Chapter 4: The Three Certainties

Question 1

1 Introduction

Answer 1

This chapter explores the three certainties. Certainty is an essential component of an express
trust. Rights and obligations need to be certain to be enforceable:
* If a trustee does not know what their obligations are, how can they comply with them?
* If a beneficiary does not know what their rights are, how can they tell whether they are being
breached?
* If the court is not able to determine those rights and obligations, how can it enforce them?

Question 2

Requirements to create a valid express trust

Answer 2

In order to create a valid express trust, it is necessary to comply with the rules known as the three
certainties. They are:
(a) Certainty of intention
(b) Certainty of objects
(c) Certainty of subject matter
This chapter will explore each of the three certainties in more detail.

Question 3

2 Certainty of intention

Answer 3

Certainty of intention is one of the three certainties necessary for the creation of an express trust. Its rationale is quite simple. By definition, an express trust is one which is brought into existence by
an intention to create it (unlike, for example, some resulting and constructive trusts which arise
independently of the parties’ intention). Thus, an intention to create a trust is a necessary
requirement for (in fact, it is the defining feature of) an express trust.

Question 4

2.1 Requisite intention

Answer 4

For these purposes, the requisite intention is an intention to impose or assume the duty which is
characteristic of a trust, ie a duty to hold property for, or apply it for the benefit of, a beneficiary (or purpose). Re Oldfield [1904] 1 Ch 549 is a simple illustration. By her will, a woman gave property to her
daughters and expressed her ‘desire’ that they should make some provision for her son. Kekewich
J held that the woman had not created a trust, saying: A desire carries no obligation except a moral one. To desire a person to do a thing is entirely different from telling him to do it.

Question 5

2.2 Ascertaining intention

Answer 5

A person’s intention can be ascertained from their words (spoken or written) and conduct. Most trusts (other than trusts of land and testamentary trusts) have no prescribed formalities, meaning
they can be created formally or informally, whether in writing or otherwise.

The courts adopt an objective approach in determining whether a person intended to create a trust. If they manifest an intention to impose or assume the duty which is characteristic of a trust, they intend to create a trust. It is irrelevant that they do not actually (ie subjectively) intend to create a trust or are unaware that such a thing even exists.

Question 6

2.2.1 Written documents

Answer 6

In some situations, intention is reduced to writing; for example, in a contract or a will. The intention
of the author(s) of a document is ascertained by identifying the meaning of the words which they
have used. And the meaning of words is ascertained by reference to:
* Their natural and ordinary meaning
* Any relevant contextual features of the document
* The facts which were known to or assumed by the author(s) of the document when it was created
* Common sense

Question 7

2.2.2 Use of the word ‘trust’

Answer 7

Generally, the use of the word ‘trust’ is a good indicator that a person intends to create one. However, it is not determinative, either by its presence or its absence.
* In particular, the fact that a transaction is characterised by the transacting parties as a trust
is not conclusive as to its nature.
* Conversely, the fact that a transaction is characterised as something other than a trust does
not prevent it taking effect as a trust if it generates the duty which is characteristic of a trust. Crucially, the nature of a relationship or transaction is determined by reference to the substantive
rights and duties which it creates and not by reference to how it has been characterised by the parties.

Question 8

2.2.3 Segregating/earmarking assets

Answer 8

A key determining factor in several important cases has been the segregation of funds in a
separate bank account which has been earmarked for a particular person or purpose. This is often good evidence of an intention to create a trust but is neither necessary for the creation of a trust nor is it conclusive evidence that a trust is intended. Like all other factors, segregation and earmarking of assets must be considered within the specific factual context.

Question 9

2.2.4 Importance of context

Answer 9

In the seminal case Paul v Constance [1977] 1 WLR 527 (discussed in further detail below), the
court was persuaded that a bank account was held on trust (jointly for the legal owner and his
partner) based largely on the repeated use of the words ‘this money is as much yours as mine’.
Another significant factor was the way in which the account was used (with the couple paying joint bingo winnings in and withdrawing funds for joint use). Of particular importance to the decision was the fact that the couple were ordinary people who were unfamiliar with the legal concept of a trust.

