Equity and Trust Law

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Date added: 17-06-26


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Brief : 189084 Delivery Date : 18/08/06 Title: "There is no single convincing explanation for the operation of the resulting trust.." Discuss ANSWER Introduction It is submitted that the resulting trust is a form of implied trust that is created by the inference of the law in circumstances in which the actions of the parties concerned and the characteristics of the transaction between them suggests a legal intent to establish a trust relationship. Resulting trusts resemble express trusts from many perspectives, in particular because intent is a prerequisite to the creation of the former mode of trust, that said however, intent in the case of a resulting trust is presumed by the law to exist between the parties instead of being directly proved by means of evidence before the court.[1] In essence a resulting trust occurs where although legal title becomes vested in a trustee, equitable title remains vested in the trust settlor. A resulting trust will typically arise in situations where it would be deemed in conflict with the fundamental principles of equity for a person in which property becomes vested to hold that property and enjoy legal rights over it otherwise than as a legal trustee with the commensurate responsibilities.[2] By way of example, in circumstances where property is purchased in the name of one party, but the purchase price is settled by another party, a resulting trust is created in favour of the person who actually paid the consideration. A resulting trust may also be created in a situation where a contract is formed for the sale of real estate property. In this case a trust will result to the purchase at the point of completion of the contract, and the vendor thereafter stands as trustee for the purchaser until the conveyance of the legal estate is subsequently made. Resulting trusts may occur in a variety of situations. For example, where an express trust fails due to an absence of formalities, or in circumstances where completion is not possible (known as dispositive failure), a resulting trust may arise. Moreover, in the case of an apparent gift, where a presumption of advancement is lacking (namely a presumption that the intention was to make a gift), equity principle dictates the conclusion that the donor must have been bereft of the intention to forfeit his entire interest in the property in question. It is contended that resulting trusts most often arise in circumstances where one party fails effectively to transfer his beneficial interest in the property concerned with the trust. This may be an accidental or deliberate occurrence and Re Vandervell's Trusts (No..2)[3], for example, offers an erudite and illuminating discussion of the classification.. This case is discussed below. Discussion of the conceptual foundations of the resulting trust Resulting trusts were not often subject to detailed analysis during the twentieth century, presumably because until the relatively recent past, the law concerning resulting trusts was considered to be largely settled. Standard textbooks on equity and trusts often provide little more than a list of situations in which resulting trusts may arise and avoid deeper comment on the jurisprudence that underpins and defines their existence. It is argued, however, that there is in fact a surprising dearth of agreement as to the exact form of the principles that govern the operation of resulting trusts, in particular regarding the central issue as to whether resulting trusts arise by a process of law or on the basis of a presumed intention to establish a trust. It is therefore suggested by this commentator that an academic polemic persists over the precise conceptual foundations and rationale for resulting trusts - specifically regarding the intention the donor must possess.[4] Many authoritative commentators have entered the debate, including for example Professor Birks in An Introduction to the Law of Restitution[5]. However it is contended there are essentially two camps of legal thought on the issue. Lord Browne-Wilkinson delivering the leading majority judgment in Westdeutsche Bank Landesbank Girozentrale v Islington London BC[6] and academic commentator William Swadling[7] have endorsed the view that a resulting trust is created on the basis of a presumption of intention to create a trust which favours the donor: for example where X has the intention to give Z Property to Y so that Y can hold it for X. A different approach is supported by such legal academic commentators as Robert Chambers, in his book Resulting Trusts[8] and in cases such as Twinsectra Ltd v Yardley and Others[9] Potter LJ and Lord Millet argue in the alternative that it is in fact an absence of intention to benefit the recipient that serves to establish a trust, for example where X transfers Z Property to Y, but does not exhibit an intention to benefit Y. Further authority on this issue can be found in cases such as Air Jamaica Ltd & Ors v Charlton. & Ors.