts are not strictly express trusts in the sense that they are created AS trusts. The name comes from the case of Barclays Bank Ltd v Quistclose Investments Ltd [1970] AC 567, in which the principles relating to this type of trust were first enunciated.

A Quistclose trust arises in commercial situations when one party lends money to another for a specific commercial purpose. The money lent does not form part of the borrowers assets but is deemed to be held on trust for the lender. In fact, Quistclose trusts are more in the nature of remedial (resulting), rather than express trusts. As such, we will look at them in more detail in week 12. See Evans, [25.8 18].

Unit trust

A unit trust is a type of express trust with a purely commercial purpose investment. They are governed by Ch 5C of the Corporations Act 2001 as managed investment schemes and are also subject to the Trustee Act (NSW). Unit trusts developed from the old-style deed of settlement company and flourished in the latter half of the 19C as management trusts. A Responsible Entity (Trustee) holds the property on trust for the unit holders (beneficiaries) RE may be a natural person, but is usually a corporation. Assets of the trust are divided into units. These may be traded on the stock exchange. In this respect they are analogous to shares. However, at law and in equity this is the only similarity.

Rights of unit holders are contained in the unit trust deed. Generally, they are given NO interest in any particular trust property, nor do they have the right to require the transfer to them of any trust property. Also, pursuant to the deed the RE is usually granted absolute discretion in dealing with the property, including the right to buy or sell and to distribute income. The equitable interests of the unit holders are thereby curtailed and, depending upon the terms of the deed, are generally not proprietary in nature, as is the case with the traditional express trust but are personal equities only. The rights of unit holders are described as inchoate; CPT Custodians Pty Ltd v Commr of State Revenue (2005) 221 ALR 196.

B. THE ESSENTIAL ELEMENTS OF AN EXPRESS TRUST

The following elements are necessary for an express trust to be valid:

1. The three certainties must be present. These are certainty of:

Intention,

Subject matter,

Object.

2. In addition to the 3 certainties, a trust must be for the benefit of persons or for charitable purposes: Morice v Bishop of Durham (1804) 32 ER 656. This is called the beneficiary principle and its underlying rationale is clearly stated in Leahy v Attorney General (NSW) (1959) 101 CLR 611; [1959] AC 457:

A gift can be made to persons (including a corporation) but it cannot be made to a purpose or to an object: so also, a trust may be created for the benefit of persons as cestuis que trust but not for a purpose or object unless the purpose or object be charitable. For a purpose or object cannot sue, but, if it be charitable the Attorney General can sue to enforce it.

3. The trust must be either

fully constituted or - if not fully constituted -

must be supported by valuable consideration

4. Also, where statute, such as the Conveyancing Act 1919 (NSW) so requires, the trust must be created in writing or evidenced in writing. For example, where real estate is being transferred to the trustee, s23C of the Conveyancing Act must be observed.

5. There must be no latent flaw, such as:

incapacity on the part of the creator of the trust,

illegality of purpose

or other vitiating factor

C. THE THREE CERTAINTIES

In Knight v Knight (1840) 3 Beav 148 it was held that:

No trust will be valid unless there is certainty of

Intention,

Subject matter,

Object.

1. CERTAINTY OF INTENTION

Certainty of intention identifies rules which require an intention to create a trust rather than some other form of obligation.

The question of certainty of intention is posed in order to determine whether the transaction gives rise to a trust, or some other form of arrangement regarding property, such as bailment or legal mortgage.

The issue of certainty of intention is particularly important when trusts are used for a commercial purpose. In Korda v Executor Trustee (SA) Ltd (2015) 255 CLR 62 [205], Gageler J noted:

The need for clarity of intention to create a trust and its subject matter is of particular importance in a commercial context where acceptance of an assertion that assets are held in trust is apt to defeat the interests of creditors of the putative trustee [because assets of a trust are quarantined from the assets of an insolvent entity or natural person my note]. The traditional inclination of the courts is to protect creditors against the use of a straw company trading as a trustee.

In order to determine intention, a court will look at the words actually used and ask whether they reveal an intention on the party of the person who wishes to establish the arrangement

Sometimes the author/writer of the deed, the will or the transfer may use incorrect or imprecise wording/language. When this happens, it is uncertain whether the transaction is a trust or some other form of holding property. The words must then be interpreted (construed) by the court. This may occur in the following situations.

(a) Words of precation

A precatory word is a word which expresses a wish, hope or desire.

A testator gives property to A and expresses the wish/desire/confidence, request, or recommendation that A will confer a benefit on B. For example,

I give everything to my wife in the fullest confidence /wish/desire/hope that she will use it in the best interests of our children.

These vague words are called words of precation and raise doubts as to whether the testator intended to impose anything more than just a moral obligation on A. The question being: did the settlor intend to create a binding obligation?

When this occurs, the court will construe/interpret the transaction/will as a whole to ascertain the settlors intention.

It was once common to refer to cases in which words of precation were held to give rise to a trust, as cases of precatory trusts.

However, in Re Williams [1897] 2 Ch 12 [Eng CA], 27, Rigby LJ rejected the use of this expression as a misleading nickname pointing out that the trust which so arises is an ordinary express trust.

Facts: A testator bequeathed the residue of his estate to his wife absolutely, in the fullest confidence that she will carry out my wishes in the following particulars

The wife did not carry out all the wishes of the testator as expressed in the will

Held: The widow took absolutely, free of any obligation, because the testator expressed only a hope - it was not a direction.

(b) Illusory trusts

An illusory trust occurs when the word trust is used, but it is fairly clear that settlor did not intend any equitable benefit to be created. It therefore becomes a question of the intention of the settlor. For example, when the word trust is used in its popular or lay meaning rather than its legal meaning.

Dean v. Cole (1921) 30 CLR 1

Facts: A testator devised his estate to his wife trusting to her that she will at some time during her lifetime, or at her death, divide in fair, just and equal shares between my children all such part and portion of my estate as she may, be in the use and enjoyment of

Held: The testator had not intended to create a trust, merely to express his wish that the wife would dispose of her property in her will fairly and justly. The wife took absolutely

Alternatively, a person may pretend to create a trust, but, in reality, has no intention of holding the property for the benefit of someone else.

Before the High Court decision in Byrnes v Kendle (see below), the court would look at the circumstances surrounding the creation of the trust to determine the creators intention. The authority for this approach is to be found in Commissioner of Stamp Duties v Jolliffe (1920) 28 CLR 178:

Facts: In Qld a person was statutorily prohibited from holding more than one bank account in their name. Mr J wanted to open a second bank account, so he opened it in his own name BUT adding that it was held on trust for Mrs J. When Mrs J died, the

Commissioner of Stamp Duties claimed estate duty on the money in the bank account, on the basis that Mrs J had a beneficial interest in the account which passed on her death to her estate.

Mr. J contended that he did not intend that a trust be created.

Held: No trust had been created by Mr J because there was no real (subjective) intention to create a trust.

In Kauter v Hilton (1953) 90 CLR 86, the High Court treated Jolliffe as deciding, for the purposes of the legislation in question, that all the relevant circumstances must be examined in order to determine whether the depositor really intended to create a trust. . . . The effect of CSD v. Jolliffe is that the mere opening of an account such as this is not necessarily sufficient to make the person trustee of another.

HOWEVER, in Byrnes v Kendle (2011) 243 CLR 253, the High Court took great pains to overturn the principle enunciated in Joliffe, above.

Facts: Ms Byrnes and Mr Kendle had been married in 1980. In 1984 they purchased a property in Mr Ks name and in 1989 a trust deed was executed in which Mr K declared that he held one half of the property on trust for Ms Byrnes. In 1994 they sold the first property and purchased another. Mr K was the sole registered proprietor of this property, but a new trust deed was executed in the same terms as the first. The parties moved out of the second property in 2002 and Mr K rented it to his son for a nominal rent, of which only the first two weeks were ever paid. The parties separated in 2007 and Ms Byrnes assigned her interest in the property to her son, a solicitor. In 2008 Mr Byrnes commenced proceedings against Mr K for breach of trust failing to collect the rent and failing to account. Mr Ks defence was that there had been no trust, and, if there had, he had no active duties and that if he were subject to duties and obligations, Ms Byrnes had acquiesced to any breaches.

Issues: Was there a trust? If so, was Mr K subject to obligations and duties re the property and if he was in breach, had Ms B acquiesced to the breaches.

Held: There was a trust and Mr K was in breach of his duties as trustee in failing to collect the rent. Ms B had not acquiesced to the breaches. In finding that there was a trust, all members of the High Court (in two joint and one individual judgment) were at pains to overturn the Jolliffe principle. It was held that a trust must be inferred ONLY from the face of any documentation alone and that the subjective intention of the putative trustee (to be inferred from surrounding circumstances) was irrelevant.

Apart from the fact that this has now placed the concept of certainty of intention in jeopardy, particularly when a trust instrument is poorly drafted and/or ambiguous, the decision also runs contrary to the maxim equity looks to the intention not the form. For a further discussion of this point see: Ludmilla Robinson, Back to the Future: Retrogression and the High Courts Decision in Byrnes v Kendle (2011) 15 UWSLR 130-148, in Module 7, Week 7 folder.

2. CERTAINTY OF SUBJECT MATTER

Certainty of subject matter covers rules as to:

whether certain kinds of property are capable of being held on trust and

the identification of the property to be held on trust.

Generally, any property may be held on trust, including an equitable interest or a common law chose in action. In Don King Inc v Warren [2000] Ch 291 it was held that even property which is not assignable (such as contracts involving personal skill or confidence) can be held on trust.

The creator of the alleged trust must:

a) identify precisely the particular property to be held on trust and/or

b) specify the quantum of the beneficiarys interest: Herdegen v FCT (1988) 84 ALR 271

The words I give the bulk of my estate to A to hold on Trust for B in Palmer v Simmonds (1854) 2 Drew 221 were held to be too uncertain. If there is no sufficiently certain identification of the trust property, no trust arises

The quantum of the beneficiarys interest also must be identified

In Boyce v Boyce (1849) 16 Sim 476:

Facts: The testator had two daughters. He also had a number of cottages as assets. In his will he devised four cottages to trustees on trust to convey to Maria whichever she may think proper to choose and to Charlotte such of the cottages left over.

Maria died without making a selection.

Held: The trust failed for uncertainty. (Usually, in such cases a resulting trust would be declared in favour of the testators residuary beneficiary or next-of-kin).

The courts will try to get around these problems of identification of the subject matter, by interpreting what would otherwise be vague expressions, provided that an objective determinant (criterion) is present.

Re Golays Will Trusts [1965] 2 All ER 660

Facts: A testator gave property to executors and directed them to

give to X a property interest in one of the testators apartments for life and

to receive a reasonable income from testators other properties

Issue: How much income/money was being transmitted in the will?

Held: The executors could choose which apartment X could enjoy for life. A reasonable income provided an effective/objective determinant. However, if the parties do not agree what constitutes a reasonable income then the court should make an appropriate determination order on the basis that the courts should try to avoid striking down dispositions on the grounds of uncertainty whenever it is possible. The court is constantly involved in making such objective assessments of what is reasonable and it is not to be deterred from doing so because subjective influences can never be wholly excluded

Thus, uncertainty exists only if:

(a) a document is incapable of having any meaning at all, or

(b) a document capable of so many meanings that not one can be preferred to the others.

3. CERTAINTY OF OBJECT

Certainty of object concerns rules governing the ascertainment of beneficiaries of a fixed private trust or charitable trust. This requirement arises from the beneficiary principle pursuant to which every trust must have either human beneficiaries or a valid charitable purpose. If there is no beneficiary, the trustee holds legal title to the property free of any beneficial interest. Since equity will not allow the trustee to hold property intended to be the subject of a trust free of a beneficial interest, the equitable interest in the property will result back to the settlor through a resulting trust.

It is important to differentiate between semantic uncertainty and evidential uncertainty/difficulty.

(a) If it is a fixed express trust, that is, involving no discretion, it must be possible from the terms of the document itself to identify who is the object of the trust. If the trust is for a fixed class of persons each of the individuals must be certain. For example, a gift to grandchildren is clear enough, but list certainty is preferable. To achieve list certainty is necessary to prepare a list of the names of all of the potential objects (all the grandchildren).

If a gift is not made to a fixed number of persons it may be given to one or more of a number of persons listed in the trust instrument as potential receivers of property and who must be chosen at the discretion of the trustee a discretionary trust.

In Re Badens Deed Trusts; McPhail v Doulton [1971] AC 424, the court discussed a number of different types of uncertainty which could invalidate a discretionary trust:

semantic uncertainty is linguistic in nature. A description in the trust instrument must be sufficiently clear for the court to determine whether any given person is eligible to be classed as an object. For example, in Re Gulbenkians Settlements (1970) AC 508, property had been left in a will to friends of my son. It was held that this was too broad a phrase to allow for certainty. Similarly, the terms relatives or dependants are insufficient to meet the criterion of certainty.

(ii) administrative uncertainty arises when the description of the range of eligible objects is clear but too wide for the purpose of forming a precise class of beneficiaries. For example, all the residents of the Parramatta area.

(iii) evidential uncertainty concerns the evidence available to identify potential beneficiaries. The court may assist in overcoming problems of evidential uncertainty.

West v Weston (1998) 44 NSWLR 657

Facts: In the testators will, the estate was required to pay:

debts, funeral and other expenses,

10% of the value of the estate to the executrix and

to divide the balance then remaining equally (per capita)amongst such of the issue living at my death of my fourgrandparents, as attain the age of twenty-one (21) years."

There proved to be over 1,600 beneficiaries, but the exact number was uncwertain, spread all over Australia.

The deceased died aged seventy-six leaving no issue and was pre-deceased by both his parents.

He had no brothers or sisters either of the whole or half blood, nor grandparents, uncles or aunts

He had no dependants

However, the executrix had researched the family, assisted by a genealogist and historical researcher, and found over 1600 person who could qualify as beneficiaries

There were examples of ex-nuptial children whose surname bore no resemblance to anyone in the family tree, but who the executrix reasonably concluded, after examination of their credentials, werelegitimate claimants to a share.

The requirement of list certainty would lead to a failure of the trust because the exact number of beneficiaries was uncertain. The executor was unable to list all of the beneficiaries and determine the quantum of each share.

Held by Young CJE: After considering all of the relevant case law in England and Australia, Young CJE propounded a modified rule of certainty:

The rule will be satisfied if, within a reasonable time after the gift comes into effect, the court can be satisfied on the balance of probabilities that the substantial majority of the beneficiaries have been ascertained and that no reasonable inquiries could be made which would improve the situation.

(b) Trusts for unincorporated associations

Unincorporated associations are not legal entities and have no separate legal identity from their members. Therefore, under common law any gift to an unincorporated association may fail, unless it can be construed to be a gift to each of the individual members.

Leahy v A-G (NSW) (1959) 101 CLR 611; [1959] AC 457

Facts: A testator, by will, made a gift of a grazing property upon trust for such order of nuns of the Catholic Church or the Christian Brothers as my executors shall select.

Held: A gift on trust for an unincorporated association would, prima facie, be valid as a gift for the individual members. That presumption would be overturned, and the trust would fail, if on proper construction the gift was made to present and future members, in which case it failed as a gift in perpetuity, or if it was a gift for the non-charitable purposes of the association. This gift failed as a private trust because the subject matter and the intended object indicated that the testator did not intend to make an absolute gift to the individual members of any order selected.

Therefore, a trust for the benefit of unincorporated associations may fail because:

they do not describe the objects with sufficient certainty, or

they are for non-charitable purposes, or

offend the rule against perpetuities (e.g., if it was a gift on trust for present and future members of the Association)

Bacon v Pianta (1966) 114 CLR 634

Facts: A residuary bequest was made to the Communist Party of Australia for its sole use and benefit

Held: The gift was held to be invalid. It was not a gift to the members of the Party, but an attempt to create a Trust for the Partys purposes (which were not charitable, but political). The present gift was an attempt to create a non-charitable purpose trust for an unincorporated organisation and therefore, it failed

The High Courts reasoning:

a gift to an unincorporated association is valid if it operates as gift to the individual members at the time of the bequest

a gift in trust for the benefit of present and future members will fail as not vesting within the perpetuity period

a gift for a purpose will fail unless it is for a charitable purpose.

It must be noted, however, that in New South Wales, s 43 of the Succession Act 2006 provides for the valid disposition of property by will to an unincorporated association on various conditions. The extent to which such gifts may be validated is uncertain at the moment and awaits judicial pronouncement on the subject. See Evans, [25.27 25.38]

D. COMPLETE CONSTITUTION OF THE EXPRESS TRUST AND WRITING REQUIREMENTS

In addition to the three certainties, an express trust must be completely constituted in order to be valid.

Complete constitution generally refers to the irrevocable transfer of the trust property and the creation of the beneficial interest.

In other words, for as trust to be completely constituted,

the trustee must hold legal title to the property,

the settlor must intend to dispose of the beneficial interest irrevocably and

the beneficiaries must be clearly identified.

If the trust is completely constituted it is enforceable by the beneficiaries (even if they are volunteers) because the settlor has fulfilled his intention by constituting the intended beneficiaries as holders of the equitable interest: Ellison v Ellison (1802) 31 ER 1243

If trust has not been fully constituted a volunteer beneficiary will not be able to enforce the equitable obligation since equity will not assist a volunteer.

An incompletely constituted trust can only amount to an agreement to constitute a trust. Such an agreement:

is not a trust but a contract, and is subject to the principles of contract law andwill not be enforceable, unless it is supported by valuable consideration.

For example, if a settlor wants to create trust immediately, but does not have the property yet, he can make a contract to settle now the later-acquired property. The trust will not be fully constituted until the property has been settled.

When the property is eventually acquired by the settlor, can the proposed beneficiaries (or trustee on their behalf) enforce the promise to settle the property and therefore compel the constitution of the trust?

if the beneficiaries gave consideration, they can seek specific performance

if they were parties (together with the trustee) to the agreement/promise (covenant), they could sue on the promise

if no consideration was provided and the beneficiaries were not party to the promise, they will not be able to enforce the trust. However, a solution would be for the intended trustee to sue on the promise/covenant and then constitute the trust for benefit of intended beneficiaries.

If the promise was made in writing under seal , i.e. in a deed, the benefit of the promise under seal is a chose in action and therefore property which will be held on trust for by the intended trustee for the intended beneficiary. This creates a constituted trust of the promise.

In Fletcher v Fletcher (1844) 4 Hare 67; 67 ER 564 it was found that such a trust of a promise existed and that the promisor/covenantor should honour that promise.

However, the trustee will only be under an obligation to sue the settlor for damages if it is established that there is a completely constituted trust of the promise to transfer the property to the trustee to hold on trust for the beneficiary. If there is a completely constituted trust of the promise, the trustee would be obliged to sue the settlor for damages at common law for breach of the agreement: Cannon v Hartley [1949] Ch 213; [1949] 1 All ER 50

If a trustee is so obliged and does not sue, the beneficiary can compel the trustee to do so, or sue the settlor, joining the trustee as co-defendant.

If there is no trust of the promise, the trustee should not commence an action, since it would be futile.

In Fletcher v Fletcher, a voluntary covenant was entered into that if the settlors ex-nuptial sons survived the settlor and attain the age of 21, his executor would pay over existing property (money) to trustees upon trust for the sons. The settlor died and an ex-nuptial son claimed the property. It was held that there was a completely constituted trust of the promise.

Similarly, in Re Cooks Settlement Trusts [1965] Ch 902; [1964] 3 All ER 898, a voluntary covenant provided that if certain paintings were sold, the net proceeds to be paid to the trustees to hold on the trusts of the settlement. The trustees commenced an action to determine whether (if a painting was sold and net proceeds not paid to them) they ought to sue settlor on the covenant. Buckley J refused to find an immediate trust and distinguished Fletcher. In this instance the trustee ought not to sue settlor. Because the covenant did not create a present obligation to hand over the proceeds from the sale the painting (and as this might never ever occur) there was no subject matter of the Trusts. Thus, one of the three certainties was missing, and there was no Trust

This appears to reconcile the cases on the basis of whether the property is present or future, since future property cannot be the subject matter of an existing trust: Holroyd v Marshall (1862) 10 HLC 191, but the right to receive it can be.

E. CREATION OF AN EXPRESS TRUST

(i) There are three ways to create an express trust:

1. Creation of trust by declaration

The absolute owner of property expresses his/her intention to hold their property on trust for another. There needs to be a statement by the legal owner of the property that it is intended to be final and binding that he, from that moment, holds the property on trust for another. Thus, the trustee retains the legal interest, but the beneficiary holds the equitable interest.

The only formal requirement is in relation to land: the writing requirement in section 23C(1)(a) Conveyancing Act 1919 (NSW), regarding the creation/disposition of an interest in land.

If the trust property is only personal property, one view is that there is no need for formalities, merely evidence of an immediate intention (there and then) to dispose of the property. The intention may also be inferred from conduct

2. Creation of trust by transfer

Title is transferred to a person with instructions to hold the property for another, either by (a) inter vivos settlement OR

(b) testamentary disposition (will).

(a) In regard to an inter vivos settlement, if the subject is real property or a subsisting equitable interest in real property, the transfer must be in writing (see Conveyancing Act 1919 (NSW)). An executory trust may be enforceable if everything necessary to transfer the title has been done by the creator (cf the rule in Milroy v Lord).

(b) Testamentary disposition, i.e. by will, is the post mortem creation of a trust. Such a trust must comply with requirements for the validity of wills in writing and signed by the testator in the presence of two or more witnesses who are not beneficiaries under the will.

3. Creation of trust by Direction

The beneficiary of an existing trust may direct the trustee to hold his equitable interest on trust for another. In other words, this is the disposition of an existing equitable interest. As such it must be:

evidenced in writing: s.23C(1)(c) Conveyancing Act (NSW)

extend to personal property: Grey v Inland Revenue Commissioners [1960] AC 1.

(ii) Executed trust and executory trust

These terms refer to the creation of a trust, not to the carrying out of its terms.

In creating a trust, the settlor may:

set out clearly and precisely all the terms and conditions of the trust, OR

merely declare a trust without going into details

An executed trust arises when the settlor has defined the interests of the beneficiaries and the duties and obligations of the trustee in a complete and final form. The trust is completely declared.

An executory trust arises when the settlor merely expresses a general intention as to the disposition of the property, indicating but not finally defining the beneficial interests or the duties, obligations and powers of the trustee. For example, the limitations of the estate of the trustees and of the beneficiaries have not been declared by the settlor yet, but will be determined at a later

TUTORIAL QUESTIONS

1. Why does equity place so much importance upon ensuring that trustees fulfil their duties?

Equity is to influence the benefits of the beneficiary however common law doesnt recognise equitable interest or equitable interest. There equitable rights can be expose and will come down really hard if trustee breach the provision of the trust.

2. What are some of the purposes for which trusts are created?

Assets, succession, big corporate development

3. What are the 3 indicia (not the 3 certainties) of a trust?

3 indicators of trust a) trustee b) beneficiary c) property

3 certainty include certainty of intention, certainty of subject matter or property and certainty of beneficiaries.

4. What is the difference between:

(a) a trust and bailment; bailment is a common law concept, legal relationship in common law where the owner transfers physical possession of personal property for a time but retains ownership. Whereas a trust is merely equitable having equitable rights.

(b) a trustee and an executor of a will? Executor is in charge of disrupting the estate or land of the will.

5. Bert created a trust. The trust deed stated, inter alia:

Clause 2. I appoint Kermit as my trustee.

Clause 3. The trustee must distribute the income of the trust annually amongst the beneficiaries on or before the 31 July.

Clause 4. The trustee may choose which of the beneficiaries will receive a distribution from the income.

What type of trust has Kermit created? Give reasons for your answer.

