Equity and Trusts: Conceptual and Evidential uncertainty (Part II)

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In our previous analysis of Trusts powers we considered Lord Wilberforce’s interpretation of Bertram Baden’s deed in McPhail v Doulton as ‘establishing a fund to provide benefits for the staff of a company and their relatives and dependants‘. (McPhail v Doulton [1971] A.C. 424).

His Lordship concluded that Baden’s deed did not evince a mere fiduciary power, but created a discretionary trust which the trustees were under a legal duty to carry out.

The test for ascertaining certainty of objects or beneficiaries of discretionary trusts was deemed to be that applied by the House of Lords to fiduciary powers in Re Gulbenkian’s Settlements [1970] A.C. 508; What followed was an affirmation of the requisite test in the following terms :

Can it be said with certainty that any given individual is or is not a member of the class?’’ (McPhail v Doulton [1971] A.C. 424)

As Prof. Virgo explains, the any ‘given postulant test’ posited by Lord Wilberforce ‘refers to anybody at all who might be considered to be a potential object‘ and not just a single person who satisfies the test. (Virgo, p. 100).

Although distinct from the ‘complete list test’ as regards fixed trusts ( see Inland Revenue v Broadway Cottages [1954] EWCA Civ 4) , the application of the any ‘given postulant’ required a trustee to be able to say with certainty that a particular postulant claiming to be part of the class of objects was indeed within or outside the specified class. The failure to do so would mean that the trust was void for uncertainty.

To Lord Wilberforce, therefore, it was not imperative for a trustee of a discretionary trust to require the preparation of a complete list of names ([1971] A.C. 424 at 449);

Rather:

If [a trustee] has to distribute the whole of a fund’s income, he must necessarily make a wider and more systematic survey than if his duty is expressed in terms of a power to make grants.’’ [1971] A.C. 424 at 449.

In finding that Baden’s use of the terms ‘dependents’ and ‘relatives’ were conceptually certain, Lord Wilberforce elucidated:

I desire to emphasize the distinction clearly made and explained by Lord Upjohn, between linguistic or semantic uncertainty which, if unresolved by the court renders the gift void, —

and the difficulty of ascertaining the existence or whereabouts of members of the class, a matter with which the court can appropriately deal on an application for directions,’’ (McPhail v Doulton [1971] A.C. 424.)

Bertram Baden’s trust was, therefore, not declared void for conceptual uncertainty, since as prof. Penner clarifies:

‘there is nothing conceptually uncertain about a ‘descendant from a common ancestor’; ‘the problem turns entirely on proving the connection, ie upon evidential uncertainty’’. (Penner, p.213).

The term ‘relatives’ was therefore deemed conceptually clear to trustees who could be expected to act sensibly in not selecting ‘a remote kinsman’ ( Re Baden’s Deed Trusts ( no.2 ) [1973] Ch.9.

Baden’s case was eventually referred by the House of Lords to the Chancery Division of the High Court, and thereafter to the Court of Appeal for a determination of whether the ‘given postulant test’ applicable to discretionary trusts was satisfied.

The Court of Appeal’s interpretation and application of the any ‘given postulant’ test: Re Baden’s Deed Trusts (no2) (1973)

Although the Court of Appeal in Re Baden’s Deed Trusts ( no2) 1973 affirmed the validity of a discretionary trust on the facts, applying Lord Wilberforce’s any ‘given postulant’ test, —

the perspectives of the Lord Justices of Appeal differed distinctly in the way the test was to be understood, ‘both as regards the determination of conceptual uncertainty and especially as regards evidential uncertainty.”( Virgo, p.100).

The Court of Appeal opined that the terms ‘relatives’ and ‘dependents’ were conceptually certain, with Sachs LJ and Megaw LJ defining the term ‘relatives’ as descendants from a common ancestor [1973] Ch.9, 21 and 30, and Stamp LJ as, ‘next of kin‘ or ‘nearest blood relations‘ [1973] Ch.9, 21 and 30. The latter definition, however, significantly limits the potential class to a much smaller number of postulants as a compared with former. (Virgo, p.100)

The question, therefore, that remained for the Court of Appeal to decide was whether the discretionary trust was evidentially certain.