The account holder could not be expected to use terminology he did not understand but this did not preclude a finding that he intended a trust relationship. This decision provides an important reminder that certainty of intention is a question which will turn on the very specific facts of a case. Words and conduct must be interpreted in context.

Question 10

2.3 Relationship with other certainties

Answer 10

In some situations, there is a significant interaction between certainty of intention and the two
other certainties. More particularly, there are cases where the subject matter or objects of an
alleged trust are so vague or uncertain that the only sensible inference is that there was no
intention to create a trust at all.
A trust creates a duty. It is unlikely that a person intends to impose a duty if the alleged duty is so
vague that the person required to discharge it is unable to identify what they are required to do.

Question 11

Mussoorie Bank Ltd v Raynor (1882) 7 App Cas 321

Answer 11

The testator gave all his property
to his wife ‘feeling confident that she will act justly to our children in dividing the same when no
longer required by her’. It was argued that the wife was a trustee of the property. The Privy Council rejected this argument. The indeterminate nature of both the (alleged) trust property and the quantum of the (alleged) beneficiaries’ interests had ‘a reflex action’ which demonstrated that the testator did not intend to create a trust at all.

Question 12

2.4 Certainty of intention: Key case law

Key case: Lyell v Kennedy (1889) 14 App Cas 437

Answer 12

Facts: Ann Duncan owned land which was let to tenants. Kennedy collected rent on Ann’s behalf. Ann died intestate. There was a dispute about the identity of her heir. Kennedy continued to collect the rent. He paid the money into a separate bank account (rather than his own). And he told various people that the sum credited to the account belonged to Ann’s heir and would be paid
to them immediately they were ascertained. Kennedy later claimed the sum for himself.

Question 13

Key case: Lyell v Kennedy (1889) 14 App Cas 437 Judgement

Answer 13

Held: Kennedy held the sum credited to the account on trust for Ann’s heir. The fact that Kennedy had paid the money into a separate bank account was ‘indicative of some sort of trust’ and was ‘certainly not indicative of a personal right, claim, or interest on the part of Kennedy’.

Question 14

Earl of Selborne

Answer 14

A man who receives the money of another on his behalf, and places it specifically to an account with a banker ear-marked and separate from his own moneys, though under his control, is […] a trustee of the fund standing to the credit of that account. For the constitution
of such a trust no express words are necessary; anything which may satisfy a Court of Equity that the money was received in a fiduciary character is enough

Question 15

Key case: Paul v Constance [1977] 1 WLR 527

Answer 15

Facts: Dennis Constance and Doreen Paul started cohabiting in 1967. In 1973, Dennis received a
cheque for £950. When he received the cheque, he said to Doreen: ‘The money is as much yours
as mine.’ They agreed to pay the cheque into a bank account. Dennis opened an account in his
name and paid the cheque into it. The bank manager advised Dennis to open the account in his
name on the basis that a joint account was inappropriate because Dennis and Doreen were not
married. Dennis made enquiries of the manager to ensure that Doreen was able to draw on the
account

Question 16

Key case: Paul v Constance [1977] 1 WLR 527

Answer 16

On various occasions in the following year, Dennis repeated his statement to Doreen that the sum
credited to the account was as much hers as his. Dennis and Doreen paid additional sums into the
account which they had won playing bingo. (They played bingo as a joint venture and regarded
any winnings as theirs jointly.) The sums withdrawn from the account were applied for Dennis and
Doreen’s joint benefit. Dennis died intestate in 1974. The issue was whether Dennis had declared a
trust of the sum credited to the account, or whether Dennis’s estranged wife was entitled to it as
his statutory next of kin.

