Law of Trusts and the three certainties

Introduction

An in-depth knowledge of methods and techniques involved in constituting express trusts assists practitioners to create proper “property management vehicles” and in providing better advice to the clients on management of property.
Given that the distinction between them is so fine, it is easy to misconstrue a trust and contract or to misinterpret personal and proprietary rights. A meticulous appreciation of the core principles of law on express trusts is essential to resolve the challenges commonly faced in property rights (Alastair Hudson, ‘Advanced Equity and Trusts’.)

The modern businesses require funds on a far greater scale than in the olden days.Newer instruments such as a repo facilitate faster and less expensive finance because of which the core idea of trusts hasgained commercial significance (Alastair Hudson, Equity and Trusts, (7 edn, Routledge 2012) and has a potential role in meeting such needs as was seen in Mills v Sportsdirect.com Retail Ltd [2010] EWHC 1072 (Ch).

Outlining the context of a trust vis-à-vis its aims and circumstances which make it contentious provides a keener insight into a discussion of the ‘three certainties.’ The significance of the ‘three certainties’ comprising intention, subject matter and objects is bound inalienably with the primary purposes of forming a trust and its inherent contentious potential.

In its simplest form, a trust is created by the settler who expects to be absent, incapacitated or death.Property may be put in trust in situations where the beneficiary may not be in an immediate position to manage the property. Shielding against contingencies, managing problems with probate, protecting the corpus while benefiting a wilful beneficiary, or providing funds for a charitable trust are some of the other reasons. Another major reason and one that attracts specific attention of the HM Revenue and Customs is what is popularly referred to as ‘Estate Planning’ or ‘Tax reasons’ meaning a legally accepted method for reducing the tax burden.
The hardest bone of contention is raised by claimants with real or imaginary interest in the assets, hope to be beneficiaries and contend that a trust exists and that the property forms the subject matter of that trust. This scenario prompts bulk of the litigation under The Perpetuities and Accumulation Act 2009, Trustee Act 2000, Insolvency Act 2000 and any other legislation thought to be convenient by litigants.

However as discussed earlier, trust law becomes intricate when mega-sized funds, business transactions and insolvency compound the issues. As illustrated by Re Kayford [1975] 1 WLR 279), a trust may be created to protect purchasers’ interests in commercial transactions. The fundamental characteristic of a trust is the division of ownership into legal and equitable interests (Mohamed Ramjohn, Text, Cases and Materials on Equity and Trusts (4th edn, Routledge-Cavendish 2008).
It is against this background that it becomes essential to conclude whether a trust exists and the law on the three certainties is the primary test to determine whether it is a trust.

The three certainties:

Langdale MR laid outthe three certainties that characterise a trustlong back in Knight v Knight [(1840) 3 Beav 148] There should be certainty as to the intention; subject matter; objects.

Certainty of intention:

The settler must have clearly intended to create a trust though no specific form or wordings are necessary except when the subject matter is land. Courts construe the nature by the parties’ conduct and the circumstances. The rule applies irrespective of whether the mater pertains to a Paul v Constance ([1977] 1 WLR 527) like domestic situation or a large corporation’s insolvency discussed in Eurosail (BNY Corporate Trustee Services Limited v Eurosail [2013] UKSC 28, http://www.supremecourt.gov.uk/decided-cases/docs/UKSC_2011_0199_Judgment.pdf.)

Facts of Mills v Sportsdirect.com [2010] EWHC 1072 (Ch): The intricacy of circumstances in this case presents an opportunity to appreciate the law of intention. Sportsdirect transferred proprietary interest in a set of securities in favour of KSF, an entity of which Mills was an administrator. The understanding was that KSF would assign the interest to Sinjul Nominees, a third party who was to act a mediator or a kind of escrow custodian. When called upon to do, KSF was to restore the securities to Sportsdirect. KSF went insolvent and SD sued claiming a trust on the shares with Sinjul. In a normal straightforward transaction, it would not have stood a chance but here Sinjul was holding the securities ‘in trust’ and so SD recovered its rights.The court noted a clear certainty of intention of trust despite absence of written articulation as Sinjul had no part to play in the transaction except to have the custody of the securities until called upon to give them back.

Certainty of subject matter:

Subject matter is the property or asset forming the trust fund. It should be manifestly possible to identify the subject matter. A trust becomes invalid if the property and other property cannot be segregated (Re London Wine Co (Shippers) Ltd [1986] PCC 121.)
However courts have made exceptions, where the trust property is intangible. All the ordinary shares of a company are identical and non-segregation of trust property and other property is immaterial in such instances (Hunter v Moss [1994] 1 WLR 452). Hudson notes that while academics questioned the principle, opposing rulings in London Wine and Hunter v Moss have occupied serious attention in the aftermath of the largest corporate collapse of Lehman Brothers and similar insolvency cases (Alastair Hudson, Equity and Trusts, (7 edn, Routledge 2012) p88.)

Certainty of objects:
Even from a common sense interpretation, this principle is easy to understand. A trust must be in favour of an identifiable beneficiary. There should at least be a formula that the trustees can use to establish who the objects are. A trustee would be liable if the property is distributed to those who are not the objects.
“Class Ascertainability Rule” expressed in IRC v. Broadway Cottages Trust ([1955] Ch. 20 (CA)) was applicable in the case of fixed trusts, which stipulates that a trust becomes void if it is not possible to prepare a complete list of all beneficiaries (Norson B Harris, 2003 ‘Guernsey: The Three Certainties Or: When Is A Trust Not A Trust?’ The Kensington.) This position has been reversed in McPhail v Doulton ([1970] UKHL) and ‘individual ascertainability test’ is the prevailing norm for discretionary trusts (Paul Todd, ‘IRC v. Broadway Cottages Trust’, http://pntodd.users.netlink.co.uk/cases/cases_b/broadway.htm)
Facts: Baden the settlor created a non-charitable trust in favour of staff of a company and the trustees had discretion to distribute need-based aid to the present and past employees. The trust deed was challenged on the ground that it is impossible to draw up a complete list of beneficiaries.

Relaxing the rigour of earlier stipulation Lord Wilberforce formulated the ‘individual ascertainability test’. “Can it be said with certainty that any given individual is or is not a member of the class?” The judgment means that when it is possible to ascertain one or more beneficiaries, they should not be denied merely because it is not possible to discover rest of the beneficiaries.
The judgment has been criticised but I am of the opinion that it is fair and more germane to large commercial transactions.
Re Harvard Securities ([1998] B.C.C. 567) demonstrates how the earlier approach of ‘Class Ascertainability’is rather mechanical and would defeat the interests of beneficiaries. Unscrupulous businesses would have the opportunity to escape by taking recourse that it is not possible to identify the entire group of beneficiaries.
Facts: On Harvard Securities going insolvent, some of the customers claimed a trust on ‘some of the securities’ which were not segregated. Neuberger J allowed the claims of the customers but appeared to do so with reluctance. He said “the decision in Hunter is binding on me.”

To be continued

(This is an extract from academic essay on the Three Certainties and their effect on Law of trusts. The client felt that the language was too complex and I gave her a different version. But, I like what I wrote – obviously and so am sharing it with you all. Only request: please bear with the way references are placed as footnote plug-in is not available in the free version.)

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