Lesson Plan 3: Week 7

Co-ownership of property
Co-ownership

A. General
 There are two main ways to own property in common with other owners at common law:
1. Joint tenancy; and
2. Tenancy in Common.
 Use of the word „tenancy‟ in this context embraces all forms of proprietary rights.

B. Joint Tenancy
 Each joint tenant owns the entire interest, subject only to the rights of all other joint tenants e.g.
married couples are usually joint tenants of the matrimonial home.
 A joint tenant is not considered to own any distinct share in the property.
 Two distinct features of the joint tenancy are: the four unities, and the right of survivorship (or jus
accrescendi)
o The Four Unities – all 4 are required for a joint tenancy to exist
 Unity of Possession:
o Each joint tenant must be entitled to unity of possession.
o It refers to the right of each tenant to enjoy possession of the entire interest.
o This is the only requirement that is shared with tenancies in common.
o If one co-owner occupies the entire property, the other cannot sue in trespass in the
absence of „ouster‟ – no co-owner can lawfully exclude the other co-owner or co-
owners from occupation of the entire property.
 Unity of Interest:
o All joint tenants must hold the same interest in the property.
o For example, if A is given the fee simple of Blackacre and B is given a life estate over
the same, there can be no joint tenancy – A and B will hold a tenancy in common while
B is alive.
o It is possible, however, for two joint tenants to be given a joint leasehold even if one is
also entitled to the reversion on the expiry of the lease.
 Unity of Title:
o Each tenant must acquire his or her right to possess and his or her unity of interest by
virtue of the same instrument or act of adverse possession.
 Unity of Time:
1
 o The time of vesting of the interest must be the same for each co-owner; otherwise a
tenancy in common, not a joint tenancy, will arise.
o For example, a transfer „to A and B in fee simple when they reach 18‟ will result in a
tenancy in common if A and B do not share the same date of birth.
o The Right of Survivorship
 This is the right of all joint tenants to have their rights enlarged on the death of a co-joint
tenant simply be being freed of the rights of the deceased (Corin v Patton).
 This prevents the deceased co-owner leaving his or her interest by will, as the interest of a
joint tenant is extinguished on death (Gould v Kemp).
 Apart from this, a joint tenant has an unrestricted freedom to dispose of an interest inter vivos
by severance.
 Where there is doubt as to the time of death of joint tenants, e.g. car crash, the younger joint
tenant is presumed to have survived the older, so that the right of survivorship works to the
younger‟s estate (Conveyancing Act 1919, s 35).

C. Tenancy in Common
 Requires only one unity
o Unity of possession.
 While A and B may have distinct shares in the interest (eg ¼ and ¾), each has a right to
occupy the whole territory
 Even when all the unities are present, however, there is no right of survivorship in the case of
a tenancy in common: the size of each tenant‟s share is fixed from the time of creation of the
interest or by subsequent dealings.
 On the death of a tenant in common his or her share passes by will or, if there is no valid
will, by intestacy.

D. Creation of Co-ownership – joint tenancy or tenancy in common?

General
 Due to the operation of trusts, joint tenancies and tenancies in common can exist at law and in
equity.
 For example, A and B may be the legal co-owners of property and are thus entitled to it
beneficially in the same way. Alternatively, A and B might hold the legal interest as joint
tenants on trust for C and D as joint tenants or tenants in common etc.

2
At Law
1. A joint tenancy or tenancy in common can be created by express words – words such as „to A
and B jointly‟ or „to A and B as joint tenants‟ will create a joint tenancy.
2. Prior to the introduction of the Conveyancing Act, in the absence of words demonstrating an
express intention, the common law presumed a joint tenancy. The joint tenancy was the
default position unless: one of the four unities was not present, words of severance were used, or
an intention to create a tenancy in common was evinced.
3. Words of severance are express words that indicate that each co-owner is to take a distinct share
in the property, as opposed to owning the entire interest jointly, e.g. „to A and B in equal shares‟
(Payne v Webb) or „to be divided between‟ (Peat v Chapman).

In equity
 In contrast, equity presumed a tenancy in common. Particularly in the following situations:
o Co-owners contributing different amounts to the purchase price –
 A resulting trust will usually arise so that they will hold shares as tenants in common in
equity in proportion to their respective contributions.
 This principle applies regardless of how the legal estate is held, so that if B‟s name was
not on the conveyance or certificate of title and, therefore, A was the sole proprietor of
the legal estate, A would still hold on trust for them in proportion to their respective
contributions.
 If land is conveyed to A and B as joint tenants they will take as joint tenants; but if their
respective contributions are ¼ and ¾ of the purchase price, equity will presume that they
hold the legal estate on trust for themselves beneficially as tenants in common, with A
entitled to ¼ and B ¾ (Bull v Bull). By contrast, if they contributed equal amounts,
equity would follow the law and they would be presumed to be joint tenants in equity
(Jackson v Jackson).
 All these presumptions are rebuttable by contrary intention (Pink v Lawrence).
 Also, presumption of resulting trust can be rebutted where a presumption of advancement
arises. E.g. Trustee of the Property of John Daniel Cummins v Cummins – where the
parties to a marriage contribute different shares to the purchase of the matrimonial home,
and are expressed to take as joint tenants, it can usually be assumed that they intend to
take equal shares, rather than the proportionate shares that would be required between
parties that are not in a requisite relationship (Brown v Brown).
o Co-owners advance money on mortgage:
 Where two or more co-owners advance money on mortgage, equity will presume a
tenancy in common.
3
  The reason for this is that co-owners would wish to get back their own investment
(Morley v Bird) – thus, equity will presume tenants in common in proportion to the
contributing amounts.
 This presumption is also rebuttable.
o Partnership Assets:
 Property acquired as part of a joint business venture is deemed to be held in equity under
a tenancy in common (Lake v Caddock).

Conveyancing Act – Statutory Reform

 S 26(1) CA sets the statutory presumption in favour of a tenancy in common, replacing the
common law‟s preference for joint tenancies.
 It follows that if an instrument fails to expressly provide for a joint tenancy, a tenancy in common
will be presumed.
 S 26(2) provides that the default rule provided in s 26(1) does not apply where the instrument
creating co-ownership „expressly provides that persons are to take as joint tenants‟.
 Minter v Minter addressed whether s 26(2) meant that an express provision for „joint tenancy‟ would
override the rules where equity would deem that a tenancy in common had been created. The court
ruled that where a document described the parties as „joint tenants‟ but they took unequal shares,
equity would deem them to be tenants in common.
 Application to chattel – s 26 also applies to chattels (Registrar-General of NSW v Wood).
 Legal and Equitable Interests:
 In Delehunt v Carmody, s 26(1) was held to apply to legal and equitable interests, so that
a disposition in favour of A and B will give rise to a tenancy in common at law and in
equity. Even in situations not strictly covered by s 26, in the absence of intention that
they have a joint tenancy, the parties are presumed to have tenancy in common, rather
than joint tenancy - even if under the old common law rules a joint tenancy would be
presumed.

E. Severance of Joint Tenancy

o A joint tenant has complete freedom to dispose of his or her interest inter vivos = severance,
because it is has the effect of fracturing the joint tenancy once and for all.
o The severed share is held in common with the other co-owners. So, where A, B and C are
joint tenants, and C transfers her share to D; A and B remain joint tenants – there is nothing that
C can do unilaterally to change their relationship – but D will hold a 1/3 undivided share as
tenant in common. The effect of the transaction in this example is that C will have deprived
them of their right of survivorship to her share, and vice versa (Wright v Gibbons).
4
o In the above example, if C sells her interest to B, rather than D, B will hold two different
interests. First, B will remain a joint tenant with A as to the remaining unsevered part of the
property. Second, B will also hold C‟s 1/3 share with A as tenant in common. So, on B‟s death,
A would become entitled to a 2/3 share by survivorship, and would hold C‟s former share as
tenant in common with B‟s estate.
o Severance can be effected in six ways: (first 3 are Williams v Hensman principles)
1. Unilateral act by one joint tenant:
Alienation to a third party
o A joint tenant may effect a severance by alienation to a third party where the legal interest is
transferred. This requires a deed under old system law (s 23B (1)) and registration for
Torrens title land (s 42 RPA).
o In equity, a severance will occur where a joint tenant has entered into a specifically
enforceable contract to transfer his or her share to a third party, because this transaction
will give the purchaser an equitable interest in the joint tenant‟s share (Lysaght v Edwards).
The severance in equity will not affect the legal estate; it will remain a joint tenancy, but held
on trust for the purchaser as a tenant in common.
o Severance by means of gift requires that the donor must have done all that is necessary to be
done on his or her part to put the donee in a position to acquire the legal title (Corin v
Patton). For Torrens title, this requires the handing over of the certificate of title.
o Nevertheless, s 97 RPA now makes it possible for a joint tenant to register a transfer to
himself or herself in order to sever the joint tenancy without the need for the production of
the certificate of title. The Registrar-General must, however, notify the other joint-tenants (s
97(5)). The purpose of this obligation is to give the non-severing joint tenants the
opportunity to raise any legal objection they might have too the severance. Once the notice
period has expired, the person who receives notice has no remedies against the Registrar-
General in respect of registration of the dealing which severs the joint tenancy.
o A gift will be perfect in equity where the donor has executed a document which satisfies s
23C (1)(a) CA; that is, a signed document in writing. At this point the donor will hold his or
her legal or equitable interest on trust for the donee.
o In Goyal v Chandra, Brereton J held that an agreement between the joint tenants, or course of
conduct by one joint tenant that led to the creation of an assumption by the other that no
severance would take place (relied on by the other to their detriment) may create by estoppel
an equitable right not to have the joint tenancy severed – and this would not amount to a
„restraint on alienation‟.
o A joint tenant is also free to alienate part of his or her interest, rather than the entire interest.

5
Mortgage
o under old system, the creation of a mortgage severs the joint tenancy as the mortgage of old
system land involves a conveyance of legal title. On reconveyance after the loan has been
repaid, the mortgagor steps into the mortgagee‟s shoes to become tenant in common.
Under Torrens title, mortgages operate as a charge over the mortgaged land, not a transfer
(Re Forrest Trust), thus severance does not occur. In the event that the mortgagor dies
before the mortgage is discharged, the right of survivorship will take precedence over the
mortgagee‟s right and the property will cease to be encumbered by the mortgage (Lyons v
Lyons).
Lease
- lease granted by a joint tenant does not sever the joint tenancy (Frieze v Unger). The grant
of the lease suspends the joint tenancy, such that the right of survivorship will be deferred
to the time the lease terminates if the joint tenant landlord dies during the currency of the
lease (Frieze v Unger). The right to enforce the covenants under the lease for the balance
of the term will pass to the joint tenant‟s heirs (Frieze v Unger). If a joint tenant landlord
survives the tenancy, the joint tenancy revives. Where the co-owned property is a lease,
the grant of a sublease by one co-owner will sever the joint tenancy for the entire lease
(Frieze v Unger).

Alienation to Self
o By ss 24 and 44(2) CA a person may transfer land to him/herself in order to sever the joint
tenancy – i.e. unity of title will be broken – with the result that her or she will become a
tenant in common of that share.
o Not possible to be effective in equity because it is impossible to hold on trust for oneself
(DKLR Holding Co (No 2) Pty Ltd v Commissioner of Stamp Duties (NSW)).
o Thus, a transfer of this nature must be effective at law or not at all. In the case of old system
land, a deed is required (s 23B (1)) and for Torrens title land, the transfer is only effective on
registration (Freed v Taffel).
Declaration of Trust
o Under s 23C (1)(b) CA, a person entitled to an interest in land may by writing signed by him
or her make a declaration of trust of any interest in that land. This applies to both old system
and Torrens title.

6
2. A Mutual Agreement among the Joint Tenants
o A joint tenancy will be severed if all the joint tenants mutually agree to hold as tenants in
common.
o Once this occurs the joint tenancy is severed in equity (Lysaght v Edwards). The co-owners
will continue to hold the legal estate as tenants in common.
o Severance, once effected, is irrevocable, even if the agreement is subsequently repudiated.
o An agreement to make mutual wills will sever a joint tenancy (Re Wilfords’s Estate).

3. A Course of Dealing among the Joint Tenants

o If there is a cause of dealing among all of the joint tenants „sufficient to intimate that the
interests of all were mutually treated as constituting a tenancy in common‟ a severance
will occur (Williams v Hensman).
o The course of dealing need not amount to an implied contract, but all must participate.
o Mere physical subdivision of the property so that each joint tenant can occupy different
parts will not sever the joint tenancy (Greenfield v Greenfield). Payment of the proceeds
of sale of a joint tenancy in sperate bank accounts is, however, conduct sufficient to
indicate a mutual treatment of the interest as a tenancy in common (Abela v Public
Trustee).
o The course of dealing need not be evidence in writing, and so does not need to conform
with the general requirement imposed by s 54A CA that contracts for sale must be in
writing.
o A contract of sale alone is not enough to constitute a course of dealing sufficient to
intimate that the interests of all were mutually treated as constituting a tenancy in
common.

4. Severance by Court Order

o An order of the court may bring about a severance.

5. Severance in cases of Unlawful Killing

o Where a joint tenant would otherwise unconscionably benefit from the right of
survivorship, equity will impose a constructive trust.
o Where A unlawfully kills a co-tenant, B, A will hold the legal estate by survivorship on
trust for himself or herself and B‟s estate as tenants in common in equal shares (Rasmanis
v Jurewitsch).

7
 o The principle, known as the „forfeiture rule‟, applies to all cases where the joint tenant
dies as a result of the felonious acts of a co-joint tenant. The severance arises indirectly
as a result of the imposition of a constructive trust.
o By ss 4 and 5 of Forfeiture Act 1995 (NSW), in cases of unlawful killings, with the
exception of murder, the Supreme Court is given power to vary the forfeiture rule if „it is
satisfied that justice requires the effect of the rule to be modified‟.

6. Severance on Bankruptcy
o Bankruptcy of a joint tenant entails the vesting of his or her property in the trustee in
bankruptcy (s 58(1) of Bankruptcy Act 1966). This process is known as involuntary
alienation. Its effect is to sever the joint tenancy in favour of the trustee.
o On declaration of bankruptcy, all joint tenants hold the legal estate on trust for the trustee
in bankruptcy as tenant in common. This equitable interest cannot be defeated by
registration because of the fiduciary duty owed to the trustee in bankruptcy.

F. Rights and Obligations of Co-owners

Right to Possession
 The unity of possession which all co-owners enjoy entitles each of them to occupy the whole of
the property (Thrift v Thrift). This right can be transferred to a third party, but the transferee
cannot be given a right which the co-owner does not have, such as a right to exclude other co-
owners (Frieze v Unger).
 A co-owner who has been excluded from possession, or „ousted‟, may sue the ousting co-owner
in trespass. This right extends to acts of destruction of the property, as where one co-owner
removed large amounts of soil and turf from the land without the consent of the other co-owners
(Wilkinson v Haygarth). The excluded co-owner will be entitled to an „occupation fee’ which is
in the nature of mesne profits (Biviano v Natoli).
 Obtaining an AVO which prevents a co-owner going near the property will not be an ouster for
the reason that it is not a legal wrong and, therefore, gives no right to sue in ejectment (Biviano v
Natoli).
 There is no ouster where one co-owner upgrades and slightly enlarges a common access strip
causing disturbance during construction work (Ferguson v Miller).
Biviano v Natoli
 The excluding must be „a legal wrong‟ – Luke v Luke.

8
  There are two circumstances where equity will consider an occupation fee:
1. In a partition suit, if there has been an exclusion, the tenant in occupation will be charged
with an occupation fee – equity follows the law;
2. If the owner in occupation claims an allowance in respect of improvements effected by him,
equity will permit such an allowance only on terms that he is accountable for an occupation
fee – he who comes to equity must have done equity.
 An ouster = „an express denial of the title and right to possession of fellow tenants, brought
home to the latter openly and unequivocally‟.
 Result: The court found that the AVO did not amount to an ouster as there was no legal wrong –
personal rights should, in a proper case, be given priority over rights of property (Davis v
Johnson). An ouster did not occur at the time court proceedings were commenced either.
However, the „wife‟ persisted in her denial of the husband‟s title to the property during
proceedings, and this amounted to an express denial of his rights as c-tenant which constituted an
ouster.
 Calculation of the occupation fee: an occupation fee = mesne profits. The onus of establishing
the quantum falls on the party claiming a fee. It would be inequitable for the excluded co-tenant
to claim the rental value of the whole property because there is already a co-tenant in occupation.
A starting point is 50% of the rental value from the time the ousting occurred.

