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The basis for the beneficiary principle is equitable ownership. Discuss

Introduction

The beneficiary principle finds its basis in two fundamental ideas. The first idea or concept is that if there is a trust for some specific purpose, there must be someone who can enforce that trust in a court of law if necessary. In other words, the trustee’s conscience needs to be controlled by someone, and that someone can only be a beneficiary or a person with a locus standi who can take the trustees to the court if the trustees fail to perform their duties under the trust. The settlor of the trust is out of the picture once the trust is created and enforced and the beneficiary is the only person who can ensure that the wishes of the settlor are honoured and the terms of the trust are followed by the trustee. It is also pertinent to note that the courts also need to take control of the trust in case the trustee fails in the duties towards trust, and for that there has to be a beneficiary who can take action against the trustee in the court.

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The second idea, and one with which this essay is concerned, is that trust requires that there must be some property in the trust and the beneficiary must have proprietary interest in the property in order to be able to take action against the trustees for their mismanagement of the trust. Although the beneficiary is not a legal owner of the trust property, he is the equitable owner and it is from equitable ownership that the beneficiary derives his right in the trust property and also rights against the trustee, which can be enforced in the court of law. Although, the idea of the beneficiary having proprietary interest in the trust property is now accepted, it is also seen that the question of beneficiary’s proprietary interest is one that has exercised both the courts as well as members of the academia.

This essay critically analyses the second idea, that is, the basis of the beneficiary principle is the equitable ownership of the beneficiary of the trust property. The essay will first discuss the beneficiary principle and then it will relate the principle to its basis in equitable ownership.

  • Alastair Hudson, Equity and Trusts (7th edition, Oxon: Routledge 2012) 197.
  • Ibid, 197-198.
  • Graham Moffat, Trusts law: text and materials (Cambridge University Press 2005).

The Beneficiary Principle

The beneficiary principle is one of the three certainties in the creation of a valid trust. The three certainties of a valid trust are: certainty of intention; certainty of subject matters; and certainty of objects. The certainty of object relates to a clear identification in the trust deed as to the names and identities of the persons who will benefit from the trust. This is called as the beneficiary principle. The object of the trust must be to benefit a natural or legal person and for the advancement of public purposes or in certain cases, private purposes.

The beneficiary principle is explained by the maxim certum est quod certum reddi potest, which is used to justify the rule relating to the certainty of the object of the trust. The maxim stands for the principle that if something is capable of being made certain it should be treated as certain.

The beneficiary principle provides that the beneficiary of the trust should be ascertainable. In other words, the trust must be made for the benefit of a clearly identifiable person who can have the locus standi to enforce the trust conditions in a court of law. In a trust, where the beneficiary is not ascertainable, the courts will not find in the favour of a trust however, in a case where there are too many beneficiaries, the court will hold in favour of the trust, so long as each beneficiary is ascertainable. This is explained by the case of Re Denley’s Trust Deed, where the court had to decide upon the validity of the trust deed made by an employer for the benefit of his employees and “other persons”. The trust allowed the allotment of land for the construction of a swimming pool for the benefit of the employees. As all of the beneficiaries were clearly identifiable, although they presented a large body of beneficiaries, the court upheld the trust by holding that the beneficiary principle was satisfied. At the same time, it is also pertinent to note that beneficiary class must not be so wide that it becomes administratively difficult for the beneficiaries to be ascertained by drawing up a lengthy list of beneficiaries, thereby creating a trust that is too wide in its object. In that case, the court will have to hold that the beneficiary principle is not applied to the trust and hold the trust as invalid.

  • P.H. Pettit, Equity and the Law of Trusts (Oxford University Press 2012).
  • Gary Watt, Equity and Trusts Law Directions (5th Edition, Oxford University Press 2016) 86.
  • Re Astor’s Settlement Trusts, [1952] Ch 534.
  • OT Computers Ltd. v First National Trinity Financial Ltd, [2003] EWHC 1010 (Ch).
  • (1969) 1 Ch 373.
  • R v District Auditor, ex parte West Yorkshire Metropolitan County Council [1986] RVR 24.