6. Why is certainty of intention so important to the validity of a trust?

7. How did the decision in Byrnes v Kendle (2011) change equitys approach to determining the issue of intention?

8. In his will, Bill Poster left the 5 residential units he owned to his testamentary trustees to hold on trust for his 4 children with the direction that:

My trustees shall choose one home unit and transfer the legal title to my wife, Beryl.

Is this a valid disposition? Give reasons.

9. What is required for a trust to be completely constituted?

10. What is the difference between an executed and an executory trust?

PROBLEM QUESTION

On 4 March 2020, Richard Mann, a wealthy media magnate, was advised by his accountant, Archie Pythagoras, to divest himself of some of his property to minimise the property taxes which the State government had been proposing to introduce.

PART A

Rich went home and drew up a list of purported dispositions. These were as follows:

1. To my trusted solicitor, Barry (Bazza) Murphy, to hold on trust for my two daughters, Hope and Faith, I give all my right, title and interest in my property at Vaucluse. The property is to be rented and the rental income to be divided equally between the two girls.

2. To my accountant, Archibald Pythagoras, I give all my right, title and interest in my 100,000 shares in my corporation Wolf Media, to hold on trust for my dear wife Betty.

3. To my accountant, Archibald Pythagoras, I also give all my right, title and interest in my collection of rare Calathumpian marbles, to hold on trust for my youngest daughter Charity, until she attains the age of 21.

On the morning of 6 March 2020, whilst still at home, Rich executed all of the necessary documents to transfer his interest in his shares, and sends an email to Archie, instructing him to register the transfer in the Company Register. He then phones Bazza and tells him to come to the offices of Wolf Media in order to take instructions on the other dispositions. Rich then leaves for work in his chauffeur-driven Rolls.

On the way across the Harbour Bridge the chauffer is bitten on the neck by a red-back spider. In his panic, the chauffeur loses control of the car which collides with one of the pylons of the Bridge. Although the chauffeur escapes with minor injuries, Rich is killed instantly.

PART B

Rich left a will in which he had appointed both Bazza and Archie as his executors and testamentary trustees. The will made (inter alia) the following dispositions:

1. I bequeath to my trustees the sum of $250,000 to be held on trust and divided equally between all the friends of my son Harvey, who helped to keep him out of gaol when he was a teenager.

2. I bequeath to my trustees two of my six properties on the Gold Coast to hold on trust. The properties are to be sold and the proceeds divided equally between Faith, Hope and Charity.

3. I give and bequeath the sum of $500,000 to the Hells Fairies Motorcycle Club.

Bazza and Archie need to prepare the application for probate on the will, but are not sure as to the validity of the three purported inter vivos dispositions made by Rich on 4 March 2017 and the three testamentary dispositions listed above.

1. Advise Bazza and Archie as to the validity of the 3 inter vivos dispositions in Part A; and

2. Advise them on the validity of the 3 testamentary dispositions in Part B.

Give reasons for your answer.

Hybrid fixed trust

Must or perform

Elements of discretion trust

Week 8 express trust variation and termination beneficiaries rights

RIGHTS OF BENEFICIARIES AND TERMINATION OF TRUSTS

1. Basic themes discussed under this topic:

Beneficiaries

RIGHT TO POSSESSION OF TRUST PROPERTY

RIGHT TO COMPEL THE PERFORMANCE OF THE TRUST

RIGHT TO RESTRAIN A BREACH OF TRUST

RIGHT TO APPROACH THE COURT

RIGHT TO EXTINGUISH THE TRUST

RIGHT TO FOLLOW TRUST PROPERTY

RIGHT TO CLAIM IN PERSONAM FROM THIRD PARTIES

REVIEW OF THE RULE IN BARNES v ADDY

Variation and Termination

VARIATION

RULE AGAINST PERPETUITIES

TERMINATION BY BENEFICIARIES

AVOIDANCE BY SETTLOR

AVOIDANCE BY THIRD PARTIES

TERMINATION BY DISTRIBUTION

2. TUTORIAL QUESTIONS

3. PROBLEM QUESTIONS

TRUSTEES

Prescribed readings :All students

Bryan and Vann, Chapter 24 Note - Bryan & Vann do not deal at any length with Beneficiaries Rights - For a fuller discussion, see Weekly Notes

JD students

H & L, Chs 25, 26 & 29

Additional reading: All students

Jacobs, Chs 9 & 23

Key Cases

* Must read

Wylde v A-G (1948) 78 CLR 224

Barnes v Addy (1874) 9 Ch App 244

Baden Delvaux v Societe Generale [1992] 4 All ER 161

Nelson v Larholt [1948] KB 339; [1947] 2 All ER 751

* Consul Development Pty Ltd v DPC Estates Pty Ltd (1975) 132 CLR 373

* Farah Construction Pty Ltd v Say-Dee Pty Ltd [2007] HCA 22; (2007) 81 ALJR 1107.

Sir Joseph Montefiore Jewish Homes v Howell (No. 7) Pty Ltd [1984] 2 NSWLR 406

The Bell Group (in liq) v Westpac Banking Corp (No 9) (2009) 70 ASCR 1

* Kennon v Spry (2008) 238 CLR 366

Nelson v Nelson (1995) 184 CLR 538

Sir Joseph Montefiore Jewish Homes v Howell (No 7) Pty Ltd [1984] 2 NSWLR 406

Legislation

Trustee Act 1925 (NSW)

Perpetuities Act 1984 (NSW)

RIGHTS OF BENEFICIARIES

The rights of beneficiaries are the most consistently and avidly protected rights in equity. This protectiveness stems from the beneficiarys position of relative vulnerability vis vis the trustee and the potential for a trustee to abuse his/her position in order to profit personally. The concept of vulnerability or weakness does not depend upon the status, knowledge or level of education of the beneficiary. Often, beneficiaries may be corporations or experienced business people.

Consequently, equity has developed a number of beneficiary rights in regard to the trust and trust property and against a trustee.

However, when examining the rights of beneficiaries, it is important to remember that the rights of a beneficiary under a FIXED trust are much more robust than those of a beneficiary under a DISCRETIONARY trust. The fixed trust beneficiary has an equitable PROPRIETARY right, whilst the beneficiary under a discretionary trust has only a personal equity. The rights of beneficiaries under a HYBRID fixed trust depend upon the nature of their entitlements under the trust deed and the duties of the Trustee.

RIGHT TO POSSESSION OF THE TRUST PROPERTY

(a) Where a trustee of a fixed trust has no active duties to perform and merely holds the property, and the beneficiary is sui juris (legally entitled to hold property), sui generis (one of a kind sole beneficiary) and absolutely entitled (has an equitable proprietary interest in regard to all of the corpus of the trust estate), the beneficiary is entitled to possession of the trust property and to the indicia of title to the property. In other words, the beneficiary has the right to demand that the legal interest in the trust property be conveyed to him or to a third person. This is the rule in Saunders v Vautier (1841) Cr & Ph240; [1835 42] All ER Rep 58. See E. Right to extinguish the trust, below.

(b) Where a trustee has active duties to perform (e.g. to manage land held on trust for the beneficiaries), the beneficiary life tenant has no right of possession. However, the beneficiary may be given possession of the property upon giving security (by way of undertaking or otherwise) that what is to be done for the benefit of other persons entitled shall be duly done. In other words, the beneficiary may be given possession of the property, the legal interest remaining with the trustee, provided they agree to maintain the property in good order. Jenkins v Milford (1820) 1 J & W 629; 37 ER 508

(c) Although in Kennon v Spry (2008) 238 CLR 366 the High Court held that the interest of a beneficiary in a discretionary trust could be regarded as property for the purposes of a Family Law settlement, a beneficiary of a discretionary trust has no proprietary right to claim the corpus of the trust, unless:

the beneficiaries are of the same class;

the trustee has the duty to distribute the whole of the income of the trust annually to one or more of the beneficiaries: and

the beneficiaries are in unanimous agreement in regard to the claim. See E. below.

RIGHT TO COMPEL PERFORMANCE OF THE TRUST

Beneficiaries of fixed, discretionary and hybrid trusts may institute proceedings to compel the trustee to perform his/her duty and/or to protect their beneficial interest. Bartlett v Bartlett (1845) 4 Hare 631; 67 ER 800.

Any failure by a trustee to carry out a duty will constitute a breach of trust, giving rise to an action against the trustee by the beneficiary. If the breach is sufficiently serious, it may also provide grounds for the removal of the trustee and the appointment of a new one.

If a trustee refuses to institute proceedings against a third party to recover trust property (e.g. to recover a debt owed to the estate), a beneficiary may institute proceedings him or herself in his or her own name. However, this may take place only in exceptional circumstances and requires the addition of the trustee and other beneficiaries as defendants.

For example, in Howden v Yorkshire Miners Association [1903] 1 KB 308; [1905] AC 256 HL:

Facts: The trustees of the union refused to take legal proceedings to restrain the union executive from a proposed misapplication of its funds.

Held: That a single member of the union was entitled to sue in his own name and add the trustees as defendants.

Alternatively, the beneficiaries may apply to equity for an order forcing the trustee to perform his or her duty (to protect trust property) and so duly administer the trust.

RIGHT TO RESTRAIN A BREACH OF TRUST

Central to a beneficiarys rights in equity is the right to prevent a breach of trust by the trustee. Thus, a beneficiary of a fixed, discretionary or hybrid trust may obtain an injunction to restrain a trustee from performing an act which would constitute a breach of trust.

In Wylde v Attorney-General (1948) 78 CLR 224:

Facts: The property of the Church of England was required to be administered on trust for the purposes of the Church of England in NSW and not otherwise.

The Anglican Bishop of Bathurst proposed to institute a new form of religious service which was not in accordance with the Anglican Book of Common Prayer. The A-G argued that the institution of the new form of service implied that the service no longer complied with Anglican doctrine and therefore, the property of the Church in Bathurst was not being used for the purposes of the Anglican Church. (The A-G represented the Church in lieu of a beneficiary, since the trust was a charitable trust this will be explained in Week 12).

Held: An injunction was granted restraining the Anglican Bishop of Bathurst from using, or authorising or encouraging the use of service not in accordance with the form contained in the Book of Common Prayer and the performance of certain ceremonies illegal in the Church of England

RIGHT TO APPROACH COURT FOR JUDICIAL ADVICE, A DETERMINATION OF QUESTIONS OF CONSTRUCTION AND/OR ADMINISTRATION

In McLean v Burns Philp Trustee Co P/L (1985) 2 NSWLR 623, 636 Young J stated that:

[I]f [the beneficiary] complains to the court about the administration of a trust, [the beneficiary] is, as a matter of course, entitled to the appropriate order, either to answer his question as to the construction [interpretation] of a trust instrument, or to settle a dispute as to the administration of the trust in whole or in part under the authority of the court, unless the court is satisfied that there is no question which requires its decision.

Beneficiaries of both fixed and discretionary trusts may apply for a determination of a question related to the trust.

Further, there is also a simple statutory procedure by way of originating summons whereby specific questions of construction of the trust instrument may be determined by the court, pursuant to Supreme Court Act (NSW) s. 63:

s. 63 Final determination

The Court shall grant, either absolutely or on terms, all such remedies as any party may appear to be entitled to in respect of any legal or equitable claim brought forward in the proceedings so that, as far as possible, all matters in controversy between the parties may be completely and finally determined, and all multiplicity of legal proceedings concerning any of those matters avoided.

Thus, any question affecting the rights and interests of the beneficiary, or the determination of any question arising in the administration of the trust may be determined by the court. However, the procedure is also available to the trustees to make application to the court for the same purposes. See also: the Rinehart litigation and Bianca Hope Rinehart t/as Trustee of the Hope Margaret Hancock Trust [2017] NSWSC 282 in Week 10 folder.

E. RIGHT TO EXTINGUISH THE TRUST

Historically, the rule in Saunders v Vautier (1841) (see above) effectively gives a sole beneficiary of a fixed trust with a proprietary interest in the trust property the right to extinguish/determine the trust. The transfer of property to the beneficiary may be absolute or by way of settlement upon fresh trusts Grey v IRC [1960] AC 1.

TODAY, the rule will apply if there is more than one beneficiary and all agree/consent to the application of the rule.

Also, beneficiaries of a discretionary trust may claim the corpus if:

all the beneficiaries are sui juris; and

all the beneficiaries join together/agree to terminate the trust and:

the class of beneficiaries is closed (no more beneficiaries may be appointed and

all of the income of the trust must be passed every year to one or more of the objects: Sir Joseph Montefiore Jewish Homes.

It should be noted that the rule does not authorise beneficiaries to force upon trustees modifications to the trust deed which would impose new duties. Nor can they use it to direct the exercise of certain discretions or powers held by trustees.

RIGHT TO FOLLOW THE TRUST PROPERTY (TRACING)

A beneficiary has the right to trace the trust property into other property into which it may have been converted in the hands of the trustee and even to follow the actual property in the hands of third parties. For example, a trustee uses trust funds contrary to the terms of the trust to buy herself a car. The beneficiaries have the right to apply to court to have the property returned to the trust.

This is a proprietary remedy and is available to beneficiaries of both fixed and discretionary trusts. Whilst the beneficiary of a discretionary trust holds only a personal equity (as opposed to an equitable proprietary remedy), equity will apply a proprietary remedy when it is necessary to preserve trust property. Thus, whilst the beneficiary of a discretionary trust has no right against trust property, s/he does have the right to request the court to order its return i.e. enforce the due administration of the trust.

In Boscawen v Bajwa [1995] 4 All ER 769, 776-7 Millett LJ said of tracing in equity that:

It is the process by which the plaintiff [beneficiary] traces what has happened to his property, identifies the persons who have handled or received it, and justifies his claim that the money which the handled or received (and if necessary which they still retain) can properly be regarded as representing his property. He needs to do this because his claim is based on the retention by him of the beneficial interest in the property which the defendant handled or received.

You will look at the remedy of tracing in much greater detail in Remedies next semester.

RIGHT TO CLAIM IN PERSONAM AGAINST A THIRD PARTY WHO HAS RECEIVED TRUST PROPERTY

As mentioned above, a beneficiary has the right to trace trust property in the hands of a third party. In Ministry of Health v Simpson [1951] AC 251 it was definitively established that a beneficiary in a deceased estate has a personal right of action to recover from an overpaid beneficiary or a stranger volunteer.

However, the English Court of Appeal expressed the view that in such circumstances the unpaid beneficiary should first exhaust his remedy against the defaulting trustee Re Diplocks Estate [1948] Ch 465

Further, the speech of Lord Simonds in Ministry of Health v. Simpson makes it clear that the discussed principles apply only to claims of beneficiaries in the estates of deceased persons. The principles do not deal with the right of an underpaid beneficiary to recover against an overpaid beneficiary or against a third party in cases concerning trusts other than estates of deceased persons.

Strangers who act as trustees de son tort

De son tort means from or because of his wrong or wrongful conduct. Therefore, if a third party takes it upon himself to discharge duties/obligations of a trust and intermeddles with trust property or does things characteristic of the office of trustee, he will be held by the court to be trustee de son tort, and hold the property on constructive trust for the beneficiaries.

A constructive trust will be declared even if the third party has acted honestly (bona fide): Life Association of Scotland v Siddai (1861) 3 De & GF & J 58; 45 ER 800

The only available defence is that the third party was instructed by a duly appointed trustee.

H. THIRD PARTIES AND BREACHES OF TRUST REVIEW OF THE RULE IN BARNES v ADDY

NOTE: THIS RULE APPLIES TO BREACHES BY ALL CLASSES OF FIDUCIARY and was also discussed in Week 3

When a trustee or fiduciary acquires property in breach of their fiduciary duty, a constructive trust is held to be the appropriate remedy. However, what happens in regard to third parties who have dealt with or assisted the trustee or the fiduciary in the commission of the breach?

If a third party has purchased legal title to the property for good value, bona fide and without notice of the interest of the beneficiary or principal, there is no liability.

However, when the third party has been involved in some way in the fiduciarys breach, either through receipt of the property or by assisting the fiduciary, the situation is more complex. A third party does not owe a fiduciary duty to the beneficiary or principal. The third party has not taken on any obligations of the trust, nor has the beneficiary placed any trust/confidence/dependence on the third party.

This problem is addressed by the rule in Barnes v Addy.

Barnes v Addy (1874) 9 Ch App 244

Facts: A trustee, acting under a power in the trust deed, appointed K as sole trustee of part of the trust property, which was held on trust for the wife and children of X. Both the trustees solicitor and of the solicitor of X had warned him that K was unreliable and untrustworthy.

However, the respective solicitors nevertheless prepared the necessary documents. The trust funds entrusted to K were lost.

Held: The solicitors could not be made liable for the loss. No funds had passed through their hands, and there had been nothing fraudulent or dishonest in their actions.

Lord Selborne LC stated the basis for the liability of third parties as a constructive trust of the property:

[The responsibility of a trustee] may no doubt be extended in equity to others who are not properly trustees, if they are found either making themselves trustees de son tort, or actually participating in any fraudulent conduct of the trustee to the injury of the cestui que trust. But, on the other hand, strangers are not to be made constructive trustees merely because they act as agents in transactions within their legal powers, transactions perhaps of which a court of equity may disapprove, unless those agents receive and become chargeable with some part of the trust property, or unless they assist with knowledge in a dishonest and fraudulent design on the part of the trustees.

Categories of knowledge

In Baden Delvaux v Societe Generale [1992] 4 All ER 161, Gibson J set out five categories of knowledge that are relevant to the decision to impose liability upon a third party:

actual knowledge

wilfully shutting of eyes to the obvious (Nelsonian knowledge)

wilfully and recklessly failing to make such inquiries as an honest and reasonable person would make

knowledge of circumstances which would indicate the facts to an honest and reasonable person

knowledge of circumstances which would put a reasonable person on inquiry

1) and 2) are treated as actual knowledge in both common law and equity

3) is treated as equivalent to actual knowledge.

4) is a type of constructive knowledge/notice: Consul Development P/L v. DPC Estates P/L (1975) 132 CLR 373, 398, 412 (Gibbs and Stephen JJ).

5) is the traditional formulation of constructive notice in equity. It is a purely equitable concept.

There was controversy as to whether all five categories of knowledge in Baden would satisfy the requirement of knowledge for the imposition of third party liability in cases of knowing receipt or whether just actual knowledge (1) should be the criterion.

For example, in Nelson v Larholt [1948] KB 339; [1947] 2 All ER 751

Facts: A bookmaker accepted cheques from a punter who was also an executor. The cheques used by the punter to pay his debts were printed with the name of the estate.

Held: The bookmaker was liable as constructive trustee for the estate because of what a reasonable person would know from the facts. He should have known that the cheques were not the personal cheques of the punter. This is behaviour amounts to the wilfully shutting of ones eyes or category 2 in Baden

The concepts of notice and knowledge should not be confused. Knowledge involves some want of probity, for example, shutting ones eyes to the obvious, or wilfully/recklessly failing to make such inquiries as an honest/reasonable person would make. The concept of notice on the other hand, involves merely having a suspicion. For example, categories 4) and 5) from Baden.

It has been argued that since the recipient of trust property gets the full advantage of the breach of trust, liability should be strict: Koorootang Nominees P/L v ANZ Banking Group Ltd [1998] 3 VR 16.

This approach is said to be consistent with the underlying rationale for receipt liability being restitution for unjust enrichment. El Ajou v Dollar Land Holdings [1993] 3 All ER 717 per Millet J

In Polly Peck International v Nadir (No. 2) [1992] 4 All ER 769, 777 Scott LJ noted that:

Liability as constructive trustee in a knowing receipt case does not require that the misapplication of the trust funds be fraudulent. It does require that the defendant have knowledge that the funds were trust funds and that they were being misapplied. Actual knowledge will obviously suffice. The various categories of mental state identified in Badens case are not rigid categories with clear and precise boundaries. One category may merge imperceptibly into another.

2. The two limbs of the Rule in Barnes v Addy

(a) Knowing receipt the first limb of the rule

Strangers who receive some part of trust property become chargeable with that property if it was received with knowledge that the property had been transferred in breach of trust.

If this happens, the plaintiff/ beneficiary must prove that the defendant:

has received trust property

knew that it was trust property and

knew of circumstances which made the transfer of the trust property in breach of trust.

The question arises as to what degree of knowledge is necessary for third party liability under the rule.

The weight of authority is that actual or constructive knowledge (i.e., 1 4) will suffice to establish liability:

Consul Development Pty Ltd v DPC Estates Pty Ltd (1975) 132 CLR 373, at 410 per Stephen J and [1974] 1 NSWLR 443, 459 ( Jacobs P).

Belmont Finance Ltd v Williams Furniture (No. 2) [1980] 1 All ER 393, 412 (Goff LJ).

Baden Delvaux v Societe Generale [1992] 4 All ER 161

In The Bell Group (in liq) v Westpac Banking Corp (No 9) (2009) 70 ASCR 1, it was held that the Bank was liable under the first limb of the rule because it had:

required a restructuring of the loans to the company

on much harsher terms than the previous securities

knowing that the directors would be in breach of their fiduciary duty by agreeing to the terms and

called in the securities when the company went into liquidation.

In Australia categories of knowledge 1 4 are required to attract liability of a third party under the first limb of the rule.

(b) Knowing assistance the second limb of the rule

Essential elements of the liability

existence of a fiduciary duty (as trustee or otherwise)

a dishonest and fraudulent design by the fiduciary/trustee

assistance by third party in that design

[assistance in the design] with knowledge that a dishonest and fraudulent design is being implemented

Until recently, there was some confusion in Australia as to the degree of knowledge required by a third party to attract liability for knowing assistance. On the one hand there are the English authorities, which apply the 5 categories of knowledge as set out in Baden. Further, the Privy Council case of Royal Brunei Airlines v. Tan [1995] 2 AC 378 held that a person who dishonestly procured or assisted in a breach of trust or fiduciary obligation was liable in equity to make good any resulting loss. This added a further element of dishonesty to the equation.

Two cases in Australia served to clarify the position to be taken in Australia (to some degree). These are:

Consul Development Pty Ltd v DPC Estates Pty Ltd (1975) 132 CLR 373 and

Farah Construction Pty Ltd v Say-Dee Pty Ltd [2007] HCA 22; (2007) 81 ALJR 1107.

Consul Development P/L v. DPC Estates P/L (1975) 132 CLR 373

Facts: A solicitor (Walton) controlled a number of companies engaged in the purchase, development and sale of land, including DPC. Grey was the manager of these companies and was precluded by his service agreement from dealing in real estate on his own account

Grey's duty was to find suitable properties for purchase by the companies.

Walton employed Clewes in his legal practice as a clerk. Clewes ran a family company (Consul) which was also engaged in property development.

Grey and Clewes entered into an arrangement that Consul should purchase properties found by Grey and that Grey and Consul should share the profits on sale. Grey had told Clewesw that DPC was not interested in the projects for lack of finance.

Plaintiff argued:

that the properties purchased by Consul were held on constructive trust for the Plaintiff (DPC); and

that constructive notice is sufficient to attract the liability of a third party.

At first instance, Hope J. dismissed the Plaintiffs claims, but this decision was reversed on Appeal. NSW CA upheld DPCs appeal

Hutley JA (Hardie JA agreed) that Consul was constructive trustee for the plaintiff of the property acquired and was therefore liable to account for profits

Per Jacobs P (dissenting):

Receipt cases: actual or constructive knowledge of the existence of the trust is sufficient.

Assistance cases: something more is required. Actual knowledge of the fraudulent design is necessary so that defendant can truly be described as a participant in that fraudulent activity of the trustee.

Therefore, on the facts Clewes should not be held to be constructively on notice that Grey was in breach of his fiduciary obligation simply because further inquiries could have been made and were not made.

In cases of receipt, no question of dishonest or fraudulent design enters the subject matter.

Consul Dev. appealed successfully to the High Court.

Held: (Barwick CJ, Gibbs and Stephen JJ; McTiernan J dissenting):

The appeal would be allowed because:

Neither his employment as Ws articled clerk nor any other circumstances placed C in a fiduciary relation to the plaintiff/respondent company; a fortiori the appellant company (Consul) owed no fiduciary duty to DPC.