Improvements and Repairs

 Common law – a co-owner who improves the property has no right to a contribution to the costs
of improvements in the absence of agreement (Leigh v Dickeson).
 Equity – the improving co-owner would have a right of contribution from co-owners who would
otherwise unfairly benefit from the improvements (Leigh v Dickeson). This is a defensive
equity; it includes circumstances where there is a suit for termination of the co-ownership, such
as a suit for partition or sale, or a suit for administration of proceeds of sale of the property. The
claim can be enforced against successors in title, since it is in the nature of an equitable charge
on the land, so that a co-owner who built houses on land, significantly increasing its value, could
claim against successors in title of the non-improving co-owners (Brickwood v Young).
 Limits – in Boulter v Boulter it was held that a co-owner is entitled either the actual amount
spent on improvements or the increase in value of the land, whichever is the lesser of the two.
So that where a co-owner spent $100,000 on improvements but the property increased in value
only by $15,000, he was only entitled to $15,000 (Squire v Rogers).
 Improvements are more than mere repairs and maintenance (Leigh v Dickeson), thus, cost of
general maintenance, such as pest control or insurance premiums, will not qualify (Forgeard v
Shanahan).
9
Forgeard v Shanahan
 Mortgage repayments and council rates are types of improvements.
 An occupation fee claim cannot exceed the claim for improvements, as it is a defensive equity.
 At common law a claim for an occupation fee can only be made where one co-owner wrongfully
ousts another, or where there is an agreement between the parties to pay such a fee.
 In equity, a co-owner can claim compensation for improvements where the property has been
realised; the value of the improvement compensation is the lesser of the cost of improvements or
the value that has been added to the property. Only where a claim for improvements has been
made can the non-occupying owner make a claim for an occupation fee.

Right an occupation fee

 If one co-owner choses not to exercise his or her rights to possession, the corresponding benefit
conferred on the remaining co-owners does not give rise to an obligation to pay a fee or rent on
the non-resident co-owner; occupation of the whole property is merely an exercise of every co-
owner‟s rights (Forgeard v Shanahan).
 There are exceptions to this rule, however:
o Where one co-owner ousts another – this gives rise to an action in trespass for an
occupation fee for the duration of the ouster (Dennis v McDonald).
o Where there is an agreement to pay an occupation rent – co-owners may vary rights
by an agreement, so as to give rise to an occupation rent, as where one vacates to allow
the other exclusive occupation in consideration for rent (Leigh v Dickeson).
o Where the occupying co-owner is claiming an allowance for improvements to the
property – in accordance with the principle that „he who seeks equity must do equity‟,
the improving co-owner is under a duty to pay an occupation fee (Teasdale v Sanderson).

Quantum of Occupation Fee

 Starting point is 50% of market rent – Biviano v Natoli.

G. Termination of Co-ownership
 Co-ownership can be brought to an end in two ways:

1. By Action of the Parties

 Tenancy in common – co-ownership will come to an end when one of the co-owners acquires the
shares of all the others.

10
  Joint tenancy – when a sole survivor succeeds to the shares of the others.
 Also, when all co-owners jointly transfer their several interests to a third party; or acts of adverse
possession by one co-owner against another (s 38(5) Limitation Act 1969 NSW); or when the co-
owners partition the property to reflect their respective shares, each becoming entitled to sole
proprietorship of a fraction of the original property.

2. By Order of Sale or Partition by the Court

 Land:
o Any co-owner of property can apply to the court to appoint trustees to hold the property
on a statutory trust for sale or partition (s 66G(1) CA). Partition is physical subdivision
of the land. The court has the discretion whether to order sale or partition (Forgeard v
Shanahan)
o A sale is the primary remedy under s 66G, and partition is allowed only in special
circumstances (Re Cordingley). If the co-owner satisfies the court that partition of the
property would be more beneficial than a sale for co-owners who own more than one-half
of the property, the court may appoint trustees for partition rather than sale (s 66G(4)).
An order under s 66G does not sever a joint tenancy, which continues to apply to the
proceeds of sale (Re Debney). In a suit for partition and sale, the court has the power to
direct an account of improvements and occupation fees (Leigh v Dickeson).
 Chattels:
o By s 36A CA the court has the power to order a division of chattels belonging to persons
jointly or in undivided shares on the application of „persons interested to the extent of a
moiety half or upwards‟.
o The court also has the power to order the property to be sold (Ferrari v Beccaris).

11
 Gifts and Sales
Week 8

Assignments
Assignments

 „Assignment‟ = the disposition of choses in action (or choses in possession).

 Chose in action = „all personal rights of property which can only be claimed or enforced by
action, and not by taking physical possession‟ (Torkington v Magee). They are intangible rights
enforceable through action.
 Choses in possession = tangible objects.
 Choses in action can be legal or equitable. An equitable chose in action is enforceable only in a
court of equity e.g. a share or interest in a partnership or an interest in a trust fund. A legal chose
in action is enforceable by an action at law, such as a debt, being the intangible right to the
payment of a sum of money from another.
 The common law did not recognise assignments of choses in action, so equity formulated its own
rules for the validity of assignments of both equitable and legal choses.
 Thus, an assignment of a chose in action must be made either under statute or in equity.

Assignments of Legal Property at Law

 The formalities depend on the type of property to be assigned.

 Equitable interests are not recognised by the law; therefore, only legal interest can be assigned at
law.

Debts and Other Choses in Action

 S 12 Conveyancing Act 1919 (NSW) requirements must be met.
 Where these statutory requirements are met, the assignment is effectual in law to pass and
transfer the legal right to the debt or other chose in action from assignor to assignee. As a result,
the assignor steps out of the picture, the assignee having standing to enforce the debt against the
debtor joining the assignor.
 A statutory assignment need not be for consideration to be enforceable, so a chose in action can
be assigned by way of a gift. However, any such assignment is subject to the equities that would
have taken priority aside from the assignment, such as set-offs and counterclaims available

12
 against the assignor. This is because the assignor cannot assign more than he/she owns, and so
the assignee cannot take a better title than the assignor.
 S 12 Conveyancing Act 1919 (NSW) requirements for a valid statutory assignment of a chose in
action, are:
o Absolute – the assignment must be absolute, in that all the assignor‟s rights in the chose
in action are unconditionally transferred to the assignee. Assignments by way of a charge
only, subject to a condition precedent or of part only of a debt do not satisfy the statutory
requirements.
o Writing Signed by the Assignor – the assignment was be in writing signed by the
assignor, but need not have the assent of the assignee.
o Express Notice – express notice must be given in writing to the debtor (although it need
not be given by the assignor) because the debtor must know the identity of the legal
owner of the debt in order to pay that person.
 Future choses in action cannot be assigned at law, only in equity if there is some consideration.
Legal chose in action has been interpreted to mean „lawfully assignable chose in action‟, which
includes equitable choses in action (Federal Commissioner of Taxation v Everett).

Land

Old System
 Assignment of legal property at law (under old system title) requires a deed – s 23B (1)
Conveyancing Act.
Torrens Title
 S 41 Real Property Act specifies that assignments of legal property are effectual at law upon
registration.

Choses in Possession

 There are three recognised methods for making a valid assignment of a chose in possession – s
22 Sale of Goods Act 1922:
1. Deed
2. Declaration of trust
3. Delivery with an intention to assign (actual, constructive, or symbolic [where
property is too bulky to deliver – Rolenson v Mort]).

13
Gifts of Chattels
 There are three recognised methods for making a valid gift of a chose in possession, such as a
painting, inter vivos:
1. deed
2. declaration
3. delivery

Gifts of Chattel by Delivery (Following principles enunciated in (Nolan v Nolan 2003)

 The essential elements of a valid gift of chattel inter vivos, in the absence of a deed of gift or a
declarations of trust, are:
o An intention to make a gift, usually expressed by words of present gift;
o Intention on the part of the donee to accept the gift; and
o Delivery.
Intention to Make a Gift
 Donative intention is characteristically accompanied by words of gift which evince the intention
and delineate the object and extent of the intended benefaction.
 The intention must be made manifest and expressed with certainty
 A gift can be valid without words of gift so long as the plaintiff proves the existence of a present,
unequivocal donative interest attended by the requisite certainty as to object, extent and whether
the gift would take immediate effect eg actions, words, documents, legalities

Intention on behalf of the donee to accept the gift

Delivery of the gift

 Plaintiff bears onus of establishing this element
 Oral or written words of gift not embodied in a deed or will are not sufficient to make an
effective gift unless there has been or is delivery of possession to the donee. There must be some
unambiguous act of actual or constructive delivery (Horsley v Phillips Fine Art Auctioneers Pty
Ltd)
 Delivery may be actual or constructive (Where the nature of bulk of the goods renders manual
delivery impossible or impractical, acts falling short of manual delivery have been held sufficient
to signal a change in possession).(Harrison v Folley)
 Delivery between Co-inhabitants – delivery is need in every case of a parol gift inter vivos. A
co-inhabitants usage of, or access to the chattels, would not suffice. There must be giving and
taking, and if the donor retains possession, has not yet given and the donee has not yet taken. In
the delivery between co-inhabitants, „if the facts proved were equally consistent with the idea
14
 that he intended to deliver the thing to the wife so as to be her property, and with the idea that he
intended to keep it as his own property then the wife failed to make out her case‟. In such a case
it is necessary that the act of delivery unequivocally evidence the donor‟s intention to transfer,
and not retain, possession of the chattel in question (Re Rose).

Concept of an Equitable Assignment

 An equitable assignment can mean one of two things (Norman v Federal Commissioner of
Taxation):
o An assignment of an equitable chose in action; or
o An assignment of a legal chose in action that is not assignable except by the aid of equity
– i.e. failure to comply with legal requirements or an assignment of future property.
 As both legal and equitable choses in action can be assigned under the statutory scheme, the
concept of equitable assignment is most relevant where the assignment does not fully comply
with the statutory requirements, or otherwise falls outside s 12, such as a part assignment or the
assignment of a future chose.
 Some choses in action, being personal in nature, cannot be assigned even in equity, such as
contracts involving personal skill or confidence (Noakes v Doncaster Amalgamated Collieries
Ltd).
 Once a valid equitable assignment has been effected, the assignee has standing to enforce the
subject matter of the assignment by suing the debtor to recover the amount due to the assignor, or
suing a third party who infringes the assignor‟s rights. Yet, because the assignor retains legal
title to the debt the assignee must ordinarily join the assignor in any proceedings to avoid the
possibility of the debtor being sued by both the assignee and the assignor (Performing Right
Society Ltd v London Theatre of varieties Ltd).

Requirements for an Equitable Assignment

 The main prerequisite for equitable assignments is an intention to assign and where future
property is assigned there must be consideration also.
 The presence or absence of notice to the debtor may be important, but it does not impact upon
the validity of the assignment.

15
Intention to Assign
 An assignment that does not comply with the statutory formalities may still be valid and
effective in equity, because „equity looks to intent not form‟.
 Provided the assignor has the intention to assign, no particular form is required.
 An intention to assign may appear on the face of the document or it may be proved by extrinsic
evidence.
 The requisite intention is an intention to transfer a chose to the assignee in a manner binding the
assignor e.g. transfer to A of „all my right title and interest‟ in a debt or other chose in action
(Shepherd v FCT).

Notice
 Notice is not a requirement of an effective equitable assignment, but there are two practical reasons
why notice is desirable:
1. Third Party not Bound until Notice is Given – a debtor who has received no clear and
unambiguous notice of the assignment cannot be expected to pay the assignee, but
legitimately continues to pay the assignor. Thus, for an equitable assignment in the
full sense, notice must be given to the third party. Once the relevant notice has been
furnished, the debtor must now pay the assignee, or otherwise face the risk of being
sued by the assignee for the money already paid over to the assignor. The notice need
not be in a particular form, but it must plainly and unambiguously convey to the
debtor that there has been an assignment and that there is a sense of peril for ignoring
the request to pay (Squires v SA Steel and Sheet Pty Ltd).
2. Priority of Assignees Dependant on Order of Notice – where there are successive
dealing with a chose the priority between those claiming as assignees is determined
prima facie by the order in which those assignees gave notice of their assignment to
the debtor, not by the order in which the assignments were made = rule in Dearle v
Hall (an exception to the usual equitable interest priority rules).

Consideration
 Consideration is only required in equity for the assignment of future property. Whether
consideration is required depends on the distinction between legal and equitable choses in action.

o Legal Choses:
 As „equity will not perfect an imperfect gift‟ and will not assist a volunteer, a voluntary
assignment of a legal chose in action that fails to comply with s12 CA requirements

16
 cannot be upheld in equity unless the assignor‟s conscience is bound to hold the
property for the assignee. This will be the case where (Olsson v Dyson):
 Assignor has furnished consideration,
 Alleged assignor, although not complying with all statutory requirements, has
done all that is required to be done by her/him under the statute to effectuate the
assignment. E.g. notice is required to be given, but it need not be given by the
assignor, so if the other requirements are met then the assignment can
nonetheless take effect as an equitable assignment.
 Assignor encourages/induces intended assignee to act to his/her detriment on
the footing that the subject of the assignment has become the assignee‟s such
that it is unconscionable for the assignor to withhold the interest from the
assignee – estoppel.

o Equitable Choses: - Future v Present Property

 Future property cannot be assigned at law – they are mere expectancies.
 If the assignment is of existing (present) vested equitable interest, consideration is not
necessary provided a clear act of assignment and an intention to assign is present
(Norman FCT).
 If the assignment is of a future property, consideration is required. If consideration is
present, equity will treat this as an agreement to assign the thing when it comes into
existence. This is because equity treats the assignor‟s conscience as bound as trustee of
her or his legal rights for the assignee upon the receipt of consideration, the assignment
being treated as a contract to assign (Palette Shoes v Krohn). The assignee‟s
entitlement to the property passes to him/her as soon as the property comes into
existence. The assignee‟s right is not premised on the availability of specific
performance, but on the equitable principle that equity regards as done that which ought
to be done.
 As consideration is required for a valid assignment of a future equitable interest but not
for a present equitable interest, it is necessary to distinguish between present and future
property.

Test for Distinguishing Present v Future Property?

 Norman – there is a distinction between a presently existing contractual obligation to pay a sum
of money, which is present property, and the sum of money itself, which is future property. To
assign a right to dividends, Norman should have assigned the shares, so obviously he was
assigning the dividends themselves, which is future property.
17
  Present property = presenting existing right to income e.g. contractual obligation.
 Future property = interest/income itself which comes into existence at some later time.

Equitable Assignment of Legal Property Assignable at Law

 If the assignment of legal property fails for lack of compliance with the statutory or other legal
requirements (but it is assignable at law in the sense that it is not part of a debt or chose in
action) and no consideration has been given, the following rules must be complied with in order
to effect a valid equitable assignment.
Rule in Milroy v Lord
 This rule applies to assignments of legal property where the recipient is intended to take
beneficially or as a trustee.
 To „completely constitute‟ a gift or trust, the settlor/assignor must have done everything that,
according to the nature of the property, was necessary to be done in order to transfer the property
(Milroy v Lord).
 Once this has been done, the beneficiaries take an equitable interest in the property and can
enforce the gift, regardless of consideration.
 If the gift or trust has not been completely constituted, the arrangement may be enforceable in
equity as an agreement to create a gift or trust if the claimant has provided consideration, or it
may be enforceable under the exceptions to the rule that equity will not assist a volunteer.
 There are two elements that must be satisfied to completely constitute a gift of property
assignable at law:
1. Everything Must Be Done – a transferee acquires an equitable estate or interest in the subject
matter of the gift once the transaction is complete so far as the transferor is concerned (Corin v
Patton). Thus, everything to be done means everything that has to be done by the transferor
rather than the completion of every single step in the transfer. The gift remains incompletely
constituted where some act remains to be done that is within the sole province of the
settlor/assignor. E.g. in Corin v Patton the transferor dies without the transfer being registered,
and the court held that the transferor had not done everything necessary to be done by her to
effect the transfer because she had not authorised the mortgagee to hand the certificate of title
to the transferee; hence, the trust was not completely constituted.

2. According to the Nature of the Property – everything that must be done is determined
according to the nature of the property (Jones v Locke). Thus, the transferor must use the
appropriate mode of transferor according to the nature of the property involved. For example:
 Gifts of Leases = assignment (Richards v Delbridge),

18
  Gifts of Cheques = endorsement to its beneficiary (Jones v Locke),
 Gifts of Chattel capable of passing by delivery = delivery to the intended trustee or
execution and delivery of a deed of gift (Anning v Anning),
 Gifts of Shares = signature of a donor on the share transfer form as prescribed by
statute and a duly executed instrument of transfer should be delivered as a matter of
prudence (Re Rose),
 Gift of Torrens Land = execution of an instrument of transfer and delivery of it to the
intended donee and possibly the certificate of title (s 46 RPA 1900). Registration is
unnecessary as the intended donee/trustee can effect it (Corin v Patton),
 Gift of Money in a Bank Account = a person must not only open an account in another‟s
name, they must hand the passbooks to the purported beneficiary and thereafter consult
that beneficiary on the basis that the latter is the beneficial owner of the moneys (or of
some interest in them) – Kauter v Hilton. Where the alleged trustee/donor retains
possession of an item that is essential to the right to have any money paid over, the trust
is incomplete (Haythorpe v Rae).

o Requirements for a Will - For a will you need writing, signed by testator and two witnesses
who are present at the same time of the signing and who attest the will in the presence of the
testator – if this is not done the testator has not done all that he/she can. (A donatio mortis
causa overrides a will; the rule in Strong v Bird, also overrides the will)

Did the Transfer Embody a Contract for Consideration, or Instead a Gift?

