John Hopkins: Constitution of Trusts
A beneficiary under a trust is a volunteer unless he has provided valuable consideration. Where a gift is made, the beneficiary will always be a volunteer as it is by definition made without consideration. The traditional equitable maxim is that equity will not assist a volunteer. This generally means that where a gift is made imperfectly, equity will not enable the intended beneficiary to claim the gift under a trust. However, there are exceptions to the rule. This essay will consider these exceptions and the extent to which the rule has developed from “equity will not assist a volunteer” to a position of “equity will not assist a volunteer if, in doing so, it would repair the consequences of a would-be donor’s folly”.
The leading case in this area is Milroy v Lord where a voluntary deed which purported to assign 50 shares to Samuel Lord on trust for Milroy. Lord was already acting as Milroy’s agent under a power of attorney. The formalities of the share transfer were not complied with. Milroy therefore sought to establish that a trust had been declared. It was held that an ineffective transfer does not constitute a declaration of trust without there being a clear intention to create a trust. Furthermore, if a voluntary settlement is to be valid and effectual, the settlor must have done everything which was necessary to be done to transfer the property and render the settlement binding upon him. As the shares had not been transferred, no trust was created and no gift made.
The case of Milroy v Lord thus provides that for the settlement to be binding there must be either an outright transfer, a declaration of self as trustee, or a transfer of property to a third party as trustee.
The facts of Jones v Lock were that a father produced a cheque payable to himself and said “Look you here, I give this to baby; it is for himself” and placed the cheque in the baby’s hand. He then took the cheque back stating that he was going to put it away for him. It was held that there had been no effective gift because no valid transfer had occurred. Moreover, it was held that a failed gift cannot be construed to be a valid declaration of trust. It was said that the crucial principle is that an owner must not be deprived of his property unless, by making a valid gift or trust, he has demonstrated the seriousness of his intention to dispose of the benefit of his property.
However, where the property is vested in the trustees in circumstances outside their capacity as trustees, the trust may be constituted, even though the beneficiaries are volunteers (Re Ralli’s Will Trusts). Other exceptions include the rule in Strong v Bird and Donationes Mortis Causa. As these exceptions are uncommon, the main exception and development as set out below will be the focus of this piece.
The case of Re Rose demonstrates the principle that where a donor has done everything they can to transfer title to another but that outright trust has not been completed, an equitable interest will have passed, even where the donee is a volunteer. This principle is therefore an exception to the general rule that equity will not assist a volunteer and is based upon the inequity of reneging on a promise once the donor has purported to transfer title by doing everything necessary for him to do.
The principle in Re Rose has recently been extended. In T Choithram International SA v Pagarani, a man lying on his deathbed sought to declare an inter vivos trust over his property. The settlor’s intention was to become one of nine trustees, but he failed to transfer legal title to all nine trustees and as a consequence, under the ordinary law of trusts, the trust would not have been validly constituted. The Court of Appeal thus held that he had neither effectively vested the property in the trustees, nor did his words of gift render him a trustee. Furthermore “the court will not give a benevolent construction so as to treat ineffective words of outright gift as taking effect as if the donor had declared himself a trustee for the donee”. In the words of Hopkins, the Court of Appeal decided the matter on the basis that “equity will not assist a volunteer” or “perfect an imperfect gift”.
In allowing the appeal, the Privy Council accepted the maxims but added that “equity will not strive officiously to defeat a gift”. The reasoning for holding a trust was that the settlor had done all that was necessary to constitute a trust, by declaring himself as trustee. His words that he would ‘give’ could only then mean “I give to the trustees of the foundation trust deed to be held by them on the trusts of the foundation trust deed”.
The case of Choithram may therefore be taken to be support for Hopkins’ statement that that the courts have left behind the well-known equitable maxim “equity will not assist a volunteer” and have reframed it as “equity will not assist a volunteer if, in doing so, it would repair the consequences of a would-be donor’s folly.” This is because, in both Re Rose and Choithram there was no folly in the sense that the donor had not done all that was necessary and therefore, on the basis of the reformulated maxim the trusts were rightly held. Conversely, in both Jones v Lock and Milroy v Lord, the donor had not done all that was necessary, and was therefore acting in folly.
However, this is not the end of the developments. In Pennington v Waine A owned 1500 of the 2000 shares in C Ltd. She instructed P, a partner in C Ltd auditors, that she wished to transfer 400 shares to her nephew H and that he was to become a director. A signed the share and P placed it “on the company’s file”. A made her will a short time later bequeathing the rest of her shareholding but making no mention of the 400 shares transferred to H.
Under the traditional law, as seen above, the gift would have been complete only once the signed stock transfer form and the share certificate had been handed to the donee. The Court of Appeal in fact held that the gift was to be regarded as completely constituted, despite the lack of delivery and the fact that there was apparently nothing to stop A from recalling her gift.
The Court of Appeal followed the maxim as stated in Choithram that equity will not assist a volunteer but will not strive officiously to defeat a gift. It was held that at the time it would be unconscionable for the transferor to be able to change their mind, equity should hold the gift to be properly constituted. Per Arden LJ:
“If one proceeds on the basis that a principle which animates the answer to the question whether an apparently incomplete gift is to be treated as completely constituted is that a donor will not be permitted to change his or her mind if it would be unconscionable, in the eyes of equity, vis-a-vis the donee to do so, what is the position here? There can be no comprehensive list of factors which makes it unconscionable for the donor to change his or her mind: it must depend on the court’s evaluation of all the relevant considerations. What then are the relevant facts here? [A] made the gift of her own free will: there is no finding that she was not competent to do this. She not only told [H] about the gift and signed a form of transfer which she delivered to [P] for him to secure registration: her agent also told [H] that he need take no action. In addition [H] agreed to become a director of the company without limit of time, which he could not do without shares being transferred to him.”
It has been argued that this decision was based on a misunderstanding of the decision in Choithram where it was held that it would be as unconscionable for a settlor who had declared a trust when he was one of a number of trustees to subsequently resile from his declaration as if he had declared himself to be the sole trustee. Moreover, it is widely accepted that the decision goes much further than previous law.
Examining Hopkins’ statement in light of this development, it is unlikely that the maxim can be said to be redefined to incorporate the donor’s folly, as the present position appears to leave plenty of scope for assisting a volunteer where doing so would correct a donor’s folly. Indeed, Pennington v Waine may well be overruled in the future, but at present, the most apt re-statement of the maxim is: “equity will not assist a volunteer unless it would be unconscionable not to do so”.
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