(Barwick CJ and Stephen J, approving Jacobs Ps dissenting judgment in the NSW Court of Appeal):

As to whether constructive knowledge of a stranger will suffice, there is a difference between the person receiving trust property and the person who is made liable even though he is not actually a recipient of trust property in that in the first place knowledge actual or constructive of the trust is sufficient, but in the second place something more is required and that something more appears to be the actual knowledge of the fraudulent or dishonest design so that the person concerned can truly be described as a participant in that fraudulent or dishonest activity. If a defendant knows of facts which themselves would, to a reasonable man, tell of fraud or breach of trust the case may well be different, as it clearly will be if the defendant has consciously refrained from inquiry for fear lest he learn of fraud. But to go further is to disregard equitys concern for the state of conscience of the defendant.

Clewess belief that the Walton group was in financial difficulties and therefore not interested in purchasing the properties, which belief was supported by objective sources independent of Grey, relieved him of any obligation to make further inquiries.

On the facts, as Clewes knew them to be, Greys conduct involved no breach of fiduciary duty.

The arrangements under which Grey participated with the appellant company did not constitute a bribe by the latter, in that

G was at all times the initiator;

on the evidence there was no general promise of profit sharing, but three separately negotiated agreements; and

those arrangements subjected G to important obligations and potential liabilities.

Held also, (Gibbs J): It does not seem to be necessary to prove that a stranger who participated in a breach of trust or fiduciary duty with knowledge of all the circumstances did so actually knowing that what he was doing was improper

For knowing assistance what is required is actual knowledge of the breach of trust, or wilful shutting of ones eyes to the obvious, not constructive knowledge.

Thus, actively participating in fraudulent conduct, or being actively involved in setting up the machinery attracts liability, but merely failing to stop someone or standing by is not assistance.

Q: What constitutes assistance?

A: If, without the acts of the third party, the breach of duty by the fiduciary could not have occurred or been implemented

it may be essential action or simply part of a chain of events

no need to inevitably lead to loss (from Baden)

irrelevant if it is done with intention to make a profit, if in fact it involves a breach of duty

This line of reasoning was followed in Farah Construction Pty Ltd v Say-Dee Pty Ltd [2007] HCA 22; (2007) 81 ALJR 1107 and the High Court confirmed that Consul Developments was a correct statement of the principles underlying knowing assistance in Australia.

Diagram of the Rule in Barnes v Addy

VARIATION AND TERMINATION OF TRUSTS

Introduction

Whilst the usual objective of a private express trust is to provide an immutable mechanism for holding the legal title to property for the benefit of a person or persons for a period of time, there are circumstances under which the terms of a trust may be varied or the trust itself may be terminated.

Also, there are statutory provisions which limit the length of time during which the trust may exist this is known as the rule against perpetuities. This week we will look at the various ways in which the terms of a trust may be varied and the circumstances under which a trust may be terminated.

A. VARIATION

1. An express trust may be varied in a number of ways:

(a) By a provision contained in the trust instrument.

For example, in Kearns v Hill (1990) 21 NSWLR 107, a power of variation was included in the trust instrument. The court held that in construction (interpretation) the words used were to be given their natural and ordinary meaning, even where the terms included a power to vary the identity of the beneficiaries of the trust.

(b) Pursuant to the inherent power of the court

In the UK there is no general power of the court to vary the terms of a trust, merely the power to allow a trustee to deviate from the terms of the trust if it can be shown that there is an emergency: Chapman v Chapman [1954] AC 429 HL.

In Chapman v Chapman the court identified four types of emergencies that could be remedied pursuant to the courts inherent jurisdiction:

changes in the nature of the investments for infants from personalty to realty

authorisation of investments in business transactions not authorised by a trust of settled land

payment of maintenance out of income, even where there is a direction to accumulate income

compromises in favour of unborn children.

In NSW, however, the position is different. In Tickle v Tickle (1987) 10 NSWLR 581, Young J decided not to follow the restrictions placed on the courts power as set down in Chapman v. Chapman. Young J:

stated that the inherent power of the court might embrace circumstances where there was an element of salvage and a flavour of compromise and the combination of these factors may make it a proper case for the court to exercise jurisdiction to vary.

he also added fifth category of circumstance which justified a variation, i.e. when circumstances have occurred that have tended to thwart the creators (settlors or testator;s) intention and where the parties have consented to a course which will effect an alternative scheme in line with the creators original intention.

(c) Pursuant to the statutory power of the court

Statute allows a court to vary a trust instrument when it is expedient or advantageous to do so. Section 81 Trustee Act 1925 (NSW) provides that where it is advantageous or expedient for the trustees to enter into some dealing or arrangement in regard to trust property, but this is not permitted under the terms of the trust instrument, the court will alter the terms of the trust to allow the dealing.

For example, in Stein v Sybmore Holdings Pty Ltd [2006] NCWSC 1004 (27 September 2006), the court granted an application by a trustee under s 81 to extend the vesting date of the trust on the grounds that, although the extension of time constituted a variation of the terms of the trust, it was well within the scope and prupose of the intentions of the settlor.

B. TERMINATION OF TRUSTS

In Week 7, you learned that a trust which:

satisfies the three certainties,

is completely constituted and

has complied with all formalities

will be valid, until terminated either by the court or in some other way.

A trust may fail or be terminated (determined) in several ways and for a number of reasons:

(i) Public policy

A trust which is contrary to public policy, or promotes immorality or interferes with the sanctity of marriage (e.g., placing absolute restriction on a beneficiary in regard to marriage) will be struck down on the grounds that the courts will not lend assistance to acts or provisions which are contrary to public policy.

However, exactly what constitutes public policy is difficult to determine. Whilst courts reflect community values, community values and standards change over time.

For example, in Re Ayles Trusts (1875) 1 Ch D 282, a trust in favour of future illegitimate children was struck down on the grounds that it was contrary to public morality. Today, such an action by a court would be considered as being contrary to public policy in itself.

(ii) Illegality of Purpose

A trust for an illegal purpose will be void. The court will not assist persons trying to carry out what is contrary to the provisions of the law. Hamilton v Waring (1820) 2 Bligh 196; 4 ER 300

For example, in Thrupp v Collett (No. 1) (1858) 26 Beav 125; 43 ER 844:

Facts: A trust fund was dedicated to paying the fines of poachers who had been imprisoned for non-payment

Held: That the trust was invalid, because it encouraged an illegal activity.

In Nelson v Nelson (1995) 184 CLR 538 there was an issue concerning the legality of the trust which Mrs N sought to impose upon a property owned by her children. The trust was tainted by the fact that she had subsequently attested to an intentionally incorrect statutory declaration. McHugh J. stated that the courts should not refuse to grant legal or equitable rights merely because they were associated with or arose out of an unlawful purpose, unless the statute explicitly provided that such rights should be unenforceable or the imposition of the statute was not disproportionate in the circumstances. The court upheld the imposition of the resulting trust.

Evans points out that: The question remains open in Australia after Nelson v Nelson as to whether any circumstances exist in which a trust will be held to be unenforceable on the grounds of illegality, [28.9]. However, this is perhaps too glib a statement in regard to illegality.

It is difficult to see how, for example, a trust settled with and for the purpose of holding and protecting moneys gained from illegal activities, e.g. drug dealing, would be upheld by the courts, particularly if the funds were claimed by a State or the Federal government pursuant to proceeds of crime legislation.

C. THE RULE AGAINST PERPETUITIES

1. The objective of the rule, as its name suggests, is to prevent the vesting of property in a series of trustees perpetually, i.e. forever. Vesting in the context of perpetuities means to give or assign an interest (legal or equitable) in property, not necessarily to give possession.

Thus, the rule avoids restrictions upon the alienation (the absolute transfer) of property which stretch into the distant future. For example, if property is settled upon successive life interests (life tenants) for several generations, no one will be free to alienate/sell/lease/mortgage the entire estate in the property which is the subject of the trust, until the expiry of all those generations.

The rule prohibits the remoteness of the vesting of a property interest too far into the future. Therefore, the trust property must vest within a specified period.

2. The PREVIOUS common law rule DOES NOT APPLY TODAY

Under the old common law rule, an interest which was created to vest at some future time, must vest within the lifetime of a nominated living person plus 21 years from the date the instrument becomes effective.

For example, A makes a gift to B for life and then to her children who attain 18 years. The time period between Bs death and the last of her children attaining the age of 18 is uncertain. However, it is certain that the last of her children, even if born at the moment when B dies, will attain the age of 18 before the expiry of the 21 years.

If the interest of the children does not vest within 21 years of Bs death, the trust will be void ab initio. For example, A makes a gift to B for life and then to her children who attain the age of 35 years. B dies when her youngest child, J, is 5 years old. J will not attain the age of 35 years for another 30 years, thereby contravening the perpetuity period of 21 years. The trust is therefore void ab initio.

If it is possible that an interest might vest outside the prescribed period, the trust will be void. Cadell v Palmer (1883) 6 ER 956.

3. STATUTORY REFORMS THE RULE TODAY

Not surprisingly, there have been statutory reforms which have attempted to simplify the rule. In 1984 the NSW Parliament passed the Perpetuities Act 1984 (NSW). Whilst many of the provisions of the Act echo the old rule, there have been a number of significant changes. The most significant of these are listed below:

(a) the perpetuity period is set automatically to 80 years from the date of the disposition: s. 7.

(b) the courts are required to postpone the invalidation of any infringing trust to see if the interests actually vest within the perpetuity period: s. 8.

(c) the court will read down the age for a beneficial interest that would otherwise fail because they are stipulated to take effect upon the beneficiaries reaching a specified age beyond 21 years + a life in being or the modern rule (80 years): s. 9(1).

4. Practicalities

As may be gathered from the discussion above, the relevance of the rule against perpetuities is particularly important when a trust instrument is being drafted. It is essential to ensure that any dispositions do not or are not likely to vest more than 80 years beyond the date on which the settlement takes place. Therefore, the vesting of an interest, for example, in my great-grandchildren and their issue should be carefully scrutinised to ensure that this does not contravene the rule. If the great-grandchildren are yet to be born, the chances are that the rule will be invoked.

5. Exception to the rule

Charitable trusts are not subject to the rule against perpetuities. This will be addressed in Week 11.

D. TERMINATION BY THE BENEFICIARIES

The rule in Saunders v Vautier (1841) 4 Beav 115; 49 ER 282 provides that when a beneficiary is sui generis (one of a kind), sui juris (has the legal capacity to hold property) and are absolutely entitled (has an equitable proprietary interest in the trust property), s/he may call upon the trustee to transfer the legal title to the property to them. If there are two or more beneficiaries, and all are sui juris and absolutely entitled, provided they unanimously agree, they may also call for the termination of the trust. Gosling v Gosling (1859) 70 ER 423

It is important to note that unless all of the beneficiaries meet the criteria of the rule, the trust cannot be terminated.

In regard to a discretionary trust, none of the beneficiaries will have a vested interest in the property of the trust until the trustee has made a decision as to distribution. Further, even when the decision has been made, it is unlikely that the interest would be sufficient to invoke the rule in Saunders. Re Weirs Settlement Trusts [1971] Ch 145.

However, as noted above in Rights of Beneficiaries, it is possible for the objects of a discretionary trust to apply to the court for termination provided:

the class of objects is restricted

all the beneficiaries are sui juris

all of the beneficiaries of the trust agree to the termination and

the trustee holds a trust power of appointment, that is, must distribute the income to at least one of the beneficiaries; Sir Moses Montefiore Jewish Home v Howell & Co (No.7) Pty Ltd [1984] 2 NSWLR 406

E. AVOIDANCE (TERMINATION) BY THE SETTLOR

Once a trust has been properly established, i.e. it has been fully constituted and the property has been settled on a third party, it is irrevocable and cannot be terminated by the settlor unless there are vitiating circumstances, for example, if the settlor was induced to create the trust through unconscionable conduct, duress or undue influence. Allcard v Skinner (1887) 36 Ch D 145

The only way possible for a settlor to revoke the trust is through the inclusion in the trust instrument of a provision which allows this. However, such a provision could be problematic. Arguably, the retention of such a right by the settlor is not an absolute and irrevocable disposition of all interests in the property and, as such, it could be held that the settlor still retains a beneficial interest.

F. AVOIDANCE (TERMINATION) BY THIRD PARTIES

There are certain circumstances under which a trust may be terminated by a third party pursuant to statute.

For example, pursuant to Pt XIII if the Family Law Act 1975 (Cth), the Family court has the power to alter property interests as between the parties and to make such orders as are appropriate in the circumstances. Thus, where a party to a marriage has made a disposition of property into a trust and that disposition can be interpreted as an attempt to defeat the power of the court, the disposition may be set aside under s 106B.

Similarly, under the Bankruptcy Act 1966 (Cth), where a disposition of property into a trust has occurred five years before the declaration of bankruptcy, it may be held by the court to be a disposition intended to defeat the claims of creditors and thereby set aside.

G. TERMINATION BY DISTRIBUTION

Termination of a trust by distribution of the assets may be instigated by a trustee pursuant to both express powers (in the trust instrument) and/or implied powers of distribution. Such a distribution generally occurs when the objective of the trust has been fulfilled. A common situation is where a fixed express trust fund is established to be distributed to the beneficiaries upon the occurrence of a particular event, such as coming of age.

For example, in Hawkesley v May [1956] 1 QB 304:

Facts: A fund was held on trust for two beneficiaries, a brother and sister, to be distributed to each when they attained the age of 21. The trustee did not inform one of the beneficiaries of his entitlement when he came of age. The fund continued to accumulate income and was distributed when the second beneficiary came of age.

Held: The trustees had a duty to pay the elder brother his share of the income as soon as he came of age.

TUTORIAL QUESTIONS

1. Why is equity so protective of the rights of beneficiaries?

2. Under what circumstances can a beneficiary terminate the trust and claim the trust property?

3. What does if mean when a trust is determined?

4. Bert, Ernie and Kermit are the beneficiaries of a trust. All three are over 18 years old. Grover is the trustee. The corpus of the trust is a bank account containing $50,000.

Clause 2 of the trust deed provides:

The trustee must distribute 90% of the income of the trust before 31 July every year. He may choose which beneficiaries shall benefit from the distribution.

There is considerable friction between Grover and the beneficiaries.

Do the beneficiaries have any right to terminate the trust and claim the corpus?

5. Explain the concept of tracing.

6. What is a trustee de son tort?

7. Under what circumstances will the court allow the terms of a trust to be varied?

8. Peter Big Bird is a well known Sydney casino owner. In April 2023, he creates a trust called the Happy Fund Trust. He appoints Kermit as the trustee and his sons, Bert, Ernie and Oscar, as beneficiaries. The corpus of the trust comprises $1 million, gained from Big Birds illegal SP bookmaking activities. The beneficiaries suspect that the funds were earned illegally, and are concerned that the trust may be terminated on application to the court by either a State or Federal law enforcement body.

Could a third party, such as the NSW Police, apply to have the trust terminated and, if so, upon what grounds?

9. In her will, Prudence makes the following disposition:

I give to my testamentary trustees $300,000 to hold on trust for my son Oscar, any children he may have and any children of theirs, in equal shares.

Prudence dies on 1 April 2024, at the time her son Oscar is 20 and has no children.

Discuss the validity of the disposition.

3. PROBLEM QUESTION

BENEFICIARIES RIGHTS

Hope, a beneficiary of the X Trust is investigating the activities of the trustee Chris and discovers that he has made certain gifts to Paris MacDonald, which were paid for from the trust Bank Account. These gifts include a diamond ring, purchased from Anxious & Goat for $20,000, a race horse purchased for $100,000 from the Magic Millions Sales on the Gold Coast, and an etching by Rembrandt valued at $150,000.

She also discovers that Bazza Murphy prepared all of the documentation for the sale of trust properties by Chris in breach of the terms of the trusts Deed.

Chris has left Sydney and is now living in Byron Bay.

On 10 April 2023 Hope receives an anonymous letter which states:

Kris as gone to Biron,and is going to skip the country with wats left in the bank.

Hope recognises the writing as that of Paris MacDonald. She has no reason to think that the letter is a hoax.

She asks you for your advice on the following:

The likelihood of being able to recover the ring, the race horse and the etching from Paris.

The liability, if any, of Bazza and whether the beneficiaries have any claim against him.

Whether there is any way to prevent Chris from withdrawing the remaining funds from the Bank Account.

She also asks you if there is any means by which the beneficiaries can terminate the trust.

WEEK 10

TRUSTEES RIGHTS, POWERS AND DUTIES

1. Basic themes discussed under this topic:

CAPACITY TO BE A TRUSTEE

APPOINTMENT, REMOVAL AND RETIREMENT OF TRUSTEES

ACCEPTANCE OF TRUST

REFUSAL TO ACT/DISCLAIMER

CEASING TO BE A TRUSTEE

DUTIES, POWERS AND DISCRETIONS

DUTY COUPLED WITH A POWER

LIABILITY OF TRUSTEES

2. QUESTIONS

3. PROBLEM QUESTION

4. Prescribed readings:

All students

Bryan and Vann, Chapters 17, 19 and 20

JD Students

H & L Chs 33, 35 & 36

Additional readings:

Jacobs, Chs 14 - 22

M Scott Donald, The proper approach to a trustees right to indemnity out of trust assets, (2014) 8 Journal of Equity, 283 298 (available in Module 10 folder)

Key cases:

* Must read

*Regal (Hastings) v Gulliver [1967] 2 AC 134 (n); [1942] 1 All ER 378

*Boardman v Phipps [1967] 2 AC 46

Re Gulbenkians Settlement Trusts; Whitshaw v Stephens [1970] AC 508

*Byrnes v Kendle (2011) 243 CLR 253

Re Beddoe [1893] 1 CH 547

*Gatsios Holdings v Nick Kritharas Holdings (2002) ATPR 41-864; [2002] NSWCA 29

** Hancock v Rinehart [2015] NSWSC 646 (in Week 8 documents folder)

** Bianca Hope Rinehart t/a Trustee of the Hope Margaret Hancock Trust [2017] NSWSC 282 (22 March 2017) (available in the Week 8 documents folder Module 4)

Legislation:

Trustee Act 1925 (NSW)

Trustee Companies (Amendment) Act 1964 (NSW)

Public Trustee Act 1913 (NSW)

TRUSTEES POWERS AND DUTIES

A. CAPACITY TO BE A TRUSTEE

1. Person

Any natural person who is capable at law of holding property in his/her own right may hold the office of trustee. In other words, provided a person has the capacity to hold a legal estate, is over 18 and is competent to conduct their own affairs, they may be a trustee.

Corporation

A corporation (a legal entity) may be a trustee, provided that it has power to do so under its memorandum of association. Re Thomsons Settlements; Thompson v Alexander [1905] 1 Ch 229

Trustee Company

Trustee Companies (Amendment) Act 1964 (NSW)

In NSW as in all Australian states and territories, there are a number of companies which have by statute been given a special status of trustee company. This status gives them the right to act in NSW:

not only as trustees, but also

as executors and administrators

Examples: Perpetual Trustees, Equity Trustees, ANZ Trustees.

Trustee companies may charge a regulated commission for their services.

NSW Trustee and Guardian

Formerly the Public Trustee of NSW, the Trustee and Guardian is a corporation originally created by statute (Public Trustee Act 1913 (NSW)). The Public Trustee merged with the Office of the Protective Commissioner in 2009. As a statutory body, the Trustee and Guardian is authorised to be appointed as executor and administrator of a deceased estate, or as a trustee. It also regulates and oversees the management of the estates of persons who no longer have the capacity to hold legal title to property and/or administer their own estates.

2. Lack of capacity

Transfer of property to a trustee who cannot legally hold it does not invalidate the trust.

Sonley v Clockmakers Co (1780) 1 Bro CC 81; 28 ER 998

If the trust is otherwise valid, it will not fail by reason only of incapacity of the trustee. The trust property will still be held in trust on the terms of the trust deed, until a new trustee is appointed pursuant to the trust instrument or by the court.

A trust can exist without a trustee, but NOT without at least one beneficiary.

B. APPOINTMENT, RETIREMENT & REMOVAL OF TRUSTEES

1. APPOINTMENT

(a) Original Trustee

A person may become a trustee in the following ways:

by being specifically appointed by the instrument/document creating the trust (original trustee)

(ii) by being appointed as a new trustee, pursuant to:

a power contained in the trust deed

appointment under statutory power

an appointment by the court

the imposition of the equitable remedy of constructive trust

see s. 5 Trustee Act.

If a person who has not been appointed as trustee takes upon him or herself the custody and administration of trust property, he/she becomes an actual trustee (a trustee de son tort i.e. a trustee because of his/her wrongful act tort). In other words, with respect to the trust property, he/she is subject to all the obligations and liabilities of an express trustee. Perpetual Trustee Co Ltd v Thomas (1903) 3 SR (NSW) 277.

Note: a person may also become a trustee pursuant to the operation of equitable principles through the imposition over property by the court of a resulting or constructive trust.

(b) The trust has no trustee

It is a principle of equity that a trust will not be allowed to fail for want of a trustee. Thus, if the settlor of a trust has omitted to appoint trustees to carry out the trust, OR if the chosen trustees are dead, otherwise incapacitated or refuse to act, the court will appoint new trustees to manage the trust.

(c) Appointment of new trustees

When a trustee ceases to act for whatever reason, a new trustee may be appointed in one of the following ways:

pursuant to the trust instrument;

pursuant to statute;

appointment by a court of equity acting in its original and exclusive jurisdiction.

Note: There is no conflict among the different methods of appointment. Where it is possible to make an appointment pursuant to the trust deed, court will generally do so, otherwise it will make the appointment pursuant to both its statutory and original/exclusive powers.

(i) in accordance with provisions of the trust instrument

For example, the settlor of the trust may make provisions in the Deed of Settlement or in a will (if it is a testamentary trust) to give a specific person the right to appoint new trustees when circumstances require such appointment.

The trust instrument is of primary importance and the court will always look to this first.

(ii) appointment under a statutory power

Statutory appointment of a trustee pursuant to s 6 of the Trustee Act is relevant only if the trust instrument is silent in regard to the appointment of trustees, OR if, for some reason, the instruments provisions do not apply. For example, if the person named in the instrument is unable or ineligible to take up the position.

appointment by the court

Persons authorised to appoint new trustees are listed in s. 6(4) Trustee Act and includes the court, where it is inexpedient, difficult or impractical to otherwise appoint

The court has a general jurisdiction in regard to the appointment of new trustees where the court considers it expedient to appoint a new trustee. This power stems from equitys original and exclusive jurisdiction over uses.

In Miller v Cameron (1936) 54 CLR 572, 580, it was held that the appointment of an infant trustee was void, it was stated by Dixon J, that expedient means having regard to:

the interests of the beneficiaries;

the security of the trust property; and

the faithful execution of the trust terms.

In this case the court appointed a trustee in place of the infant.

Section 70 Trustee Act deals with the appointment of new trustees by the court.

(1) persons appointed by court

In Re Tempest (1866) LR 1 Ch App 485, the court refused to appoint as a new trustee a person who had been nominated by a member of the testators family and:

who had been specially excluded from management of the trust property andwho had been nominated specifically in the interests of a particular beneficiary under the trust(a) The general rules for the appointment of new trustees by the court are as follows: the court

will have regard to the wishes of persons by whom the trust has been created (if they are still alive);

will not appoint a person to be trustee whose appointment might be in the interest of some of the persons interested under the trust;

will avoid appointing a trustee in opposition either to the wishes of the testator/settlor or adverse to the interests of some of the beneficiaries;

will have regard to the question whether the appointment of a particular person will promote or impede the execution of the trust.

(b) Vesting of property in new trustees (appointed by court)

Property is vested in a trustee when the legal title (ownership) is transferred into the trustees name. (Note: property may also vest in a beneficiary when a trust is terminated/determined i.e. when legal title to the property is transferred from the trustee to the beneficiary.)