 Consideration in the present case was $1 – it is settled that nominal consideration suffices to
support a simple contract.
 However, nominal consideration is a factor to be taken into account when considering the
availability of specific performance. Because equity will not assist a volunteer, specific
performance will not be available for a gratuitous promise even though it is binding at law
because it is supported by nominal consideration.
 Inadequacy of consideration alone is not an absolute bar to specific performance, as parties are
supposed to able to determine adequacy of consideration for themselves.
 Yet, where there is merely nominal consideration, specific performance will be denied in any
event. A contract at law may still be left, but no equitable interest will have arisen and equity
will not complete the gift unless the gift binds the conscience of the donor (Corin v Patton).

19
Test for Determining whether a Gift of RPA Land under an Unregistered Transfer was Complete
and Effective in Equity…
 Twofold:
o Whether the donor has done all that is necessary to place the vesting of the legal title
within the control of the donee; and
o Beyond the recall or intervention of the donor.
 Once that stage is reached, the gift is complete and effective in equity, and the equitable interest
in the land vests in the donee, thus, the donor is bound in conscience to hold the property as
trustee for the donee pending the vesting of the legal title.
 „Necessary‟ in the context of this test = those things which only the donor could do to effect a
transfer of legal title.
 The execution and delivery of the transfer and the delivery of the certificate of title would
constitute a completed gift. In Corin v Patton, the donee need to have authorised the bank to
produce the CT - s 96(2) CA 1919 requires the mortgagee to release and lodge the CT at the
Registrar-General‟s upon request from the mortgagor.
 The necessity of action by a third party, neither assignor or assignee, is not fatal to the
completeness of the gift.
 E.g. in Re Rose a gift of shares in a company was held complete , notwithstanding that the
company had yet to register it, where the transfer was in the prescribed form duly signed by both
transferor and transferee and lodged with the relevant share certificates. In Anning v Anning, the
further action was within the power of the assignee, namely in giving notice to the debtor of the
assignment, so that the assignee was placed in a position where without anyone else‟s
intervention it could effect the assignment.

Result in regards to ‘everything must be done’

 Eric‟s direction to produce the CT suffices for the gift to be complete and the action of third
parties still required to produce the CT is not fatal to the completeness of the assignment in those
circumstances.
 Eric‟s transfer constituted a severance of the joint tenancy by unilateral act by the assignor
operating upon his own share.
 Thus, joint tenancy has been severed by a complete gift in equity, vesting in P an equitable
interest as tenant in common.

Has P’s Equitable Interest been Retracted or Defeated?

 Retraction by a later inconsistent unregistered transfer is only possible if the gift were not then
complete.
20
  Since the gift was complete, the 2nd transfer alone is not enough to recall the gift.
 Moreover, D is not granted indefeasibility of title due to ss 42 and 43 fraud. D knew of the
earlier gift and refused the CT to be released, and then rushed to get his transfer registered.

Conclusion
 P has 50% interest as tenant in common, in equity.

Costin v Costin (1997)

Transfer beyond the Donor’s Recall or Intervention
 On appeal, it was held that Eric did not perfect the gift as he failed to comply with the second
limb of the Milroy and Lord, which states;
o „In order to render a voluntary settlement valid and effectual, the settlor must have done
everything which, according to the nature of the property comprised in the settlement,
was necessary to be done in order to transfer the property and render the settlement
binding upon him.
 The court held that whilst Eric‟s gift was complete in the sense that the donor had done all that
was required to be done by him alone to transfer the legal title, Eric had not done all that was
necessary to render the gift binding upon himself or of putting the transfer beyond the donor‟s
recall or intervention.
 The donor effectively allowed the appellant rather than the respondent to become the owner at
law of the donor‟s interest in the property.
 Thus, the gift was not perfected – and equity will perfect an imperfect gift.

Equitable Assignment of Legal Property Not Assignable at Law

 A part (as opposed to the whole of) a legal chose in action can be assigned in equity without
formality; all that is required is an intention to immediately transfer.
 Future property is not assignable at law but it can be assigned in equity, provided that there is
consideration.

Equitable Assignment of Equitable Property

At Law – Writing Requirements
 As equity looks to intent not form, there is no general requirement of writing to create a valid
inter vivos trust or gift. However, statute requires certain trusts/gifts to comply with writing
requirements as a condition of validity or enforceability.
 S 23C(1) CA provides:

21
a) No interest in land can be created or disposed of except by writing signed by the person
creating or conveying the same, or by his/her agent thereunto lawfully authorised in
writing, or by will, or by operation of law;
b) A declaration of trust respecting any land or any interest therein must be manifested and
proved by some writing signed by some person who is able to declare such trust or by
his/her will;
c) A disposition of an equitable interest or tryst subsisting at the time of the disposition,
must be in writing signed by the person disposing of the same or by his/her will, or by
his/her agent thereunto lawfully authorise in writing.

22
Disposition Type of Property Writing Comments
Requirements
Land New Interest in Adamson v Hayes
Land = Writing holds that s 23C (1)
required under s (a) applies to both
23C (1) (a). legal and equitable
interests in land.
Subsisting Interest
in Land = Writing
required under ss
23C (1) (a) and (c).
Personal Property New Interest = no Pt Ltd v Maradona
writing requirement s 23C (1) (c)
applies to both
Subsisting Interest realty and
= writing required personalty.
under s 23C (1) (c).
S 23C (1) (b) requires that a „declaration of trust‟ of property relating to an interest in
land be evidenced in writing. So, although a trust relating to land can be created
orally, its enforceability is premised on it being evidenced in writing by some
document signed by the settlor (Kauter v Hilton). The document need not be in any
particular form provided the terms of the trust, the trust property and the
beneficiaries can be ascertained (Hagan v Waterhouse). Also, the writing may be
made subsequently to the time the trust is declared (Secretary, Department of Social
Security v James). Writing that predates the declaration and makes no reference to it
cannot evidence a declaration (Benjamin v Leicher). The signature of an agent is
insufficient and there must be a signature from both parties (Equuscorp Pty Ltd v
Jimenez).

In Equity

 The equitable assignment of equitable property has three elements (discussed above):
o Intention to assign
o Notice (in order to bind the debtor and secure priority)
o Consideration (required for future property and to escape the 2 volunteer maxims).
23
 If the equitable interest is an equitable chose in action, look to see whether it can be assigned
under s 12 CA. Otherwise, an intention to assign must be present.

24
Week 9

Exceptions to the Rule that Equity will not assist a Volunteer

Equity will not assist a Volunteer
 If a gift or trust is not validly constituted, equity will not provide any protection to the donee or
the beneficiary because he or she is a volunteer.
 There are three main exceptions to this rule, however, and they are:
o The rule in Strong v Bird;
o Donatio Mortis Causa – gifts in contemplation of death; and
o Estoppel.
 These exceptions override a will.

Exceptions 1: the Rule in Strong v Bird

 This rule provides that if the testator (A) expresses a present intention to make an immediate gift
of specific property to another person (B), and that intention continues unchanged until A‟s death
and B becomes the executor of A‟s will, then B is entitled to hold the property for his/her own
benefit, despite the fact that the gift was imperfect.
 This exception applies where the testator actually thought he/she had given the gift to B, and
continued to believe this until his/her death. Having thought that he/she had already parted with
this property, it has not been included in the will. If B then becomes the executor of testator‟s
estate, B will be entitled to the property in equity.

Exceptions 2: Donatio Mortis Causa

 This exception requires proof of:
i. A gift of personal property in contemplation of impending death (contemplation of
suicide is sufficient – Re Dudman- and even if death comes from cause other than
expected – Mills v Sheilds);
ii. Delivery of the subject matter of the gift, or a transfer of the means of getting at the
property, or a transfer of the indicia of title (physical, constructive and symbolic); and
iii. The gift being conditional upon the death of the donor (but otherwise unconditional) +
intention to gift is required here (Dufficy v Mollica). DMC becomes absolute upon death,
and is revocable any time before that.

25
Exceptions 3: Estoppel
 „A donor will not be permitted to change his or her mind if it would unconscionable, in the eyes
of equity, vis-à-vis the donee to do so‟ (Pennington v Waine). E.g. where the trust is almost
completely constituted at the time of the settlor‟s death.

Factors Vitiating Gifts

Capacity
Test for Capacity in regards Transfers
 Ball v Mannin holds that the question is whether the person concerned is capable of
understanding what he/she does by executing the deed in question when its general purport has
been fully explained to him/her.
 Although it was explained to Mrs Beaney that she was making a gift of the house to Valerie, she
was never told that its effect would be to deprive her other 2 children of any real interest in her
estate.
 Gibbs v Wright states that the mental capacity required by the law of any instrument, is the
capacity to understand the nature of that transaction when it is explained, and is relative to the
particular transaction being effected.
 If the subject matter and value of a gift are trivial in relation to the donor‟s other assets, a low
degree of understanding will suffice. But, on the other hand, if the subject matter of the gift is
the donor‟s only valuable asset, a high degree of understanding is required – like a will.
 Here, Mrs Beaney did not know that she was making an absolute gift of the property for Valerie.

Result
 Plaintiffs succeed.
 Although Mrs Beaney may have intended to transfer the house to Valerie, the facts suggest that
Mrs Beaney did not have a full understanding of the nature of the transaction – and such
understanding is required, given that the house was her only asset.

Undue Influence/Unconscionability
Louth v Diprose
Facts
 Diprose was infatuated by Louth – they had an on-off relationship. Louth didn‟t want to see him
anymore, until she became depressed/suicidal and got in contact with him again. Diprose made
many gifts to Louth and sometimes paid unpaid bills.

26
  Diprose bought Tranmere house but by agreement following threats that she would kill herself,
the house was registered in Louth‟s name.

Unconscionability Elements
 Three factors must be present for equity to set aside a gift procured by unconscionable conduct
(Amadio factors):
1. a relationship between the parties which, to the knowledge of the donee, places the
donor at a special disadvantage vis-à-vis the donee;
2. the donee‟s unconscientious exploitation of the donor‟s disadvantage ; and
3. the consequent overbearing of the will of the donor whereby the donor is unable to
make a worthwhile judgement as to what is in his/her best interest.
 Unconscionability looks to the conduct of the stronger party.

Undue Influence
 Undue influence is similar to unconscionability, but it looks to the quality of consent of the
weaker party, whose will must be overborne.
 It prevents an unconscientious use of any special capacity or opportunity that may exist or arise
of affecting the alienor‟s will or freedom of judgement in reference to such a matter.
 An antecedent relationship (doctor/patient, lawyer/client and parent/child) gives rise to a
rebuttable presumption that of undue influence, but where no antecedent relationship exists, the
claimant bears the onus of proving actual influence over the mind of the alienor.

Result
 Diprose discharged the onus of proof – Louth took advantage of Diprose‟s special disadvantage
(infatuation) in relation to her, such that Diprose was unable to make a worthwhile judgement as
to what is in his best interest.

27
Lesson Plan #5: Issues in the Law of Express Trusts
Week 10

The Nature of a Trust

Definition and Characteristics

 Trust involves the holding of property by its legal owner (the trustee) for the benefit of others
(the beneficiaries or objects).
 Dual ownership of the same property – the legal ownership being vested in the trustee and the
equitable ownership (or beneficial) ownership in the beneficiaries.
 Three elements common to all trusts include:
1. A trustee who holds legal title to the trust property;
2. Holding of the property by the trustee for the benefit of a beneficiary (or for charitable
purposes);
3. The existence of trust property vested in the trustee that is identifiable and certain.
 An equitable obligation binds a trustee to administer the trust property for the benefit of the
beneficiaries (or charitable purposes prescribed). Thus, beneficiaries have remedies available to
them should a trustee default in performing his/her duties + beneficiaries can enforce their
equitable interest in the trust property against any subsequent holder of the property other than a
bona fide purchaser for value of the legal interest who takes without notice of the equitable
interest (Pilcher v Rawlins).
 The creator of the trust = the settlor (or testator for trusts created in a will). It is the settlor‟s
intention that is usually the main inquiry in determining whether a trust has been created.

Classification of Trusts
Express Trusts
 Where settlor has expressed an intention (which may be inferred from the facts) to create a trust
and the certainties and formalities are met, an „express trust‟ arises.
 Express trusts can be classified in a variety of ways:
o Private v Public express trusts – private = where trust is intended to benefit one or more
persons; public = trust recognisable as charitable in law.
o Fixed v Discretionary trusts – beneficiaries of fixed trust have fixed interest in the
income/capital of the trust property, thus they can enforce both the administration and
distribution of the property trust. Trustees of a discretionary trust have an absolute discretion
28
 to apply the income to the beneficiaries, thus the beneficiaries have no enforceable claim to
the income/capital of the trust until the trustees elect to exercise the discretion in their favour;
o Bare trusts = the trustee holds the property without any interest in it other than existing by
reason of the legal title of trustee, and without any duty to perform, except to convey it upon
demand to the beneficiaries or as directed by them.

Non-Express Trusts
 Equity can either imply or impose a trust:
o Resulting trusts (implication) = arise where one person (settlor) confers title to property to
another person but the settlor is presumed to retain beneficial ownership of the property;
o Constructive trusts (imposition) = the court imposes a constructive trust where no trust has
been declared, but where, according to the principles of equity, it would be a fraud for the
person upon whom the court imposes the trust to assert a beneficial ownership.

History of Trusts
 The trust as an institution developed within the exclusive jurisdiction of equity – it is a direct
descendant of the medieval „use‟, where land was transferred by common law conveyance, to A
(the „feoffee to use‟, the modern trustee) to the use of B (the „cestui que use‟, the modern
beneficiary).

Modern Functions of Trusts

 The trust has expanded from being principally a landholding device to having many varied and
flexible functions, e.g.:
o Limited Interests in Succession -
o Claimant Priority Trusts -
o Protective Trusts –
o Investment –
o Trusts for Commercial Trading Purposes –
o Family Trusts –
o Trusts for Charitable Purposes –
o Trust as a Remedy –
o Unincorporated Associations and Trusts -

Trusts and Other Legal Relationships

29
  The trust has similar characteristics to a number of other legal relationships – but different legal
consequences flow.
Trust and Debt
 Debt relationship arises where a sum of money is due from one person, debtor, to another,
creditor.
 Distinction between trust and debt is important because in the case of insolvency of a trustee, trust
property will not be divisible amongst the insolvent trustee‟s creditors.
 Generally, the intention of the parties is the distinguishing factor.
 Henry v Hammond holds that:
o „if the terms upon which the person receives the money are that he is bound to keep it
separate…and to hand that money so kept as a separate fund to the person entitled to it, then
he is a trustee of that money…if he is not bound to keep the money separate, but is entitled to
mix it with his own money and deal with it as he pleases, and when called upon to hand over
an equivalent sum of money, then…he is not a trustee of that money, but merely a debtor‟.
 However, where the existence of a trust is explicit, the absence of an express obligation to keep
trust money separate does not deny the trust (Associated Alloys Pty Ltd v CAN 001 452 106 Pty
Ltd)

Trust and Contract

 Trusts are based upon intention not agreement; they do not require consideration as a
precondition to their validity; and remedies differ as between trusts and contracts.
 Nevertheless, the terms of a contract can potentially create a trust (Associated Alloys Pty Ltd v
CAN 001 452 106 Pty Ltd).

Trusts and Insolvency

 Property held on trust lies outside that available to satisfy the claims of creditors of the trustee
(Bankruptcy Act 1966 (Cth), s 116(2) (a); Re Australian Home Finance Ltd).
 Thus, an avenue is open whereby property can be protected from the claims of creditors in the
event of insolvency.

Property Given for a Specific Purpose

 Property held on trust lies outside that available to satisfy claims of creditors of the trustee. If A
who has advanced money to B succeeds in proving that the money was to be held on trust, the
money becomes trust property, and so is unavailable for distribution between B‟s creditors.
Generally this intention must be inferred from the circumstances.

30
Trust or Debt?
 It is the intention of the parties that separates a trust from a debt.
 A weighty factor is whether the person to whom the money is advanced is required to keep it
separate or can mix it with his or her own funds.
 In Re Australian Home Finance Pty Ltd a company received periodic payments form prospective
house purchasers to be used to finance house purchasers. These payments were deposited into a
separate „progressive purchase fund account‟. On liquidation of the company, it was held that
the money in that account was held in trust for the purchasers in proportion to their contributions,
and was not available to meet the claims of the company‟s creditors.