[10]. In such an instance, where there is a lack of contradictory evidence, the trust returns the money to X on the presumption that he did not want Y to benefit. Of course, it is submitted that in many situations the result may be the same whichever line is taken. However, it may be forcefully contended that the difference between the two approaches may be highly significant in light of the fact that in many cases it may be extremely hard to prove actual intention but nonetheless much easier to rebut the legal presumption. There is little doubt that the approach advocated by Robert Chambers would inevitably result in the creation of significantly more resulting trusts than that endorsed by Swadling et al. In support of Swadling’s preferred line in Westdeutsche v. Islington BC Lord Browne-Wilkinson was manifestly fearful that pursuit of the alternative would serve to offer every claimant a tangible proprietary right in bankruptcy and thus create a so-called open-floodgates issue. This would, it is argued result in vastly more claimants becoming secured creditors, with the effect that the rights and protection enjoyed by secured creditors would be diluted in practice. Lord Browne-Wilkinson did appear to conclude in Westdeutsche that the remedial constructive trust might provide a more appropriate framework for the support of restitutionary remedies than the resulting trust. Lord Browne-Wilkinson opined: ‘the court may, by way of remedy impose a constructive trust on a defendant who knowingly retains the property of which the claimant has been unjustly deprived.. Since the remedy can be tailored to the circumstances of the particular case, innocent third parties would not be prejudiced and restitutionary defences, such as change of position, are capable of being given effect.’[11] However, at this point it should be noted that Westdeutsche v. Islington BC has been subject to extensive criticism in the academic press and from some perspectives it can indeed be found wanting. The loan transaction in question in Westdeutsche would under normal market conditions have earned compound interest for the lender.. It could be argued that by refusing to grant the lender in Westdeutsche compound interest the House of Lords effectively failed to grant full restitution to the lender. It is consequently an easy step to infer that the borrower in question in Westdeutsche was therefore unjustifiably enriched at the expense of the lender by the value of the compound interest on the loan. Lord Browne-Wilkinson appeared to lend stoic support to the principles of tracing as established in Re Diplock[12] in the Westdeutsche case. It can be inferred from this that his Lordship accepted the stipulation that a fiduciary relationship must exist before tracing could be permitted in equity. Often this will not provoke undue difficulty, because as Millett LJ noted in cases such as the early Banque Belge pour l'Etranger v Hambrouck[13] and the more recent Agip (Africa) Ltd v Jackson[14] theft is typically perpetrated by an employee who enjoys a fiduciary position, however, it may result in problems if theft is committed by a stranger. The stipulation that a fiduciary relationship exists has been said not to be necessary in terms of fundamental principle, and it is submitted that most authorities that hinge upon it are historical in nature. However in the Westdeutsche case Lord Browne-Wilkinson seemed to stress the importance of the factor. In light of his Lordship’s opinion as to the lender’s assertion that it had taken steps to retain the equitable title, it is hard to understand the means by which an equitable interest could be established at all without the creation of a trust, given that it makes no legal sense to discuss the concept of equitable title in any circumstances where one party enjoys absolute ownership of property.. That said, it can be argued that a resulting trust is not an apposite vehicle for the grant of restitution, due to the fact that the fiduciary relationship that it inevitably establishes is a not an altogether appropriate side effect of that device, assuming that the recipient’s conscience is unaffected. It is submitted that it would have been possible to achieve full restitution by extending the jurisdiction to award compound interest to cover the relevant eventualities (money had and received). It appears that the old, established authorities persuaded Lord Browne-Wilkinson against pursuing this form of approach, however he may have taken a different line in other circumstances, so it may well be that this is an area of law that should be considered for reform by Parliament. If it was possible to award compound interest on a claim for “money had and received” plaintiffs could be entitled to a grant of full restitution avoiding the proprietary consequence of imposing a resulting trust which may often be undesirable in the circumstances. Where a resulting trust is created however, the donee is considered a fiduciary for the settlor and the former is bound to return the money that has been received and also to invest the sum. As in such cases as A-G for Hong Kong v Reid[15] the settlor is thereafter entitled to claim title to the investments. However, if the donee’s conscience remains unaffected