Trust property does not automatically vest in a new trustee when s/he is appointed by the court. A vesting order is necessary. Vesting orders, i.e. court orders which require title to be transferred to the trustee, are made pursuant to s 71 TA. In NSW trust property also vests on execution and registration of the deed of appointment.

(2) Number of new trustees

The number of new trustees appointed depends upon the terms of the instrument and whether the number may be increased or decreased. The approach of the court is not to interfere with expressed intentions of the settlor of the trust. For example, if the deed expressly requires a certain number of trustees to be retained.

Additional trustees may be appointed if it is desirable to do so , even though no vacancy has occurred. (s. 7 Trustee Act )Powers of new trustees

New trustees, whether appointed by the court or pursuant to the terms of the trust deed, hold the same powers/authorities and discretions as if they had been appointed originally by the trust instrument (s. 6 Trustee Act).

C. ACCEPTANCE OF TRUST

A person must assent/agree before any trust property can indefeasibly vest in him or her. If property is transferred to him/her without his/her knowledge:

the property will vest in him/her, but only

subject to his/her right to disclaim it (see D below), when informed of the appointment.

A person who is appointed as a trustee does not assume that office until s/he has accepted the trust.

Acceptance may be either:

express, OR

implied

Express acceptance occurs when the trustee provides clear oral or written consent to act.

Acceptance will be implied from acts inconsistent with disclaimer, such as interference with trust property

D. REFUSAL TO ACT/DISCLAIMER

A trustee may refuse or decline to act by disclaiming the deed appointing him/her. This will give jurisdiction for the exercise of the power of appointment of new trustees by either:

the persons authorised under the trust instrument; or

by the court pursuant to the statutory power to appoint new trustees.

For example, in Re Birchall; Birchall v Ashton (1889) 40 Ch D 436 the court appointed a new trustee after the original trustee had not acted in the position for nine years

Held: that the original trustee had disclaimed the trust by his conduct and consequently was ineligible to appoint new trustees.

In order for the disclaimer to be effective, the trustee must disclaim the trust as a whole (in toto) OR s/he still remains a trustee as to all of the trust property. Therefore, there is no partial disclaimer of the office of trustee it is all or nothing. Re Lord and Fullertons Contracts [1896] 1 Ch 228

The usual way to make a disclaimer is by deed. Alternatively, disclaimer may implied by the trustee refusing the office either orally or by his/her conduct.

A disclaimer by the trustee does not put an end to the trust, but takes effect, ab initio, to vest the property in the trustees who consent to act. Alternatively, if none consent to act, the property vests in the settlor by resulting trust, or, if the settlor is dead, the property vests in his legal personal representatives (executor or administrator), who will hold the property until a new trustee is appointed, upon the trust specified in the settlement or will: Mallot v Wilson [1903] 2 Ch 494

E. CEASING TO BE A TRUSTEE

A trustee may cease to be a trustee by:

death [of course!]

retirement

removal by Court

completely execution of (completing the objectives of) the trusts and handing the trust property over to the beneficiaries

The trust continues in respect of the property, in the first 3 cases above.

Death of a trustee

The office of a deceased trustee does not devolve upon/pass to his/her legal personal representatives (executor or administrator). Although the trustee holds legal title to the trust property, it does not become part of the trustees deceased estate i.e. the trust estate is quarantined. [The trust is also quarantined from any proceedings or claims against the trustee either in bankruptcy or personal debt.]

(a) Where the deceased trustee is a sole /last surviving trustee, the office becomes vacant and a new trustee will need to be appointed.

A legal personal representative of a deceased trustee has no power to act as the trustee of the trust. S/he will have power to execute the trust only if s/he is listed in the trust instrument as a person capable of executing the trusts. Re Crunden and Meuxs Contract [1909] 1 Ch 690

(b) Where there are surviving co-trustee/s, the office remains in the survivors who are able to exercise the powers vested in the trustees, unless a contrary intention was expressed in the trust instrument (s. 57 TA)

Retirement of Trustees

Traditionally, a trustee who has not disclaimed the trust cannot retire from the office unless the trust instrument provides for retirement.

If a trustee wishes to retire and is unable to do so because of the terms of the trust deed, s/he can apply to a court of equity. Equity has an inherent and exclusive jurisdiction to permit a trustee to retire and may do so, although the court may require the retiring trustee to pay the costs of the application.

Removal of Trustees

A trustee may be removed from the office in the following circumstances:

Pursuant to an express power contained in the trust instrument a rare occurrence

Pursuant to statutory powers for appointing new trustees out of court, if a trustee is appointed who desires to be discharged, who refuses or is unfit to act or who is incapable of acting

By the court pursuant to statutory power

By the court, pursuant to the courts inherent exclusive jurisdiction. For example, in cases of positive misconduct, when trustees who have abused the trust or committed acts/omissions that have endangered the trust property or showed lack of honesty or a want of proper capacity to execute the duties

Friction or hostility between a trustee and beneficiary is not of itself a reason for the removal of a trustee, unless the hostility is connected to the manner in which the trust is administered and the animosity becomes detrimental to the execution of the trust: Letterstedt v Broers (1884) 9 App Cas 371; also, see the text box below.

Cases where a trustee has been removed by the court include:

breach of trust (not all breaches suffice)

refusing to execute the trust

residing abroad permanently

impeding co-trustees

Removal is not inevitable just because some or even all of the beneficiaries are opposed to the trustee. In each case it is a matter of what is best for the welfare of the trust estate as a whole: Guazzini v Patterson (1918) 18 SR (NSW) 275, 294 (Street CJ E).

00A contemporary example of a high profile and very public attempt by beneficiaries to remove a trustee is the proceedings (still in train) in relation to the Hope Margaret Hancock Trust: Hancock v Rinehart [2015] NSWSC 646.

Gina Rineharts four children are beneficiaries of a discretionary trust. Gina was both the sole trustee and a beneficiary. The relationship between Gina and three of the children has been antagonistic (to say the least). In 2011 Gina purported to change the vesting date of the trust (the date on which the trust terminates and the property is transferred to the beneficiaries) from 2022 to 2068. The three children commenced proceedings seeking orders that she be removed as trustee for breaches of duty. Although the vesting date was changed back by Gina to the original date, the beneficiaries maintained their action to have her removed. The court removed Gina as trustee and appointed Bianca, one of her daughters, in her place.

In March 2017 Bianca, as Trustee of the Trust, sought judicial advice as to whether she could commence proceedings against Gina for breach of trust. The advice of the court was that she could. See Bianca Hope Rinehart t/a Trustee of the Hope Margaret Hancock Trust [2017] NSWSC 282 (22 March 2017) in Week 10 folder.

In late March 2019, Gina lost an appeal against a court order which required her to produce documents relating to the $A4 billion trust. In a subsequent decision in 2019 the court allowed an application that all future proceedings should be held in camera, i.e. in private away from the eyes of the public and the press. No further news reports were released.

The Trust was due to be determined ended and the property distributed among the beneficiaries at some time in 2022.

00A contemporary example of a high profile and very public attempt by beneficiaries to remove a trustee is the proceedings (still in train) in relation to the Hope Margaret Hancock Trust: Hancock v Rinehart [2015] NSWSC 646.

Gina Rineharts four children are beneficiaries of a discretionary trust. Gina was both the sole trustee and a beneficiary. The relationship between Gina and three of the children has been antagonistic (to say the least). In 2011 Gina purported to change the vesting date of the trust (the date on which the trust terminates and the property is transferred to the beneficiaries) from 2022 to 2068. The three children commenced proceedings seeking orders that she be removed as trustee for breaches of duty. Although the vesting date was changed back by Gina to the original date, the beneficiaries maintained their action to have her removed. The court removed Gina as trustee and appointed Bianca, one of her daughters, in her place.

In March 2017 Bianca, as Trustee of the Trust, sought judicial advice as to whether she could commence proceedings against Gina for breach of trust. The advice of the court was that she could. See Bianca Hope Rinehart t/a Trustee of the Hope Margaret Hancock Trust [2017] NSWSC 282 (22 March 2017) in Week 10 folder.

In late March 2019, Gina lost an appeal against a court order which required her to produce documents relating to the $A4 billion trust. In a subsequent decision in 2019 the court allowed an application that all future proceedings should be held in camera, i.e. in private away from the eyes of the public and the press. No further news reports were released.

The Trust was due to be determined ended and the property distributed among the beneficiaries at some time in 2022.

When a trustee is removed by the courts, she/he is not allowed his or her costs out of the trust estate and may be ordered to pay all the costs incurred in any litigation.

F. DUTIES, POWERS AND DISCRETIONS

In the administration of a trust, the trustee must perform certain duties (i.e. imperative obligations) and may exercise certain powers (s/he may exercise them if s/he thinks fit; i.e. they are discretionary).

The doctrine of powers holds that a trustee must exercise his or her powers both in good faith and for a proper purpose.

When the trust instrument is silent as to the duties of a trustee, the duties will be implied: Byrnes v Kendle (2011) 243 CLR 253. In this case, Mr K as trustee did not collect rent owing on a leased property held on trust. Although the trust deed was silent as to his duties, the High Court held that both the statutory duties and those implied in equity must be carried out by the trustee. Part 2 Division 2 of the TA sets out the statutory powers and duties of a trustee.

1. Duties

Duties are all the acts that the trustee must do (positive duties) or refrain from doing (negative duties) in the administration of the trust. Failure to carry out any duty amounts to a breach of trust, irrespective of whether the trustee was careful/negligent, honest/dishonest.

Duties are usually expressly imposed by the terms of the trust instrument (e.g., to sell property or invest funds) and are also generally implied by equitable principles (e.g., to obey the terms of the trust). Thus the trustee is bound to observe them, whether in his/her view it is wise or not. But, as noted above, if the instrument is silent in regard to the trustees duties, these will be implied pursuant to Pt 2 Div 2 of the TA.

(a) A fairly exhaustive list of the duties owed by a trustee is set out in Jacobs Law of Trusts Ch. 17. However, the main duties are set out below:

To acquaint himself or herself with the terms of the trust, including the documents, deeds relating/affecting trust property, the nature/circumstances of trust property and relevant obligations.

Not to impeach (i.e. question or deny) the validity of the trust instrument or the rights of the beneficiary.

To adhere to and carry out the terms of the trust and adhere rigidly to the terms of the trust (subject to statute or court order) in all things, great and small, important and seemingly unimportant. The court has the power to authorize deviations (s. 81 T A).

To act impartially between the beneficiaries.

To properly to invest the trust funds (s. 14 TA) in accordance with instruction in the trust instrument or as the law provides.

To keep and render proper accounts and to give full information when required by beneficiaries (s.51 T A)

To exercise reasonable care in the management of trust business and to exercise same diligence and prudence as an ordinary prudent man of business would have exercised in conducting his own business: Charitable Corporation v Sutton (1742) 26 ER 642.

Not to delegate his/her powers or duties unless permitted by the trust instrument or statute; or to do ministerial act involving no exercise of discretion (employ an agent) (s. 53 T A)

The Trustee Act ss. 58, 60 offers some protection to trustees when certain payments are made (under powers of attorney, after advertisement for claims etc).

To act gratuitously unless otherwise stated in the terms of the trust instrument, or agreement. It is a rule of equity that a trustee must not profit by his/her trusteeship. Therefore, a trustee is not entitled to remuneration for their work in regard to the trust. The basis for this rule is the avoidance of a conflict of personal interest and duty as a trustee. A trustee may receive remuneration if expressly/impliedly provided for in the trust instrument, or by special agreement between the trustee and beneficiaries, or payment of the trustee has been allowed by the court pursuant to s. 81 Trustee Act 1925 (NSW).

Not to deal with trust property for his/her own benefit, or otherwise to make a profit directly or indirectly out of the trust estate. If s/he does so, the trustee must account for benefits received. This is particularly relevant when the profit arises from circumstances where there is a conflict between his/her personal interest and duty as a trustee or by reason/use/knowledge resulting from his/her fiduciary position: Regal (Hastings) v Gulliver [1967] 2 AC 134 (n); [1942] 1 All ER 378: Boardman v Phipps [1967] 2 AC 46.

The trustee is not allowed to purchase trust property either from himself or herself or from co-trustee/s, (even at auction), irrespective of whether the purchase was honest and fair except with the consent of the court, pursuant to an express power in the trust instrument or with the informed consent of all beneficiaries.

(b) A trustee may depart from any of his/her specified duties only if s/he is directed to do so by all the beneficiaries (all being sui juris and absolutely entitled) or by the court.

If a trustee fails to perform a duty, the court will compel him or her to perform it, or will do so for him or her.

(c) Beneficiary

Any beneficiary who has reason to believe that the trustee is about to do an act not authorised by the trust instrument and/or statute and/or is contrary to equitable principles, the beneficiary may apply for an injunction to restrain the trustee: Balls v Strutt (1841) 1 Hare 146; 66 ER 984

(d) Court

The court has statutory jurisdiction to relieve a trustee, wholly or partly, from the consequences of a breach of trust where s/he has acted honestly, reasonably, and ought fairly to be excused for the breach of Trust and for omitting to obtain the direction of the Court. (s85 T A )2. Duty or power?

(a) Nature of powers

A power may be a trust power or a mere or bare power. The person on whose behalf THE POWER IS EXERCISED (such as the beneficiary of a trust) is called the OBJECT.

Trust powers

Where the trustee is directed/obliged to exercise that power, it is a trust power.

Such a power is in the nature of a trust and the trustee of the trust power is under a fiduciary obligation to exercise it. For example, the power of trustees in a discretionary trust to choose the beneficiaries who will benefit from income of the trust, is a trust power. Therefore, although the trustee has the discretion as to which of the beneficiaries will benefit, the trustee also has a duty to make the selection.

A trust power is usually indicated in the trust instrument by the use of the words must or shall.

The object of a trust power (such as a beneficiary of a discretionary trust) has the right to be considered and the right to compel the proper administration of the trust (a personal equity). Gartside v IRC [1968] AC 553

Mere/bare powers

On the other hand, where the trustee is authorised but not obliged to exercise a power, it is a bare or mere power. In other words, it is discretionary.

The object of a mere power cannot demand that the power is exercised.

It is important to note that a mere or bare power given to a trustee in a trust instrument does not make this a trust power.

A mere or bare power is usually indicated in the trust instrument by the use of the words may and/or discretion.

Identifying the nature and effect of a power is a matter of construction of the instrument which confers the power. Hourigan v Trustees Executors and Agency Co Ltd (1934) 51 CLR 619.

THEREFORE, THE DISTINCTION BETWEEN A TRUST POWER AND A BARE POWER IS AS FOLLOWS:

EXERCISE OF A TRUST POWER IS COMPULSORY

EXERCISE OF A MERE/BARE POWER IS DISCRETIONARY

(b) Duties of trustee with a discretionary power

When a trust instrument confers bare (discretionary) powers upon a trustee, the trustee has particular duties attached to the way in which such powers are exercised. Failure to act honestly in the exercise of his or her discretion is a breach of trust. Partridge v Equity Trustees Executors and Agency Co Ltd (1947) 75 CLR 149. Therefore, s/he must carefully consider the exercise of the power, before deciding how to act.

A trustee may exercise his or her discretion by deciding not to perform the discretionary act. National Trustees Executors and Agency Co of Australasia v Dwyer (1940) 63 CLR 1

The duties attached to a discretionary power are as follows:

to act honestly and in good faith. However, mere carelessness or blundering will not negate good faith. Jones v Gordon (1877) 2 App Cas 616

(ii) to act upon genuine consideration i.e., the exercise of an active discretion and to take an informed view of whether to exercise the discretion or not. Partridge v Equity Trustees Executors and Agency Co Ltd (1947) 75 CLR 149

(iii) to exercise the power with due consideration for the purpose for which it was conferred and not for an ulterior purpose. For example, a trustee purported to exercise the power of advancement, while the real object was to benefit the beneficiarys father. Re Paulings Settlement Trusts (no 1) [1964] Ch 303

When considering the exercise of a discretionary power, it is irrelevant whether or not the trustees decision proves to be beneficial or prudent. The court is concerned with whether discretion has been exercised, not whether the decision of the trustees was accurate or efficient. For example, in Re Londonderrys Settlement [1965] Ch 918, beneficiaries were held not to be entitled to discovery or inspection of documents which contained reasons which led to the conclusions reached by trustees in the exercise of their discretion. The court found that the documents were private/confidential to the trustees.

The above principles apply to acts done within the scope of the relevant discretion and in each case the court will examine the precise scope/ambit of the relevant discretion and the construction of the words of the instrument.

For example, in Elders Trustee and Executor Co Ltd v. Higgins (1963) 113 CLR 426:

Facts: A trustee was carrying on a pastoral business. The discretion conferred by the instrument was the fullest powers and discretion as to the mode of conducting the business"

Held: as a matter of construction, the trustee was not relieved of his ordinary duty of care to exercise an option to purchase neighbouring land.

Acting bona fide

It is presumed that a trustee acts bona fide in the exercise of his or her discretion, and this presumption will protect him whether the result be good or bad: Garrett v Noble (1834) 6 Sim 504; 58 ER 683. The onus of rebutting the presumption of acting bona fide lies on the party impeaching the trustees actions.

All trustees must concur

When an instrument appoints more than one trustee, all trustees must concur in the exercise of the powers conferred on them. The act of the majority of the trustees does not bind a dissenting minority or the trust estate ( s. 49 T A).

G. DUTY COUPLED WITH A POWER

Sometimes an imperative duty is coupled with a discretionary power. Usually, the power is limited to the time/manner of doing an act which the trustee has an imperative duty to perform. When such a duty/power exists, the court will insist that the duty is performed and compel the trustee. However, it will not interfere with the trustees decision as to how the duty is executed. For example, if the trust instrument imposes a duty on the trustee to sell real property coupled with a discretionary power to postpone sale, the court will not interfere with the timing/mode of sale. Re Hammond (1903) 3 SR (NSW) 270

If two or more trustees disagree as to the exercise of the power, the duty prevails.

For example, in Re Allen-Meyricks Will Trusts [1966] 1 WLR 499:

Facts: The testamentary trustees of will had the discretion to pay the annual income to the testatrixs husband, but, if they did not do this, they must hold the income on trust for two named beneficiaries and accumulated income. The trustees could not agree whether or not to pay it to the husband.

Held: If the trustees could not agree on whether to pay the income to the husband (the discretionary power) then they were bound to accumulate it for the benefit of the named beneficiaries (the duty).

INDEMNITY AND LIABILITY OF TRUSTEES

(a) Indemnity

Pursuant to s. 59(4) Trustee Act a trustee may reimburse him or herself or pay or discharge out of the trust property all expenses incurred in or about the execution of his or her duties or powers. For example, where new trustees are appointed under a power in an instrument, the costs of making the appointment are paid out of the estate: Harvey v Olliver (1887) 57 LT 239

This right of indemnity extends to all expenses that are properly incurred by a trustee. For example, such expenses may include:

damages and costs awarded to a third party in an action against the trustee as the legal owner of the property: Re Raybould [1900] 1 Ch 199

liabilities incurred in carrying on a business authorised by the trust instrument: Vacuum Oil Co P/L/ v Wiltshire[1945] 72 CLR 319

and the cost of taking or defending legal proceedings with respect to the trust.

However, equity has always prevented trustees from abusing their positions of trust and if absolute/complete indemnity were given to trustees, they would be able to expend trust assets on what might be unsuitable causes. For example, in Re Beddoes [1893] 1 CH 547, a trustee was denied indemnity for expenses after he had seriously depleted the assets of the trust on litigation that he had been advised was hopeless and which had no prospects of success.

The issue therefore revolves upon the question of the meaning of properly. What does properly mean? There is considerable uncertainty. In Re Beddoes, Bowen LJ suggested that it means reasonably as well as honestly, (562). However, in Gatsios Holdings v Nick Kritharas Holdings (2002) ATPR 41-864; [2002] NSWCA 29, the NSW Supreme Court, Court of Appeal suggested that the trustee would not be indemnified only if the liability were incurred as a result of a breach of trust or criminal activities. In his article: The proper approach to a trustees right to indemnity out of trust assets, (see list of readings) M Scott Donald suggests that the basis for a trustees right to indemnity is akin to the doctrine of powers and that a trustee must act in good faith and for a proper purpose. It is arguable that, in view of the controversy, this is a reasonable approach to a difficult question.

It should also be remembered that in commercial matters, the limits of a trustees power to incur expenses on behalf of the trust and the issue of his or her indemnity, is usually contained in a clause of the trust instrument.

(b) Liability; see M. Scott Donald article in Module 9

In equity, a trustee has the most onerous duties of all fiduciaries, and the court will do its utmost to ensure that a trustee carries out his/her obligations to the letter. Failure by trustee to comply with any one of his duties constitutes a breach of trust

Breach of trust may arise from

a positive act (commission), such as the making an unauthorised investment or from

a failure to act (omission), such as the failure to convert the trust property into an authorised investment when the trust instrument so requires.

The trustees liability extends to all loss caused directly or indirectly to the trust property. Elders Trustee and Executor Co Ltd v EG Reeces P/L (1987) 78 ALR 193

Where two or more trustees are responsible for a breach of trust, their liability is joint and several. Furthermore, if one trustee commits a breach of trust, the others are liable for his/her default, even if they were unaware of the breach. Also, if a trustee makes good the loss caused by another trustee, he/she is generally entitled to call upon the co-trustees to contribute their share of the loss.

A beneficiary who consented, concurred or acquiesced to a breach of trust cannot obtain any relief against the trustee. Consent and/or acquiescence is therefore a defence to an action for breach of trust.

Chillingworth v Chambers [1896] 1 Ch 685 Eng. CA, but also see Byrnes v Kendle.

TUTORIAL QUESTIONS

1. In Boardman v Phipps, one of the trustees, Mrs. Phipps, was suffering from dementia. The court held that, nevertheless, she should have been consulted regarding the purchase of the shares. What do you think was the basis for this decision?

2. In his will Kermit appoints Big Bird as his executor and Oscar as his testamentary trustee. Kermit dies on 1 April 2023. At the time of Kermits death Oscar is 16 years old.

What happens to the testamentary trusts created in Kermits will? Give reasons for your answer.

3. In regard to the appointment and dismissal of trustees, are the courts statutory and inherent powers mutually exclusive? Give reasons for your answer.

4. Explain the general rules applied by the court in the appointment of new trustees.

5. Oscar is the sole trustee of the Sesame Street Trust. The trust comprises a share portfolio and a bank account containing approx. $60,000. On 17 April 2023 Oscar declares that he is no longer the trustee of the bank account, but will continue to hold the shares on trust for the beneficiaries. Is this a valid disclaimer of the trust? Explain the rationale underlying your answer.

6. Why is friction and/or hostility between trustees and beneficiaries usually not a sufficient reason for the removal by the court of a trustee? Are there any exceptions to this rule?

7. Explain the difference between a duty and a power.

8. The Wonderland Trust deed contains (inter alia) the following provisions:

1. Alice is hereby appointed trustee of the said trust.

2. The trustee must distribute $10,000 of the income of the trust before 31 July every year.

3. The trustee may choose which beneficiaries shall receive a distribution, but the chosen beneficiaries must include Fred (the Mad) Hatter.

4. The trustee shall ensure that any income remaining after the distribution is re-invested, but she may choose the form of the investment.

What type of powers are granted to Alice in clauses 2, 3 and 4? Give reasons for your answer.

9. Gina Coldheart is the trustee of the Coldheart Trust. She commences proceedings in the Local Court on behalf of the trust against GenCorp Ltd for recovery of a debt of $5,000 owed to the trust. The trusts lawyers have advised her against commencing proceedings on the grounds that:

- GenCorp is insolvent;

- the costs of recovery of the debt would be in excess of $10,000; and

- the debt can be written off against tax.

Will Gina be indemnified for the costs of the litigation from the assets of the trust? Give reasons for your answer.