Question 17

Key case: Paul v Constance [1977] 1 WLR 527 Judgement

Answer 17

Held: Dennis had declared a trust of the sum credited to the account for Doreen and himself and
Doreen was entitled to half that sum as the beneficiary of the trust.
* Scarman LJ noted that Dennis was a simple, unsophisticated man and that in ascertaining his
intention the court ‘should consider the various things that were said and done by [Doreen]
and [Dennis] during their time together against their own background and in their own
circumstances.’
* He conceded that it was a ‘borderline’ case and that it was ‘not easy to pin-point a specific
moment of declaration’. Nevertheless, he concluded that Dennis’s repeated use of the words
‘This money is as much yours as mine’ evidenced an intention to create a trust of the sum
credited to the account for himself and Doreen.
* And he considered that this conclusion was supported by the various background features,
especially Dennis’s conversation with the bank manager and the treatment of the bingo
winnings and withdrawals from the account.

Question 18

Key case: Re Kayford Ltd (in liquidation) [1975] 1 WLR 279

Answer 18

Facts: Kayford Ltd was a mail order company. Its managing director, Kay, was concerned about its solvency and about customers who were paying for goods which the company might be unable to supply. He consulted an insolvency specialist, Wainwright, about these concerns.
* In relation to the customers, Wainwright advised Kay to open a separate bank account and to
call it the ‘Customers’ Trust Deposit Account’ and to pay into the account any further payments received from customers. The purpose of doing this was to ensure that, if the company went into liquidation, it would be able to refund those customers’ payments. Kay accepted and implemented Wainwright’s advice. Later, the company went into voluntary liquidation.
* The issue was whether the sum credited to the separate bank account was held on trust for
customers or was one of the company’s general assets

Question 19

Key case: Re Kayford Ltd (in liquidation) [1975] 1 WLR 279 Judgement

Answer 19

Held: The sum credited to the account was held on trust for customers. Megarry J made the
following two points:
* A trust can be created without using the word ‘trust’. ‘The question is whether in substance a
sufficient intention to create a trust has been manifested’.
* Although the payment of money into a separate bank account is a good indicator of an
intention to create a trust, it is neither necessary nor conclusive.
On the facts of this case, the company intended to create a trust of the sum credited to the
account because ‘[t]he whole purpose of what was done was to ensure that the moneys remained
in the beneficial ownership of those who sent them, and a trust is the obvious means of achieving
this’

Question 20

Key case: Re Lehman Brothers International (Europe) (in administration) [2009]
EWHC 2545 (Ch)

Answer 20

Facts: Lehman provided various brokerage services, including the acquisition and custody of
securities. Lehman agreed to hold securities acquired for its clients on trust for them. Lehman also
received various payments in respect of the securities it held on trust.
Lehman and its client agreed (by cl 5.2) that: (i) Lehman was to have ‘full ownership’ of any such
payments; (ii) Lehman would use the sums received ‘in the course of its business’; and (iii) the
client would ‘rank as a general creditor’ in respect of such payments. Clients typically instructed
Lehman to use the money owed to them to acquire new securities on their behalf and Lehman did
so.

Question 21

Key case: Re Lehman Brothers International (Europe) (in administration) [2009]
EWHC 2545 (Ch)

Answer 21

Lehman went into administration and, as a result, was unable to implement its clients’ instructions.
Post-administration, Lehman received payments of $1.8 billion in respect of trust securities. The
issue was whether clients were mere creditors in respect of post-administration payments attributable to their securities.

