Unraveling the Foundation of Trusts and the Role of Good Conscience

Equity has become more of rule and principle-based and recognises identifiable doctrines. The modern equity is based on a framework of principles that seek to provide some structure and predictability. However, the exercise of judicial discretion makes equity flexible in order to secure fair and just result.

The origin of trust is based on the concept of equity. Equity comprises the principles of justice and conscience. The principles of equity makes a trust enforceable. Such principles are recognised by the court in equitable jurisdiction in the form of an express trust document.

In this context, this essay will explore the impact of equity in the development of trusts, especially the express, implied, charitable and discretionary trusts.

The development of trust law is subject to equitable principles. Trust imposes an equitable obligation on a legal owner of a property (trustee) to act in good conscience while dealing with the property in favour of the beneficiary, who possesses a beneficial interest recognised by equity in that property. As such, a trust is enforceable by equity. For example, in case of an unconscionable receipt of property, a defendant will hold the property on a constructive trust on behalf of the person entitled in equity to the property. Equity imposes a trustee obligation found in equity to act in good conscience. This is supported by Lord Browne-Wilkinson in Westdeutche Landesbank Girozentrale v Islington LBC, identifying the root of any form of trust in equity.

A system of law uses equity as the means to balance out the need for certainty in the process of rule-making and the need for fair and just results relevant with individual circumstances. As such, ‘equity mitigates the rigours of common law’. Legal provisions must not be strictly applied to the extent that it could lead to injustice in individual cases. This is ensured by the application of the principles of equity that seek to prevent any undue benefit or to compensate loss arising from unconscionable conduct.

Equity gives the court the discretion to deviate from statutory or common law rules if good conscience requires it. In the case of Rochefoucauld v Boustead, the court applied the principle that equity cannot permit a statute to be used as a means of fraud. In the case of Yaxley v Gotts, the court applied the doctrine of equitable estoppel in contravention of the text of the Acts with the intent of preventing benefit or loss arising from an unconscionable conduct.

Trust is considered the most significant equitable doctrine. In Westdeutsche Landesbank v Islington LBC, Lord Browne-Wilkinson opined that the traditional notions of equity form the core part of trusts law. His Lordship held that equity acts as the conscience of the lawful owner of a legal interest. In regard to trust, the conscience requires the owner to carry out the purposes for which the property is vested in him, whether express or implied trust, or the purposes that law has imposed on the owner due to his unconscionable conduct. Such obligation imposed by equity on the owner could be found in the laws such as the Law of Property Act 1925 or the Wills Act 1837. Such laws provide for the formalities requirements to make enforceable trust. For example, the Wills Act, s9 states that Will shall be in writing and be signed to establish the intent of the testator. The Law of Property Act 1925, s 53(1)(a) states that a written Will is required to create an interest in the land of the settler. The case of Milroy v Lord gave the legal principle that a voluntary deed of trust cannot create a legal title of the shares in the trustee if the formalities requirement of registering the transfer have not taken place. The Court of Appeal ruled that there was no declaration of trust due to failure of registration.

In regard to implied trusts, which are the resulting trust and the constructive trust, the role of equity imposes on the holder of such trust to undertake the purposes for which a property is trusted in him or which the law imposes. For example, a resulting trust is created where a property is transferred to a defendant and where a recognised trigger, at the time of the transfer or after, occurs, which makes the defendant hold the property on behalf of the claimant. Such impact of equity could be seen when the beneficial interest of the claimant in the property returns in equity to the person who transferred the property in the first place. This is seen in the case of implied trust where the interest is transferred to or created for the defendant.

Equity seeks for a fair and just results by recognising such resulting trust where a property is held on trust for a beneficiary. A trustee will be personally liable to a third party even where such a trustee was not aware of the trust. In Stack v Dowden, which concerns a division of interests in family property after the breakdown of a cohabitation relationship, the House of Lords ruled that if there was a resulting trust presumption at the date of acquisition, unless any later acts or discussion defy these, it is not justifiable to deviate from the manner a beneficial interest is owned. Example of resulting trust is found in Section 12 of the Trusts of Land and Appointment of Trustees Act 1996. Section 12(1) entitles a beneficiary to occupy a land, at any time, to which he is ‘beneficially entitled to an interest in possession in land subject to a trust of land’. Section 12(1)(a) and (b) require that the purposes of the trust is to make the land available for his occupation and that ‘the land is held by the trustees so as to be so available’ respectively. The provisions demonstrate origin in equitable principles.