Co-existence of Loan and Trust – ‘Quistclose Trust’

 Barclays Bank Ltd v Quistclose Investments Ltd recognises that a loan may co-exist with a trust
relationship. In this case Rolls Razor borrowed money from Quistclose to pay a dividend it had
declared to its shareholders (a dividend, once declared, is a debt owing by a company to its
shareholders). The terms of the loan provided that it was for the purpose of paying the final
dividend and that the money was to be paid into a separate account. The separate account was
with the appellant bank, which had notice that the money was for a specific purpose. Rolls
Razor went into liquidation and the bank sought to set-off the overdrafts owing against the
money in the account. Quistclose, however, claimed that the money was impressed with a trust
and was therefore returnable to it in priority to the bank‟s claim. The court held that the account
was impressed with a secondary trust for repayment to the respondent upon the failure of the
primary trust for payment of the dividend.
 The arrangement for payment of the shareholders Quistclose gave rise to a fiduciary duty that the
court characterised as the primary trust. The terms of the loan were such as to impress on the
sum advanced a secondary trust in favour of the respondent were the dividend not paid. As the
bank had notice of the circumstances giving rise to the trust, its claim was subject to it.

Trust for Individual as Opposed to Purpose Trust

 Australian courts have rejected the notion that the Quistclose trust heralds a new era for the non-
charitable purpose trusts.
 Lord Millet in Twinsectra Ltd v Yardley believed the relevant vehicle through which a Quistclose
trust could be effect was the resulting trust:
o „Like all resulting trusts, the trust in favour of the lender arises when the lender parts with
the money on terms which do not exhaust the beneficial interest being a default trust

31
 which fills the gap when some part of the beneficial interest is undisposed of and
prevents it from being „in suspense‟”.
 This construction would, however, entitle the lender to demand repayment of the money at any
time prior to the fulfilment or failure of the stated purpose.

The Relevance of Intention

 Australian Courts have shunned the two-trust approach taken in Quistclose.
 In Australasian Conference Association Ltd v Mainline Constructions Pty Ltd Gibbs CJ
interpreted Quistclose to mean:
o „where money is advanced by A to B, with the mutual intention that it should become the
assets of B, but should be used exclusively for a specific purpose, there will be implied a
stipulation that if the purpose fails the money will be repaid, and the arrangement will
give rise to a relationship of a fiduciary character, or trust…‟
 A Quistclose trust has been seen as a single express trust, its existence determined by reference
to the intention of the parties involved, to be inferred from the language the parties employed, the
nature of the transaction and the circumstances attending their relationship.
 The principal inquiry is the intention of the person who advances the funds, to be ascertained
objectively (Educational Resources Pty Ltd v Poteri).
 Where there is no evidence that the transferor of moneys or property intended to transfer only
legal ownership in that money or property, a Quistclose trust cannot arise. In Re Australian
Elizabethan Theatre Trust Gummow J held that the making of an „unconditional‟ donation was
inconsistent with an intention to retain beneficial ownership in it.
 The accounting treatment of the funds concerned may constitute evidence concerning the
intention of the parties. Where the moneys received are earmarked for a specific purpose and
kept separate from the recipient‟s other funds such as to warrant the conclusion that the moneys
are held specifically for that purpose the court may recognise a Quistclose type of trust. Moneys
placed in a general operating account do not usually attract a trust relationship (Gliderol
International Pty Ltd v Hall).
 The Quistclose trust sits better as an express trust than a resulting trust.
 Quistclose trusts usually look to the mutual intention of both the lender and the borrower, and
are more likely to be recognised where the funds are earmarked for a specific purpose and are
kept separate from the recipient‟s other funds – the parties must evince an intention that should
the purpose fail, the money borrowed will be repaid to the lender. Thus, pending the application
of the money for the specific purpose, the lender retains the beneficial interest in the money. If
the purpose fails, the lender is entitled to be repaid.

32
Trusts and Powers
Powers
 A power (or mere power) = an authority to dispose of real or personal property irrespective of
any existing estate or interest in the holder of the power.
 Donee of the power (or appointor) = person who exercises the authority.
 Objects (or appointees) = persons to whom the property is disposed pursuant to this authority.
 Donor of the power (or settlor) = the person who confers upon the donee the said authority.
 Donees of a general power are entitled to appoint any person they wish including themselves –
thus equivalent to unencumbered title of the property.
 A special power, on the other hand, allows the donee to appoint in favour of some or all of the
persons within the class of objects specified by the terms of the power. Generally, not to
themselves.
 A trust instrument must vest in the trustees two kinds of dispositive discretions:
2. discretions the trustee must exercise (trust powers); and
3. discretions the trustee may exercise but have no duty to exercise (mere powers).

Similarities between Trust Powers and Mere Powers

1. Both beneficiaries and objects of a power have a mere expectancy to receive a distribution, thus
same test for certainty of object.
2. Both beneficiaries and objects can prevent payment being made outside (ultra vires) the trust or
the power respectively, and prevent the trustee or donee from acting in bad faith in administering
the trust or exercising the power.

Distinctions between Trust Powers and Mere Powers

 The trustee must act because the trust is imperative, whereas the donee of a power may or may
not choose to act because a power is facultative (McPhail v Doulton). Thus, the donee of a mere
power (or bare power) cannot be called to make any payment to objects, whereas the trustee of a
fixed trust can be compelled to make a distribution prescribed by the trust deed.
 A donee of a mere power need not have any property vested in her or him - only authority to deal
with it – whereas a trustee must have title to the trust property.
 A trust is an equitable relationship, whereas a power may be legal (such as power of attorney) or
equitable (if within a trust instrument).

Distinguishing Trust Powers from Mere Powers

 Most relevant in the context of discretions to distribute income.

33
  Trust powers – trustees are bound to distribute the income but have discretion as to how it should
be divided between the beneficiaries.
 Mere powers – trustees have two discretions e.g. discretion whether or not to distribute the
income, and discretion as to how to divide the income between the beneficiaries.
 Requires an inquiry as to the settlor‟s intention; a question of construction (Re Leek).
 Where the language of the disposition impose a clear duty on the donee of the power to distribute
the funds amongst at least some of the class of potential beneficiaries, the discretion extending
merely to who to appoint and not to deciding whether or not to appoint, a trust power is created
(Hourigon v Trustees Executors and Agency Co Ltd).

The Requisite Certainties

Principles
 To create a valid trust, in addition to satisfying the requirements of formalities and complete
constitution, capacity and legality, the three certainties must be present. Namely:

2. Certainty of Intention to Create a Trust – settlor must have an intention, whether express or
inferred, that the property be held on trust. Absent such intention, the transfer may be
construed as a gift, or will revest. An express trust can be created in one of two ways;
 By transfer, where the settlor transfers legal title to property to a trustee to hold the
property on trust, or
 By declaration, where the settlor retains legal title to the property in question, but
declares that he or she intends to hold the that property on trust.
 Construction – ‘equity looks to intent rather than form‟, thus, no particular words are
necessary provided the words bear an imperative meaning e.g. „hope‟, „belief‟, „desire‟,
„understanding‟, „wish‟ are merely precatory and don‟t give rise to a trust, absent
intention.
 Inferring an Intention to create a trust – an intention to create a trust may be inferred
(but not imputed) where this reflects the true nature of the relationship entered into by
the parties, even if they did not realise that they were creating a trust or understand its
nature and effect. For example, the intention to create a trust may be inferred where its
presence could overcome problems with contractual privity – protecting the interest of
a third party – Bahr v Nicolay – also where trustee is insolvent.

34
3. Certainty of the Subject matter of the Trust – the property of a trust must be defined and
identifiable, or the trust will be void for uncertainty (Federal Commissioner of Taxation v
Clarke). Also, the quantum beneficial interests taken by beneficiaries in the trust property
must, other than in the case of a discretionary trust, be certain.
 Nature of the property – any interest in property (real, personal, choses in action,
choses in possession, legal, equitable) may be the subject of a trust. However, a mere
expectancy is not property, so cannot be the subject of a trust. Nor can an object of a
mere power, or a beneficiary of a discretionary trust, be trust property. Also, future
property cannot be the subject of an immediate trust.
 Quantum of interest – where the settlor fails to precisely define the actual beneficial
interest to be taken, the trust will be void for uncertainty. Uncertain phrases include,
„the bulk of my estate‟, „the remaining part which he does not want‟, or „most of my
houses‟ – Boyce v Boyce. Where the words used are capable of being interpreted with
certainty by the court, such as where there is some objective criteria to calculate the
quantum, there will be no difficulty with certainty of subject matter. In Re Golay, a
disposition in a will of „a reasonable income‟ was upheld on the basis that the testator
had prescribed an objective yardstick.

4. Certainty of Objects of the Trust –

 Beneficiary Principle – requires a trust to be in favour of definite beneficiaries (objects),
ascertained or capable of being ascertained, or of a recognisable charitable purpose (or
tomb and animal cases are other exceptions).
 Fixed Trusts – must be possible for the trustee to compile a list of all the possible objects of
the trust (list certainty – Inland Revenue Commissionaires v Broadway Cottages Trust).
Subject to the rule against perpetuities, it is not essential that all objects can be ascertained
when the trust commences, provided they are described with sufficient precision so that a
list can be made at the date of distribution (Kinsela v Caldwell). Therefore, a trust may be
validly created for the benefit of unborn children, the beneficial interest vesting upon birth.
Where a list cannot be complied, the trust will fail for uncertainty of object and the
testator‟s intention will be frustrated. Western v Western says that as long as on the balance
of probabilities you are able to make a reasonable list of the objects, it will satisfy list
certainty.
 Discretionary Trusts – essence of this type of trust is that the trustees have a discretion to
select, from amongst a class of possible beneficiaries, who will benefit under the trust and
the extent of such benefit. The „criterion certainty test‟ must be satisfied in the context of
discretionary trusts (McPhail v Doulton – aka Baden No 1). This requires the trustee to be
35
 able to determine with certainty whether or not any claimant is within the description of the
class of beneficiary prescribed by the settlor – there must be a criterion applied for this
purpose.

Types of Uncertainty of Object – Inter vivos

 There are 3 main forms of uncertainty of object:
1. Semantic Uncertainty (or conceptual/linguistic) – focuses on the precision of the language
used by the settlor to define the class of beneficiaries. To be semantically certain, there must
be a criterion capable of certain application. If a trust meets the requirement of semantic
certainty it meets the criterion certainty test. A disposition tainted by semantic uncertainty is
void, and the trustee holds the trust property on resulting trust for the remaining objects (Re
Beckbessinger). It is unlikely that a settlor can avoid semantic uncertainty by stipulating that
the objects are those who the trustee or some third person considers to have met a specified
(uncertain) criterion (Tatham v Huxtable).

Re Baden’s Deed Trusts (No 2)

 A disposition to the „dependants‟ or „relatives‟ of specified employees is certain because, even on
the widest meaning attributable to those words, the trustees are able to determine whether or not a
particular candidate comes within that class‟.
 Prior to Baden (No 1) there was a different test for bare powers (criterion certainty) and discretionary
trusts (list certainty). But Baden said that criterion certainty is used for both bare powers and
discretionary trusts.
 Relevant Question: Can it be said with certainty that any given individual is or is not a member of
the class? (Re Gulbenkian’s Settlements).
 Whilst semantic, or linguistic, uncertainty renders the trust void, evidentiary uncertainty does not;
the court can appropriately deal with the latter on an application for directions.
 Once a class of persons is conceptually certain it is a question of fact if an individual is within that
class.
 As to the word „dependants‟ – the difficulties that arise in determining whether an individual is a
dependent are evidential and raise questions of fact and not law. There is no conceptual uncertainty
inherent in the use of the word „dependants‟.
 As to the word „relatives‟ – even the widest meaning of the word „relative‟ does not produce
linguistic uncertainty; there only exists a degree of evidentiary uncertainty.
 The use of the phrase „is or is not a member‟ in the Re Gulbenkian’s Settlements test does not mean
that a trustee must be able to say with certainty that an individual is not a member of a class – not
36
 only would this be impractical, but it would involve an inconsistency with the latter part of the test
that the trust „does not fail simply because it is impossible to ascertain every member of the class‟,
and it would go back to list certainty. The essence of the test is that it requires that at least a
„substantial number‟ of objects could be said with certainty to fall within the trust.
 The complete ascertainment test has been rejected.
 The doubt which the use of the words „dependants‟ and „relatives‟ gives rise to, is a question which
can be determined by the court and does not introduce linguistic uncertainty.
 Thus, the test for discretionary trusts is now criterion certainty – it is not necessary to prove who is
definitely not a member of the class. There needs to be a survey done, and a substantial number of
beneficiaries identified.
2. Evidential Uncertainty – focuses on the extent to which the available evidence enables
specific persons or bodies to be identified as members of the class and therefore (potential)
beneficiaries. If semantically certain, evidential problems will not invalidate the disposition
for uncertainty of object, especially where the identity of prime candidates for the exercise of
the discretion is clear (Schmidt v Rosewood Trust Ltd).
3. Administrative Uncertainty – where the meaning of the words is clear but the definition of
beneficiaries is so hopelessly wide as to not form „anything like a class‟, so as to render the
trust administratively unworkable (McPhail v Doulton); for example, a disposition to „all the
residents of greater London‟. Administrative uncertainty invalidates a trust, although mere
powers are not subject to this additional requirement (Re Manisty’s Settlement).

By Will:
The Rule against Delegation of Testamentary Power
 Classic statement of the testamentary non-delegation rule comes form Houston v Burns:
o „a testator can defeat the claim of those entitled by law in the absence of a valid will to
succeed to the beneficial interest in his estate only if he has made a complete disposition
of that beneficial interest. He cannot leave it to another person to make such a
disposition for him unless he has passed the beneficial interest to that person to dispose
of as his own. He may, indeed, provide that a special class of persons…are to take in
such shares as a third person may determine, but that is only because he had disposed of
the beneficial interest in favour of that class as his beneficiaries‟.
 Usually under a discretionary trust, the trustee is left with the discretion to decide who will be
within the specified class. When you have a discretionary trust established under a will, and it is
criterion certain, it may still offend the rule against delegation of testamentary power (e.g. „…to
who the trustee thinks fit‟). This is because the testator is leaving it to another to dispose of the
benefit.
37
  This is not the case with fixed trusts, as for these to be valid there must be list certainty, thus the
testator has already selected the beneficiaries.
 S 44 Succession Act aligns the requirements of certainty of object under a will with the
requirements inter vivos. If the testator died after 1 March 2008, you would only look to
criterion certainty and ignore the common law rule against delegation of testamentary power.
 Gregory v Hudson held that the non-delegation rule does not apply:
o To bequests for charitable purposes
o To gifts of property by will to a pre-existing trust or to constitute a completely constituted
trust
o Where secret trusts are used

Purpose Trusts
The General Rule
 Trusts for charitable purposes satisfy the beneficiary principle because they are enforceable by
the relevant Attorney-General.
 A trust for non-charitable purposes, as distinct from a trust fro individuals, is clearly void
because there is no beneficiary (Re Recher’s Will Trusts) – thus it is often argued that a trust
either fosters a charitable object or is for individual beneficiaries.

Exception: Tomb and Animal Cases

 The principal exception to the strictness of the principle that non-charitable purpose trusts fail
concerns trusts for the erection and maintenance of tombs not associated with churches, and
trusts to maintain particular animals belonging to the testator - Pettingall v Pettingall.

Gifts to Unincorporated Associations

Common Law Approaches to Validating Gifts
 Unincorporated association = association of persons who share a common interest; it has no legal
status separate from its individual members and so cannot hold property.
 Thus, if the purposes of the association are not charitable, you cannot characterise the trust as a
charitable trust.
 The law has sought to validate gifts to unincorporated associations (which would otherwise fail),
by construing them in one of three ways:
1. By construing the gift as an outright gift to the individual members of the association at
the relevant date, in which case any member can sever his/her share and claim it even if
he/she ceases to be a member of the association. In Re Clarke a bequest „to the

38
 Committee for the time being‟ of an unincorporated association, was upheld on the basis
that it was a gift for persons. As a joint tenant, members can sever the joint tenancy and
can claim a share even if the cease to be a member.
2. By construing the gift as for the existing members subject to their respective contractual
rights and liabilities towards one another as members of the association. In such a case,
each member can ensure that the subject matter of the gift is applied in accordance with
those rules, but cannot sever his/her share, which accrues to the other members on his/her
death or resignation.
3. By construing the gift as for the continuing purposes of the association, in which case it
takes effect as a trust for those purposes. Thus, in accordance with the beneficiary
principle, those purposes must be charitable for a gift so construed to be valid.
 As a starting point, the courts ordinarily assume that the second construction is what the donor
intended. This presumption is rebuttable by evidence that shows the donor intended to foster the
continuing purposes of the association rather than benefiting its members directly.
 In Leahy v Attorney-General (NSW) the validity of a gift to a selected order of nuns was at issue.
It was held that the form of the gift, the number and geographical spread of members of the
order, and the subject matter of the gift (a grazing property), indicated that it was likely that the
testator intended to benefit the continuing purpose of the order. Hence, the gift would be valid,
as a trust, only if it was for a charitable purpose.
 In Bacon v Pianta a gift „to the Communist Party of Australia‟, an unincorporated association,
was held to be for the purposes of the Party. The prima facie presumption favouring a gift to the
members of the association was displaced due to the form of the gift (to the Communist Party
„for its sole use and benefit‟), the extensive membership of the Party that was subject to
substantial fluctuation, and the fact that at the time when the bequest became operative the
members of the Party had no capacity to put an end to their association and distribute its assets.
As the purpose was political, it could not take effect as a valid charitable trust.
 The Succession Act validates gifts to unincorporated associations in wills – and only if the
testator dies after I March 2008.
 A lot of associations get around this by incorporating.