Question 22

Key case: Re Lehman Brothers International (Europe) (in administration) [2009]
EWHC 2545 (Ch) Judgement

Answer 22

Held: The clients were not mere creditors. Rather, Lehman held post-administration receipts on
trust for them. It was an implied term of the agreement that if Lehman was unable to carry on its
business cl 5.2 would cease to operate because the purpose of cl 5.2 was to enable Lehman to use
the payments it received in the course of its business. Since the administration order prevented Lehman from carrying on its business, cl 5.2 ceased to operate immediately the order was made

Question 23

Briggs J

Answer 23

Held that it was a further implied term that Lehman held post-administration receipts on trust for clients whose securities generated them. He said: The involuntary conversion of a [client] from a beneficiary with proprietary interests in securities into an unsecured creditor would be likely to take place at precisely the time when
the preservation of its proprietary rights mattered most. The existence and safeguarding of those rights was an important feature of the agreement […] and the destruction of those rights […] cannot therefore be consistent with the agreement, read as a whole

Question 24

Key case: Modelboard Ltd v Outer Box Ltd (in liquidation) [1993] BCLC 623

Answer 24

Facts: The plaintiff sold cardboard sheets to the defendant. The parties agreed that:
(a) The plaintiff would retain ownership of sheets delivered to the defendant until they were paid
for.
(b) The defendant would pay the purchase price within 30 days of delivery.
(c) The defendant could use sheets which had not been paid for in its manufacturing process.
(d) If the defendant sold any products incorporating sheets which had not been paid for, the
defendant would hold ‘the entire proceeds thereof […] in trust for the plaintiff’.
The defendant used sheets which it had not paid for in its manufacturing process and sold the resultant products to third parties. The issue was whether the defendant held the proceeds of sale on trust for the plaintiff.

Question 25

Key case: Modelboard Ltd v Outer Box Ltd (in liquidation) [1993] BCLC 623 Judgement

Answer 25

Held: There was no trust but the plaintiff had a charge over those proceeds.

Question 26

Key case: Modelboard Ltd v Outer Box Ltd (in liquidation) [1993] BCLC 623 Judgement

Answer 26

* Michael Hart QC held that the issue must be resolved by ascertaining the correct relationship between the plaintiff’s interest in the sale proceeds and the defendant’s obligation to pay the purchase price. * He used the example of the plaintiff selling sheets to the defendant for £1,000, with the defendant selling products incorporating the sheets for £1,200 before paying the defendant. * He rejected the view that the defendant’s obligation was discharged on receipt of the £1,200, with the defendant holding the money on trust for the plaintiff. This would be ‘odd in business terms, since it would allow the plaintiff to enjoy the defendant’s business profits in respect of sales by the latter during the credit period’.

Question 27

Key case: Modelboard Ltd v Outer Box Ltd (in liquidation) [1993] BCLC 623 Judgement

Answer 27

* The only solution which made ‘business sense’ and was consistent with ‘commercial reality’ was that the plaintiff’s interest in the £1,200 extended only so far as was necessary to discharge the defendant’s payment obligation. * The plaintiff’s interest in the sale proceeds was capable of being defeated by payment of the purchase price. The plaintiff was therefore a secured creditor, not a beneficiary of a trust. This conclusion was not precluded by the fact that the parties had described the relationship as a trust. The fact that a transaction is characterised by the transacting parties as a trust is not conclusive as to its nature.

Question 28

3 Certainty of subject matter

Answer 28

Certainty of subject matter is one of the three certainties necessary for the creation of an express trust. It comprises two distinct requirements: (a) The trust property requirement: It must be possible to identify the trust property. (b) The beneficial entitlement requirement: It must be possible to ascertain the beneficiary’s interest in the trust property.

Question 29

3.1 The trust property requirement

Answer 29

The trust property requirement has a simple rationale. A trust is characterised by two principal features: a duty and a property right. The duty to hold property for beneficiaries or to apply it for their benefit is meaningless unless it is possible to identify the property to which it relates. Similarly, the assertion of an equitable property right is futile unless it is possible to identify the property against which the right is being asserted.

Question 30

3.1 The trust property requirement

Answer 30

In cases where a trust is created by transferring assets to a trustee, the trust property can be easily identified: it is the assets which are transferred. In other cases, the trust property requirement can be problematic. Problems have been commonly encountered in two situations: (a) A person attempts to identify the trust property by description. (b) A person attempts to create a trust of a specific number of items from a larger quantity of similar items without identifying those to be held on trust.