10. In the situation above, imagine that Bert and Ernie are two other trustees of the trust and answer the following questions:

(a) If Bert and Ernie are unaware that Gina has commenced proceedings against GenCorp, are they liable to the trust for any losses incurred by Ginas actions?

(b) Because of the legal proceedings, the trust incurs $10,000 in legal costs. Ernie pays this out of his own pocket. Can he recover this amount from:- the trust and/or

- the other two trustees?

Give reasons for your answers.

PROBLEM QUESTION - TRUSTEES POWERS AND DUTIES

Bill Doors was a wealthy mining magnate and founder of Doors Resources Ltd who died in January 2022. His will established a number of testamentary trusts. One of these trusts appointed his widow Betty and his best friend Chris Rook as trustees. The will contained (inter alia) the following provisions:

The trustees shall hold on trust jointly the following real and personal property:

Bank account BSB007 a/c no 222222 at the Which Bank, containing approx $1 million (the Bank Account);

the apartment on the Esplanade at Manly, folio identifier ----

the apartment in Hassall Street, Parramatta, folio identifier ---

the house in Dalgetty Street, Dubbo, folio identifier ----

250,000 A class shares in Doors Resources, approx value $2.5 million.

2. The apartments at Manly and Parramatta and the house in Dubbo are to be leased and the rental payments deposited into the Bank account.

3. The dividends from the shares are to be likewise deposited into the Bank Account.

4. The Beneficiaries of the trust are my three daughters Faith, Hope and Charity.

5. The Beneficiaries are to receive the following income from the trust in the proportions listed below:

Faith $30,000 p/a

Hope $40,000 p/a

Charity $50,000 p/a

The said income is to be paid in quarterly instalments on 30 March, 30 June, 30 September and 31 December of each and every year.

6. Further, on or before 31 December each and every year the trustees shall select whichsoever of the named beneficiaries they shall choose to receive a distribution from the Bank Account of $5,000.

7. Also, on or before the 31 December of each and every year the trustees shall apply so much of the income of the corpus of the trust as the trustees shall decide, to the maintenance of each of the three beneficiaries.

8. The trustees shall not sell or alienate any interest in any of the real property in any way otherwise than is consistent with the terms of this trust.

9. The trustees may, in their absolute discretion, sell the shares in Doors Resources and apply the proceeds to the Bank Account.

10. The trustees may deposit and withdraw moneys from the Bank Account either jointly or severally.

In June 2021 Chris meets and falls for Paris MacDonald. In order to impress her with his wealth, he begins to spend money from the trust Bank Account. He buys a large cabin cruiser to take Paris on trips around the Harbour, a top of the range BMW, a beach house on the Sunshine Coast and takes her on a 3 week holiday to Hamilton Island.

At the beginning of October 2021, the Bank Account is reduced to a mere $30,000. In order to be able to meet the following quarter payments to the beneficiaries, he decides to sell the property in Manly for $1.5 million.

After having obtained an offer for the property through a Manly real estate agent, he takes the documents to Betty Doors for her signature. Betty is suffering from the early stages of dementia and is unclear as to the meaning of the documents she is signing. Chris tells her that they are transfers of money to the beneficiaries and she signs on the dotted line.

Completion of the sale occurs on 29 November 2021. The proceeds are deposited into the Bank Account.

In early December the value of Doors Resources shares doubles because of a rumour that the company will be taken over by Z Layer, a rival mining company. Chris decides to take the opportunity to make an extra profit for the trust,and sells the shares at twice their original value. He persuades Betty to sign the transfer.

Paris hints to Chris that it would be wicked if they could both run away together to Mallorca and live a life there full of fun, shopping and luxury. Chris also thinks that this is a good idea and begins to lay his plans.

On 31 December 2021 he does not pay the beneficiaries their quarterly income, neither does he make any distributions pursuant to clauses 6 and 7 of the trust instrument.

In January 2022 he sells both the Parramatta apartment and the house in Dubbo for approx $1 million (getting Betty to sign the necessary documents) and deposits the proceeds into the Bank Account.

Chris and Paris plan to leave for Mallorca in late April, after she has received her entitlement as residual beneficiary under her grandmother Georgias will. No quarterly payments are made to the beneficiaries on 30 March.

On 1 April 2022, Hope, Faith and Charity become worried about their entitlements under the trust. Hope tries to phone Chris on a number of occasions, but always gets his voicemail. Her mother, whom she contacts, is unable to help her.

Hope goes to see Bazza Murphy, her fathers solicitor. She shows him her copy of her fathers will, tells him the situation and asks if there is anything the beneficiaries can do to enforce the provisions of the trust against Chris. Bazza tells her that the trust is a discretionary trust and that Chris and their mother do not have to make a distribution if they do not wish to and that the trustees may deal with the property as they wish.

Hope is unconvinced that this advice is accurate and asks you for your assistance and whether they can have new trustees appointed to the trust in lieu of Chris and Betty.

Advise Hope as to:

whether Bazza was right;

the position of Betty; and

any remedies Hope and her sisters may have;

giving reasons for your answers.

Week 11 Charitable trusts

2. TUTORIAL QUESTIONS

3. PROBLEM QUESTION

4. Prescribed reading:

Evans, Ch 29

H & L, Ch 30

Additional reading:

Jacobs, Chs 10 & 11

Cases

* Must read

Morice v Bishop of Durham (1804) 32 ER 656

* Oppenheim v Tobacco Securities Trust Co Ltd [1951] AC 297

Thompson v Federal Commissioner of Taxation (1959) 102 CLR 315

Joyce v. Ashfield Municipal Council [1975] 1 NSWLR 744

Sir Moses Montefiore Jewish Home v Howell and Co (No. 7) Pty Ltd [1984] 2 NSWLR 406

Wylde v Attorney-General (1948) 78 CLR 224

Legislation

Charitable Trusts Act 1993 (NSW)

Succession Act 2006 (NSW)

Charities Act 2013 (Cth)

Australian Charities and Not-for-Profit Commission Act 2012 (Cth)

CHARITABLE TRUSTS

A. INTRODUCTION

(a) Definition

A charitable trust is a trust for purposes that are considered by law to be charitable. A trust for charitable purposes is a trust which confers benefit on the public and which falls within the spirit and intendment of the Preamble of the Statute of Charitable Uses 1601 (Statute of Elizabeth)

There are two ways to create a charitable trust:

by inter vivos settlement

by testament (testamentary charitable trust)

It is important to note that the legal meaning of charitable is different from the popular/lay (wider) meaning of charitable. In fact, the two meanings:

are so far apart that it is necessary almost to dismiss the popular meaning from the mind as misleading before setting out to determine whether a gift is Charitable within the legal meaning.

Verge v Somerville [1924] AC 496, 502 (Lord Wrenbury)

The specific meaning of charity in law is derived from the Statute of Charitable Uses 1601 (No. 43, Eliz I, Chap. 4, parcel 1601) in which the Preamble sets out a catalogue of the vices it was intended to overcome:

for relief of aged, impotent, and poor people, some for maintenance of sick and maimed soldiers and mariners, schools of learning, free schools, and scholars in universities: some for repair of bridges, ports, havens, causeways, churches, sea-banks and highways; some for education and preferment of orphans, some for or toward the relief, stock or maintenance of houses of correction; some for marriages of poor maidens; some for supportation, aid, and help of young tradesmen, handicraftsmen, and persons decayed; and other for relief or redemption of prisoners or captives, and for the aid or ease of any poor inhabitants concerning payment of fifteens, setting out of soldiers, and other taxes; .

IMPORTANT NOTE

Although a trust may be held NOT to be charitable, it may still be a valid trust, provided that it conforms to the requirements for a valid express trust. The usual consequence of a trust not being charitable is that it will be subject to both revenue statutes and the rule against perpetuities.

(b) COMMONWEALTH REGULATION OF CHARITIES

In 2012 the Federal Government introduced the Australian Charities and Not-For-Profits Commission Bill. The Bill was passed and became the Australian Charities and Not-For-Profits Commission Act 2012 (Cth). The purpose of the Act is to establish a Federal Commission which provides a national framework for the regulation of charities and not-for-profit organisations. The objectives of the Commission are to:

increase transparency and accountability

strengthen reporting requirements

increase the monitoring of activities

of all charitable and not-for-profit organisations within Australia, as well as to provide a one-stop-shop for registration and the granting of tax concession applications.

The Commission maintains a register of all charitable and not-for-profit organisations in Australia. If a charity is not registered, it is not deemed to be a charity. Registered charities may be deregistered if the Commission deems that the purpose is no longer predominantly charitable.

The Charities Act 2013 (Cth) came into effect on 1 January 2014. The purpose of this Act is to provide a statutory definition of charity and charitable purpose as an attempt to clarify the meaning of these terms as developed in equitys original and exclusive jurisdiction.

Although there is now Commonwealth legislation which applies to charities and not-for profit organisations in Australia, it MUST be remembered that:

the Commonwealth legislation was enacted to make the application of other COMMONWEALTH statutes easier PARTICULARLY the Income Tax Assessment Act 1997 and the Fringe Benefits Tax 1986. For example, if a charity is not registered, it cannot claim exemptions under the Income Tax Assessment Act.

Where there is a dispute concerning a charity or a charitable purpose under Commonwealth legislation, equitable principles will still apply; AND

the Charitable Trusts Act 1993 (NSW) still applies to the administration and organisation of charitable trusts in NSW.

(c) ADVANTAGES OF CHARITABLE TRUSTS

Charitable trusts are an important part of our social welfare structure and are treated more favourably both pursuant to revenue laws and by the courts, than private trusts.

In A-G (NSW) v Perpetual Trustee Co (1940) 63 CLR 209, the advantages of charitable trusts were discussed at length. These advantages include:

certain kinds of charity are exempt from taxes (income, goods and services tax, and gift, death and estate duties);

the requirements of certainty are less strict for charitable trusts. Although there is a need for certainty of intention and of subject matter, the trust instrument need not be a specific charitable object, so long as the donor has a general charitable intention.

provided the property vests within the period prescribed in relation to perpetuities, a charitable trust can last in perpetuity (for ever). IN OTHER WORDS, A CHARITABLE TRUST IS NOT SUBJECT TO THE RULE AGAINST PERPETUITIES.

Today, charitable trusts are used as part of certain business structures, the 0% income tax on charitable trust income being the incentive. This feature of the use (and arguably in some cases, MISuse) of charitable trusts was one of the reasons why the Commonwealth enacted the legislation discussed above.

However, there is scope for potential challenges to both testamentary and inter vivos charitable trusts from legatees or residuary beneficiaries in relation to testamentary trusts, and revenue authorities in regard to charitable trusts used as a cloak for businesses or commercial structures (cf. the James Hardie Trust).

In March 2020, the ACNFPC announced that it was going to tighten up the Act in relation to the charitable requirement for business/commercially run charities, to prevent abuses of the system ad since then, a number of so-called commercially operated charities have been struck from the register.

(d) Although in NSW the administration of charitable trusts is governed by the Charitable Trusts Act 1993 (NSW), the principles in regard to what constitutes a charitable trust are still applicable, particularly in deciding whether the organisation is for a charitable purpose.

B. THE BENEFICIARY PRINCIPLE

Morice v Bishop of Durham (1804) 32 ER 656 expounded the beneficiary principle which requires that a trust must be for the benefit of either persons or a charitable purpose. A trust which is not for the benefit of persons or for a charitable purpose will be void, unless it can be classified as a purpose trust (discussed later in these notes).

Charitable trusts do not breach the beneficiary principle as the Attorney-General of every state and territory can sue to enforce the trust.

C. THE ELEMENTS OF A CHARITABLE TRUST

A trust is charitable if it satisfies two conditions:

where the purpose falls within the spirit and intendment (intention) of the Preamble of the Statute AND

where it is of public benefit

In Royal National Agricultural and Industrial Association v Chester (1974) 48 ALJR

304:

Facts: A testator left the residue of his estate for the purpose of applying the income in improving the breeding and racing of pigeons

Held: The trust failed. It might satisfy (ii), but not (i). Both criteria must be satisfied

where purpose falls within the spirit and intendment of Preamble of the Statute (i.e., the meaning of charity) see page 3 above

In Morice v Bishop of Durham (1805) 32 ER 947, a charitable trust failed because the discretion to exercise liberality and benevolence by the Bishop could be applied to many purposes which may not be charitable. A gift for benevolent purposes is not charitable within the legal definition of the word.

In Commissioners for Special Purposes of Income Tax v Pemsel [1891] AC 53:

Facts: Land was conveyed on trust to apply part of the rents to advance the missionary work of the Moravian Church among heathen nations. A reduction of income tax was available pursuant to statute in relation to the rents from land applied to charitable purposes.

Held by a majority of the House of Lords: that the trust was for a charitable purpose. In this case Lord Macnaghten classified the various and numerous charitable purposes set out in the Preamble to the Statute of Elizabeth into 4 categories when he stated as follows:

How far then, it may be asked, does the popular meaning of the word charity correspond with its legal meaning?

Charity in its legal sense comprises four principal divisions:

[1] trust for the relief of poverty;

[2] trust for the advancement of education;

[3] trusts for the advancement of religion; and

[4] trusts for other purposes beneficial to the community, not falling under any of the preceding heads.

In Scottish Burial Reform and Cremation Society v Glasgow Corporation [1968] AC 138:

Facts: the SBR promoted cremation as a way of disposing of the dead.

Issue: the SBR sought exemption from tax for being charitable. It was a non-profit organisation, but charged for its services.

Held: just because it charged for services, it did not mean that it was not charitable.

The purpose was beneficial to the community, and within the spirit and intendment of the Preamble. Because it had been established by previous decisions that trusts for burial grounds were within the Preamble then by analogy, so were trusts for cremation and to repair of churches (Lord Wilberforce)

Similarly, in Incorporated Council of Law Reporting of the State of Queensland v Federal Commissioner of Taxation (1971) 125 CLR 659:

Facts: the Appellants only substantial purpose was the production of law reports

Issue: whether it was a charitable institution for the purposes of exemption from tax.

Held: The reported cases may in some instances afford a guide by analogy to the decision whether a particular trust, or a particular purpose is charitable The instances given in that preamble are not exhaustive: and

the production of law reports is clearly beneficial to the whole community because of the universal importance of maintaining the socially sustaining fabric of the law.

That the council itself should profit by the production of the law reports cannot prevent the council being a charitable institution. Indeed, the very fact that the Act exempts the income of a charitable institution concedes that such an institution may derive profits from its activities.

Where it is for the public benefit

(a) Public

A charitable trust must be for the benefit of the public/community as a whole, or even for a section of the public

A section of the community or the public is:

not numerically negligible and

not restricted in membership and

there is no personal element in the selection of the beneficiaries

i.e., the quality which distinguishes them from other members of the community must not depend on their relationship to a particular individual: Oppenheim v Tobacco Securities Trust Co Ltd [1951] AC 297 (Simonds LJ).

Therefore, a trust for the education of the members of a family ONLY will fail (i.e., it is not a charitable trust).

This is illustrated in the case of Oppenheim v Tobacco Securities Trust Co Ltd [1951] AC 297:

Facts: Trustees were directed to apply income for the education of children of employees or former employees of British-American Tobacco Ltd. The employees could be employees of the company or any of its subsidiary or allied companies. There were over 110,000 employees

Held: The trust was for a non-charitable purpose. The class of beneficiaries was numerous, but a difficulty arises in regard to their common and distinguishing feature. Their right to benefit from the trust depended on the personal element of common employment by the employees.

In Re Scarisbrick; Cockshott v Public Trustee [1951] Ch 622, 649 Jenkins LJ stated that:

An aggregate of individuals ascertained by reference to some personal tie (e.g., of blood or contract), such as:

the relations of a particular individual,

the members of a particular family,

the employees of a particular firm,

the members of a particular association,

does not amount to the public or a section thereof for the purposes of the general rule.

Public benefit must be contrasted to a private advantage.

Thompson v Federal Commissioner of Taxation (1959) 102 CLR 315

Facts: A testamentary gift was made to schools restricted to children of the brethren and deceased brethren of the Masonic Order in NSW. Membership of the order was by election by existing members. Exemption was sought from estate duty on the ground that gift was for public educational purposes [pursuant to the Estate Duty Assessment Act 1914 (Cth) s.8(3)]

Held: It was a non-charitable purpose on the basis that (Dixon CJ) such a Trust lacks the public element. The court applied the test developed in Oppenheim v. Tobacco Securities Trust Co Ltd [1951] AC 297.

BUT: SEE THE FOUNDERS KIN CASES BELOW.

(b) Benefit

A charitable trust must be for the benefit of the public. If it is for education, religion, or the relief of poverty, the benefit is presumed, unless it is proven to be non-beneficial by the person challenging it. The opposite of beneficial to the public is not detrimental to the public, but non-beneficial to the public

Objectively, the intention of the donor does not matter (however well-intentioned). The courts assessment will reflect community standards at the time. For example, in National Anti-Vivisection Society v Inland Revenue Commissioners [1948] AC 31:

Issue: Whether a society having for its object the total suppression of vivisection was established for charitable purposes only to be exempt from income tax.

Held: The total suppression of vivisection was not of public benefit. Even if earlier decisions exist, they are not binding because attitudes of the public as to what constitutes a benefit to society change over time.

It is therefore likely that today the purpose would be considered to be charitable.

D. THE FOUR DIVISIONS OF CHARITABLE PURPOSE

As noted above, the four divisions of charitable trusts come from the case of Commissioners for Special Purposes of Income Tax v. Pemsel [1891] AC 53, (Lord Macnaghten). These are:

[1] trusts for the relief of poverty (and of the aged and sick);

[2] trust for the advancement of education;

[3] trusts for the advancement of religion; and

[4] trusts for other purposes beneficial to the community, not falling under any of the preceding heads.

(1) Relief of poverty

(a) Downing v Federal Commissioner of Taxation (1971) 125 CLR 185

Facts: Property was left for the amelioration of the condition of dependants of any member or ex-member of Her Majestys naval, military or air forces of the Commonwealth.

Held: The intention to provide for the relief of persons from poverty need not be stated in express terms; it may be implicit. Therefore, amelioration implied relief and the trust was therefore charitable.

If a trust is for the relief of poverty there is no need to show that it is for the benefit of the public. The trust can be for a limited class of poor people, as in Downing (above).

(b) Trusts for the aged

The concept of poverty infers need. A trust for the aged is not necessarily a charitable trust since not all aged people are needy (e.g. Rupert Murdoch).

In the UK all trusts for the aged are charitable trusts, unless it is undesirable (e.g., for the very rich aged). Therefore, it might be necessary to prove public benefit.

(c) Trusts for the sick and for hospitals

This category includes the disabled and orphans, but not Youth Clubs, because youth is not generally regarded as a disability.

Le Cras v Perpetual Trustee Co Ltd [1969] 1 AC 514

Facts: Income from property was given on trust for the general purposes of St. Vincents private Hospital in Melbourne. The plaintiff was the testators next of kin, and was challenging the large gift from the residuary estate.

Held: That it was a valid charitable bequest on the basis that (Lord Wilberforce):

A gift for the purposes of a hospital is prima facie a good charitable gift. . . because the provision of medical care for the sick is, in modern times, accepted as a public benefit suitable to attract the privileges given to charitable institutions. It is not a condition of validity of a trust for the relief of the sick that the trust should be limited to the poor sick. The test is essentially of public benefit direct as well as indirect.

In this case, the private hospital patients were charged for health care, but the purpose of the charge was not to make a profit. The trustees were required to apply most of the net surplus to hospital purposes and to provide medical care at the lowest cost practicable. The poor were not excluded from the bequest.

Therefore, it was a valid charitable gift.

(2) Advancement of education

(a) Any trust broadly connected to education will be for a charitable purpose. The category is not limited only to schools, but includes gifts to: universities, physical/mental/moral/artistic education, learned societies, Boy Scouts, Police Boys, Student Unions, scholarships and prizes, foundation lectureships/chairs. In other words, all institutions and activities which had the effect of promoting knowledge.

For example, in Re Hopkins Will Trusts [1965] Ch 669:

Facts: Property was left to the Francis Bacon Society Inc for the purpose of finding the Bacon-Shakespeare manuscripts

Held (Wilberforce J) The gift was a charitable bequest for the benefit of history and literature. The word education must be used in a wide sense, certainly extending beyond teaching, but must improve the sum of communicable knowledge in an area which education may cover.

Further, in Taylor v Taylor (1910) 10 CLR 218, the HC upheld a trust for the advancement of scientific research because it is recognised as adding to the knowledge of mankind. What is a public general purpose must be ascertained from the conditions of the age in which the donor lives

However, in Re Shaw (Decd) [1957] 1 All ER 745:

Facts: When George Bernard Shaw died, he left property for purposes connected with investigating and advocating the virtues of a new English alphabet (40 letters)

Held: The gift failed, because there is no element of teaching or education. It also failed because it was advocating to change the law.

(b) Public benefit

There must be a public benefit for a charitable trust for the advancement of education.

In regard to the public element, there is no need for the benefit to be limited to the poor.

EXCEPTIONS THE FOUNDERS KIN CASES

Founders kin trusts are trusts of a public nature/benefit, coupled with a request/direction to prefer as individual beneficiaries persons who are kin to/related to the founder (creator/settlor of the trust) or members of some other limited class, which is not a class of the public for charitable purpose, but are, nonetheless, valid charitable trusts.

For example, in Re Koettgens Will Trusts [1954] Ch 252, a testamentary trust was established for a primary class of beneficiaries defined as British-born subjects of either sex with insufficient means. There followed direction to give preference to employees of a named company and the families of such employees.

Upjohn J upheld the validity of the charitable trust because, although the gift mentioned employees and families of a named company, they were merely to be given preference. The trust was not exclusively for their benefit.

Benefit: The court must reflect community attitudes as to what constitutes benefit. Benefit will be presumed, unless rebutted by a challenger.

In Re Hummeltenberg; Beatty v London Spiritualistic Alliance [1923] 1 Ch 237; All ER Rep 49, a bequest to establish a college for the training of spiritualistic mediums was held not to be charitable. It failed because it was not for the benefit of the public. Expert evidence is admissible to support or negate the existence of the educational value (benefit) of a gift.

(3) Advancement of religion

The intention to create a charitable trust for the purposes of religion is inferred from the general words used in the instrument, for example spreading the word of God, or church of England.

The religion need not be widespread or generally recognised, nor are the courts concerned with the truth of doctrines and/or beliefs or their utility.

In Thornton v Howe (1862) 31 Beav 14; 54 ER 1042, Sir John Romilly MR held that a religious trust would not be void even though the court may consider the opinions sought to be propagated, foolish or even devoid of foundation. In this case, a trust established for the purpose of circulating the work of a woman thought to be a child of the Holy Ghost was upheld as charitable trust.

In The Church of the New Faith v The Commissioner of Pay-Roll Tax (Vic) (1983) 154 CLR 120:

Held by the High Court: Scientology, i.e., the beliefs, practices and observances of the Church of the New Faith in Victoria, was a religion.

Mason ACJ and Brennan J:

for the purposes of the law, the criteria of religion are twofold:

first, belief in a supernatural Being, Thing or Principle; and

second, the acceptance of canons of conduct in order to give effect to that belief

They rejected the argument that only theistic religions qualify, since that would exclude Theravada Buddhism, which is an acknowledged religion

They also rejected the narrow, more restrictive test employed in Re South Place Ethical Society [1980] 3 All ER 918 in which Dillon J had said: It seems to me that two of the essential attributes of religion are:

faith in a god; and

worship of that god (referring to Oxford English Dictionary).

Further, in Re Hetherington (Decd) [1990] AC 1, it was held that saying prayers in public gatherings was sufficient to constitute a public benefit, the public benefit criterion being satisfied because of the soothing effect on the public.

However, a trust for the support of private religious rites was held not to be for the public benefit, as in Gilmour v Coates [1949] AC 426

Facts: A trust was established for the purposes of supporting a community of cloistered nuns.