39
Week 11

Charitable Trusts
Ask is this a trust for persons or a purpose. If for a purpose, does it come within the heads of Pemsel? If
in the first 3 heads there is rebuttable presumption of public benefit, if in the fourth head you have to
prove both public benefit and that it comes within the spirit of the Preamble. Both qualitative and
quantitative public benefit must be shown.

Charitable Trusts v Private Trusts

 Charitable and private trusts may be created inter vivos or by will, and must fulfil certainty of
intention and subject matter.
 Charitable trusts = trusts for purposes; and private trusts = trusts for persons.
 Charitable trusts lack traditional beneficiaries, but those who will ultimately benefit are termed
„ultimate beneficiaries‟.
 Charitable trusts‟ ultimate beneficiaries must be members of a class of persons that represent a
section of the community sufficient to meet the criterion of public benefit.

Charitable Trusts and Certainty of Object

 The law recognises the Attorney-General as protector of charities, with the right and duty to
enforce charitable trusts.
 Thus, certainty of object for charitable trusts involves an inquiry as to whether the purposes
specified in the trust are charitable (according to the legal definition).

Taxation and Rating Concessions

 Charitable trusts enjoy exemptions from income tax, provided that the statutory conditions are
fulfilled.
 Donations to charities are usually tax deductible.

Perpetuities Rules
 Must satisfy the perpetuity rule.
 A gift that vests in a charity within the perpetuity period is valid even though its actual
application in carrying the charitable purpose into execution awaits an event that may not happen
within the perpetuity period.
 Gifts over from one charity to another are exempt from the rule against perpetuities.

40
Meaning of ‘Charitable’ at Law
 For present purposes, defining what is „charitable‟ as understood by the law is important as trusts
for non-charitable purposes are void because there is no individual person capable of enforcing
the terms of the trust (like the A-G for charitable purpose trusts).

Charitable Purposes
 To define charity courts have historically been guided by the Preamble of the Elizabethan Statute
of Charitable Uses 1601, which contains the following list of charitable purposes:
 Relief of aged, impotent and poor people;
 Maintenance of sick and maimed soldiers and mariners, schools of learning, fire schools
and scholars in universities;
 Repair of bridges, ports, havens, causeways, churches, sea banks and highways;
 Education and preferment (advancement) of orphans;
 Relief stock or maintenance of houses of correction;
 Marriages of poor maids;
 Support aid and help for young tradesmen, handicraftsmen and persons decayed;
 Relief or redemption of prisoners or captives; and
 Aid or ease of any poor inhabitant concerning payment of fifteens, setting out soldiers
and other taxes.
 Courts look at whether a trust is within the spirit of the Statute.
 Lord Macnaghten in Pemsel grouped the charitable objects into four heads of charity, which is
applied in modern charity law: (start with these categories in an exam).
 The relief of poverty, age and impotence;
 The advancement of education;
 The advancement of religion;
 Other purpose beneficial to the community.
 Extension of Charitable Purposes Act impacts Commonwealth legislation only – includes
child care, contemplative religion etc.

Requirement of Public Benefit

 Public benefit is a necessary prerequisite under each head of charity except the first (the relief of
poverty; where you only have to establish private benefit).
 Two aspects to public benefit:
o Qualitative – demonstrable public benefit; public benefit:detriment ratio of a trust

41
 o Quantitative – Oppenheim test – does it exclude people based on some personal tie or
elitist characteristic.
 It must be for the „benefit of the community or an appreciably important class of the community‟
(Verge v Somerville).
 A class of ultimate beneficiaries under a proposed charitable trust linked by „blood, contract,
family, association membership or employment‟ does not constitute the „public‟ for the purposes
of the public benefit test (Oppenheim v Tobacco Securities Trust Co Ltd – here the class was
dependent upon employment with the Tobacco company; even though it was a trust for
education). What about a trust for genetic disabilities where all are related? Strathalbyn says
that there is a public benefit for such a trust. A request that family members get preference is ok.
 Public benefit is usually presumed in the first three heads of charity, subject to contrary
evidence, but it must be positively established under the fourth head.
 Trusts for the relief of poverty are an exception to the public benefit requirement.

1. Trusts for the Relief of the Poor, Aged and Impotent

Relief of Poverty
 Poverty = „anyone who in the normal acceptation of life has to “go short” in the ordinary
acceptation of the term, due regard being had to their status in life‟ (Re Coulthurst).
 Going short = necessitous circumstance – an inability „to obtain all that is necessary, not only for
a bare existence, but for a modest standard of living n the Australian Community‟ (Ballarat
Trustees Executors v Federal Commissioner of Taxation).
 Relief connotes „necessity‟, synonymous with „benefit‟.
 An intention to relieve may be readily apparent (Muir v Open Brethren), or the court may infer
an intention to relieve poverty from the wording of the gift. In Downing v Federal
Commissioner of Taxation, a gift for the „amelioration of the condition of members or ex-
members of the defence forces‟ was held to evince an intention to relieve poverty.

Relief of the Aged (need public benefit)

 A trust for the relief of the needs attributable to old age is prima facie charitable.
 The higher the threshold age, the more likely it is that the settlor intended to relieve the
disabilities of age (Owners of SP 39204 v Sutherland Shire Council).
 The charitable status of retirement homes and villages that do not generate private profit for
individuals, carry the inference that the gift is intended for the relief of the aged (D V Bryant
Trust Board v Hamilton City Council).

42
Relief of Impotence (need public benefit)
 Impotent = physically weak, disabled or helpless.
 Gifts for hospitals and like institutions that do not generate private profit for their owners are
charitable under this head (Le Cras v Perpetual Trustee Co Ltd – trust for St Vincent Private
Hospital was charitable).

2. Trusts for the Advancement of Education

Educational Purposes
 Requires the requisite element of public benefit.
 Educational purposes are not restricted to the conventional idea of classroom teaching but extend
to all branches of human knowledge and its dissemination (spreading).

‘Advancement’ of Education
 Advancement includes the establishment, maintenance and contribution to educational
institutions, establishing teaching positions, and providing scholarships ad academic prizes for
students.
 Zoological, botanical gardens, museums and art galleries, public libraries and observatories are
also educational charities.
 Research having as its object the increase of useful knowledge comes within the advancement of
education (Taylor v Taylor – a trust for the „advancement of scientific research generally‟ was
upheld). Trusts for medical research have also been upheld as valid charitable trusts. Will not
be valid if the subject of the research is useless (Humelton).
 If a sport is attached to an educational institution, it will be a valid trust for the advancement of
education.

Public Benefit and Education

 The „public‟ element is absent where the nexus between possible ultimate beneficiaries is their
relationship to a single propositus or several propositi, in which case those beneficiaries are
neither the community nor a section of it (Oppenheim v Tobacco Securities Trust Co Ltd).
 The „benefit‟ element will be absent where the evidence shows that there is unlikely to be any
benefit attaching to the gift in question (Re Pinion).

43
 3. Trusts for the Advancement of Religion
The Meaning of ‘Religion’
 According to Church of the New Faith v Commissioner of Pay-roll, the legal definition of
religion involves:
o Belief in a supernatural being, thing or principle; and
o The acceptance of cannons of conduct in order to give effect to that belief.
 Broad scope – does not have to be a recognised denomination.
 It cannot be a mere parody or sham, and a religion cannot involve beliefs or activities that are
contrary to the law or public policy.

Religious Buildings, Cemeteries and Tombs

 The provision of facilities for worship is a valid charitable purpose.

Gifts to Religious Officials

 Gifts for the provision and maintenance of clergy are charitable.
 Where the gift is construed as virtute officii (a gift to a person for the time being by virtue of the
church office that person holds) the court must determine whether the purposes for which it is to
be applied are exclusively charitable.
 Gifts to church offices to which „superadded words‟ are attached, such as „church purposes‟,
involve the court determining whether these words broaden the scope of the gift so as to
encompass non-charitable purposes. However, saving legislation is usually applied here.

‘Advancement’ of Religion
 Must advance religion to be valid.
 To advance religion = to promote it, spread its message, and take some positive steps to sustain
and increase religious belief, in pastoral or missionary ways.

Public benefit
 Requisite public benefit must be met.
 If the purposes are found to be religious in nature, the court will generally presume a public
benefit unless contrary evidence is established.
 This assumption reflects the courts‟ reluctance to assess the comparative worth of different
religions, and also the view that religion itself generates benefit to the public.

4. Trusts for Other Purposes Beneficial to the Community

44
Two-Stage Test
 Dispositions under the fourth head of charity must satisfy a two-stage test as a prerequisite of
validity:
1. the purpose in question must be beneficial to the community, or some section of it; and
2. the purpose must fall within the spirit of the Preamble of the Elizabethan Statute of
Charitable Uses 1601.
 In the leading Australian case of Incorporated Council of Law Reporting of the State of
Queensland v Federal Commissioner of Taxation, Barwick CJ reasoned that „the production of
law reports is…beneficial to the whole community because of the universal importance of
maintaining the socially sustaining fabric of the law‟, and was within the spirit of the Preamble
because „the sustenance of the law is a benefit of a material kind which ensures for the benefit of
the whole community‟.

The Protection of Animals

 Trusts of this nature are generally upheld as charitable, on the assumption that they promote
personal and public morality by curbing inborn tendencies to cruelty (Re Wedgwood).
 Thus gifts to animal welfare organisations for the protection of animals are valid, as are gifts to
establish and maintain homes for homeless, sick, stray or unwanted animals.
 Trust for the „benefit of animals generally‟ is not charitable because it is not for the benefit of the
community served by benevolence towards animals (Murdoch v Attorney-General (TAS)).
 Trusts for the preservation of native fauna are charitable on the ground that a real and substantial
benefit will accrue to the community from saving indigenous wildlife from the encroachment of
human activity‟ (Attorney-General (NSW) v Sawtell).

Locality Cases
 A gift with reference to a particular district or locality is generally considered charitable as
importing the necessary element of public benefit even though a specific purpose is not stated.
E.g. gift for the beautification of a locality is for the edification and enjoyment of the community
as whole; not private individuals (Monds v Stackhouse).

Relief of Distress
 The relief of human distress is a valid charitable purpose, often arising out of natural disasters
and wars (Re Darwin Cyclone Tracy Relief Trust Fund).
 Gifts for institutions providing emergency services may also be valid under this class.

45
  The relief for the benefit of Australian aborigines is a example of a gift that may carry the
inference that its aim is the relief of human distress – a group judicially described as „in need of
protection and assistance‟ (Re Matthew (deceased)).

Promotion of Safety and Protection of the Country

 This is a good charitable purpose; e.g. gifts for the recruitment, training and improvement in the
efficiency of members of the services and police offies are charitable (Inland Revenue
Commissioners v City of Glasgow Police Athletic Association).

Recreation and Sport

 A trust for mere sport is not charitable (Royal National Agricultural and Industrial Association v
Chester). Nor is a trust for mere recreation, hospitality and entertainment (Williams Trustees v
Inland Revenue Commissioners).
 A gift for sport or recreation may be upheld where:
o It is incidental or pursuant to an accepted charitable object;
 Most commonly, this in the context of a gift for the promotion of sport or
recreation at an educational institution (Kearins v Kearins – fostering Rugby at
Sydney Uni was a valid charitable trust as it has the effect of promoting education
in the wide sense). On the other hand, activities of a recreational character are not
viewed as advancing religion merely because they are conducted by a religious
organisation (Attorney-General v Cahill).
o It represents a public recreational facility;
o It is validated pursuant to statute.

Political Purposes
 Generally, trusts for the promulgation of political views or agitation for legislative change are
invalid. This is because it is difficult for the Court to determine whether a proposed change in
the law will or will not be for the public benefit (Bowman v Secular Society Ltd).
 A political purpose trust will be valid only where the political purpose is ancillary or incidental
to an established charitable object, such as education (Attorney-General v Ross – where attached
to an educational institution).

Mixed Charitable and Non-Charitable Purposes

 Apart from saving legislation or severability, a trust expressed to be for both charitable and non-
charitable purposes is regarded as non-charitable.

46
Gifts for Purposes of Associations
 This depends on the objects and activities of the association. If its main purpose is charitable the
association is a charity – thus courts have to distinguish the main from the ancillary or incidental.
 In Congregational Union of NSW v Thistlethwayte, the associations objects included the
maintenance of philanthropic agencies, and the preservation of civil and religious liberty. The
High Court held that when viewed in the context of the constitution as a whole, these non-
charitable objects were ancillary to the association‟s religious objects – the constitution was
construed by the court in a way that suggested the maintenance of philanthropic agencies needed
to be conducive to the achievement of its main religious object.
Alternative and Cumulative Expressions
 Except where validated by legislation, gifts expressed to be for charitable or alternatively non-
charitable objects, will fail (Chichester Diocesan Fund and Board of Finance v Simpson – trust
for „charitable or benevolent purposes was invalid).
 Gifts that an be construed as specifying cumulative requirements in addition to a charitable
object, will generally be upheld (Smith v WA Trustee Executor & Agency Co Ltd – „charitable
institutions, bodies and organisations‟, where charitable was construed as qualifying each of the
following words).

Saving Legislation
 In NSW, s 23 Charitable Trusts Act 1993 (NSW) addresses the problem of mixed charitable and
non-charitable purposes – the trust is construed as giving effect only to the charitable purposes;
no invalid purposes should be deemed to have been directed or allowed. So long as there is a
general charitable intention.
 Alternative Purposes – the legislation severs the non-charitable purpose („blue pencil‟
approach).
 Compendious Purposes – a gift involving an expression that connotes charitable and non-
charitable purposes, such as „benevolent purposes‟, will be validated where its object is so
predominately charitable as to evidence a charitable intention on the part of the settlor. E.g. in
Re Ashton the court saved a gift of a church „to help in any good work‟ by restricting the
application of the trust funds to „good and charitable work‟ – charitable purposes. Vague and
uncertain expressions that disclose no general charitable intention are not saved by the
legislation.
 Application to Associations – a trust for institutions whose objects are predominately charitable
may be saved from failure – in Leahy v Attorney-General (NSW) a gift „to orders of nuns‟ was
saved by confining it to orders of nuns considered charitable in law.

47
Enforcement of Trusts
Cy-pre`s Schemes
 Where the intended purpose of a trust is impossible, impractical or illegal, the question arises as
to the destination of the trust fund.
 By setting a cy-pre`s scheme, it is possible for the court to apply the available funds to objects
that are as near as possible to the testator‟s original intention. Again, there must be a general
charitable intent; if there is a specific intent that it is assumed that the settlor intended the funds
to return to him/her if the institution did not exist.
 The cy-pre`s doctrine does not apply where:
o The trust instrument makes provision for the use of the property in the event of failure of
the particular purpose;
o The evidence indicates that the testator has misdescribed the institution the subject of the
gift, in which case the most appropriate course for the trustee is to seek directions from
the court to apply the fund to the institution intended (Re Chanter).

Initial Failure – General Charitable Intention

 This is where a testamentary charitable trust is impossible or impracticable to carry out as at the
date of the testator‟s death – e.g. where the charity doesn‟t exist or it‟s not possible to use the
property for the intended purpose or there is no trustee.
 General charitable intention is a prerequisite for a cy-pre`s application in such cases. This
requires the court to find a purpose wider than the execution of a specific plan involving the
direction that has failed; an intention more general than a bare intention that the failed direction
be executed (Attorney-General (NSW) v Perpetual Trustee Co Ltd).
 Under s 10 of Charitable Trusts Act 1993 a general charitable intention is presumed unless there
is evidence to the contrary in the instrument creating the trust. best to start with this presumption
in an exam.

Trusts for Non-existent Institutions

 A gift to a specified charitable institution which never existed will lapse absent a general
charitable intention that enables it be applied cy-pre`s (Re Davis).
 Where an institution existed at one time but has since disappeared, the gift will lapse in the
absence of a general charitable intention – this may be difficult to import where a specific
institution is identified carefully as the institution to receive the gift (Re Mills). However, a gift
may be applied to a successor institution.

48
Subsequent Impossibility
 Where a valid charitable trust has become impossible or impractical after it has commenced its
operation, the court will apply its property cy-pre`s. This is because the gift has already become
the subject of charity, not due to any general charitable intention (Re Slevin). Thus, no proof of a
general charitable intention is required in the case of subsequent impossibility.

S 12 Charitable Trusts Act provides the A-G power to approve cy-pres scheme where property < $5500

Public Appeals – Excess Moneys

 Where money donated exceeds what is required to fulfil that charitable purpose, the law
recognises three possible option for the destination of that excess money:
o To revert to the donors, in proportion to their contribution, via the resulting trust. This
applies where the court concludes that the donation was for the specified purpose only.
o To be applied cy-pre`s, where an intention to donate outright + a general charitable
intention can be inferred.
o To pass to the Crown, bona vacentia.