Question 31

3.1.1 Identifying subject matter by description

Answer 31

In cases where the trust property is identified by description, the trust will fail for uncertainty if it is not possible to ascertain the trust property from the description.

Question 32

Example

Answer 32

For example, a person cannot create a testamentary trust of the ‘bulk’ of their residuary estate because, although the residuary estate can be ascertained, it is not possible to ascertain how much of it constitutes the ‘bulk’: Palmer v Simmonds (1854) 2 Drewry 221, 227.

Question 33

Example

Answer 33

And a company cannot create a trust of its ‘net assets’ because ‘net assets’ does not describe any specific property of the company: Wilkinson v North [2018] EWCA Civ 161. Rather, the ‘net assets’ of a company is an abstract monetary sum representing the difference between the value of its assets and its liabilities.

Question 34

3.1.2 Identifying subject matter out of larger mass

Answer 34

An issue which has resulted in a large body of case law is the question of whether it is possible to create a trust over some items from a larger quantity of similar (or identical) items without identifying the specific items which are to be held on trust.

Question 35

Exercise: Engage

Answer 35

Consider the following examples. In each case, do you think it should be possible to declare a trust over the assets without going further and identifying the specific shares or diamonds which are to be held on trust? (a) 20 of the settlor’s 100 ordinary shares in a company (b) 20% of the settlor’s 100 ordinary shares in a company (c) One of the settlor’s five one-carat diamonds (d) 20% of the settlor’s five one-carat diamonds

Question 36

Fractional interests

Answer 36

Two of the examples above present no difficulties at all when it comes to certainty of subject matter (providing the wider mass of assets has been clearly identified): (a) 20% of the settlor’s 100 ordinary shares in a company (b) 20% of the settlor’s five one-carat diamonds. There is no problem with creating a trust over a fractional interest of a wider mass, regardless of the nature of the property. In the first example, the 100 shares are the subject matter of the trust, and the beneficiary has a 20% interest in each of them. Similarly, in the second example, the five diamonds are the trust property, and the beneficiary has a 20% share of each. This situation is quite different from the two other examples, which relate to trusts of specific items from a larger mass, as opposed to trusts of a specified percentage of such a mass

Question 37

Specific number of items from larger mass

Answer 37

The difficulty arises when a settlor purports to declare a trust over a specified number of items from a larger mass. Let’s remind ourselves of our remaining two examples: (a) 20 of the settlor’s 100 ordinary shares in a company (b) One of the settlor’s five one-carat diamonds Do you think there is a practical difference between these examples and the trusts over 20% of each of the assets?

Question 38

Specific number of items from larger mass

Answer 38

You may think that there is no difference between a trust over a fractional share of the assets and a specified number of those assets but consider the following: (a) The trustee sells 20 shares at a profit (b) The trustee sells the remaining 80 shares at a loss (c) Four of the five diamonds are stolen

Question 39

Practical considerations

Answer 39

If the beneficiary has a 20% fractional share in every asset: (a) They share in any profits or losses every time the trustee sells shares. (b) They had a 20% share of each of the stolen diamonds and still have a 20% share of the remaining diamond. In contrast, if the beneficiary is only intended to have a specified number of shares or diamonds, it is important to know which are held on trust for them and which are not. If the beneficiary has a specified number of shares, it will clearly matter to them whether their shares are amongst the 20 sold at a profit or the 80 sold at a loss. Similarly, if only one diamond is held on trust, it is important to know whether that diamond was one of the four that was stolen.