Held by the House of Lords: There was no evidence of public benefit from the activities. The court required proof of public benefit and could not rely on the belief of the donor or recipients.

However, in Joyce v. Ashfield Municipal Council [1975] 1 NSWLR 744:

Issue: Whether land occupied by a hall used for meetings of a religious sect (the Exclusive Brethren) was exempt from rating, as belonging to a public charity and used for its purposes. EB members abstain from voting, and other community activities (such as joining Parents and Citizens Associations)

Held: The court demonstrated a favourable view of the Exclusive Brethren who begin with closed prayers, but go out in the world to do good eventually. The bequest was upheld.

Even if the ceremonies of the Exclusive Brethren in the hall can be regarded as temporary withdrawal from the world, those ceremonies are a preparation for assumption of their place in the world in which they will battle according to their religious views to raise the standards of the world by precept and example.

From the fact that they prepare themselves in private, nothing can be deduced to deny the conclusion that these religious ceremonies have the same public value in improving the standards of the believer in the world as any public worship.

the doctrine of Gilmour v. Coates does not apply to the Exclusive Brethren, and, from the fact that their religious ceremonies cannot be classed as public worship, it cannot be deduced that they are not for the public benefit.

(4) Trusts for other purposes beneficial to the community

Under this heading are grouped all the purposes which

either are specifically mentioned in the Statute of Elizabeth

or have been held to be within its spirit and intendment, but which do not come under the first three heads already considered.

These are various purposes which defy orderly classification. The only common element being the concept of public benefit.

In Barby v Perpetual Trustee Co Ltd (1937) 58 CLR 316, Dixon J noted that it is impossible to define this fourth category of benefit to the community.

However, the purposes must have elements of both improvement of society and public utility. Therefore, the benefit of such a trust must be open to all members of the public who are capable of enjoying it.

For example, in Incorporated Council of Law Reporting of the State of Queensland v Federal Commissioner of Taxation (1971) 125 CLR 659, it was held that not every purpose beneficial to the community will be charitable. Therefore, public benefit will have to be established by analogy to the Preamble and it is necessary to show some public utility in a broad perspective.

A further example is to be found in Inland Revenue Commissioners v Baddeley [1955] AC 572:

Facts: A gift of land and buildings was conveyed to trustees upon trust for the promotion of the religious, social and physical well-being of certain people, resident in a certain geographical area in England, who were likely to become members of a certain religious denomination (Methodists).

Held: The more restricted the gift, the less likely it is to be upheld as charitable. In this instance the gift failed for uncertainty. It was too vague to qualify as charitable and a gift under the fourth category must be open to enjoyment by all members of the public who are capable of enjoying it (Lord Simonds and Lord Somervell).

In Australia, in Royal National Agricultural and Industrial Association v Chester (1974) 48 ALJR 304, a testamentary gift of a fund to a charitable body to apply the income thereof for the purpose of improving the breeding and racing of homing pigeons was held not to constitute a valid charitable trust. Although it would provide recreation for quite a number of pigeon fanciers, and an opportunity for the scientific study of the birds remarkable homing instinct, such a purpose was neither specifically mentioned in the Preamble of the Elizabethan Statute, nor was it within its spirit and intendment.

E. OTHER TYPES OF TRUSTS AND PURPOSES

1. Political purposes

There are two broad categories of political purposes: a) party politics and b) advocating changes in the law.

Party politics and international relations

These are not charitable purposes. The rationale being that it is undesirable for the advantages of charity to be conferred on a trust to secure a certain line of political administration and policy. For example, in Re Astor [1952] Ch 534 a trust to promote good will and understanding among foreign nations was held NOT to be as a charitable trust.

In McGovern v. A-G [1981] 3 All ER 493, the discussion of political went beyond changes in the law (e.g., advocating reversal of government policy).

Facts: Amnesty International trusts have three purposes

To secure release of prisoners of conscience

To secure the abolition of torture and inhumane imprisonment

To promote research into the maintenance and observance of human rights

Held: The trusts were not charitable since they were for a political purpose. To secure release of prisoners of conscience, the primary means of achieving the purpose was by placing moral pressure on foreign governments. The purpose of securing the abolition of torture and inhumane imprisonment also failed because it was political and, therefore, non-charitable.

The trust to promote research into the maintenance and observance of human rights was a charitable purpose, but because the purposes of the trust were mixed, it failed entirely.

It is arguable that today, given the more enlightened view of the work of Amnesty and its international importance, the court would make a different finding and would probably attempt to sever and save

Trusts to advocate a change in the law

In National Anti-Vivisection Society v IRC [1948] AC 3, Simonds LJ in the HL cited Bowman v. Secular Society [1917] AC 406 per Lord Parker at 422:

A trust for the attainment of political objects has always been held invalid, not because it is illegal but because the court has no means of judging whether a proposed change in the law will or will not be for the public benefit.

In Re Shaw [1957] 1 All ER 745, the gift for the purpose of investigating the advantages of a 40 letter alphabet, publishing it and also translating one of his plays into that new alphabet was held to be invalid as a political trust, being analogous to a change in the law. The propaganda element is fatal for the validity of a gift for a charitable purpose (also: not educational either).

2. Sporting purposes

Gifts for the encouragement of sport are not charitable. In Re Nottage [1895] 2 Ch 649, a testator bequeathed a sum of money, the interest of which was to be expended in providing a cup to be given for the encouragement of yachting. This was held not to be charitable

However, in Oldham Borough Council v A-G [1993] Ch 210, a trust to hold certain playing fields for the benefit of the inhabitants of a defined area was held to be a charitable trust.

Therefore: sporting purposes are traditionally not charitable purposes unless they are ancillary to some plainly charitable purpose (e.g., poverty, education).

3. Hospitality or entertainment purposes

Where the dominant purpose of a trust is hospitality or entertainment it is not a valid charitable trust

In Re Spensleys Will Trusts; Barclays Bank Ltd v Staughton [1954] Ch 233, a devise of lands on trust:

for the use of the High Commissioner or other person representing the Government of the Commonwealth of Australia in England for the time being to be used by him as a country residence in a way similar to that in which Chequers is used by the Prime Minister of England

failed as a charitable trust.

However, a trust for the advancement of music is a valid (Canterbury Orchestra Trust v Smitham [1978] 1 NZLR 787)

4. Gifts for foreign charitable trusts

Trusts for the provision of gifts to accepted or valid charitable purposes outside the jurisdiction will be upheld. For example, a trust to set up a hospital in Greece or a trust for the relief of distress in Europe after WW II were held to be for charitable purposes Thus, foreign charitable trusts will be upheld unless they offend local public policy, for example, a trust for the benefit of an enemy country during war. The question arises, however, as to how a trust for an overseas purpose can benefit the local community.

In Lowin (Decd); Perpetual Trustee Co Ltd v Robins [1967] 2 NSWLR 140, a trust to provide a prize payable in a foreign country for a musical competition to be conducted in Austria (Vienna) between composers of that foreign country was held to be for a charitable purpose on the basis that: Music is a universal interest and its advancement and encouragement in Austria have a sufficient nexus with the benefit of a substantial section of our public to validate the trust in question.

5. Mixed purposes

If a trust is for mixed (charitable and non-charitable.) purposes and the trustees have discretion to apply the whole to the non-charitable purpose, the trust will be invalid: Morice v Bishop of Durham (1805)

However, the Charitable Trusts Act 1993 (NSW) s.23 enables the court to sever and save the charitable purpose and treat it as the sole purpose.

F. SCHEMES

Schemes are strategies or arrangements devised/employed by courts to deal with problems that may exist in relation to charitable trusts.

The court may direct that property should be administered through a particular scheme where:

there is some want of definition or administrative procedures in the trust instrument,(general scheme) or

there is an element of impossibility or impracticability in the trust as drafted (cy-prs scheme).

1. General scheme (administrative scheme):

Where the trust document lacks sufficient detail about implementation or administration of the trust, the court can supply the necessary machinery/guidance to supplement the original directions by way of a GENERAL SCHEME of administration for the trust.

For example, where the testator has expressed/revealed a general charitable intention, but

(i) the machinery for ascertaining the objects of the trust fails (e.g., to be appointed/determined by particular person who fails to do so); or

(ii) the machinery for carrying out the donors intention does not exist or fails (i.e., problems of administration).

The court will intervene and prescribe all the necessary details of administration pursuant to s.7 Charitable Trusts Act 1993 (NSW)

Cy-prs scheme

Pursuant to Pt 3, sections 9, 10 and 11 of the Charitable Trusts Act, a cy-prs (close) scheme will be created where the charitable purpose must be changed due to an initial failure of the specified purpose, a supervening failure or in the event of a residue. This may occur where the donor exhibits a general charitable intention, and a particular purpose, but one which has been (or cannot be) fulfilled or achieved.

In such a case the court can apply the gift for some other charitable purpose by way of cy-prs scheme

The necessity for such a scheme may arise in a number of different ways. For example, there is:

initial impossibility/impracticability/failure (e.g., it is impossible to carry out the trust because of illegality or because the precise object has been fulfilled)

supervening impossibility/impracticability (whether or not donors intention is general or particular), or a surplus is left after fulfilling the precise object.

The court will substitute a new purpose or object as close as possible to donors intention. In order to do this it will look at donors disposition and all other evidence available.

In Re Lysaght (Decd) [1966] Ch 191:

Facts: A testatrix directed payment of a fund to the Royal College of Surgeons to be held on trust to provide scholarships to British-born students not of Jewish or Roman Catholic faith. The College refused to accept the gift on those terms but was willing to accept it if those terms were deleted.

Held: If the terms were deleted, the trust would fail for initial impossibility. The court was able to discover a general charitable intention on the part of the testatrix. The court applied a cy-prs scheme to provide scholarships and disregarded the discriminatory element (this is also an example of sever and save s 23 CTA).

NB. If the court had found a specific intention (to exclude Roman Catholics and Jews) the trust would have failed.

G. LAPSE

If a gift is made to an institution which ceases to exist before the testators death, under normal conditions, the gift will fail for initial impossibility.

However, if a general charitable intention is present, a cy-prs scheme will be applied. If a particular charitable intention is found, the gift will lapse.

TODAY, a gift will not lapse if the particular charitable purpose still exists, although the institution may have been closed. Thus, the court will consider that the gift was not to the particular institution, but to its purposes.

Sir Moses Montefiore Jewish Home v Howell and Co (No. 7) Pty Ltd [1984] 2 NSWLR 406:

Facts: The plaintiff was a corporation holding its property on trust for the charitable purpose of providing a home for distressed persons of the Jewish faith.

It was also the trustee of an unincorporated body (Isabella Lazarus Home for Jewish Children) and held property on trust for the charitable purposes of that body.

The defendants were trustees under two trusts conferring benefits on the two homes

The plaintiff sought to invoke the rule in Saunders v. Vautier (1841) 4 Beav 115; 41 ER 482 so as to extinguish the trusts and compel immediate transfer of the trust funds.

Held: That a gift in favour of a charitable organisation is presumed to be a trust for its purposes, rather than to the organisation itself. Therefore, the corporation could not call for the immediate transfer of the funds under the rule in Saunders v. Vautier. Only if it had been a private trust could Saunders v. Vautier apply.

H. ENFORCEMENT OF CHARITABLE TRUSTS

Trustees of charitable trusts are subject to the same duties as trustees of private trusts. In addition, their operations and activities are reviewed by the ACNPC, to ensure that their purpose continues to be charitable.

As noted at page 5, above, the Attorney-General of each state is the proper plaintiff in regard to the enforcement of a charitable trust and disputes which arise with trustees: see Wylde v Attorney-General (1948) 78 CLR 224. This is because charitable trusts are public trusts and, therefore, do not have named beneficiaries, like private trusts.

I. PURPOSE TRUSTS

1. Purpose trusts generally

Purpose trusts are superficially similar to, but completely distinct from charitable trusts. Purpose trusts is a class of trusts of imperfect obligation which lack any human beneficiary.

For example, trusts for the

erection/repair of tombstones and monuments

maintenance of animals

furthering some non-charitable cause

Because a purpose trust lacks any human beneficiary, who is going to enforce it?

Not the Attorney-General, because the purpose is not charitable.

If the trustees choose not to carry out such a trust, they hold the property:

(a) on resulting trust for the donor, if it is an inter vivos trust; OR(b) the residuary beneficiary/beneficiaries, if it is a testamentary trust.

Well-recognised categories of purpose trusts are:

trusts for the upkeep of animals

trusts for the erection/maintenance of graves/monuments

trusts for the purposes of unincorporated non-charitable associations

miscellaneous cases

Pettingall v. Pettingall (1842) 11 LJ Ch 176

Facts: The testator bequeathed 50 a year for the maintenance of favourite black mare. The executor was bound in honour to fulfil the request

Held: 50 a year should be paid to the executor during the life of the mare after the executor has given an undertaking to maintain the horse properly. If there was any surplus after the death of the horse, it was to be enjoyed by the executor beneficially. If the mare was not looked after properly, any of the residuary legatees could apply to court.

Re Dean; Cooper-Dean v. Stevens (1889) 41 Ch D 552

Facts: A testator bequeathed his horses and dogs to his trustees together with an annual sum for the maintenance of the animals for 50 years (if any of them should live so long).

Held: The trust was valid, although it was not a charity.

The trust was challenged on the bases that:

animals could not enforce the trust

not a charity, since it was for the benefit of particular animals

no cestui que trust to enforce the trust

The court dismissed challenges on the following grounds:

It was possible to give a legacy to the trustees upon trust to apply it in erecting/repairing a monument/church (by analogy):

Although there is no beneficiary to enforce the trust, it is acceptable, provided the testator limits the time for which trust is to exist.

Most courts in Australia and the UK have taken the view that purpose trusts are anomalous exceptions and will not be extended.

Finally, purpose trusts, even when valid, are only upheld to a limited extent. Nobody can insist that they be performed and the trustees have absolute discretion as to the performance of their duties. Trustees cannot be compelled to perform their duties nor can they be prevented from doing so.

In each of these anomalous areas, the trust is subject to two special and curious rules:

the trust can only last for 21 years (based upon the original pre-statutory perpetuity period)

(ii) the trustee must be under no duty to perform the trust, although courts may ask him to give undertaking to perform it.

2. Trusts for unincorporated associations

Pursuant to equitable principles, unincorporated associations are not legal entities and have no separate legal identity from their members. Therefore, they cannot hold property in their own right and any gift to such associations will be invalid. However, s 43 of the Succession Act 2006 (NSW) provides for the validation of testamentary gifts under certain circumstances.

TUTORIAL QUESTIONS

1. How and why does the meaning of the word charitable differ at law and in equity from its ordinary, everyday meaning?

2. Why do charitable trusts need to be for the benefit of the public as well as for a purpose within the spirit and intendment of the Preamble to the Statute of Elizabeth?

3. Peter Dodgy establishes the Fellowship of the Right, which is operated and managed by a trust. The organisation is registered with the Australian Charities and Not-For-Profit Commission as a religious charity.

Each meeting of the Fellowship begins with a prayer to Zeus, and this is then followed by a sermon on Zeus powers. The rest of the meeting is always devoted to political discussions which centre around ultra-right-wing principles.

In April 2023, the ACNFPC deregister the organisation on the grounds that it is not a religious organisation but a political party.

Do you think that the ACNFPC decision was correct?

4. Why was the High Court decision in the Scientology Case so important?

5. What is the basis for the differing outcomes in Joyce v Ashfield MC [1975] and Coates v Gilmore [1949]?

6. How could the settlor of the Tobacco Securities Trust Ltd (in Oppenheim) have avoided the ruling that it was not for the public benefit and therefore not a charitable trust?

7. In his will, Bert instructs his testamentary trustees to hold $1m on trust for the aged and infirm living in Point Piper, one of the wealthiest suburbs in Australia. Is this a charitable purpose?

8. Why was the trust created in the will of George Bernard Shaw (Re Shaw [1957]) held not to be a charitable trust?

9. What is a cy-prs scheme and how does it work?

10. In her will, Molly wants to leave $1m to a trustee to care for her 3 cats. Advise Molly on the best way to do this?

PROBLEM QUESTION

CHARITABLE TRUSTS

Fred Normal is a retired property developer who made his fortune in re-zoning and developing rural land for residential uses. He is 79 years old and lives alone on his property Nirvana, on the south coast of NSW, with 6 cats and a donkey. His housekeeper, Beryl Bates, goes to the property every day to clean and cook for him.

On 21 April 2023, while Beryl is vacuuming the carpet in the lounge, Fred collapses in front of her. She immediately rings for an ambulance, but by the time it arrives, Fred is dead.

Fred has left a will which appoints Abby Normal, his niece, and Beryl Bates as his executors and testamentary trustees. Freds will contains (inter alia) the following testamentary dispositions:

1. To my niece, Abigail Normal I leave the sum of $100,000 as trustee for the benefit of my 6 cats and Donald the Donkey for their care and maintenance.

2. To my trustees to hold on trust, the sum of $500,000 to establish a scholarship for two students to study law at the Macarthur University for the children of my former employees.

3. To my trustees to hold on trust, the sum of $500,000 to fund research into the desirability of making Australia a republic.

4. My property Nirvana to be sold and the proceeds to be held on trust and distributed by my executors to such beneficial organisations as they decide.

5. The residue of my estate to my son and daughter Ernest Normal and Paris MacDonald in equal shares.

As soon as the provisions of the will become known, Paris begins to ring Abby constantly, asking when she can get the money from Freds estate. On 1 May 2023 Abby receives a letter from Bazza Murphy written on Paris behalf claiming that testamentary dispositions 1 to 4 are invalid.

Abby also discovers that unless the gifts left by Fred are charitable trusts, the trustees will have to pay tax on any income earned on the funds.

Advise Abby.

MODULE 11 WEEK 12

RESULTING TRUSTS

1. Basic themes discussed under this topic:

INTRODUCTION

AUTOMATIC RESULTING TRUSTS

PRESUMED RESULTING TRUSTS

PRESUMPTION OF ADVANCEMENT

ILLEGALITY AND THE RESULTING TRUST

FUTURE OF THE RESULTING TRUST

2. TUTORIAL QUESTIONS

3. PROBLEM QUESTION

4. Prescribed readings:

All students

Bryan and Vann, Chapter 22 [2.1 21.30]

JD Students

H & L, Ch 31

Additional readings:

Jacobs, Ch 12

Key Cases:* Must read

*** Nelson v. Nelson (1995) 184 CLR 538

Re Vandervells Trusts (No.1) [1967] 2 AC 291

Boyce v Boyce (1849) 16 Sim 476.

Re Goulbenkians Settlement Trusts [1970] AC 508; [1968] 3 All ER 785

Re Gillingham Bus Disaster Fund [1958] Ch 300

* Calverley v Green (1984) 155 CLR 242

** Jain v Amit Laundry Pty Ltd [2019] NSWCA 20 (19 February 2019) available in Week 12 folder

*** Henley v Bone [2019] NSWSC 254 (18 March 2019) available in Week 12 folder

RESULTING TRUSTS

INTRODUCTION

1. Resulting and constructive trusts are created by the court, in some instances irrespective of the intentions of the parties. This is in contrast to express trusts, which can only be created if it is the settlors intention that property be held on trust.

A constructive trust will be imposed by the court over property (always created irrespective of the intentions of one of the parties):

acquired by a fiduciary in breach of duty;

on the application of the rule in Barnes v Addy;

acquired by a trustee de son tort;

as a remedy in a claim pursuant to equitable estoppel;

as a remedy for claims against property when there has been an intermingling of funds and/or non-financial contributions by one person to the property of another, eg Property (Relationships) Act;

where property has been acquired in contravention of other equitable principles. E.g. undue influence or unconscionable conduct.

Constructive trusts are a temporary remedy which remain in place until the consequential orders have been put into effect.

You will study constructive trusts in much greater detail in Remedies.

A resulting trust will be imposed when:

(a) there is a failure of one of the three certainties which leads to a failure in the beneficial interest (automatic resulting trust); or

(b) one person has purchased property and placed it in the name of another (presumed resulting trust).

In both types of resulting trust, the beneficial interest results in (goes back to) the settlor, the testators residuary estate or the person who purchased the property.

2. Categories of resulting trust

As seen above, there are two categories of resulting trust:

a) automatic

b) presumed

In Re Vandervells Trusts (No.1) [1967] 2 AC 291, Lord Upjohn described the differences between them:

(a)

An automatic resulting trust is imposed to fill what would otherwise be a gap in the beneficial interest in property and takes effect by operation of equitable principles. An automatic resulting trust therefore concerns the incomplete disposition of an equitable interest in property.

In such circumstances an automatic resulting trusts will be imposed as a result of the application of the beneficiary principle (Morrice v Bishop of Durham (1804) 9 Ves. 399; 32 ER 656), which provides that a trust cannot exist without a beneficiary or a beneficial purpose. If there is no beneficiary, the trustee holds the legal title to the trust property free of any beneficial interest. This would defeat the intention/purpose of the trust. Therefore, the court imposes a resulting trust to create the necessary beneficial interest.

Therefore, if a settlor has failed to dispose effectively of the beneficial/equitable interest in an express trust (e.g., he has transferred property to trustees but has not disposed of the beneficial interest), that beneficial interest automatically results in (goes back to) the settlor. For example, when a trust fails because the beneficiary has not been chosen yet or is a sole beneficiary who has died, the beneficial interest that was not disposed effectively will automatically go back to the settlor.

Another example will arise when the Testator has failed to identify the subject matter of a trust: Boyce v Boyce (1849) 16 Sim 476.

(b) A presumed resulting trust arises:

. . . where A transfers [or directs a trustee for him/her to transfer] the legal estate to B otherwise than for valuable consideration: it is a question of As intention whether B to take beneficially or on trust.

If the document transferring the legal estate is silent as to As intentions, then there is said to arise a resulting trust in favour of A. But this is only a presumption and is easily rebutted. All the relevant facts and circumstances can be considered in order to ascertain As intention with a view to rebut this presumption.

In other words, it is a rebuttable presumption that B holds the property on resulting trust for A. An effective property disposition of some kind has taken place and, in the absence of obvious intention, there is a rebuttable presumption that the settlor intended to create a trust.

For example, when B purchases property with funds provided by A, and the property is placed in Bs name, a resulting trust will be presumed in favour of A, unless evidence shows that A had a different intention: see Nelson v Nelson (1995) 184 CLR 538.

Further, it is not necessary that the whole of the purchase price of a property be provided by another party for a resulting trust to be imposed. When a financial contribution has been made to the purchase of a property, the court may declare that the holder of the legal title holds the property on resulting trust in equal or unequal shares depending upon the contributions.

For example, in Jain v Amit Laundry Pty Ltd [2019] NSWCA 20 (19 February 2019) the judge at first instance, declared that the appellant, Jain, held the property on resulting trust for the respondent and another party and ordered that title to the property be rectified in the register of land to record that it was held as tenants in common in various shares of the parties [7]. The Court of Appeal affirmed this ruling.

(c) No writing requirement

S..23C Conveyancing Act 1919 (NSW): writing requirements do not apply to resulting or constructive trusts.

B. AUTOMATIC RESULTING TRUST: NON-DISPOSAL OF BENEFICIAL INTEREST

1. Situations in which an automatic resulting trust will arise

When an express trust fails, the equitable interest results or goes back to the creator of the trust.