The beneficiary principle provides that the beneficiaries of the trust must be fixed and ascertained or ascertainable within a period not amounting to perpetuity, or else the trust will not be considered to be validly constituted. The beneficiary principle was articulated by Lord Grant MR in Morice v. Bishop of Durham as follows:

“There can be no trust, over the exercise of which this court will not assume control ... If there be a clear trust, but for uncertain objects, the property ... is undisposed of ... . Every ... trust must have a definite object. There must be somebody in whose favour the court can decree performance.”

The beneficiary principle is the basis for the trust. Without a beneficiary, there cannot be a trust. At the same time, there must be equitable ownership in property for the beneficiary to enforce his rights and interests in the trust property as against the trustees. In a trust, there is a division of ownership, with the legal title or ownership vesting in the trustee and the beneficial ownership vesting in the beneficiary.

Equitable Ownership as the Basis for the Beneficiary Principle

The question of the proprietary interest in the property of the trust can be a complex one for the beneficiaries. First of all, beneficiaries have a benefit from the trust property, but does that mean that the beneficiary has an interest in the trust property. The beneficiary can certainly apply to the court for the court to enforce the duties of the trustees and the court also gets the jurisdiction to do so from the application made to it by the beneficiary. Therefore, it can be said that the right to apply to the court for a redressal against the trustees’ failure to carry out trust duties, is a crucial element in the ensuring of the interest of the beneficiary, described as a chose in action, which by itself is a property interest. However, a question may be raised as to whether the beneficiary of the trust has a proprietary interest in the trust property. In Baker v Archer Shee, the view taken by the dissenting minority was that beneficiaries do not have a property interest in any particular

  • Re Leahy [1959] AC 457.
  • (1804) 9 Ves. 399; (1805) 10 Ves 522.
  • Alison Clarke and Paul Kohler, Property law: commentary and materials (Cambridge University Press 2005) 404.
  • Ibid, 334.
  • Ibid.
  • [1927] AC 844.

assets of the trust other than the right to enforce the carrying out of trust conditions. The majority of the judges considered (for the purpose of taxation) that the beneficiary had an interest in each investment. As this case depicts, the question as to the nature of the interest that the beneficiary has in the trust property is one that is open to different interpretations. In Gartside v IRC, the House of Lords have accepted the difficulty of assessing when a beneficiary can be said to have a proprietary interest in the property, although the House of Lords accepted that there can be a proprietary interest in the abstract fund of the trust, which is represented by the assets held by the trustee for the beneficiaries from time to time.

At this point it is important to note that the legislative intention is also seen to protect the interest of beneficiary. The LPA 1925 tried to maintain a balance between the trustees’ power to administer or even dispose of the property, while at the same time, ensured that the rights of the beneficiaries under the trust by providing for the ‘principle of overreaching’. This principle allowed the equitable interests, such as the interests of the beneficiaries under a trust to be off the title to the legal estate, so that if the sale of the property takes place, the sale proceeds would be used to settle the claims of the beneficiaries of the trust property. The LPA 1925, s.2(1) provides that when the legal estate is sold, directions as to payment to be made to the beneficiaries can be done from the consideration amount.

The beneficiary principle is rooted in the proprietary interest that is owned by the beneficiary in the trust property. In other words, the beneficiary of the trust is the equitable owner of the property of the trust and as such ownership is equitable in nature (although the trustee or legal owner, may also be a beneficiary of the trust), therefore, it can be said that equitable ownership is the basis of the beneficiary principle. The rights of ownership can be asserted by the beneficiary due to the proprietary interests in the trust fund. It is pertinent to distinguish between legal and equitable estate or ownership in land and the Law of Property Act 1925, s.1 defines both legal as well as equitable estate. LPA 1925, s.1(4) provides that estates, interests, and charges which are conveyed or created at law are legal estates. LPA 1925, s.1(8) provides that those Estates, interests, and charges in land which are not legal estates are equitable interests. As mentioned earlier, the nature of interest that a

    [1968] AC 553.