Statutory Cy-Pre`s
 Court do not have an unrestricted cy-pre`s jurisdiction, thus legislation was introduced -
Charitable Trusts Act 1993 (NSW) ss 9-11.
 A general charitable intention is presumed absent evidence to the contrary in the trust instrument.
 Ss 12-22 confers upon the Attorney-General a limited power to settle cy-pre`s schemes.

Administrative Schemes
 Where a donor has made a gift for charitable purposes but has failed to specify a means by which
it is to be applied, the court can provide an administrative scheme. In NSW, the A-G may settle
administrative schemes in circumstances prescribed by statute: Charitable Trusts Act 1993
(NSW) ss 12-22.

Strathalbyn Show Jumping Club Inc v Mayes

 Sport – the general rule is that trusts for mere sport will not be charitable (Re Nottage). Yet, if
the trust is to encourage sport for some charitable end or if the trust will establish
sporting/recreational facilities which will benefit the public, the situation may be different (IRC v
McMullen). In Re Hadden a trust for the establishment of fields, parks and gyms for working
people was held to charitable as the dominant object was the health and welfare of the working
classes + the working classes were a sufficient section of the public to meet the public benefit
49
 test. Re Hadden said that a trust to establish a sporting or recreational facility that can also be
said to have some public benefit will be a valid charitable trust. „If an additional charitable
flavour can be detected amongst the objects, so much the better‟ e.g. benefit of locality. Thus,
distinction between trusts for the promotion of sport, and trusts for the provision of sporting
facilities that will benefit the public.
 The difficulty in most cases is determining whether there is a sufficient element of public utility.
 Sport principles: At common law, a trust merely for the promotion of sport will not be a valid
charitable trust; unless it is part of or as an adjunct to a broader educational purpose, or for the
promotion of the general health and welfare of a sector of the community, or as an adjunct to
some other charitable purpose. A trust for the establishment of a sports ground or recreational
facilities will be charitable, provided that it is for use by the community at large or is of general
public utility.
 Public Benefit: If the trust were charitable in the Elizabethan sense, it would have to be for the
benefit of public, or a section thereof. Beneficiaries must not be numerically negligible; the
quality that distinguishes the class from other members of the community, so that they form a
section of it, must be a quality which does not depend on their relationship to a particular
individual. The members of a private club or association will not form a relevant section of the
community to satisfy the test of public benefit.

50
Week 12

Trustees
Capacity to Act as Trustee
 Persons legally capable of holding property in their own right have the capacity to be a trustee.
 A beneficiary can act as a trustee, but a sole beneficiary cannot be a sole trustee, otherwise the
trust disappears as the separate legal and equitable estates merge.
 A company may act as a trustee – „corporate trustee‟.
 A trust is not invalidate if a settlor attempts to vest property in a person who cannot legally hold
it, as equity will not allow a trust to fail for want of a trustee – the court will appoint another
trustee.

Types of Trustees
Trustee Companies
 Trustee Companies Act 1964 (NSW) governs the creation and operation of „trustee companies‟.
 As well as acting as executors and administrators of estates and the trustees, trustee companies‟
main role concerns the investment and management of funs on behalf of clients.

Public Trustees
 The Public Trustee is empowered by statute to administer wills, small estates and act as trustee
of estates of mentally incapacitated persons (Public Trustee Act 1913 (NSW)).

Bare Trustees
 A bare trustee – person who holds the property on trust for the absolute benefit and at the
absolute disposal of beneficiaries who are of full age and capacity, but has no interest in that
property other than by reason of legal title as trustee, and has no further duty to perform in
respect of that property other than to convey it upon demand to the beneficiaries or as directed by
them (Herdegen v Federal Commissioner of Taxation).
 The presence of active duties of management distinguishes „active‟ from „bare‟ trustees – but this
should not be applies to rigidly (Herdegen v Federal Commissioner of Taxation).
 This is the highest form of equitable interest you can have.

Appointment of Trustees
 Trustees can be appointed to replace or increase the number of trustees pursuant to:
o The terms of the trust instrument;

51
 o Statute;
o The court.

Appointment Pursuant to the Trust Instrument

 Trust instruments commonly include a provision that governs the occasions and manner of
appointment of new trustees.
 Such a provision takes precedence over statutory powers to appoint trustees.
 „Appointor‟ = the person under the trust instrument who has the power to appoint, and usually
remove, trustees.

Appointment Pursuant to Statutory Power

 Absent a power to appoint trustees in the trust instrument, the trustee legislation prescribes the
circumstances in which appointments can be made and the persons who may make that
appointment (s 6).
 Appointments can be made where the outgoing trustee:
o Is dead;
o Remains out of the State/Territory for >12 months;
o Desires to be discharged; refuses to act; is incapable due to unsound mind (Re East), or
serious prolonged illness (Re Weston’s Trusts); or is unfit to act (e.g. by becoming
bankrupt – Re Turner).
o Has committed a serious breach of trust or neglect of duty (Willis v Stephens) or engaged
in a conflict of interest and duty (Monty Financial Services v Delmo); or
o Is removed under a power contained in the trust instrument.
 Persons who may make the order are:
o Those nominated in the trust instrument;
o The surviving trustees; and
o The personal representatives of the last or only surviving trustee.

Appointment by the Court

 The court has jurisdiction to appoint new trustees due to its general supervisory jurisdiction over
trusts, giving effect to the maxim that „a trust will not fail for want of a trustee‟.
 S 70 provides that:
o „the Court may, whenever it is expedient to appoint a new trustee/s, and it is found
inexpedient, difficult or impracticable to do so without the assistance of the Court, make
an order appointing new trustee/s either in substitution for or in addition to any existing
trustee/s, or although there is no existing trustee‟.
52
  Examples of situations justifying an appointment on the grounds of „expediency‟ include:
o Where no trustee was appointed or capable of acting (Re Lemann’s Trusts);
o Where the trustee was under a legal disability (Re Shelmerdine);
o Where there was animosity between the trustees (Letterstedt v Broers).
 In making the appointment and determining the identity of the new trustee/s, the court‟s
dominant consideration is the welfare of the beneficiaries (Miller v Cameron) – this involves
consideration of the safety of the trust property and the interests of the beneficiaries.
 The identity of the new trustee/s will be impacted upon by three considerations (Re Tempest):
o Whether the settlor has expressly or impliedly shown who he/she wishes to act as trustee.
The wishes of the settlor are given great weight, but the Court is not bound to follow
them (Re Wilson);
o Whether the proposed appointee will represent the interests of all the beneficiaries –
appointees can‟t be aligned with one of the beneficiaries (Australian Olympic Committee
v Big Flights Inc) or biased against one or more of the beneficiaries (Wallace v Wallace).
o Whether the proposed appointment will promote the execution of the trust.

Number of Trustees
 The original number of trustees need only be maintained if the instrument so directs (Re Mayne).
 There is no limit on the number of trustees that may be appointed pursuant to an express power
of appointment.
 In NSW (s 6(5)(b)), the statutory power to appoint cannot be used to increase the number of
trustees beyond four.

Disclaimer by Trustee
 A person appointed as trustee may disclaim the trust office before doing any act or performance
amounting to the acceptance of that trust (Lady Naas v Westminster Bank Ltd).
 A trustee who accepts the office cannot disclaim, but may leave under the retirement provisions.
 The disclaimer must be of the whole trust and must be within a reasonable time after
appointment, preferably in writing (Re Lord and Fullerton’s Contract).
 If a sole trustee disclaims, the trust property revests in the settlor as trustee until the appointment
of a new trustee (Mallott v Wilson), or the court may appoint a trustee in his/her place.

Retirement of Trustees
 Trustees may retire from a trust:
o Pursuant to a provision of the trust instrument;

53
 o Pursuant to trustee legislation – provided there are 2 trustees left (or a trustee company),
or where the other trustee consents – s 8.
o With the consent of all beneficiaries being of full legal capacity, but the beneficiaries
cannot direct the continuing trustees to appoint a new trustee.
o With the consent of the court e.g. \grounds of sickness, infancy or where the trustee is
carrying on the testator‟s business at a loss (Will of Phillips).

Removal of Trustees
 Often proceedings to appoint new trustees are concurrent with efforts to remove a trustee. Thus
trusts may be removed:
o Pursuant to an express power in the trust instrument, which will be strictly construed
(Werner v Boehm);
o Pursuant to statutory provisions concerning the replacement of trustees;
o By the court, pursuant to its inherent jurisdiction to administer trusts.

Removal by the Court

 The welfare of the beneficiaries is the dominant consideration here – consideration of the
security of the trust property; efficient execution of trust and a faithful and sound exercise of
powers (Miller v Cameron).

Breaches of Trust
 Breach of trust doesn‟t necessarily result in the court ordering the removal of the trustee
(Quinton v Proctor).
 The court will remove a trustee whose breach amounts to negation of the trust, or whose conduct
is likely to jeopardise the security of trust property, or where there is evidence that the trust will
not be properly executed in the interests of the beneficiaries.
 In Craven-Sands v Koch the court ordered the removal of trustees where the evidence (trustees
had written blank cheques, lost records, had a confrontational approach and tolerated delay) had
a „cumulative effect on the disintegration of the trustee‟s capacity to carry out their duties‟.

Friction between Trustees

 Where friction between trustees or beneficiaries and trustees has become obstructive to the
administration of the trust and there is no prospect of improvement in the future, the „welfare of
the beneficiaries‟ principle will be offended and the court may order removal (Titterton v Oates).

54
Potential Conflict of Interest
 Conflict of interest carries considerable weight.
 In Hunter v Hunter the court ordered removal where the evidence shoed that there was a conflict
between interest and duty; the trustees had failed to recognise this conflict and take steps to
ensure that their interest should not prevail as against their duty; the trustees had disregarded the
interests of infant beneficiaries; and a state of hostility existed between the trustees and the
immediate possessor of the trust estate which worked against the interests of te trust.
 If it is evident that the settlor/testator had contemplated the conflict of interest in appointing that
person as trustee, the court will only remove in a situation where allowing that person to
continue as trustee endangers the security of the trust property (Monty Financial Services Ltd v
Delmo).

Incapacity of the Trustee

 Courts have removed trustees by reasons of incapacity e.g. financial distress, disappearance, or
absence for a prolonged period.
 In Hackett v Hackett a trustee was removed by reason of drunkenness + financial difficulties and
a general disregard of the interests of the trust.

Duties, Powers and Rights of Trustees

 Upon accepting office, a trustee becomes subject to the duties and acquires the powers and rights
that attach to that office.
 Duties = imperative, they compel or prohibit a trustee from acting in a certain way.
 Powers = facultative, they enable a trustee to act in a certain way, but leave a discretion as to
whether and how he/she should act.
 The rights of trustees are mainly prescribed by general law but can be excluded by contrary
provisions in the trust instrument.

Duties of Trustees
Basic Duties
 Trustees must first ensure that the property is brought under their control and vested in them.
This may include taking proceedings against a co-trustee, a former trustee of a third party who is
liable to redress a breach of trust or otherwise owes a present liability to the trust.
 Trustee must ensure that the documents of title are kept in a safe place and safeguarded from
unauthorised access or use.

55
  Trustees must familiarise themselves with the terms of the trust deed and carry out their
obligations dutifully so as to give effect to the settlor‟s intention.
 A trustee will not be bound to carry out the terms of the rust instrument where:
o Unanimously directed by absolute beneficiaries of full age and capacity;
o An illegality will occur as a consequence of obedience;
o Statute or court order warrants this departure;
o The deviation is sanctioned by the court.

Standard of Care
 That of an ordinary prudent business person (Re Speight).
 Professional trustees, like trustee companies, may be subject to a higher standard of care because
they hold themselves out as having special expertise and charge for their services (Bartlett v
Barclays Bank Trust Co Ltd).
 S 14A Trust Act imposes higher standard for trustee companies – the standard of care required is
that which a prudent person engaged in that profession would exercise in managing the affairs of
others.

Duty to Account and Provide Information

Duty to Account’
 A trustee must account to the beneficiaries for transactions carried out by the trust in a timely,
faithful and accurate fashion – reduce likelihood of breach of trust.
 This duty generally requires:
o Accurate and timely information regarding the name, age, address and marital status of
beneficiaries;
o A schedule of trust property;
o Separate income and capital accounts;
o Accounts that substantiate revenues and expenditure in respect of the trust.
Beneficiaries Right to Information
 Beneficiaries are entitled to full information regarding the trust property, to be furnished fully
and not reluctantly by the trustee (Re Fairbairn).

No Right to Reasons
 Trustee has no duty to explain how the trust is managed or reasons for particular decisions – such
a duty would add to the trustee‟s already onerous obligations and might embitter the relationship

56
 between trustees and beneficiaries or the beneficiaries themselves (Re Londonderry’s
Settlement).
 In terms of legal proceedings, however, if plaintiff puts forward a prima facie case that the
trustees‟ discretion has miscarried, the absence of reasons and the absence of any evidence
before the court as to what happened will tend to make that prima facie case a „virtual certainty‟
(Maciejewski v Telstra Super Ltd).

No Right to Non-trust Documents

 Beneficiaries‟ right to inspect is limited to „trust documents‟ which are characterised by the
following (Re Londonderry’s Settlement):
o In possession of the trustees in their capacity as trustees;
o Contain information about the trust which the beneficiaries are entitled to know;
o Beneficiaries have a proprietary interest in the documents.
 Documents prepared by trustees for their own purposes that would not be required to be handed
over to the beneficiaries on the winding up of the trust are not „trust documents‟ (Hartigan
Nominees v Rydge).

Disclosure Inconsistent with Settlor’s Intention

 The beneficiaries‟ right to information may be ousted by the trust instrument (Hartigan
Nominees v Rydge).
 The court may infer confidentiality in respect of certain information pertaining to the trust, where
it can be discerned that the trustee receives it in circumstances attracting a duty of
confidentiality.

Duty to Administer the Trust Personally

Fettering Discretion
 Trustees cannot commit themselves in advance as to their future conduct as trustees. They must
not bind themselves contractually to exercise a power in a prescribed manner – must make
decisions that are in the best interest of the beneficiaries at the time the diecison is made, not
some time prior.
 E.g. in Re Stephenson’s Settled Estates the court held that it was a breach of trust for trustees
with a power of sale to enter into a contract binding them to sell the trust property for a fixed
price at a specified future.
 Trustees must not permit others to dictate to them the manner in which their discretion ought to
be exercised unless the trust instrument requires them to consult such persons (Re Brockbank).

57
Duty Not to delegate and its Exceptions
 The duty to act personally prohibits a trustee from delegating the exercise of his/her powers,
authorities and discretions arising under the trust, either to a co-trustee or a third party
 Delegation is permitted where the trust instrument allows it.

Appointment of Agents
 Unlike delegates, who actually exercise the trustee‟s power, discretion ad authority, agents are
employed merely to carry out or implement decisions properly taken by the trustees.
 Agents may be appointed where the trust instrument, the general law or statute permits this.

Appointment of Agents at General Law

 At general law a trustee may appoint agents (such as lawyers, accountants etc) to assist him/her
in the performance of his/her duties and powers were this is necessary for practical reasons.
 As stated in Re Speight: „a trustee may not appoint an agent where he should do the work
himself; but he may employ an agent where…it is in the ordinary course of business to use
others, and if he runs no needless risk in doing so‟.
 Care must be taken in selecting and supervising agents in the work they undertake. If the
relevant care is taken, the trustee is not liable for losses incurred by the agent (Re Speight).

Appointment of Agents under Statute

 Trustee legislation allows agents to be appointed (s 53).
 The trustee will not be responsible for the default of an agent employed in good faith.

Unanimity in Trustee Decision Making

 Rule of trustee unanimity provides that trustees of private trusts must agree unanimously to any
course of action (Luke v South Kensington Hotel Company).
 Thus, trust business can only be transacted at a meeting of all trustees.
 The trust instrument may provide otherwise – e.g. a majority vote instead.
 Charitable trusts require only a majority vote.

Fiduciary Duties
 The relationship between trustee and beneficiary is fiduciary, thus, trustees are subject to the dual
fiduciary rules of „no conflict‟ (the trustee must refrain from engaging his/her own interests in

58
 any activity that may conflict with the duties as trustee) and „no profit‟ (the trustee may not take
an unauthorised profit from the trust) – designed to ensure loyalty to the trust.

Trustee’s Remuneration
 A trustee who is renumerated prima facie profits from the position of trustee, therefore, the
payment of remuneration is generally precluded.
 There are three situations where the trustee will be allowed remuneration:

1. Remuneration Pursuant to Express Provision in the trust Instrument

 A charging clause may be inserted for this purpose especially where the trustee is a professional
(such as a solicitor or an accountant).
 The court will construe any such clause strictly.
 A remunerated trustee may be subject to a higher standard of trusteeship than a gratuitous
trustee.

2. Remuneration Pursuant to a Valid Agreement between Trustee and Beneficiaries

 Applies where beneficiaries are of full age and capacity and where the agreement provides that
the trustee is to be paid for his/her services.
 Courts will be wary where there is evidence of the slightest unfairness or undue pressure.
 There must be clear agreement, with fully informed beneficiaries, consent being in writing.