Sachs LJ began his analysis by distinguishing between the conceptual and evidential uncertainty underlying the terms ‘relatives’ and  ‘dependants’, positing that the ‘is or is not’ test  is applicable only to the former (Penner, p. 213).

His Lordship stated:

’the court is never defeated by evidential uncertainty’’ and it is in my judgment clear that it is conceptual uncertainty to which reference was made when the ‘is or is not a member of the class’ test was enunciated’’;

“Once the class of persons to be benefitted is conceptual certain it then becomes a question of fact to be determined on evidence whether any postulant has on inquiry been proved to be within it; if he is not so proved, then he is not in it.’’ (Re Baden’s Deed Trusts (no 2 ) CA [1973] Ch.9).

Evidentially speaking therefore, just because an individual postulant was not proved to be within the class of objects did not necessarily invalidate the trust or render it void;

rather, for Sachs LJ, the significance of such a finding would be that the postulant would not be deemed an object under the trust. (note Virgo p. 101);

What remains unclear is the question of who bears the burden of proving that a postulant falls within or outside a class; ‘

Prof. Penner argues that ‘presumably if any postulant must be proved to be within it to take, then the trustees would have to be satisfied so that their decision would stand in the face of a challenge by another beneficiary.’’ ( Penner, p.213).

Following this analysis , Sachs LJ’s interpretation of the ‘given postulant test’ might allow for the inference that the evidential burden of proving a postulant as a member of a class lies with the postulant herself;

the consequence of such thinking is that the discretionary trust remains valid even if such a postulant fails to take any benefit under the trust, since, ”this will not prevent anybody else from proving that they do fall within the class of objects.” (Virgo, p. 102).

However, one should note that such an approach of shifting the burden of proof to the postulant would not cure conceptual uncertainty, since ‘the matter would not be susceptible of proof.’ ( Glister, p. 93).

Exemplifying this point are cases involving conceptual uncertainty surrounding the use of the term, ‘friends’ of the testatrix; cases requiring an appreciation of the semantic and linguistic difficulties such terms pose for the interpretative powers of trustees and the courts.

Interestingly, the problem of conceptual uncertainty is less pronounced when dealing with gifts subject to a condition precedent rather than trusts. A less stringent approach to determining if a class of ‘any friends’ of the testatrix was conceptually certain was applied in Re Barlow’s Will Trust [1979]1 WLR 278; a case involving a gift subject to a condition precedent rather than a discretionary trust or power. The court held that a ‘friend’ was a person who had a relationship of long standing with the testatrix, which was a social as opposed to a business or professional relationship.’ (Glister, p.98)

Sachs LJ’s analysis has much to say for itself, since one might expect fewer discretionary trusts involving large classes of objects to be deemed void by the Court.

Yet, the question remains if his Lordship was rewriting the test for certainty of objects affirmed by Lord Wilberforce.

Megarry LJ’s understanding of the test for evidential certainty in Re Baden (No.2) 1973 CH.9 at 24 differed significantly from that of Sachs LJ’s; His lordship stated:

In my judgment, much too great emphasis is placed in the executors’ argument on the words “or is not.”

To my mind, the test is satisfied if, as regards at least a substantial number of objects, it can be said with certainty that they fall within the trust;

even though, as regards a substantial number of other persons, if they ever for some fanciful reason fell to be considered, the answer would have to be, not “they are outside the trust,” but “it is not proven whether they are in or out.”