    Alison Clarke and Paul Kohler, Property law: commentary and materials (Cambridge University Press 2005) 335.

beneficiary has in the property of the trust is an equitable interest or interest of an equitable owner.

The nature of a beneficiary’s interest has been subject to debate, in which the central issue was whether a beneficiary’s right under the trust is a right in rem, that is, a proprietary right which can be enforced against persons generally with relation to the trust property; or a right in personam, which is available to the beneficiary as against the trustee. The initial position in equity with respect to the nature of the beneficiary’s interest was that it was a right in personam to be enforced by the beneficiary as against the trustee, where the beneficiary could enforce a duty under the trust as against the trustee or make the trustee make good a loss arising from no- performance of trust duties. However, the evolution of the trust law has also seen an evolution of the beneficiary’s interest to an equitable ownership of property. A recent case decided by the Court of Appeal is indicative of the nature of the beneficiary’s interest.

The case is Shell UK Ltd v Total UK Ltd, decided by the Court of Appeal and the judgement also contains principles related to the present essay. The facts of the case relate to an incident of destruction of fuel storage tanks, pipelines and associated equipment caused by the negligent overfilling of a fuel storage tank belonging to the defendant oil company. This overfilling led to the creation of a large hydrocarbon rich vapour cloud which led to the explosion. There were many claimants for compensation due to the damage caused by the explosion, including Shell, as the explosion had caused substantial damage to property in which Shell stored oil. However, Shell was not the legal title holder of these tanks and pipelines and these were owned by another vehicle company holding these in trust for Shell. Shell’s claim for compensation as a beneficial owner opened up the question of the nature of

a beneficiary’s interest under a trust. Shell did not have a possessory title to the damaged property, but it did have shared equitable ownership of the property. The court held that duty of care is owed to both the legal as well as the beneficial or equitable owners. The court held that it was enough that the equitable owner joined the legal owner to the

  • Graham Moffat, Trusts law: text and materials (Cambridge University Press 2005) 236.
  • Ibid.
  • [2010] EWCA Civ 180, [142].

proceedings and it did not matter that the beneficial owner was not in possession of the property.

Courts have generally acted to protect the beneficiaries interest in matters relating to trust property or trust management under a variety of circumstances, demonstrating the value placed on the equitable ownership of the trust property. In Saunders v Vautier, the court held that if all of the beneficiaries act unanimously and decide to direct the trustees how to deal with the trust property even if that is in contravention of the terms of the trust as set out by the settlor, the court would allow it because being the equitable owners of the property, they can act in unison to direct the management of the trust fund. Thus, the equitable ownership is treated to be at par with legal ownership for the purpose of enforcing the rights of the beneficiaries.

In Armitage v Nurse, the court observed that, “If the beneficiaries have no rights enforceable against the trustees there are no trusts.” Here, the shift from proprietary right to obligation aspect is seen. In other words, there is a shift in the emphasis in the centrality of the equitable ownership to the one where enforceability becomes the focal issue. The question of the reducible core of a trust, whether being equitable ownership of the beneficiary or the obligatory nature of the trustee’s duties has become important.