3. Court-Awarded Remuneration
 The court may allow remuneration where the work is time-consuming and the remuneration is
required to ensure proper services are obtained from the trustee (Re Queensland Coal and oil
Shale Mining Industry).

Purchase of Trust Property by Trustee (‘Purchase Rule’)

 The purchase or lease of trust property by a trustee is generally prohibited because it places the
trustee‟s personal interest in conflict with his/her duty to the beneficiaries, and raises the
possibility that the trustee could derive an advantage over third party purchasers by reason of
his/her knowledge of the property.
 Any such transaction is treated in equity as voidable at the instance of the beneficiary.
 The purchase of trust property by a spouse, close relative or associate of the trustee raises the
presumption that it is for the trustee‟s own benefit, which, if not rebutted, will be grounds for its
setting aside (Re Douglas).

59
Purchases Prior and Subsequent to Appointment
 Trustee‟s retirement from the rust for the purpose of purchasing or leasing trust property is
subject to the purchase rule because the decision to purchase or lease was been taken whilst
acting as trustee, and using information received in the capacity of trustee (Gould v O’Carroll).

Exceptions to the Purchase Rule

 Trustee may purchase trust property where:
o All beneficiaries (fully informed, full age and capacity) consent to the acquisition and the
acquisition occurs at arm‟s length for a fair price (Williams v Scott).
o The court approves the transaction – requires evidence of exceptional circumstances.
o Provision in trust instrument allows this.

Duty to Act Impartially

 The trustee must not act so as to favour one class of beneficiaries at the expense of another.
 This duty is particularly important where there are beneficial interests in succession; i.e. where
the trustees hold property on trust to pay income to income beneficiaries and, at the termination
of their interest, transfer the corpus to persons in remainder.
 To ensure fairness between income and capital beneficiaries, the trustee must make the trust
productive in the interests of the income beneficiaries, but not risk capital to secure a higher
return of income. Maintenance of separate income and capital accounts is mandatory in this
case.
 The courts are alert to schemes that effect an imbalance between income and capital
beneficiaries. E.g. in Re Zimpel the court directed trustees to not to accept a recommendation
that would have changed that would have changed the nature of the trust funds from income to
capital, as this would have benefited the persons in remainder to the detriment of the income
beneficiaries – even though a majority of the income beneficiaries agreed to the proposal.

Duty to Invest
 Trustees must invest trust moneys even where the trust instrument does not direct them.
 This duty must be exercised by the trustee in the manner authorised by the trust instrument,
statute or court order.
Trust Instrument
 If a trust instrument gives the trustee power to invest „upon such investment as to them seem fit‟,
such discretion is circumscribed by the ordinary prudent person standard of care.

60
  The ordinary prudent standard of care operates both to prevent speculation by the trustee and to
make the trustee personally accountable for failing to actually invest trust moneys for the
purpose of ensuring a return.
Statute
 S 14 Trustee Act 1925 (NSW) provides that a trustee may, unless expressly prohibited by the trust
instrument, invest trust funds in any form of investment, and vary such an investment at any
time. Thus, the list of authorised investments has gone.
 This power is controlled by the general law standard of care: „a trustee exercising any power of
investment shall exercise the care, diligence and skill that a prudent person of business would
exercise in managing the affairs of others‟.
 In the case of a professional trustee, the standard of care required is that which a prudent person
engaged in that profession would exercise in managing the affairs of others.
Court – pursuant to ‘expediency’ jurisdiction
 Likely to arise only where the trust deed expressly prohibits certain investment avenues available
to the trustees.
Investment for Financial Advantage of the Trust
 Subject to provisions in the trust deed, trustees must be concerned primarily with the financial
advantage to the trust, in carry out their duty to invest (Cowan v Scargill).
 Trustees must put then own personal interest asides.
 The opinions of beneficiaries cannot justify an investment strategy that reduces financial
advantage to the trust.
 Where the subject of a profitable investment would be inconsistent with the views on moral and
social activities strictly held by adult beneficiaries, it may not be for the „benefit‟ of those
beneficiaries to know that they are receiving larger financial returns under the trust by reason of
investment in those activities than they would have received by investing in other investments.
 This situation is most likely to arise in the context of charitable trusts.

Maintenance of the ‘Real’ Value of the Trust Fund

 In order to maintain an action for breach of trust, the beneficiaries must prove that the trustees
made decisions regarding investments that would not have been made by an ordinary prudent
business person, and that a quantifiable loss to the trust estate has resulted from this (Nestle v
National Westminster Bank).
 Where it is clear that the trustees‟ failure to adopt an appropriate investment strategy is not
consistent with the standard of an ordinary prudent business person, and that as a result the trust

61
 estate has suffered a quantifiable loss, the trustees will be liable to compensate the trust fund for
that loss whether or not the real value of the fund has been maintained.

Duty to Pay Correct Beneficiaries

 If a trustee overpays a beneficiary he/she is required to recover the overpayment from the
overpaid beneficiary‟s share remaining in the trust estate or from future receipts of income to
which that beneficiary would otherwise be entitled.
 However, a trustee cannot recover in a personal action against the beneficiary (Merriman v
Perpetual Trustee Co). Nevertheless, a trustee should be able to sue a beneficiary under the law
of restitution to recover an overpayment made by mistake, whether of fact or of law.
 An underpaid beneficiary may sue the trustee for breach of trust, and the trustee is liable to make
the loss caused by the wrongful payment. It may also be possible for an underpaid beneficiary to
pursue an action in personam against an overpaid recipient if the trustee cannot meet the liability.

Powers of Trustees
 Powers must be exercised within the trustee‟s scope and authority.
 Excess exercises of power are severable, leaving the execution as effective as it may be.
 Powers are conferred upon trustees by the trust instrument, statute or the court.
Sources of Trustees’ Power
 Common for trust instrument to specify extensively the various powers of the trustee. The
powers conferred will reflect the nature and duration of the trust created. For example, a
testamentary trust calls for less extensive powers than an inter vivos trust; charity trustees will be
vested with a different range of powers than trustees of private trusts.
 Trustee Act also confers powers. Such provisions usually contain a provision specifying that the
power so conferred is subject to the trust instrument.
 Courts may, pursuant to their jurisdiction to act for reasons of ‘expediency’, confer upon trustees
the necessary power to effect a transaction that could not otherwise be effected by reason of the
absence of a power for that purpose in the trust instrument.

Trustee’s Discretion
 The exercise of most powers contained in trust instruments is at the discretion of the trustee.
This must be exercised in accordance with the purpose for which it was conferred and it must not
be exercised irresponsibly, capriciously or wantonly, in order to fulfil the good faith and real and
genuine consideration requirements (Karger v Paul).
Court’s Assessment of Trustee’s Discretion
62
  A court will only interfere with a discretionary decision of a trustee where bad faith can be
shown (Karger v Paul).
 Heavy onus lies upon person seeking review of a trustee‟s decision – otherwise, the trustee, who
usually undertakes heavy responsibilities for no financial reward, would be burdened.
 Honest blundering, carelessness or gross negligence in a trustee exercising a discretion ≠ bad
faith.
 Fraud, making a decision for an ulterior motive, the absence of fair consideration of the issues,
and refraining from further inquiry for fear of confirming a suspicion that something is wrong =
bad faith.
 The court may intervene where it is satisfied that the trustee has not given real and genuine
consideration to the exercise of the discretion e.g. where a trustee does not familiarise
him/herself with the trust deed, so doesn‟t even know that there is a discretion to exercise, and
relies on directions of others regarding the trust estate, does not exhibit real and genuine
consideration (Turner v Turner).
 Court will examine evidence of the trustee‟s inquiries, the information he/she had, and the
reasons for/manner of the exercise of the discretion.
 Court will set aside an errant exercise of discretion, and direct the trustee to re-exercise the
discretion correctly. The court may also substitute its own decision for that of the trustee where
it is established that the trustee is unlikely to properly fulfil the relevant duty (Minehan v AGL
Employees Superannuation Pty Ltd).

Views of Beneficiaries
 Beneficiaries cannot direct trustees in the performance of their trust (Re Brockbank); otherwise
they would fetter the trustee‟s discretion.

Rights of Trustees
Right to Indemnity and Recruitment
 As the legal owner of the trust property, a trustee is personally liable for debts he/she incurs in
performing the trust.
 Because trustees manage the trust property for the benefit of beneficiaries, they can indemnify
themselves out of the trust property to satisfy the debts incurred on the trusts behalf (Vacuum Oil
Co Pty Ltd v Wiltshire + s 59 Trustee Act), instead of expending their own funds and
subsequently seeking reimbursement.

Nature of the Right

63
  For the purposes of enforcing the indemnity, the trustee possesses a charge or equitable lien over
trust assets. The equitable charge of the trustee over the trust assets, will take priority over the
beneficiaries equitable interest, in situations where the trustee is out of pocket as a result of the
management of the trust property – until the charge has been satisfied (Octavo Investments Pty
Ltd v Knight).
 This right of the trustee to indemnity does not, however, deny the equitable ownership of the
beneficiary in whom the trust fund is vested in interest and possession (Arjon Pty Ltd v
Commissioner of State Revenue).
 The fact that the trustee‟s right to indemnity represents an equitable proprietary interest with
priority over the claims of the beneficiaries, means that (Octavo):
o The right passes to the trustee in bankruptcy/liquidator where the trustee is insolvent.
o A successor trustee with notice takes the trust assets subject to any unsatisfied charge.
o The trustee‟s creditors may be subrogated (entitled) to the trustee‟s charge.
 The right is proprietary in nature so it survives the trustee‟s loss of office – the former trustee‟s
claim for indemnity would be against the new trustee in whom the trust assets are vested, who
takes the trust property subject to the right of indemnity of the former trustee.

Expenses Subject to the Trustee’s Indemnity

 The beneficiaries are effectively meeting the trustee‟s expenses and liabilities; therefore, there
must be a check on those expenses and liabilities.
 Must be properly incurred – improperly incurred expenses or liabilities do not come within the
right of indemnity but fall on the trustee personally.
 Expenses authorised by the trust deed, statute or general law, such as rates and taxes, and
expenses of carrying on the business where this is authorised, are (prima facie) properly incurred
(RWG Management Ltd v Commissioner for Corporate Affairs).
 If trustee deliberately acts in breach of trust, expenses will be improperly incurred (the trustee
may still be personally liable to the contracting party of an unauthorised agreement, however).
 A „mere slip‟ or „error of judgement‟ will not prevent an expense from being properly incurred
(Nolan v Collie).

Enforceability of Right of Indemnity against Beneficiaries

 Right of indemnity is of 2 types (Hardoon v Belilos):
1. A right of indemnity against the trust property; and
2. A right to proceed against a beneficiary personally for recoupment.
 In practice, the latter is only exercised once the trustee, or a person subrogated to a trustee, has
exhausted the right to indemnity out of the trust estate (J W Broomhead).
64
  The right of indemnity from the beneficiaries does not accrue to a trustee of a discretionary
trust, because the beneficiaries‟ right is not proprietary.

Contrary Provision in the Trust Instrument

 Trustee Act (NSW) does not make the right of indemnity subject to the trust instrument.

Right to Seek Advice and Directions from the Court

 S 63 Trustee Act (NSW) vests in the trustee, the right to seek the opinion, advice or direction of
the court on any question respecting the management or administration of the trust property.
 If the trustee has placed before the court all relevant evidence such that the court is fully
informed as to the matter, then the trustee is deemed to have discharged his/her duty as trustee in
the subject matter of the application when he/she acts in accordance with the advice or directions
of the court.
 The procedure should not be used for substantive issues, to secure additional powers for the
trustees, or for resolving a contest between the trustees or other parties to the trust – all parties
should be heard in regards to these types of issues.

65
Week 13

Breach and Terminations of Trust

Breach of Trust
What is a Breach of Trust?
 An act or omission in contravention of the trustee‟s duties; or
 Acting in excess of a trustee‟s powers, or failing to exercise those powers reasonably, in good
faith and for the purposes for which they were conferred.
 That is, failing to act as an ordinary prudent person in the management of trust assets (Re
Speight) or, for a professional trustee, failing to act as an ordinary prudent person of business
(Bartlett v Barclay’s Bank Trusts)

Who has Standing to Sue for Breach of Trust?

 A beneficiary (including a person representing the beneficiary‟s estate), a co-trustee or a
successor trustee, may sue a trustee who has breached trust.
 The court may restrict the right of a beneficiary to sue in his/her own name where it is not yet
possible to ascertain the identity of all beneficiaries (Fried v National Australia Bank Ltd).

Remedies for Breach of Trust

Personal or Proprietary/Against Trustee or Third Party?
 Personal - A trustee is personally liable to the beneficiaries for the consequences of breaches of
trust – thus, the beneficiaries may seek redress from the trustee (or a third party receiver)
personally for such consequences.
 Proprietary - where a trustee uses trust moneys or property, or a mixture of trust moneys and
his/her own moneys, or trust moneys from more than one trust, to purchase or improve an asset
in the trustee‟s own name (or that of a third party), the beneficiaries may seek a remedy directly
against that asset a.k.a. proprietary claim.
o Constructive trust is imposed on trustee (Chan v Zacharia)
o Three main advantages of a proprietary claim, over a personal claim, are:
o if the trustee is insolvent, it allows the beneficiaries to claim the asset in priority to the
trustee‟s creditors;
o if the asset is transferred to a third party other than a bona fide purchaser for value, the
beneficiaries‟ claim is enforceable against that third party;
o any increase of the value of the asset accrues to the beneficiaries.

66
  Thus, if T is bankrupt, if there is an increase in the value of the property, or if the property
remains in the hands of the trustee, one should seek to make a proprietary claim. On the other
hand, if the asset is in the hands of another, one should seek personal remedies against the trustee
and/or the 3rd party receiver.
 3rd party: a personal action against persons who receive trust property as volunteers is available
where the distribution was in breach of trust and all possible remedies against the trustee have
been exhausted (Re Diplock 1948)

Personal Remedies against the Trustee

Account of Profits
 This remedy is an alternative to equitable compensation.
 A trustee must account to the beneficiaries for any profit made from the trust fund, whether by
breach of trust or in the ordinary course of management of the trust.
 Beneficiaries will seek an account of profits if they can show that a profit has been made and that
the account will yield more than compensation with interest.
 The remedy of account of profits is particularly beneficial to beneficiaries where the trustees
have made a profit in breach of trust that could not have been made by the trust of the
beneficiaries themselves for lack of skill, information or capacity (Attorney-General for Hong
Kong v Reid) – e.g. where trustees utilise confidential information. Allowances will be made for
the skill and work of the trustee (discounts will be made to the account of profits) (Boardman v
Phipps).
 Where trust funds are invested profitably n breach of trust, the beneficiaries are entitled to the
entire profit.
 Where the trustee has used both trust money and his/her own money to realise an unauthorised
gain, the beneficiaries will be entitled at least to a proportional amount of the profits. S

Equitable Compensation for Loss

 Where a breach of trust has been committed, the trustee is liable to restore the trust estate to the
same position as it would have been had no breach been committed (Target Holdings v Rederns)
 Connection Test: The relevant test is whether the losses „would have been incurred but for the
trustee‟s breach‟ (Bank of NZ v NZ Guardian Trust Co 1999)
 Different from common law damages; issues of causation, remoteness, etc, do not apply (Re
Dawson) – the rationale for this is deterrence of trustee breaches.

Compensation for Gain that would have been made through Reasonable Diligence

67
  Compensation must be made for any gain that a trust fund would have made had the trustee acted
with reasonable diligence.
 E.g.
o Where T effects an unauthorised sale of an asset that later rises in value, the beneficiaries
are entitled to the gain that would have accrued to the trust had the property not been
prematurely sold (Re Bell’s Indenture),
o Where T fails to purchase assets and it is his/her durty to buy, and these assets would
have profited the trust, the beneficiaries can sue for the gain that would have been made
had the duty been fulfilled (Elder’s Trustee and Executor Co Ltd v Higgins),
o If T retains assets that should have been sold, the beneficiaries may claim compensation
for any subsequent fall in value (Hicks v Trustees, Executors and Agency Co Ltd).

Interest
 A trustee who has occasioned loss to the trust estate through breach of trust is liable to make
good the loss together with interest (Re Dawson).
 This can also apply to an account of profits.
 An award of interest is founded upon stripping a trustee of profits rather than compensating the
beneficiary for loss suffered (Wallersteiner v Moir (No 2)).

Liability for Co-Trustee’s Breaches of Trust – ‘Wilful Default’

 S 59(2) Trustee Act provides that a trustee is answerable and accountable only for his/her own
acts, receipts, neglects or defaults, and not for those of any other trustee except where these
happen through the first trustee‟s own „wilful default‟.
 A person is in „wilful default‟ only if he/she „knows that he/she is committing, and intends to
commit, a breach of his/her duty, or is recklessly careless in the sense of not caring whether
his/her act or omission is or is not a breach of duty‟ - Re City Equitable fire Insurance Co Ltd.
Mere negligence or error of judgement does not amount; some degree of moral turpitude is
required.