Question 40

3.1.3 Categorising assets

Answer 40

Exercise: Engage Do you think there is any difference between the types of assets in our examples (shares and diamonds) which might justify different rules when it comes to certainty of subject matter? You may be surprised to learn that they are treated differently for these purposes. It is possible to declare a trust of 20 out of 100 ordinary shares in the same company without identifying the specific shares. In contrast, it is not possible to declare a trust over one out of five diamonds without identifying the specific diamond to which the trust relates. In order to understand the case law in this area it is necessary to distinguish: (a) Tangible and intangible assets (b) Fungible and non-fungible assets

Question 41

Tangible and intangible

Answer 41

Tangible assets are physical assets such as the diamonds in our examples. Another example of a tangible asset is cash. In contrast, intangible assets do not exist in physical form, like the company shares in our example. Other examples of intangible assets include intellectual property rights and debts.

Question 42

Tangible assets

Answer 42

Physical assets such as the diamonds and cash.

Question 43

Intangible assets

Answer 43

Assets that do not exist in physical form such as company shares, intellectual property rights and debts

Question 44

Fungible and non-fungible

Answer 44

Assets are described as ‘fungible’ if they are identical and readily exchangeable, like the ordinary shares in our examples. Although the price of the shares may fluctuate over time, at any given time they will all be worth the same and therefore interchangeable. The diamonds in our examples are non-fungible. Although they have similarities, they may be distinguishable in cut, colour and clarity. Crucially, they may well not have the same value and are therefore not interchangeable.

Question 45

Fungible

Answer 45

Identical and readily exchangeable.

Question 46

Fungible, intangible assets

Answer 46

The trust over the shares in our example is valid because the shares are intangible and fungible. There is no need to identify the specific shares which are subject to the trust. They are completely interchangeable. (In contrast, there would be a problem with certainty of subject matter if the settlor owned different classes of share in the same company and failed to specify which type of share was the subject matter of the trust. The bulk must comprise of identical assets in order for the trust to be valid.)

Question 47

Non-fungible, tangible assets

Answer 47

The trust over the diamond in our example is void for uncertainty of subject matter because the diamonds are tangible and non-fungible. Each diamond is unique. As discussed earlier, there may be differences in cut, clarity and colour which impact their value. They are not interchangeable, and it is necessary to identify the specific diamond which is the subject matter of the trust. This may be by way of segregating, earmarking or otherwise describing the specific diamond subject to the trust.

Question 48

Fungible, tangible assets

Answer 48

What about tangible, fungible assets? If the assets forming the wider bulk are effectively identical, will they be treated in the same way as the shares or as the diamonds?

Question 49

3.2 The beneficial entitlement requirement

Answer 49

The subject matter rules we have considered so far relate to the requirement for the trust property itself to be certain. It must also be possible to ascertain the nature and extent of the beneficiary’s interest in that trust property. To the extent that it is not possible to do so, the trust will fail. This is the beneficial entitlement requirement. In the remainder of this section, we will consider some examples of cases in which the beneficial entitlement requirement may prove to be a problem.

Question 50

3.2.1 Power to determine beneficial entitlement

Answer 50

Example Consider a trust under which the trustees are to hold two cars on trust for A and B, with a power to C to determine which car should be held for A and which for B. * There is initially no problem with this trust because there is a mechanism for determining beneficial entitlement. * However, if C dies before making the selection, the trust will fail because it is no longer possible to ascertain which beneficiary is entitled to which car. A similar trust failed in Boyce v Boyce (1849) 16 Sim 476, for this reason. * This example highlights the importance of good drafting when declaring a trust. The real problem in this scenario is the failure of the settlor to consider the possibility that C might not be able to exercise the power. The settlor could have avoided this problem by making clear what should happen to the property if C couldn’t or wouldn’t exercise the power. One solution might have been to give the trustees a default power to make the decision. * The example also highlights an important legal point, being that a trust can fail for certainty either when it is initially declared or, as in this case, subsequently.