For example if:

there is a failure of one of the three certainties;

there is property left in the trust (e.g. unexhausted revenue) after its determination;

property is conveyed on trust without any beneficial interests being stated;

property is conveyed to on trust to X, but the gift fails for illegality, uncertainty, contravention of the rule against perpetuities or lapse;

property is conveyed on trust to X on a condition, but the condition is not satisfied (e.g., Re Gardiner [1971] NSWLR;

property is conveyed on trust for a particular loan purpose which becomes impossible to achieve (Quistclose trust);

2. A Quistclose trust

Quistclose trusts are imposed in commercial situations and is named after the case: Barclays Bank Ltd v. Quistclose Investments [1970] AC 567:

Facts: Rolls Razor borrowed money from Barclays to pay dividends to its shareholders. Before the dividends could be paid, the company went into liquidation. Quistclose, a shareholder of RR maintained that the money borrowed from Barclays was intended to be used to pay dividends, it was held on a primary trust for the shareholders. Barclays claimed that the money was held on trust for its benefit,

Held by the House of Lords: a primary trust between the borrower and creditors (shareholders) failed because the purpose of the loan could not be achieved (i.e. to pay a dividend to the shareholders). Upon such a failure, a secondary trust arises whereby the loan monies are held on trust to return to the lender. Where the property is conveyed only for a particular purpose which is NOT fulfilled, the beneficial interest in the property will automatically result back to the settlor.

2. Unexhausted revenue from a private express trust

When there is a surplus of trust property after the objective of a trust has been achieved, a resulting trust of any surplus which might exist after the beneficiaries have taken their entitlements or have died, will go back to the settlor.

For example, A gives B $100,000 to hold on trust for C, D and E, who are to receive $30,000 each. A has given no instructions as to the disposition of the remaining $10,000. This will therefore result in the settlor A.

4. Property in testamentary trust is not completely distributed

If the trust is a testamentary trust, any property not disposed of in the will results (goes back) to the deceased estate. For example, if there is no residuary beneficiary and there is still property remaining in the estate after completion of administration (distribution of gifts, payment of debts etc): Smith v Cooke [1891] AC 297.

Similarly, in Re Goulbenkians Settlement Trusts [1970] AC 508; [1968] 3 All ER 785, in which a gift to the friends of the deceaseds son failed for lack of certainty of object and Boyce v Boyce, in which a bequest to the deceaseds daughters failed for lack of certainty of subject. In both examples the property resulted in the residuary estate.

If the settlors purpose is fulfilled, but his or her intention is not to retain any beneficial ownership, the Crown takes the property as bona vacantia (meaning: no beneficiary/beneficial interest): Westdeutsche Landesbank Gorozentrale v Islington LBC [1996] AC 669, 708 (Lord Browne-Wilkinson).

5. Cases where monies are raised by public subscription for some particular purpose

Quite often, money will be raised from the general public for a particular purpose. For example, funds may be raised from public donations to purchase a wheelchair for a disabled person. The question then arises as to the disposition of any surplus, after the purpose has been achieved. If the wheelchair costs $1,500 and $2,000 is raised, what happens to the surplus of $500?

There are a number of possibilities:

The funds may be held upon a resulting trust for the benefit of each of the donors.

If the fund was raised for a charitable purpose and a general charitable intention can be found by the court, the money will be applied upon a cy-pres scheme.

If the fund was raised for a charitable purpose, but no general charitable intention is evident, a resulting trust will be raised in favour of the donors.

If the donors intended to part with the money for ever (once and for all) and thereby relinquished any claim to it, the money will go to the Crown bona vacantia, In Australia, property that is held to be bona vacantia goes to the State.

The resolution of each case depends upon the particular facts and circumstances involved.

For example, in Re the Trusts of the Abbott Fund; Smith v Abbott [1900] 2 Ch 326:

Facts: A fund was raised by subscription for the maintenance and support of two elderly ladies left in poverty stricken circumstances. The names and addresses of the donors and the amounts contributed were recorded in a ledger. At the death of the survivor, there was a portion of the fund unused.

Held: that a resulting trust of the balance arose in favour of each of the subscribers.

In this case, because a detailed record of donations was kept by the trustees, it was possible to identify each and every one of the contributors individually.

However, where individual donors of the fund are unascertainable, a different approach must be taken. For example, in Re Gillingham Bus Disaster Fund [1958] Ch 300:

Facts: A car accident caused the death of 24 cadets marching along a road. The mayors of the surrounding towns set up a memorial trust fund to assist the survivors and the families of the deceased. Only a fraction (1/3) of the fund was used. The issue arose as to the disposition of the surplus.

Held: that the surplus should not be paid to the Crown as bona vacantia merely because the donors were unascertainable. However, the donors could not to be taken to have parted with their money absolutely out-and-out. Therefore, trustees held the fund on resulting trust in favour of the donors and were required to pay the fund into the court like any other trustee who cannot find the beneficiary. The trustees were ordered to make enquiries as to the identity of the donors so that the surplus of each donors contribution to be returned to him or her. The donations of any donors who could not be found went to the Crown bona vacantia.

In Re West Sussex Constabularys Widows, Children and Benevolent (1930) Trust Funds [1971] 1 Ch 1, (Goff J):

Facts: Anonymous donors contributed funds into a collection box in aid of disaster victims. After payments to those entitled to receive a distribution, there were funds left over.

Held: The donors intended to make an out and out gift. Therefore, the surplus should go to the Crown as bona vacantia. The Court also stated that people who buy a contract for a benefit (e.g., by buying a ticket for an entertainment, raffle or sweepstake) will be held to have parted with their money out and out, i.e. the contributors did not want any surplus to be returned and had intended to part with the money once and for all.

The decisions in each of the above cases highlight the importance of ensuring that when money is being raised for a particular purpose (for example, for new computers for a school) it must be raised either:

in such a way as to clearly demonstrate that the donors intended to part with their money out and out or once and for all. For example, through a raffle, a cake stall or a concert; AND

the purpose of the fund raising is sufficiently broad, to allow any surplus to remain with the institution raising the funds.

C. PRESUMED RESULTING TRUSTS

PURCHASE MONEY TRUSTS

1. The classic authority for this category of resulting trust is Dyer v Dyer (1788) 2 Cox 92, 93; 30 ER 42, 43, in which Eyre LCB stated:

[T]he trust of a legal estate whether taken in the names of the purchasers or other jointly, or in the name of others without that of the purchaser results to the man who advances the purchase money.

That position was confirmed by the High Court in Napier v. Public Trustee (WA) (1980) 32 ALR 153, 158 (Aickin J):

Where a property is transferred by one person into the name of another without consideration, [and where a purchaser pays the vendor and directs him to transfer the property into the name of another person without consideration passing from that person], there is a presumption that the transferee holds the property upon trust for the transferor or the purchaser as the case may be.

The proposition is subject to the exception that in the case of transfers to a wife or a child (including someone with respect to whom the transferor stands in loco parentis) there is a presumption of advancement so that the beneficial as well as the legal interest will pass.

Each of the presumptions may be rebutted by evidence.

2. Presumption of a resulting trust

A presumed resulting trust may apply to both real property and personal property. In Russell v. Scott (1936) 55 CLR 440, a resulting trust over a bank account was claimed, but then rebutted by evidence of an intention to convey a beneficial interest to the transferee.

The presumption of a resulting trust will not arise where the purchase money has been provided as a loan.

3. Contributions to the purchase of property

A leading authority is Calverley v Green (1984) 155 CLR 242 (Please note that the decision in Calverly was handed down before the enactment in NSW of the De Facto Relationships Act 1984 (NSW), which is now the Property (Relationships) Act 1984 (NSW)),

Facts: A man and woman lived in a de facto relationship as a couple for more than 10 years. They decided to purchase a house to live in. M told W that a finance company required the purchase to be in joint names. M provided the deposit (1/3 of purchase price) and the couple jointly borrowed the balance on a mortgage (i.e., jointly and severally liable to make repayments).

M made the repayments on the mortgage whilst the W paid all household expenses.

The parties were held the property as joint tenants and lived in the house for 5 years, until W left.

W claimed a 1/2 share in the property and M claimed that she held her interest in the house on resulting trust for him.

At first instance the W had no beneficial interest in the property because the only reason she was named as joint tenant was to obtain finance.

The Court of Appeal reversed the decision and held that parties were joint owners.

Held by the High Court: (majority 4-1: Gibbs CJ, Mason, Brennan and Deane JJ - Murphy J dissenting) that the Ws liability under the mortgage was a contribution to the purchase price

Gibbs CJ, 245-7:

[I]f two persons have contributed the purchase money in unequal shares, and the property is purchased in their joint names, there is, in the absence of a relationship that gives rise to a presumption of advancement, a presumption that the property is held by the purchasers in trust for themselves as tenants in common in the proportion in which they contributed the purchase money.

The fact that the W executed the mortgage made her a contributor of 1/2 the money borrowed as a joint liability. She was considered to have made a direct contribution to the purchase price.

The presumption of proportionate shares in a resulting trust may be displaced by evidence of contrary intention.

The presumption of advancement does not apply to de facto couples:(Mason and Brennan JJ and Deane J)

4. Rebuttal of presumption of a resulting trust

When the presumption of a resulting trust arises, evidence can be adduced of the actual intention of the parties, to prove that no such trust was intended

The onus of rebutting the presumption is on the person who did not contribute to the purchase money, e.g., by evidence that transfer of property was intended as a gift (see Nelson v Nelson).

The evidence must refer to the intention at the relevant time of the purchase (i.e., time when interest was created). The relevant time is before or at the time of purchase, or so immediately thereafter as to constitute a part of the transaction: Martin v Martin (1959) 110 CLR 297

D. PRESUMPTION OF ADVANCEMENT

1. The rationale for the presumption of advancement is said to be based on the moral duty of a father to provide for his wife and children.

In Scott v Pauly (1917) 24 CLR 274, 282 (Isaacs J):

[The presumption of advancement] is an inference which the courts of equity in practice drew from the mere fact of the purchase being the father, and the head of the family, under the primary moral obligation to provide for the children of the marriage, and in that respect differing from the mother.

Advancement means a provision for the health, education and general well-being of another person.

In certain relationships equity infers or presumes that any benefit has been provided by way of advancement.

The presumption of advancement applies to transfers from

husband to wife. H either provides the purchase price or makes contributions to the purchase price of property in which the wife is given a legal interest: Kais v Turvey (1994) 11 WAR 357. But not from wife to husband (March v March (1945) 62 WN (NSW) 111)

between a man and his intended wife/fiance: Wirth v. Wirth (1956) 98 CLR 228

BUT not between de facto couples (Napier v Public Trustee (WA) (1980) 32 ALR 153; Calverley v Green (1984) 155 CLR 242 HC)

father to child. This may also apply to a transfer from step-father to step-child (Oliveri v Oliveri (1993) 38 NSWLR 665)

mother to child and mother to adult child: Nelson v. Nelson (1995) 184 CLR 538.

2. Rebuttal of the presumption of advancement

The presumption of advancement can be rebutted by evidence that the intention at the relevant time was not to make a gift (see Nelson v Nelson).

For example, in Calverley v Green evidence was adduced that M did not intend to make a gift, but merely wanted to comply with the finance companys insistence on joint names on the mortgage. The presumption of advancement could have been rebutted if a de facto relationship was admitted as a category which falls within such a presumption.

Evidence of the acts or declarations of the parties before or at the time of purchase, or so immediately thereafter as to constitute a part of the transaction will be admissible for and against the actor or declarant. Subsequent acts and declarations may also be adduced in rebutting the presumption. However, evidence of subsequent acts are admissible only against a person, not in their favour Shepard v Cartwright [1954] 3 All ER 649; [1955] AC 431 (the High Court reaffirmed this as the law in Australia: Calverley v. Green (1984) 155 CLR 242).

In Hedley v Bone [2019] NSWSC 254 (18 March 2019), a son purchased a property with money provided by his mother, who had obtained it from the sale of her business, in which the son had worked for eight years. He had not owned a property before and was therefore entitled to the first home owners grant. The son allowed the mother and his sister to live in the property. After his death, the mother claimed that he had held the property on resulting trust for her because of her payment of the purchase price. The Court held that although there was no presumption of a resulting trust or presumption of advancement in this instance, the sons ownership of the property was subject to a personal obligation to permit [the mother] to treat the property as her own [49]. No decision was made as to the status of the property and further proceedings are necessary to determine this.

E. ILLEGALITY AND THE RESULTING TRUST

Nelson v. Nelson (1995) 184 CLR 538

Facts: Mrs N purchased a home in the name of her two children. Later she filled a statutory declaration under the Defence Service Homes Act 1918 (Cth), stating that she had no interest (equitable or legal) in any other property. The declaration entitled her to be eligible for a $25,000low interest loan from the Commonwealth, which she used towards the purchase of another home (balance provide by mortgage over first property). When she discovered that the children were going to sell the house, she commenced proceedings claiming that they held the property on resulting trust for her.

Issues:

Did a resulting trust arise in her favour for the first property?

Did a presumption of advancement arise in favour of her children?

Could the presumption of advancement be rebutted, using evidence of her illegal purpose in registering the house in the names of her children?

Held by the High Court: Illegality could prevent rights from arising i.e., could prevent the presumption of a resulting trust.

The presumption of advancement between mother and child exists, but it may be rebutted by evidence of contrary intention.

Evidence rebutting the presumption is admissible even where it may disclose an illegal or immoral purpose.

If a presumption of resulting trust is rebutted, where does the equitable title lie?

If an illegal purpose has been carried through, it will not necessarily preclude the presumption of a resulting trust. If the illegality flows from the statute, then the issue is whether the purpose of the statute will be defeated if the resulting trust is enforced. This approach requires an examination of the statute and the policy behind it.

McHugh J: the remedy (i.e., application of a resulting trust) should not be denied, unless:

the statute discloses an intention that those rights should be unenforceable in all circumstances; or

the sanction of refusing to enforce those rights is not disproportionate to the seriousness of the unlawful conduct; or

the imposition of the sanction is necessary, having regard to the terms of the statute, to protect its objects or policies; andthe statute does not disclose an intention that the sanctions and remedies contained in the statute are to be the only legal consequence of a breach of the statute or the frustration of its policies

On the facts therefore:

the illegality of obtaining a subsidised loan by deceit did not contravene a significant section of the relevant Statute, nor did it defeat or destroy the purpose of the Act

the purpose was to provide assistance to Defence Force personnel in acquiring homes.

Mrs. N was granted a resulting trust on condition that she returned the fraudulently obtained $25,000 ( she was allowed to wash her hands clean)

F. THE FUTURE OF THE RESULTING TRUST

In Calverley v. Green (1984) 155 CLR 242 in dissent, Murphy J said that the presumptions of resulting trust and of advancement should be discarded because:

they were inappropriate in our times, and are opposed to a rational evaluation of property cases arising out of personal relationships

presumptions can only be made in law when they accord with common experience

If standards of behaviour change, so should the presumptions, otherwise the rationale for the presumptions is lost, and instead of assisting the evaluation of evidence, they may detract from it.

In Nelson v. Nelson (1995) 184 CLR 538, 602, McHugh J called upon the legislature to abolish the presumptions on the grounds that they could cause significant injustice to parties who are unaware of their existence.

However, despite the statements of Murphy and McHugh JJ, the resulting trust continues to survive, not only in the form of the Quistclose trust, but also as presumed resulting trusts and in cases were there has been a failure to dispose completely of the beneficial interest or where there has been a substantial contribution to the purchase price of a property. The two recent cases of Jain and Hedley, above, indicate that resulting trusts are still very much alive and regarded as relevant in the equity jurisdiction in the twenty first century.

2. TUTORIAL QUESTIONS

1. What is the difference between a resulting trust and a constructive trust?

2. In what circumstances will an automatic resulting trust arise?

3. WHY does the court impose an automatic resulting trust in such circumstances?

4. What is a Quistclose trust? What are the commercial advantages of such a trust?

5. The Winterfell Public School is a small primary school situated in the far west of NSW. The P & C committee decided to raise money to buy a new computer for the school library. They need to raise approx. $1,000.

The find-raising activities they have planned are as follows:

- a raffle

- a cake stall

- a car boot sale.

Should the fund-raiser be described as: a fund-raiser for a new computer OR

a fund-raiser for the Winterfell Public School?

Give reasons for your answer.

6. What is the conceptual basis for the presumption of advancement? How was it rebutted in Nelson v Nelson?

7. Ernie purchased a property but placed title in his brother Berts name. Five years later Bert decides to sell the property. Does Ernie have any claim to the property? Does Bert have a defence to any claim made by Ernie?

8. Do you agree with Murphy J that resulting trusts and the presumption of advancement are no longer relevant? Give reasons for your answer.

3. PROBLEM QUESTION

A few months after Frodo Baggins, the world-famous writer of crime fiction, recovered from his debilitating stroke, he met Arwen Evenstar, a professional pole dancer, at a party. He fell madly in love with her and after a brief courtship, asked her to marry him. She accepts and at the engagement party, to which all their friends were invited, he gives her a diamond engagement ring.

The following day, Frodo met Arwen for lunch and gave her an envelope containing a cheque for $750,000. He tells her words to the effect that -

We cant live with my sister Nelly after were married because she doesnt like you, so use this to buy us a nice little house. I leave it up to you to choose whatever you want, wherever you want. Put the house in your name, because I know that if anything happens to me, Nelly will cause trouble.

That night, Frodo rings his best friend, Perry Took, and tells him that he has given Arwen some money to buy their matrimonial home. Perry is surprised that Frodo should be so reckless, but merely states that he supposes Frodo knows what he is doing. Frodo also tells Nelly that he has given Arwen money to buy a house and that he will live there with Arwen after they are married.

Arwen buys a nice little property on the Northern Beaches, and lives there on her own. She and Frodo have set the date for the wedding for the 1 January 2023. On the 23 December 2022, Frodo suffers another stroke, this time it is fatal!

In his will, Frodo appoints Nelly and Perry Took as executors and testamentary trustees. His will contains the following provisions (inter alia):

1. I give to my trustees to hold on trust the sum of $250,000 to be distributed equally between all of my drinking mates at the Three Weeds Hotel (aka the Rose, Shamrock and Thistle) in Rozelle.

2. I give to my trustees to hold on trust the sum of $100,000 to be distributed equally between the surviving issue of my maternal great-grandparents, who have attained the age of 18 years and who are living in the Sydney region.

3. I leave to my only child, Galdriel the sum of $500,000.

4. I give the residue of my estate to my dear sister Nelly.

Frodo had neither seen nor heard from Galadriel for the 10 years prior to his death, when they had quarrelled. Nelly is not sure if Galadriel is still in Australia or even if she is still alive.

Three weeks after Frodos death, Arwen invites Roy Rogers (whom she met at Frodos funeral) to move into the house on the Northern Beaches with her. Naturally, he accepts.

So that she can determine the approximate value of Frodos residual estate, Nelly seeks your advice as to:

1. whether she can claim an interest for Frodos estate in the house on the Northern Beaches;

2. the validity of the gift to Frodos drinking buddies;

3. the validity of the gift to the issue of Frodos maternal great grandparents;

4. the validity of the gift to Galadriel, if Galadriel cannot be found or if she is dead.

Advise Nelly.

WEEK 13

EQUITY IN PRACTICE

1. A. EQUITABLE DEFENCES

Laches and acquiescence

Hardship

Unclean hands

B. EQUITY IN NSW

2. PROBLEM QUESTIONS

Key cases

* must read

* Nelson v Nelson (1995) 184 CLR 538

Lindsay Petroleum Co v Heard (1874) LR 5 PC 221

* Bester v Perpetual Trustee Co Ltd [1970] 3 NSWR 30

* Streeter v Western Areas Exploration Pty Ltd [No 2] [2011] WASCA 17 (20 January); (2011) 278 ALR 291

Beckford v Wade (1805) 17 Ves 87

Re Howlett [1949] Ch 767

Haas Timber and Trading Co Pty Ltd v Wade (1955) 94 CLR 593

* Allcard v Skinner (1887) 36 Ch D 145; [1886-90] All ER Rep 90

* Byrnes v Kendle (201) 243 CLR 253

PLEASE NOTE: THE MATERIAL IN THIS WEEKS SEMINAR NOTES IS NOT EXAMINABLE. THEREFORE, IF NECESSARY, THIS WEEK MAY BE USED BY YOUR TUTOR TO DISCUSS OR COMPLETE OTHER TOPICS.

A. EQUITABLE DEFENCES

THIS IS NOT EXAMINABLE - it is for your information only.

1. Introduction

Injunctions are not granted, specific performance orders are not made, and normally other equitable relief will not be granted if an equitable defence is made out. Such a defence may be established if the defendant argues and supports it with evidence or because the court identifies a defence from the material before it, sometimes from the plaintiffs own evidence.

Further, it must be remembered that at all times, the Court has a wide discretion to allow relief or accept a defence.

2. Defences based upon maxims

2.1 Some defences find their expression in the maxims of equity. These are often expressed with great generality. Because of the discretionary and flexible nature of the jurisdiction, the maxims and other equitable defences should be regarded more as guidelines than fixed rules (compare the distinction between guidelines and fundamental principles suggested in Films Rover International v Cannon Film Sales [1987] 1 WLR 670, 680-682, (Hoffman J).

2.2 He who comes to equity must come with clean hands

Whilst unclean hands will disqualify a plaintiff from receiving equitable relief, under certain circumstances that Court will allow the plaintiff towash their hands.

Nelson v Nelson (1995) 184 CLR 538

2.3 He who seeks equity must do equity

2.4 Equity will not assist a volunteer

3. Laches

3.1 The defence of laches is enshrined in the maxim:

Equity assists the diligent (sometimes vigilant), not the tardy

In other words, if the plaintiff has delayed for a time in requesting relief from the Court for an infringement of rights, the defendant may raise the defence of laches.

The basis for the defence is as follows:

the plaintiffs delay in seeking relief was such that

the defendant believed that the plaintiff had accepted the state of affairs (infringement of rights)

the defendant may (or may not) have altered his or her position in reliance upon this belief and,

in any case, it would therefore be an injustice to the defendant if the Court were to alter the status quo by granting the relief requested.

Lindsay Petroleum Co v Heard (1874) LR 5 PC 221

3.2 Factors considered by the Court

3.2.1 Length of the delay

Whether the plaintiffs conduct constitutes delay sufficient to found the defence of laches depends upon the circumstances of the case. Mere lapse of time does not necessarily constitute laches. For example, a delay of many years (e.g. 20 years) would not constitute laches if there were mitigating factors, such as unconscionable conduct on the part of the defendant.

Bester v Perpetual Trustee Co Ltd [1970] 3 NSWR 30

3.2.2 Plaintiffs knowledge and conduct

There are certain disputes which require prompt action by the parties in seeking a remedy. For example, applications claiming a constructive trust, or to have a transaction set aside on the grounds of undue influence: Streeter v Western Areas Exploration Pty Ltd [2011], [632] [662].

Therefore, in order to successfully raise the defence of laches the defendant must be able to show that at all relevant times the plaintiff was aware of his rights to pursue a claim in equity. Further, knowing of this right, the plaintiff failed to act.

Beckford v Wade (1805) 17 Ves 87; Re Howlett [1949] Ch 767

Time does not begin to run for the defence until the plaintiff becomes aware of these rights.

Bester v Perpetual Trustee Co [1970]

3.2.3 Change of position of the defendant

The defendant must also be able to prove that:

the plaintiffs delay caused him to change his position and

that the grant of relief would in all the circumstances therefore be unjust and inequitable.

Lindsay Petroleum Co v Heard (1874)

3.2.4 Prejudice to the rights of others

Laches will succeed as a defence if it can be shown that the plaintiffs delay has led third parties to alter their position or acquire rights which would be infringed if the Court granted the remedy sought by the plaintiff.

Haas Timber and Trading Co Pty Ltd v Wade (1955) 94 CLR 593

Orr v Ford (1989) 167 CLR 316

3.2.5 Other factors which affect success of the defence

Statutes of Limitation Laches does not apply as a defence until the statutory limitation period has expired. Archbold v Scully (1861) 9HLC 360

A defence of laches will rarely succeed if the plaintiff is seeking equitable relief in regard to a legal right. Re White [1917] SASR 193. It is therefore principally a defence used in regard to equitable rights.

4. Acquiescence

4.1 Acquiescence may be raised as a defence when the behaviour of the plaintiff suggests/indicates that they have accepted a set of circumstances or state of affairs and that, further, they will not pursue a claim which may be available to them in relation to any rights which may have arisen.