Proprietary Remedies against the Trustee

Constructive Trust of Property gained in Breach of Trust
 An alternative remedy to account of profits.
 Look to this remedy where the trustee has used trust property exclusively to purchase another
property. If there is a mix of trust property and other funds, then look to tracing.

68
  A constructive trust can be imposed over property purchased in breach of trust even if the
errant trustee/fiduciary has not profited from that transaction.
 The imposition of a constructive trust „obliges the holder of the legal title to surrender the
property in question, thereby bringing about a determination of the rights and titles of the parties‟
(Giumelli v Giumelli). The constructive trust is more like a bare trust, and unlike an express trust
it does not create an enduring relationship but is aimed at securing a particular result.
 The constructive trust arises at the time the breach occurs – this has implications for priority
disputes. The principal of a constructive trust has the earlier equitable interest, and will take
priority over interests created later in time, as long as the purchaser is not a bona fide purchaser
for value of the legal estate without notice.
Attorney-General for Hong Kong v Reid (1994)
 Facts: Mr Reid accepted bribes in breach of a fiduciary duty owed to the Crown. Mr Reid‟s assets include
three properties purchased with the bribes.
 Principles:
o At law, the money constituting the bribes belongs to the recipient. The legal estate conveyed to the
false fiduciary also vests in him.
o In equity, the fiduciary who receives the bribes becomes a debtor in equity for the amount of that bribe
and also for any benefits, namely, the increased value of the property representing the bribe.
o When a bribe is accepted by a fiduciary in breach of duty, he/she holds that bribe in trust for the
person to whom the duty was owed. If the property decreases in value the fiduciary must pay the
difference between that value and the initial amount. If the property increases in value, the fiduciary
is not entitled to any surplus in excess of the initial value because he/she cannot profit from a breach.
o * Property which a trustee obtains by use of knowledge acquired as trustee becomes trust property.
o * The recipient of a bribe hols that bribe and the property representing the bribe on trust for the injured
person.
o In the event of insolvency of trustee, any moneys mistakenly invested by the trustee, together with any
profits, which ought to be payed to the beneficiaries, and any bribes and profits which ought to be
payed to the beneficiaries, should be withdrawn from the unsecured creditors as soon as the mistake it
discovered.
o The bribe and property representing the bribe (or another breach) are held on constructive trust for the
person injured. The fiduciary/trustee remains personally liable for the bribe/breach if the value of that
property then recovered by the injured person proved to be less than that amount.

Tracing
Nature of Tracing
Tracing is the „process by which the plaintiff traces what has happened to his property, identifies the
persons who have handled or received it, and justifies his claim that the money which they
handled or received (and if necessary which they still retain) can properly be regarded as
representing his property‟ (Boscawen v Bajwa).
69
 Tracing or itself confers no rights, but may be a precondition for the exercise of rights.

Tracing at Common Law

 Only available at common law if the claimant establishes:
o A pre-existing common law cause of action, such as an action for money had and
received, or conversion; and
o The continuing ability to identify the property, which cannot be maintained if the
property has changed form or become mixed with another‟s property.
 Since tracing is usually used in situations where trust property has been mixed with other
property, common law tracing will be of little relevance.

Tracing in Equity
 Available where the claimant can establish the Re Diplock requirements:
1. Breach of fiduciary duty;
2. Change in ownership (succession) to the property contrary to the trust/fiduciary
relationship;
3. Property in question remains identifiable (not been dissipated), even though it may have
changed form or have been mixed with other property; and
4. That the legal estate has not been acquired by a bona fide purchaser for value without
notice or has not been registered without fraud (Farah v Say-Dee)
 Tracing in equity enables the claimant to establish a right to a pre-existing equitable proprietary
interest, which pre-dates the claims of third party recipients. This is advantageous where the
defendant is insolvent and a personal remedy, such as compensation, lacks practical value.
 The claimant may also obtain the benefit of increases in the value of the property (or in the case
of mixed funds, at least a proportionate share of the increase).
 Tracing is an „in rem‟ remedy, but it can support a personal remedy for recipient liability or
accessory liability.
 Proprietary claims (beneficial interest) will usually be asserted where the value of the traceable
proceeds exceeds that of the original asset, or the defendant is insolvent and it is desirable to
secure priority over other claimants. Otherwise, personal claims for compensation or an account
of profits are effective remedies for the beneficiaries. Where, on the other hand, the trust money
represents only part of the cost of acquiring the new asset the beneficiary may, at his/her
election, tale a proportionate part of the new property secured by way of an equitable charge.

Where Single Trust Fund is mixed with Trustee’s own Money and thereafter Converted…
 The principal task to identify the trust money.
70
  Apply Re Hallet: the court presumes that where trust funds are mixed in the trustee‟s own bank
account, and a trustee withdraws money, the trustee is acting honestly, such that the trustee
withdraws and expends his/her own money first, leaving the beneficiary to claim any balance
remaining. (T can‟t use this as a defence to deny B‟s interest in any property bought with money
from the mixed funds account – Re Oatway).
 Lowest intermediate balance rule – equity limits the beneficiary‟s proprietary claim to the lowest
balance in the account between the date of the wrongful deposit and the date the claim was made,
unless it can be inferred that the trustee intended to restore funds to the depleted trust (James
Roscoe (Bolton) Ltd v Winder).
 Re Hallet applies to other property, such as shares (Brady v Stapleton).
 Where the trustee has used the mixed funds to purchase other property the beneficiary is put to
an election to either:
o Claim a proportionate part of the property; or
o Claim a charge/lien against the trustee equal to the trust‟s contribution (Foskett v
McKeown). Where a loss has been suffered, beneficiaries would not want to claim an
interest in the property, so they can cliam a charge/lien securing repayment of their
respective contributions to the purchase price.
 If the trustee realises an unauthorised gain, the beneficiaries are entitled to at least a proportional
amount of the profits (Scott v Scott).

Where Multiple Trust Funds are Involved…

 Where property from more than one trust is mixed with the trustee‟s own money, in addition to
first identifying what property is traceable, it is also necessary to allocate the traceable trust
property between respective trusts.
 There are two main approaches used by the courts:

1. „Pari Passu’ (the proportionate approach) – where the property of more than one trust is
mixed, the general rule is that the beneficiaries of the several trusts have an interest in the
mixed fund in proportion to their contribution to it. (Windsor Mortgage Nominees v
Raymond Griffith Cardwell (1979) E.g. if B1 contributed $3,000 and B2 contributed
$1,000 to the mixed funds, the beneficiaries will have an interest in the proportion of 3:1.

2. ‘First in, First Out’ Approach – an exception to pari passu has been recognised in cases
where the funds have been mixed in a bank account.

71
  Re French Caledonia Travel Service Pty ltd (2003): The court held that as a matter of
principle, the rule should not be used to allocate losses suffered by beneficiaries
whose funds are mixed.
 In such a case, the rule in Clayton’s Case applies and it is assumed that the sum first
paid into the account is first withdrawn. This rule doesn‟t apply:
 To transactions entered on the same day (it applies to the balance at the end of the
day) – Re Laughton
 Where there is a specific contrary agreement – Barclays v Quistclose
 Where specific withdrawals are earmarked as belonging to a particular trust,
although the court is not bound by a defaulting trustee‟s intentional allocation of
loss to specific beneficiaries – Re Global Finance Group.

 Pari passu is generally preferred, as the first in first out approach leads to complications.

Options Apart from Action for Breach of Trust

 Before contemplating an action for breach of trust a beneficiary may:
o Apply to the court to remove trustees who have breached trust;
o Seek an order to inspect trust documents or account;
o Seek a declaration as a means of resolving a question as to whether a particular course of
conduct, was or will be, in breach of trust;
o Call in his/her share, if possible;
o Seek to restrain a breach of trust, or compel proper performance of the trustee‟s duties,
by way of an injunction;
o Seek an administration action calling for an order that the trust be carried into execution
by the court;
o Seek the appointment of a receiver (usually „if misconduct, waste, or improper
disposition of assets can be shown, or if it appears that the trust property has been
improperly managed, or if is in danger of being lost or if it can be satisfactorily
established that parties in a fiduciary position have been guilty of a breach of trust‟ –
Yunghanns v Candoora);
o Pursue personal action against third party recipients.

Personal Remedies against Third Party

 Rights against the trustee must at first be exhausted (Re Diplock)
Court Order

72
  A beneficiary may seek a court order, against a 3rd party innocent volunteer or a purchaser with
notice, to convey the property to the beneficiary or a newly appointed trustee.

Trustee de son Tort

 Persons who are not properly the trustee, but who make themselves trustees by there acts (i.e.
being „busy bodies‟), are accountable for gains and liable for losses.

Barnes v Addy Constructive Trust

1st limb of Barnes v Addy – knowing receipt
 A person who receives property in his/her own name, or for his/her own benefit, knowing it is
subject to a fiduciary duty and that its transfer is in breach of that duty will be made a
constructive trustee of that property for the benefit of the principal.
 The knowledge required for recipient liability extends to the first 4 Baden categories, according
to Consul Development v DPC Estates:
1. actual knowledge,
2. willfully shutting one‟s eyes to the obvious,
3. willfully and recklessly failing to make such inquiries as an honest and reasonable man
would make,
4. knowledge of circumstances which would indicate the facts to an honest and reasonable
person (but Australia does not accept constructive knowledge).
 Farah v Say-Dee holds that on registration of Torrens title property the knowing receipt claim is
cut off, unless fraud can be shown.

2nd limb of Barnes v Addy – knowing assistance

 Persons who dishonestly assist or induce a trustee or other fiduciary will be liable as constructive
trustees for any resultant losses, and accountable as constructive trustees in respect of any
resultant gains, to the relevant fund.
 This is a way of imposing personal liability for the loss or gain – this allows for the remedy of
equitable compensation to be pursued.
 The fault element for accessory liability is more stringent than for recipient liability, because the
accessory has not received trust property. This element of fault is premised upon proof of
dishonesty or fraudulent design on behalf of the accessory. Acting dishonesty has been defined
as „not acting as an honest person would in the circumstances‟ – objective standard (Brunei
Airlines v Tan).
 Proof of mere negligence, or a mere failure to inquire in a manner consistent with the behaviour
expected of a reasonable and honest person, is insufficient to attract accessorial liability.
73
  Personal remedies are not sustainable against successors in title.

Proprietary Remedies against Third Party

Original Trust Property
 Where a third party receives the original trust property, a priority dispute arises. Registration of
a bona fide purchaser of the legal estate without notice will take priority over beneficiaries‟
claim.

Substitute for Trust Property: Tracing
 If the trust property has changed form the property can be traced, so long as the third party is not
a bona fide purchaser of the legal estate without notice.
 Provided the original property was held in a fiduciary capacity, tracing in equity is permitted
even though the substitute property is now held by an „innocent volunteer‟.
 Tracing in equity is permitted even though the substitute property consists of a contribution from
the innocent volunteer.
 Where trust property and property of the innocent volunteer are mixed, the situation is treated as
the same as the mixing of property from two different trusts.

Defences to Breach of Trust

Trustee Exemption Clauses
 A provision may be included in the trust instrument limiting the extent of a trustee‟s liability for
breach of trust.
 Exemption clauses are construed according to the ordinary meaning of the words used in their
context, but the court will construe any ambiguity contra proferentem (Reader v Fried).
 A trust can exclude a trustee‟s liability for all breaches, excluding fraud and breaches involving
dishonesty (Armitage v Nurse). Advertent or reckless breaches of fiduciary duty would
constitute dishonesty or bad faith for the purpose of breach of trust (Alexander v Perpetual
Trustee).

Consent or Acquiescence by the Beneficiaries

Consent
 A beneficiary who instigates, consents or concurs in a trustee‟s breach of trust cannot succeed in
an action based upon that breach, because such a beneficiary lacks clean hands.
 A trustee cannot avoid liability for breach of trust simply by putting the beneficiary to an election
to either object or acquiesce in the breach – a beneficiary is entitled to keep his/her options open
74
 concerning consent to an impending breach until called upon to do some formal or unequivocal
act, such as exercising a vote as company director to effect the breach (Spellson v George).
 Active encouragement or inducement, participation with or without direct financial benefit, and
express consent = consent. Consent may also be inferred from silence and lack of activity with
knowledge.
 However, the trustee must know of the consent prior to the breach, in order to establish the
defence (Spellson v George).

Acquiescence in a Past Breach of Trust

 The acquiescence of a beneficiary to a past breach is a defence to a claim for breach of trust.
 Acquiescence = positive act, such as adoption of the breach, or the beneficiary remaining
inactive with knowledge of the breach.
 The beneficiary‟s knowledge must be full knowledge of the act complained of and his/her rights
in respect of that act (National Trustee Co of Australasia Ltd v General Finance Co of
Australasia).

Delay/Laches
 Delay in bringing a claim (laches) may evidence acquiescence or it may render the pursuit of the
claim inequitable even in the absence of acquiescence.
 Essence of laches is not knowledge, it is delay. Therefore, laches may be pleaded whether or not
the beneficiary had knowledge of the breach of trust.
 S 48(a) Trustee Act (NSW) limits the time in which a person can bring an action against a trustee
for „innocent‟ breaches of trust to 6 years. S 47(1) (e) Trustee Act prescribes a 12 year limitation
period for fraud, fraudulent breach of trust or the retention or conversion of trust funds or
property.

Court’s Statutory Power to Excuse Breach

 S 85 Trustee Act (NSW) gives the court the discretion to relieve trustee from liability for breach
of trust where they have acted honestly and reasonably, and ought fairly to be excused.
 Onus is on trustees to show that their conduct was honest and reasonable and that in all the
circumstances of the case they ought fairly to be excused.
 Relief is only in respect of past or possibly continuing breaches (Edwards v Attorney-General
(NSW)).
 „Honesty‟ requires proof that trustees act in good faith and for the welfare of the trust - thus, not
a fraudulent trustee or one who misappropriates trust funds (Cotton v Dempster).

75
  „Reasonableness‟ is the most difficult hurdle; harder for professional trustees, though. Grossly
negligent behaviour or carelessness, or a clear fiduciary breach, will undermine any case based
on reasonableness of the trustee‟s conduct. A plea of relying on the advice of others will not be
accepted as „reasonable‟ unless such reliance is justified. E.g. where a trustee properly engages a
solicitor experienced in the field and relies on that advice, which proves to be incorrect, that
trustee is likely to be entitled to relief from a resultant breach of trust for having acted reasonably
(Re Investa Properties).
 The „ought fairly to be excused‟ is the final hurdle. A court may decline an honest and
reasonable trustee relief where to do so would cause undue prejudice to the beneficiaries, or there
is another discretionary equitable bar to relief, such as delay (Hagan v Waterhouse).

Termination of Trust
Termination by Revocation
 A power of revocation may be included in the trust instrument that allows the settlor, the trustees
or a third party to revoke the trust.
 Unless such a power is included in the instrument, no right to revoke arises and the trust is
treated as an irrevocable disposition of property (Mallott v Wilson).

Termination by Beneficiaries
 The rule in Saunders v Vautier holds that the beneficiaries of a fixed trust may, if they all
consent and are all of full capacity, terminate the trust, even if this defeats the settlor‟s intention.
This principle operates only where the entitlement to the beneficial interest is unrestricted, that
is, where the objects of a trust are entitled to the trust property indefeasibly and absolutely.
 Also, a beneficiary absolutely and indefeasibly entitled to an aliquot share of the trust may
terminate the trust in respect of that share and call for payment; provided that there is no contrary
intention in the trust deed, and provided that the beneficiary does not owe a liability to the trust
estate (Whakatane Paper Mills v Public Trustee).
 The court retains an overriding discretion to deny the right to terminate a trust of an aliquot share
where the nature of the trust property is not conveniently divisible (Manfred v Maddrell).

Termination by the Court

 The court may terminate the trust pursuant to an application for variation by way of an order for
the distribution of the assts, or by way of resettlement on other assets.

76
Termination by Distribution of Trust Property
 The terms of the trust ordinarily provide for its duration. It duration may be fixed by reference to
a certain event in the case of a strict private trust or, in the case of a discretionary trust, by the
due exercise of the trustee‟s discretion.
 In any case, the trust is terminated by the distribution of trust property to the beneficiaries in
accordance with the terms of the trust.
Settlement of Outstanding Claims
 Trustees must settle outstanding claims against the trust estate prior to distributing the trust
property at the trust‟s termination.
 The beneficiaries‟ entitlement is confined to so much of those assets as is available after the
liabilities have been discharged or provision has been made for them.
Possibility of Additional Beneficiaries Coming into Existence
 Where there is a possibility of other beneficiaries coming into existence, trustees should seek
leave of the court to distribute trust property for the purposes of terminating the trust.
 The court must be satisfied that there is a strong probability that no further beneficiaries will be
added to the class.
 The court will consider the possibility of an unborn, adopted or illegitimate child, or a future
spouse, entitled to benefit under the trust, so as not to deprive existing persons, including the
next of kin of the testator or settlor, of their rights (Trustees Executors & Agency Co Ltd v
Margottini).

77