it is submitted that this may not be an equitable solution. Furthermore as Lord Browne-Wilkinson noted in the Westdeutsche case because the settlor remains owner of the money in equity he or she can trace into any property purchased with the money and this may cause far-reaching and inappropriate consequences. While the law in this field is far from perfect, on this basis and generally on the strength of Millet’s argument in his Law Quarterly Review article Tracing the Proceeds of Fraud[16] it is argued that the use of a resulting trust as a means of granting restitution may not prove to be a panacea. Trusts are typically classified as either express (namely those established by intention) or constructive (namely those established by matters other than intent) and this would seem to leave little space for a third class of resulting trusts.. It is submitted that the category of constructive trusts should perhaps therefore be expanded to include resulting trusts as another species of trust established by the operation of the law.[17] The term ‘resulting’ itself causes some difficulty. As opposed to the terms express and constructive, which refer to the mode of creation of the trust, the term resulting refers to the effect of the trust, describing that one party has received an asset from another party and that the trust preserves the beneficial ownership the latter party. Professor Birks has branded the categorisation of trusts as either express, constructive or resulting as a “bent classification”. In dwelling in the anomalies of the law in this field he argued that: ‘When we say that trusts are express, implied, resulting, or constructive, the word “resulting” is on its face the odd man out, for “resulting” indicates that the beneficial interest resalit (jumps back), and the other terms are focused on the mode of creation, not the location of the beneficial interest.’[18] Chambers also notes[19] that Professor Birks argues that even express and constructive trusts can be resulting in shape, form and effect.[20] It is submitted however that the resulting trust is not designed to include trusts which maybe constructive or express but which nonetheless have a resulting effect.. Instead it is suggested that the purpose of the resulting trust classification is to group certain trusts on the basis of the events that serve to establish those trusts. Perhaps the chief area of disagreement between academic commentators and members of the judiciary concerns the precise nature of those establishing factors.. As a consequence of this uncertainty it is sometimes difficult to determine, in a coherent fashion, why a resulting trust has not been categorised as either a constructive or an indeed an express trust. Megarry’s classification of resulting trusts Megarry J set out two main classes of resulting trust. In Re Vandervell's Trusts (No. 2)[21] , Megarry J drew a distinction between automatic and presumed resulting trusts, on the following lines: “(a) The first class of case is where the transfer to B is not made on any trust ... there is a rebuttable presumption that B holds on resulting trust for A. The question is not one of the automatic consequences of a dispositive failure by A, but one of presumption: the property has been carried to B, and from the absence of consideration and any presumption of advancement B is presumed not only to hold the entire interest on trust, but also to hold the beneficial interest for A absolutely. The presumption thus establishes both that B is to take on trust and also what that trust is. Such resulting trusts may be called "presumed resulting trusts". (b) The second class of case is where the transfer to B is made on trusts which leave some or all of the beneficial interest undisposed of. Here B automatically holds on resulting trust for A to the extent that the beneficial interest has not been carried to him or others. The resulting trust here does not depend on any intentions or presumptions, but is the automatic consequence of A's failure to dispose of what is vested in him. Since ex hypothesi the transfer is on trust, the resulting trust does not establish the trust but merely carries back to A the beneficial interest that has not been disposed of. Such resulting trusts may be called "automatic resulting trusts".” This classification was considered to be definitive until Lord Browne-Wilkinson laid down his own classification in the Westdeutsche case, which although similar to that of Megarry was slightly less expansive in its scope. From Re EVTR to Twinsectra Prior to Westdeutsche, other decisions were heavily influenced by, if not predicated on Megarry’s suggested model for resulting trusts. In the case Re EVTR[22] Dillion LJ considered what might be labelled as the fictional justification for resulting trusts that they are designed to give full effect to the settlor’s wishes, in comparing the resulting trust to the constructive trust. Dillion LJ theorised that: “As an equitable mechanism to vindicate the equitable interests of beneficiaries under express or resulting trusts, it is a long established principle of equity that, if a person who is a trustee receives money or property