Byrnes v Kendle (2011) 243 CLR 253

Bester v Perpetual Trustee [1970]

4.2 Acquiescence is very closely related to laches, but they are not mutually dependant.

Allcard v Skinner (1887) 36 Ch D 145; [1886-90] All ER Rep 90

Facts: Ms A, pursuant to the advice of her religious advisor, entered an Anglican convent. During her time there she made substantial donations to the order. However, some years later she left the convent, left the Anglican church and became a Roman Catholic. Six years later, Ms A decided that she wanted her property returned and applied to the court to have the assignments set aside on the grounds of undue influence. Ms As brother was a solicitor and she also had an independent solicitor. Therefore, she had access to legal advice whenever she required it.

Ms S, for the convent, raised the defence of laches and acquiescence.

Held: The majority of the Court rejected the defence of laches, but noted that the case did not simply rest upon the issue of lapse of time and that:

There is far more than inactivity and delay on the part of the plaintiff. There is conduct amounting to the confirmation of the gift 816 (Lindley CJ).

Thus, if A realises that his rights are being infringed by B but does nothing about it, then he may be said to have acquiesced to the infringement. If A waits for 10 years before pursuing a remedy, then B could also raise the defence of laches.

Glasson v Fuller [1922] SASR 148

Therefore, the defences of laches and acquiescence may be used either separately or together.

4.3 In considering a defence of acquiescence, the Court will consider similar factors to those which are applied re the defence of laches, viz:

the conduct of the plaintiff

whether the defendant changed his position

the rights of third parties

any other circumstances relevant to doing justice between the parties.

5. Hardship

If compliance with a decree of specific performance or injunction would cause hardship to a defendant, this hardship may - but not necessarily -serve as a defence.

Each case will be judged by the court on its merits.

In regard to specific performance, only in extraordinary circumstances can hardship supply an excuse for resisting performance of a contract for the sale of immovable property, Patel v Ali [1984]Ch 283, 288. Thus, difficulty of the defendant in finding money or even imminent insolvency (AMEC Properties Ltd v Planning & Research Systems Plc [1992] 1 EGLR 70) have been held to be insufficient to constitute hardship. However, risk to the defendant of prosecution (Norton v Angus (1926) 38 CLR 523, 534), or forfeiture of property have been deemed sufficient.

Further, the court will also consider a defence of hardship to a third party in regard to a decree of specific performance (Colyton Investments Pty Ltd v Mc Sorely (1962) 107 CLR 177, 185).

B. EQUITY IN NSW

THIS IS NOT EXAMINABLE - it is for your information only.

NOTE: ALL TRIBUNALS in Australia apply equitable principles. The following notes apply to the Equitable Division of the Supreme Court of NSW.

Historically, equitys exclusive jurisdiction covered the determination of matters arising from:

The guardianship of infants and lunatics

Uses (trusts)

Deceased estates/succession

Fiduciary relationships

Unconscionable behaviour/transactions.

Today, the Equity Division of the Supreme Court hears matters which do not involve the recovery of damages (unless available under Lords Cairns Act which you will study in Remedies), or a debt, such as:

The enforcement of equitable rights

Applications for injunctive relief

Matters relating to trusts

Equitable remedies for contractual disputes

The administration of corporations

Issues arising from fiduciary relationships.

There are also a number of specialised divisions within Equity. These are the:

Admiralty

Commercial

Probate and

Protective Divisions

Also, there are a number of statutes that are administered in Equity. The most commonly invoked are:

Property (Relationships) Act 1984 (NSW) (formerly the De Facto Relationships Act)

Succession Act 2006 (NSW)

Trustee Act 1925 (NSW)

Charitable Trusts Act 1993(NSW)

These pieces of legislation have arisen in relation to

the PRA, the application of equitable principles to the division of property in the breakdown of domestic relationships; and

Chapter 3 of the Succession Act 2006 (NSW) (formerly the Family Provision Act 1982 (NSW)) equitys jurisdiction over deceased estates; and

the TA and CTA equitys historical and exclusive jurisdiction in relation to the creation and administration of trusts.

1. SUCCESSION ACT 2006 (NSW) - Chapter 3: Family Provision

1. Chapter 3 of the Succession Act 2006 (NSW) (SA) enables persons who believe themselves entitled to a share of the property of a deceased, but who have been left out of the deceaseds will, or who have been left what they believe to be inadequate provision, to apply to the Court of Equity for a distribution from the estate.

2. History

Originally, the provision for relatives who had been omitted from the will of a deceased was dealt with in separate legislation, the Family Provision Act 1982 (NSW). However, in 2008-2009 this was repealed and the provisions of this Act were incorporated into the SA.

3. Provision from the estate

The court takes the interference with the wishes of the deceased very seriously. This attitude is based upon the premise that a testator (or testatrix) of sound mind is entitled to leave their property as and to whom they wish. Consequently, the provisions of the SA impose strict eligibility requirements which must be supported by detailed and cogent evidence of the relationship between the deceased and the plaintiff, as well as his/her health, financial situation and present and future needs.

4. Does the testator have a moral obligation to leave a share of their estate to a relative?

Prior to the case of Singer v Berghouse (1994) 181 CLR 201; 123 ALR 481, equity tended to approach applications under the SA from the point of view of the moral duty of the testator to consider a person when disposing of their property in a will and asked the question: given the health, financial circumstances and needs of the plaintiff, should the testator have given the person a share of the estate?

However, in Singer the High Court of Australia rejected the notion of moral duty (see particularly the judgment of Gaudron J), preferring the standard of the wise and just testator, considering all of the circumstances of the case.

5. Key provisions of Chapter 3

An eligible person under the Act is defined in s 57 as follows:

a wife or husband of the deceased

a person with whom the deceased person was living in a de facto relationship

a child of the deceased

a former spouse

a person who at a particular time was wholly or partly dependant upon the deceased or a grandchild of the deceased AND

who was at any particular time a member of the household of which the deceased was also a member (e.g, a sibling)

a person with whom the deceased was living in a close personal relationship at the time of death.

Section 98 requires the court to refer an application for mediation before it considers the application. Needless to say, it is often in the interests of all parties if the matter can be settled without recourse to a hearing.

Distributions from the estate are made pursuant to s 59. The Court has the power to make any order it thinks ought, to be made for the maintenance, education and advancement in life of the eligible person, having regard to the facts known to the Court at the time the order is made have made some provision for the maintenance, education or advancement in life of the eligible person.

Section 60 sets out the factors which the Court may take into consideration when determining the application. These include:

any provision made for the applicant during the lifetime of the deceased

the age and health of the applicant

the financial circumstances of the applicant

any financial or non-financial contributions made by the applicant to the acquisition, conservation or improvement of the deceaseds property

any contributions to the welfare of the deceased

the relationship between the applicant and the deceased and any circumstances existing at the time of the deceased death

the character and conduct of the applicant before and after the death of the deceased.

Section 58 provides that an application must be made within 12 months of the death of the deceased.

Section 99 deals with costs and gives the Court wide discretion as to the costs orders which may be made.

6. Example of the operation of the Act

In his will T left the whole of his estate, including his home and more than $1 million in savings and life insurance, to his son, S, but only $5,000 to his daughter, D. S is a wealthy and successful lawyer in his mid-thirties. He owns his home in Mosman, a holiday home on the Gold Coast and has no health problems. Ss relationship with T was very erratic. They would often argue violently and S had not seen T for 2 years prior to Ts death. D, on the other hand, is in her mid-forties and suffers from diabetes and epilepsy. Her health is so poor that she is unable to work and it is likely that at some time in the future she will need an operation to replace a faulty valve in her heart. D had always lived with T in what had been the family home. After the death of her mother 15 years prior to Ts death, and despite her own frail health, D took on the responsibility for all of the housekeeping and home maintenance. Not only did she cook, clean do all of the washing for T, but in his last few years, nursed T through his final illness. In this situation, D can apply under the Act for an increase in the provision made for her in Ts will. In considering the application the court will take into account the size of the estate, the relative current and future needs of S and D, their relationship to T and their respective contributions to Ts welfare and property. In consideration of all of the facts, it is highly likely that the court would order a significant provision for D out Ts estate, which would enable her to purchase her own property and provide a financial buffer for her future needs.

2. THE PROPERTY (RELATIONSHIPS) ACT 1984 (NSW)

1. Introduction

The objective of the Property (Relationships) Act 1984 (PRA) is to provide a just and equitable division of property and adjustment of financial interests between persons who have been living together in a bona fide domestic relationship which has broken down.

2. Relationships to which the PRA applies

The PRA is based upon the De Facto Relationships Act 1984 (NSW) (DFRA), which was originally intended to provide a statutory mechanism for the settlement of property disputes between couples living in a de facto relationship, that is, they were not married, and who were therefore ineligible to apply for a settlement under the Family Law Act 1975 (Cth). The need for such legislation had been highlighted by such cases as Allen v Snyder [1977] 2 NSWLR 685, Calverley v Green (1984) 155 CLR 242 and Muschinski v Dodds (1985) 160 CLR 583; (1985) 62 ALR 429. Prior to the DFRA, parties in de facto relationships needed to apply to equity in its original jurisdiction for a remedy. No guidelines were available to the court regarding the weight to be given to all of the various factors which determine the settlement of property interests as provided for married couples under the Family Law Act 1975 (Cth).

A major limitation of the DFRA, however, was that it applied only to de facto heterosexual couples. In response to changes in society and the need for legislation which covered relationships other than heterosexual de facto relationships, the DFRA was amended in 1999, and the title changed to the PRA.

Accordingly, the PRA covers those categories of relationships which do not arise from a marriage and are therefore were not covered by the Family Law Act 1975 (Cth). These relationships are as follows:

3. De facto relationships Pursuant to section 4 (1) a de facto relationship is defined as two adults living together as a couple and who are not married to one another or related. It should be noted that the section does not specify that the couple must be heterosexual, and it may therefore also be applied to same sex couples. In deciding whether the couple are living in a de facto relationship for the purposes of the Act, the court will take into account a number of factors (section 4 (2)), including:

the length of the relationship (section 4 (2) (a)) and whether or not a sexual relationship exists between the parties (section 4(2) (c);

the degree of mutual commitment to the relationship (section 4 (2) (e) and the degree of public recognition and acknowledgement of the parties as a couple (section 4 (2) (j);

the financial and property aspects of the relationship, including the ownership of property (section 4 (2) (e)) and the degree of financial dependence (section 4 (2) (d));

the care and support of children (section 4 (2) (g)) and sharing of household duties (section 4 (2) (h)).

4. Domestic relationships are defined pursuant to section 5. The definition encompasses close relationships between two adults, other than marriage or a de facto relationship. The parties may or may not be related to each other. There must, however, be the provision of either mutual domestic care and support or the care and support of one party by the other (section 5 (1) (b)). However, the definition specifically excludes paid and community organisation carers (section 5 (1) (b)). For example, a paid housekeeper, who is employed to care for an elderly person in his/her home.

NOTE: Today, heterosexual and same sex couples may apply to the Family Court or Federal Magistrates Court for a property settlement pursuant to the provisions of Part VIII AB of the Family Law Act 1975, provided both parties agree in writing to submit the dispute to the Family Court.

If these conditions are not fulfilled, the dispute is resolved under the PRA.

5.Time considerations

In order to bring an application under the PRA the parties must have lived together for at least 2 years (section 17 (1)). Further, the application must be brought within two years of the breakdown of the relationship (section 18 (1), although the court has the power to extend the time limit (section 18 (2)).

6. Factors taken into consideration in determining property interests

The factors taken into consideration by the court in determining the property adjustment of the parties are set out in section 20. In essence, the court takes into account the relative financial and non-financial, direct and indirect contributions of the parties in relation to:

1. the acquisition, conservation or improvement of any property and financial resources of the parties (section 20 (1) (a); and

2. the welfare of the parties and any children they may have. These contributions include contributions in the capacity of homemaker, or parent (section 20 (1) (b)).

The financial contributions taken into consideration by the court include not only the acquisition of the shared home or other real property, and the payment of bills and outgoings, but also any contribution made by one party to the financial resources of the other. For example, the payment by one party of all the household bills which thereby allows the other to accumulate a superannuation or savings benefit. Further, it should also be noted that the court also takes into account the financial contributions made by a third party on behalf of one of the parties to the relationship.

Non-financial contributions to the welfare of the parties encompass all aspects of homecare and homemaking, such as cooking, cleaning, washing and gardening, as well as home maintenance, such as painting, and child care. The acknowledgement of non-financial contributions echoes both the factors considered by the Family Court in determining the adjustment of property interests of parties to a marriage contained in section 79 (4) of the Family Law Act 1975 (Cth) and the approach of the High Court in Muschinski v Dodds (1985) 160 CLR 583; (1985) 62 ALR 429, to contributions, other than financial, to the welfare and care of a family.

7. Orders that may be made by the court

Pursuant to section 19, it is the duty of the court to make such orders as will, as far as possible, end the financial relations between the parties. Accordingly, under section 38, the court has extremely wide powers in regard to the type of orders which may be made, including orders under any other Act or law (section 38 (2)).

Further, the court may set aside any transaction which has been made by a party with the intention of defeating any existing or anticipated order (s 42).

8. Example of the operation of the Act

A daughter, D, has been living with her elderly mother, M, for 15 years. D provides both physical care for M and also does all of the housekeeping, cooking, cleaning and washing. D also pays all of the household bills, including buying clothing for M and paying for the maintenance on the Victorian house in which they live and which is owned by her mother. M contributes nothing in financial or non-financial terms to the running of the house or the relationship. All of her pension money is therefore paid into a bank account, where it has been accumulating. The relationship between D and M deteriorates and finally breaks down. M announces that she is going to move in with her son, S, and sell the home she has shared with D. In this situation, D could apply to the court for an adjustment of the property interests between herself and M. The court would take into consideration Ds financial and non-financial contributions, as well as the value of Ms home and the amount of money that M has been able to accumulate in her bank account as a result of Ds financial contributions to her welfare. Although it is always impossible to predict with any degree of certainty the type of orders that the court will make, it is highly arguable that in this instance the court would order a lump sum payment for D and/or declare that M holds a percentage of the house on constructive trust for D, in proportion to Ds contributions to the relationship.

PROBLEM QUESTIONS

REVIEW OF TRUSTS

2. Donald Dodgy, a successful businessman with a multi million dollar share portfolio has political ambitions. In 2020 he joins the Good Australia Party (GAP), and in November 2022 he is nominated by GAP to stand for the seat of Didjabringabeeralong in the 2023 Qld State election.

The Qld Electoral Act provides that NO sitting member of the Qld Parliament or member of the his or her family shall hold any shares, investments or equitable or legal interests in any investment which could create a conflict of interest between the members private interest and their duty to the State and the people of Queensland.

At the time of his nomination, Dodgy holds the following shares:

10,000 shares in Qld Mining Co

14,000 shares in Sunshine Coast (Qld) Property Development Co

20,000 shares in Didjabringabeeralong Mining NL (DMNL).

The total value of the shareholding is $3.5 million.

The Queensland Government derives a large proportion of its revenue from mining royalties, and Didjabringabeeralong is one of the major mining areas in the State. For two (2) years, DMNL has been negotiating with the Qld Government for a lower royalty on its coal exports.

In order to circumvent the provisions of the Act, in January 2023 Dodgy settles all of his interests in the shares on his second cousin Norm, to hold on trust for Dodgy, Beryl his wife and their three children Tom, Dick and Mary. The trustee has the discretion to choose which beneficiaries shall receive a distribution from the income of the trust on or before 30 June each year. The trust will determine when the youngest of the children, Tom, reaches the age of 21. He is currently 10 years old.

In March 2023 Dodgy is asked by a Brisbane Courier Mail reporter whether he has any interest in any shares in either property development or mining companies which would contravene the relevant provisions of the Electoral Act. He puts his hand over his heart and says:

Neither I nor any member of my direct family have any interest in any property or development company or mining operation. I divested myself of all my interests in January of this year.

Is this statement correct or incorrect? Give detailed reasons for your answer.

3. Arizona Jones is a television producer and is married to Peter Prudent, who is a sculptor. They have two children, Dakota, who is a uni student and Jason, who is a professional surfer.

Arizona wanted to settle her property in an efficient way and in August 2021 visited her accountant, Max Smart. Max advised her to establish a trust and transfer her entire property into it. Arizona agreed.

Her property comprised:

A parcel of shares (50,000) in a telecommunications company

$400,000 in the Which Bank

A terrace house in Paddington

A beach house on the Central Coast

Max prepared a trust deed and Arizona completed valid transfers of all of her property to Peter and her sister Montana Jones, who is a successful actor, to hold as trustees.

The trust deed contained (inter alia) the following clauses:

1. all realty is to be held on trust by Peter and Montana as joint tenants for such of Arizona and Peter and the children of Arizona and Peter as the trustees shall select.

2. all personal property is to be held on trust by Peter and Montana for Peter.

Peter died suddenly in March 2022, leaving a will in which he left all of his property to Arizona.

Arizona has no real understanding of trusts or how they operate. She comes to you for advice as to:

1. Who is entitled to the real estate?

2. Who is entitled to the personal property?

Week 13 Equity in Practice

Rule of four, unless a principle attracts four of the justices of the high court, it isnt a binding principle. Of course, this was said before the decision in Farah Constructions which im going to mention in the course of these remarks. The rule of four in my opinion, and in the traditional opinion of the discernment of the binding rule made by judges determined in a democratic manner by four of the justices on the final court of appeal in Australia, and that is high court of Australia. That is a pretty fundamental principle for the ascertainment of the binding rule for which the case stands.

Equities exceptionalism in Australia

The issue came face to face with me in the decision of the high court of Australia in Garcia. Garcia interesting case, 194 Commonwealth law reports 1998.

Facts.Mrs Garcia (physiotherapist) and her husband executed mortgage in favour of bank for purposes of securing guarantees under husband's business(Mrs Garcia had signed four guarantees, including a guarantee in November 1987 in respect of which theNABsubsequently demanded payment).

High court must consider: serious considered dicta

EXAM INFORMATION

The following notes, tips and suggestions are intended to assist you in preparing for the Equity & Trusts exam in the most efficient way possible.

THIS INFORMATION APPLIES TO BOTH THE FINAL AND DEFERRED EXAMS

THE PAPER

Value: 45% Time: 24 hours INCLUDING reading time

The exam is OPEN BOOK.

Number of Questions: 2

Part 1 20% Equitable Principles

2 questions, each worth 10%

Part 2 25 % Trusts

3 questions 2 x 10% and 1 x 5%

REVISION

You do NOT need to revise

History of equity

Equity in NSW

Defences

Unconscionable Conduct

Undue influence

Assignments in equity except future property see below

You MUST revise:

1. Trusts

ALL aspects of trusts, but particularly:

Creation of trusts

Trustees duties and indemnity from trust assets

Beneficiaries rights against trustees and third parties (Barnes v Addy)

Charitable and purpose trusts

Resulting trusts

Termination of trusts, including the rule in Saunders v Vautier

Variation of trusts

2. Other equitable principles:

Unconscionability as a general concept

Equitable fraud

Estoppel

Assignment of future property in equity Shepherd and Norman

Fiduciary relationships, including the rule in Barnes v Addy

INSTRUCTIONS, TIPS AND SUGGESTIONS

NOTE - USE OF CHAT-GPT OR ANY OTHER AI The AI detection function in Turnitin LTI is fairly sophisticated as demonstrated by its use for the essay. Use of AI is CHEATING and therefore ACADEMIC MISCONDUCT

NUMBER YOUR ANSWERS TO EACH QUESTION AND SUB-QUESTION CLEARLY, ESPECIALLY IF YOU ANSWER THE QUESTIONS OUT OF THE ORDER IN WHICH THAY ARE GIVEN.

DO NOT CITE/USE ANY US OR UK CASES UNLESS THEY ARE LEADING CASES , eg Barnes v Addy

You may cite cases as follows:

- for the first time, by the name and date only, e.g. Giumelli v Giumelli (1999) (it is unnecessary to use the full citation); and

- second and subsequent citations, name only, e.g. GiumelliPlease underline or highlight case names.

Do not use point form answers. Use complete sentences and paragraphs.

DO NOT PREPARE ANSWERS BEFORE HAND. You cannot pick what areas will be on the paper (an exam is not the Melbourne Cup). Also, whilst you do not have marks deducted for irrelevant material in your answers, you will lose marks because you waste time by addressing issues which are unnecessary/irrelevant.

STUDY AND REVISE!!!! Although the exam is open book AND 24 hours long, you do not really have time to undertake detailed research in your texts during the course of the exam.

The best way to study is to answer the problem questions at the end of the Notes for each week.

Above all do not worry!!!!

The best of luck to everyone!!!!

EQUITY AND TRUST PROBLEM QUESTIONS

PART 1 (20 marks)

Priya is an artist who creates original artworks depicting Sydney Harbour and its environs. She then prints fifty posters from each of the works and sells them from her stall in the Rocks Markets on Saturdays and Sundays for $75.00 each. Each weekend, she sells approximately 50 prints, worth a total of $ $3,750 gross before the deduction of expenses.

On both days, she employs Hans to assist with the sales and the set-up of the stall. Priya also leaves work early on Saturdays to visit her parents. There is no employment contract and Hans is paid in cash.

Hans works for Priya for 4 months and realises how profitable the business is. Han shares a unit in Newtown with his sister, Gilda. When Hans tells Gilda how successful the business has become, she devises a plan.

Every week, Hans steals 3 or 4 posters from the stall. He takes them home and Gilda sells them on e-bay for $40.00 each. Hans and Gilda divide the proceeds of the sales equally. About 6 months after Hans began stealing the prints, a potential customer approaches Priya at the stall and says; Oh, I can buy this exact same print for $40.00 online and walks away.

Priya is devastated. After confronting Hans, he confesses and states But you cant prove it and walks away.

In addition to any potential criminal charges which you do not need to discuss, Priya asks your advice whether she has any other claim against

Hans (10 marks); and/or

Gilda (10 marks).

Equitable fraud

PART 2 (25 marks)

Severus Snape is the head of the Board of Trustees of the Hogwarts Educational Trust. The other trustees are Ron Weasley and Hermione Grainger. The Trust provides scholarships for young wizards and witches only and is supported by donations from former students of the school. It does not accept applications from the wider community. The beneficiaries are existing and potential future students of Hogwarts, but the school also has full fee-paying students as well.

There is approximately $500,000 in the Trust bank account, which is used not only to provide the scholarships, but also for repairs to the old buildings, buying new equipment and general operating costs.

In March 2023, Snape electronically withdraws $60,000 from the bank account, without the knowledge of the other two trustees, who never take any part in the running the Trust. He takes the money to a local casino and loses it all.

He then seeks the advice of the schools solicitor, Mr Tulkinghorn, on whether he can commence proceedings on behalf of the Trust against the former headmaster, Dumbledore, who once called him a snake. Tulkinghorn advises that such an action would be very, very unlikely to succeed, especially since Dumbledore is deceased. Snape ignores the advice, and commences a defamation suit, planning to use the Trusts money to fund the proceedings, as representative of the Hogwarts Educational Trust,. The judge finds in favour of Dumbledore estate and Snape is ordered to pay the estates costs as well as his own legal bills. These come to $150,000.

Ron Weasley finally checks the Trust bank account and discovers that there is $60,000 missing from the account. He also learns that Snape has incurred the legal fees on the Trusts behalf. When Ron and Hermione confront Snape about the missing funds and the litigation, he replies that the $60,000 was an investment that went wrong, the litigation was a legitimate expense of the Trust and that Trust will indemnify him for this and any other expenses that he has incurred on his own behalf.

Was the money lost by Snape at the casino an investment? (10 marks)

Can Snape be indemnified from the Trust funds for the litigation costs? (10 marks)

Do Ron and Hermione have any liability for Snapes actions? (5 marks)

Support your answers .