Question 51

3.2.2 Objective assessment

Answer 51

Although not free from criticism, the legal principles discussed above are generally quite clear. There is, however, one more controversial case on beneficial entitlement which is rather harder to apply in practice. Consider the scenario in which trustees hold a sum of money on trust, out of which they are directed to pay a ‘reasonable income’ to a beneficiary. Based on the principles we have discussed so far, you would be forgiven for concluding that this trust would be void for uncertainty of subject matter

Question 52

Key case: Re Golay’s Will Trusts [1965] 1 WLR 969

Answer 52

The case of Re Golay’s Will Trusts [1965] 1 WLR 969 indicates that this trust would be valid on the basis that ‘reasonable income’ is an ‘objective yardstick’.

Question 53

Key case: Re Golay’s Will Trusts [1965] 1 WLR 969

Answer 53

If you are asked whether it is possible to create a trust in these terms the answer is therefore ‘yes’. However, the practical question of what constitutes a ‘reasonable income’ is more difficult and will likely turn on very specific facts.

Question 54

3.3 Certainty of subject matter in context: Key case law

Answer 54

We will now look in detail at some cases on certainty of subject matter.

Question 55

Key case: Re London Wine Company (Shippers) Ltd [1986] PCC 121 (decided in 1975)

Answer 55

Facts: The company carried on business as a wine merchant. Customers purchased wine on the basis that the company would continue to store the wine in its warehouse until the customer requested delivery. The company issued ‘certificates of title’ to customers stating that the customer was ‘the sole and beneficial owner’ of the wine they had purchased. But the company did not appropriate wine from its general stock to any particular contract: it simply maintained the general stock. The issue was whether the company held any wine on trust for the customers.

Question 56

Key case: Re London Wine Company (Shippers) Ltd [1986] PCC 121 (decided in 1975)

Answer 56

Held: The company did not hold any wine on trust for the customers. Given the company’s failure to allocate specific wine to any particular contract, it was not possible to identify any trust property. Oliver J provided the following reasoning for the decision: […] to create a trust it must be possible to ascertain with certainty not only what the interest of the beneficiary is to be but to what property it is to attach […] I cannot see how, for instance, a farmer who declares himself to be a trustee of two sheep (without identifying them) can be said to have created a perfect and complete trust […] And it would seem to me to be immaterial that at the time he has a flock of sheep out of which he could satisfy the interest.

Question 57

Key case: Re Goldcorp Exchange Ltd (in receivership) [1995] 1 AC 74, 91

Answer 57

Oliver J’s judgment in Re London Wine was subsequently endorsed by Lord Mustill in Re Goldcorp Exchange Ltd (in receivership) [1995] 1 AC 74, 91. The court in Goldcorp reached a very similar decision to that in Re London Wine but in that case the relevant property was gold bullion rather than bottles of wine.

Question 58

Key case: Hunter v Moss [1993] 1 WLR 934

Answer 58

Facts: The defendant was the registered shareholder of 950 ordinary shares in a company. He declared a trust of 50 of those shares for the plaintiff but did not identify them. The issue was whether the trust was valid or void for uncertainty of subject matter.

Question 59

Key case: Hunter v Moss [1993] 1 WLR 934 Judgement

Answer 59

Held: There was a valid trust of 50 shares. Deputy judge, Colin Rimer QC distinguished Re London Wine. He reasoned that as every tangible asset is discrete, its physical properties may differ from those of other seemingly identical assets. This, he argued, is why it is necessary to specifically identify which tangible assets are to be held on trust.

Question 60

Key case: Hunter v Moss [1993] 1 WLR 934 Judgement

Answer 60

However, Rimer QC held that this rationale has no application to intangible assets of the same type (such as ordinary shares in the same company) because such assets really are identical. He said: The defendant did not identify any particular 50 shares for the plaintiff because to do so was unnecessary and irrelevant. All 950 of his shares carried identical rights […]. The shares were […] of such a nature that each of them could satisfy the trust just as well as any other of them. Why therefore should equity be concerned that 50 particular shares were not identified? […] Any suggested uncertainty as to subject matter appears […] to be theoretical and conceptual rather than real or practical.