because of, or in respect of, trust property, he will hold what he receives as a constructive trustee on the trusts of that original trust property. Similarly, a third party other than a bona fide purchaser for value without notice, who, through breach of trust, receives property subject to an express, resulting or constructive trust will hold it and its traceable products as a constructive trustee on the trusts affecting such property. Finally, a person not within such two categories, but who has obtained or enhanced his interest in property…will be constructive trustee of the whole or part thereof where it would be unconscionable for him to act inconsistently with the property..” Furthermore, as Peter Gibson J stressed in the case Carreras Rothmans Ltd v Freeman Matthews Treasure Ltd [23] the practical effect of adopting Megarry’s analytical model is in fact to leave the beneficial interest in a state of suspense until either the purpose of the trust is fulfilled or it fails. It is submitted however that the problem with this unorthodox line is that it does not properly acknowledge the role that the resulting trust plays in the greater scheme of equity. In addition it fails to explain why the money in question is not merely held on a resulting trust for the lender. These points were considered by Lord Millett in Twinsectra Ltd v Yardley and Others[24], which was primarily concerned with the nature of the so-called “Quistclose trust” (from the case Quistclose Investments Ltd. v Rolls Razor Ltd.[25]) and the requirements for its creation. A “Quistclose trust” describes an arrangement whereby a loan is made to a borrower for a specific purpose and on terms on which the borrower is not free to use the money for any other purpose. Such an arrangement may create fiduciary obligations on the part of the recipient of the money which will be enforced by a court of equity. Concluding Comments In his judgment in Twinsectra Ltd v Yardley and Others,[26] while sharing a great deal of common ground with Chambers, Lord Millett did not endorse that commentators ultimate analysis as to the roots of the resulting trust, preferring the stance of Ho and Smart in “Reinterpreting the Quistclose Trust: A Critique of Chambers’ Analysis”.[27] It is the conclusion of this commentator that, given that Chambers’ approach offers no easy solution to cases involving non-contractual payment and that it seems to contradict Lord Wilberforce's assertion in Quistclose[28] that the borrower's obligation is fiduciary in nature and not simply contractual, Lord Millett’s reasoning as to the nature of the resulting trust should now be preferred as the most reliable modelling of the modern law. Having considered a variety of authorities and theories, in sum it is submitted that the analysis of resulting trusts provided by Lord Millett in Twinsectra rises above the polemic to stand as the most coherent and authoritative statement of the shape of the law to date. THE END WORD COUNT : 3125 BIBLIOGRAPHY Chambers R., Resulting Trusts, (1997) Clarendon Press. Birks P., An Introduction to the Law of Restitution (1989), Oxford. Todd P, Cases & Materials on Equity and Trusts, (2000) Blackstones Press Ltd. Sydenham A., Equity and Trusts, (2000) Sweet and Maxwell. Chalmers R., Resulting Trusts in Canada (Part I): http://shelburne.butterworths.co.uk/truststaxestates/articles/dataitem.asp?ID=16981&tid=7 Parker D. et al, Parker and Mellows: The Modern Law of Trusts, (2003) Sweet and Maxwell Hudson A, Understanding Equity and Trust Law, (2004) Cavendish Publishing Ltd. P Birks, ‘Equity, Conscience, and Unjust Enrichment’ (1999) 23 Melbourne UL Rev 1 Hayton, D..J., The Law of Trusts, (2004) Sweet and Maxwell Ltd Swadling W, The Quistclose Trust, (2004) Hart Publishing. 1


[1] Hudson A, Understanding Equity and Trust Law, (2004) Cavendish Publishing Ltd. [2] See for general comment, Todd P, Cases & Materials on Equity and Trusts, (2000) Blackstones Press Ltd. [3] [1974] Ch 269. [4] See for insightful general comments and analysis: Hayton, D.J., The Law of Trusts, (2004), Sweet and Maxwell Ltd. [5] Birks P., An Introduction to the Law of Restitution (1989), Oxford. [6] [1996] 2 All E.R. 961. [7] Swadling W, The Quistclose Trust, (2004) Hart Publishing. [8] Chambers R., Resulting Trusts, (1997) Clarendon Press. [9] [2002] UKHL 12. [10] [1999] PLR 247. [11] [1996] 2 All E.R. 961. [12] [1948] Ch 456. [13] [1921] 1 KB 321. [14] [1990] 1 Ch 265. [15] [1994] AC 324 PC. [16] (1991) LQR 71. [17] See for comment: Chalmers R., Resulting Trusts in Canada (Part I): http://shelburne.butterworths.co.uk/truststaxestates/articles/dataitem.asp?ID=16981&tid=7 [18] P Birks, ‘Equity, Conscience, and Unjust Enrichment’ (1999) 23 Melbourne UL Rev 1 at p 10. [19] Chalmers R., Resulting Trusts in Canada (Part I): http://shelburne.butterworths.co.uk/truststaxestates/articles/dataitem.asp?ID=16981&tid=7 [20] Birks P., An Introduction to the Law of Restitution (1989), Oxford. [21] [1974] Ch. 269. [22] [1987] BCLC 646. [23] [1985] Ch 207. [24] [2002] UKHL 12. [25] [1970] AC 567. [26] [2002] UKHL 12. [27] (2001) 21 OJLS 267. [28] [1970] AC 567.
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