Equitable principles are more extendedly applied when it comes to charitable trust. The trustees are imposed legal obligations to carry out the purposes for which the trust was created. For example, Section 35 of the Charities Act 2011 imposes duties on the trustees to get the charity registered. Charity is referred to as a ‘ward of chancery’. The law of charitable trust is law unto itself. The courts impose on themselves the duty to preserve charitable trusts and as such the duty is founded on principles of the highest public policy. This is found in the public benefit requirement stated in Section 4 of the Charities Act 2011. Charitable trusts are unlike private trusts where there are beneficiaries to enforce them. They do not have any definite beneficiaries. The public is the beneficiary. Most charitable trusts are declared trust in the most general terms. Such express terms must be understandable to a trustee of ordinary intelligence. A court of equity imposes a limit on the powers of the trustees.

In White v Baugh, it was held that equity will not relieve a fiduciary from the ‘fetters imposed upon his own custody and management of the fund, by sharing that management with another, and giving that other as much power over it as himself.’ Equitable principles impose a fiduciary responsibility on the fiduciary. The non-delegation of such responsibility could be found in the contractual relationship between the charities and the government where the fiduciary cannot ‘fetter his discretion by binding himself as to the manner in which he will exercise discretion in the future’. Such prohibition on delegation of trustees’ discretion will make void a contract entered by charity trustees in order to carry out government programmes for future time.

As with charitable trust, where duties and limits are imposed on a trustee, trustees must exercise their discretionary power within the limits set by equitable principles. Equity sets out a test of certainty in discretionary trust where trustees must exercise their discretion in respect to the objects of the trust to be benefited by the distribution of trust property and the proportion. The trustees are given certain discretionary power to select amongst objects that are entitled to the distribution. In McPhail v Doulton, which is a case concerning certainty of beneficiaries, the House of Lords held that a trust is valid if it could be determined whether or not the claimants are a beneficiary. This case reflects the discretionary power to select amongst objects that are entitled to the distribution.

In cases where the trustees are unable to determine whether or not the claimants are beneficiaries, the power of the trustees are surrendered to the court to determine how the discretion should be exercised. The court will determine in the best interest of the trust and of the beneficiaries. When trustees surrender their discretion to the court, they must submit all available information and documents. The maxim, ‘Those who seek equity must come with clean hands’ applies here.

To conclude, the principles of equity has emerged due to the change in the modern practices of dealing with interests in properties. Equity has developed principles that remedies the deficiencies in the modern rules of disposing interests in property. The purpose of fair and just result has developed formalities and implied requirement to ensure performance of purposes by a trustees to whom a property is entrusted. The role of equity keeps changing with the change in property laws. Equity will remain a core idea in respect to delivering just and fair result as long as the law defines.

Continue your journey with our comprehensive guide to Protection of Equality Act 2010 governing.

Cases

McPhail v Doulton [1970] UKHL 1

Milroy v Lord (1862) 4 De GF & J 264

Rochefoucauld v Boustead [1897] 1 Ch 196

Stack v Dowden [2007] UKHL 17

Westdeutsche Landesbank v Islington LBC [1996] AC 669

White v Baugh (1835), 6 ER 1354, 1371 (HL)

Yaxley v Gotts [2000] Ch 162

Legislations

The Charities Act 2011

The Law of Property Act 1925

The Trusts of Land and Appointment of Trustees Act 1996

The Wills Act

Books

Chan K, The Public-Private Nature of Charity Law (Bloomsbury Publishing 2016)

Hudson A, Equity and Trusts (Routledge 2013)

Hudson A, Equity and Trusts (Taylor & Francis 2009)

Reed E, England and Wales’ in Charles Gothard and Sanjvee Shah, The World Trust Survey (Oxford University Press 2010)

Virgo G, The Principles of Equity & Trusts (Oxford University Press 2020)

Journals

Stinson PR, ‘Modern Charitable Trusts and the Law’ (1932) 17 ST. LOUIS L. REV. 307.