To Megarry LJ, therefore, the evidential test for certainty of objects validating a trust was contingent upon finding a substantial number of persons who fell within a class. (Re Baden (No.2) 1973 CH.9)

Rather than reduce the possible class of objects to an exhaustive list or ‘complete list’ of individual employees and their families as required for fixed trusts , Prof. Penner explains the ”substantial numbers’ test ‘merely establishes the validity or the trust’ rather than clarifies ‘the extent of any survey he (the trustee) must make of the class before distributing , —

ie the extent of the consideration he must give to distributing to those not within the ‘substantial numbers’, yet who may fall within the class intended by the settlor.” (Penner, p. 213)

In this respect, the Settlor’s original intention to benefit the objects of a large class of employees and their dependents and relatives may ostensibly be upheld, since a substantial number of persons who have yet to be proven ‘whether they are in or out’ of the class may potentially benefit from the trust in the event they are are considered by the Trustee to be within the class.

What is a “substantial number” may well be a question of common sense and of degree in relation to the particular trust: particularly where, as here, it would be fantasy, to use a mild word, to suggest that any practical difficulty would arise in the fair, proper and sensible administration of this trust in respect of relatives and dependants.” (per Megaw LJ, Re Baden’s Deed Trusts (no 2 ) CA [1973] Ch.9)

What initially appears to be a commonsensical approach to evidencing the class of objects of a discretionary trust seems, on further analysis, inconsistent with the test propounded by Lord Wilberforce, ‘that the trust is valid if it can be said with certainty that any given individual is or is not a member of the class.’ ( per Lord Wilberforce, McPhail v Doulton [1971] A.C. 424.)

Requiring that a substantial number of postulants satisfy the ‘is or is not test’ may have the effect of narrowing the class of objects specified in a settlement. (McFarlane and Mitchell, p. 165).

Additionally, although Lord Wilberforce had indicated in McPhail that the test no longer required a complete list of names of postulants to be drawn up, his Lordship did opine that it ‘must be possible to say of any given person that they were or were not within the class’ for the discretionary trust to be valid. (Virgo, p. 102.).

Adherence to this imperative might not be entirely possible if the trustees are unsure as to ‘what the range of the class might be’ ( Virgo p.102), or whether they should distribute to a person who may not be part of the substantial number of postulants identified by the trustees.

In contradistinction, Stamp LJ‘s approach appeared to be ”the most consistent with the any given postulant test propounded by Lord Wilberforce” (Virgo, p. 102);

His Lordship was of the view that the trust would not be valid if there were uncertainty about any individual as to whether or not they were within the class; in this respect, evidential uncertainty for Stamp LJ remained a possible means for invalidating the trust. His Lordship explained:

Validity or invalidity is to depend upon whether you can say of any individual – and the accent must be upon that word “any,” for it is not simply the individual whose claim you are considering who is spoken of – “is or is not a member of the class,” for only thus can you make a survey of the range of objects or possible beneficiaries. If the matter rested there, it would in my judgment follow that, treating the word “relatives” as meaning descendants from a common ancestor, a trust for distribution such as is here in question would not be valid. Any “survey of the range of the objects or possible beneficiaries” would certainly be incomplete, and I am able to discern no principle upon which such a survey could be conducted or where it should start or finish.Re Baden’s Deed Trusts (no 2 ) CA [1973] Ch.9 at 28.

Following this analysis, Stamp LJ would have found the trust to be void if the term ‘relatives’ were defined as descendants of a common ancestor;

His Lordship, however found the term to be conceptually similar to the term ‘relations’ found in the case of Harding v. Glyn (1739) 1 Atk. 469, in which a discretionary trust was executed for relations, and proceeded to define the conceptual meaning of relatives as ‘next of kin’, rendering the trust conceptually certain.

Patrick J.

References

J.E. Penner, The Law of Trusts, Oxford University Press, 11th edn. 2019.

Graham Virgo, The Principles of Equity and Trusts, Oxford University Press, 4th edn., 2020.

Jamie Glister, James Lee, Hanbury and Martin: Modern Equity, Sweet and Maxwell, 20th edn., 2015.

Charles Mitchell, Ben McFarlane, Hayton and Mitchell on the Law of Trusts & Equitable Remedies : Texts, Cases & Materials, Sweet and Maxwell, 14th edn., 2015.

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