Further complication of a beneficiary’s interest in the trust property is seen in discretionary trusts. In Gartside v IRC, it was held that although a beneficiary in an exhaustive discretionary trust had an interest in the trust property, the nature of which interest can be that he is the potential recipient of benefit by the trustees as well as the holder of the right to enforce his interest in a court of law. However, that interest cannot by itself be enough to use the potential income from the trust for assessing and charging tax from the beneficiary. In Sainsbury v IRC, the same principle was applied by the court. In Vestey v IRC (No.2), it was held that the rights of the beneficiaries in a discretionary trust were the rights to be considered by the trustee for the distribution, the right to prevent certain kinds of

  • Ibid.
  • (1841) 4 Beav 115.
  • [1998] Ch 241.
  • Ibid, [253] per Millett LJ.
  • Graham Moffat, Trusts law: text and materials (Cambridge University Press 2005) 242.
  • [1968] 1 All ER 121.
  • [1970] Ch 712.
  • [1979] 2 All ER 225.
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misconduct by the trustee, and the right to retain sums paid to him by the trustee. However, the beneficiary does not have the right or any kind of power over the income of the trust property. Due to these positions within the law as applied to discretionary trusts, there is a difficulty in identifying where the equitable interest of the beneficiary lies from the sense of the ‘right’ as opposed to ‘proprietary’ interest. Equity recognises the equitable ownership of the beneficiary in the trust property. Just like legal ownership, equitable ownership is capable of alienation as well as decided by the court in Vestey v IRC (No.2). It is also seen that in some situations the trust may have the object to create an ownership for the beneficiary as opposed to creating a limited interest, in which case, the courts do treat the interest of the beneficiary as a “full-blooded property interest”. Generally, with the exception of the area of discretionary trusts, the beneficiary’s proprietary right is seen to be the basis of the beneficiary principle, wherein the identification of the beneficiary has the central focus of assigning proprietary interest in the property.

Conclusion

In trust, there is a division of ownership of property as between the trustee and the beneficiary. Where the trustee has the legal ownership of the property, the beneficiary has the equitable ownership of the property. There has always been a question mark over the nature of the beneficiary interest in the trust property. However, the equitable ownership of the beneficiary is now accepted. The beneficiary principle is based on the equitable ownership of the beneficiary. It is in this basis that the beneficiary can ask for remedies in rem with respect to the trust property, as seen in the case of Shell UK Ltd. v Total UK Ltd. Had the beneficiary only had rights in the property as opposed to proprietary interest, only rights in personam would be available to him with respect to the trustee. Courts have also protected the proprietary rights of the beneficiaries in cases that have come before them. At the same time, with respect to discretionary trusts, there is a complexity in this situation as courts have had to deny taxing the beneficiary for their interest in the trust property.

  • Ibid.
  • Graham Moffat, Trusts law: text and materials (Cambridge University Press 2005) 240.
  • [1979] 2 All ER 225.
  • Alison Clarke and Paul Kohler, Property law: commentary and materials (Cambridge University Press 2005) 404.

Table of Cases

  • Armitage v Nurse, [1998] Ch 241.
  • Baker v Archer Shee, [1927] AC 844.
  • Gartside v IRC, [1968] 1 All ER 121.
  • Morice v. Bishop of Durham, (1805) 10 Ves 522.
  • OT Computers Ltd. v First National Trinity Financial Ltd, [2003] EWHC 1010 (Ch).
  • Re Astor’s Settlement Trusts, [1952] Ch 534.
  • Re Denley’s Trust Deed, (1969) 1 Ch 373.
  • Re Leahy [1959] AC 457.
  • R v District Auditor, ex parte West Yorkshire Metropolitan County Council [1986] RVR 24.
  • Sainsbury v IRC, [1970] Ch 712.
  • Saunders v Vautier, (1841) 4 Beav 115.
  • Shell UK Ltd v Total UK Ltd, [2010] EWCA Civ 180
  • Vestey v IRC (No.2), [1979] 2 All ER 225

Bibliography

  • Clarke A and Kohler P, Property law: commentary and materials (Cambridge University Press 2005)
  • Hudson A, Equity and Trusts (7th edition, Oxon: Routledge 2012)
  • Moffat G, Trusts law: text and materials (Cambridge University Press 2005)
  • Pettit PH, Equity and the Law of Trusts (Oxford University Press 2012)
  • Watt G, Equity and Trusts Law Directions (5th Edition, Oxford University Press 2016)

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