Question 61

Exercise: Engage

Answer 61

Practical problem: Is the case law in this area consistent? Hunter has been applied in subsequent cases, eg Re Harvard Securities Ltd (In liquidation) [1997] 2 BCLC 369, but it is not particularly satisfactory when compared with the case law on tangible property. It establishes that a person can create a trust of 20 of their 100 ordinary shares in a company without identifying the 20 shares to be held on trust, even though it is impossible to identify the shares which are held on that trust. And it raises the question of why shares ought to be treated any differently to tangible fungibles such as gold bullion, where the same tracing rules could be applied. Why shouldn’t it be possible to create a trust of 20 out of 100 identical gold bars?

Question 62

Key case: Re Lehman Brothers International (Europe) (in administration) [2009] EWHC 2545 (Ch)

Answer 62

In Lehman Brothers, at para 232, Briggs J acknowledged that the difficulty of applying Hunter ‘lies in the absence of any clearly expressed rationale as to how such a trust works in practice’. He continued: The analysis which I have found the most persuasive is that such a trust works by creating a beneficial co-ownership share in the identified fund, rather than in the conceptually much more difficult notion of seeking to identify a particular part of that fund which the beneficiary owns outright.

Question 63

Briggs J’s approach

Answer 63

In Lehman Brothers is a clear reconceptualisation of Hunter. Its effect can be illustrated by the example of a person creating a trust of 20 of their 100 ordinary shares in a company without identifying the 20 shares to be held on trust.

Question 64

According to Hunter

Answer 64

The trust takes effect as a trust of 20 specific shares, with the remaining 80 shares unaffected. However, on Briggs J’s approach, the trust takes effect as a trust of all the shares, with the beneficiary having a 1/5 interest in every one of them. In other words, Briggs J’s approach changes an intention to create a trust of a specific number of shares from a larger quantity of similar shares into an intention to create a trust of a fractional interest in all the shares.

Question 65

Briggs J

Answer 65

Generally, the courts refuse to change a person’s intention in this (or any other) manner: London Wine, at 137-138; Goldcorp, at 91. However, Briggs J may have been influenced by the fact that a share is simply a fractional interest in a company’s capital, such that transactions involving shares are necessarily transactions involving fractional interests.

Question 66

4. Certainty of objects

Answer 66

Certainty of objects is one of the three certainties necessary for the creation of an express trust. The objects of a trust need to be certain so that the trust can be regulated and (if necessary) enforced by the court. Usually the objects of a trust will be people (although it is possible to create trusts for permitted purposes). This section focuses on trusts where the objects are people.

Question 67

4 Certainty of objects

Answer 67

Although we are focusing on trusts for people, we will continue to use the term ‘objects’ rather than ‘beneficiaries’. This is because the objects will not always be beneficiaries in the true sense, as will become clear when we discuss discretionary trusts. If it is not possible to say who the objects are, it may not be possible to properly administer the trust.

Question 68

4.1 Test for certainty of objects

Answer 68

The test of certainty of objects depends on the type of trust in question. * A greater degree of certainty is required for a fixed trust than for a discretionary trust, because the trustee is required to divide the property exactly as the settlor has instructed. The trustees must know exactly who is to benefit (certainty of objects) and how much they are to receive (certainty of beneficial entitlement). If there is uncertainty, the trust will fail (in whole or in part).

Question 69

4.1 Test for certainty of objects

Answer 69

* In contrast, the power afforded to the trustee in a discretionary trust allows the courts to apply a less stringent test of certainty. This is because the trustees are not required to divide the property between all the objects, and thus they do not need to be able to identify them all. * Similarly, where a power of appointment exists, the donee of the power is not required to exercise the power. They therefore do not need to be able to identify all the potential objects of the power.

Question 70

4.2 Fixed trusts

Answer 70

It is the nature of a fixed trust that each beneficiary has a definable interest in the trust fund. In the simplest case, a fixed trust will have a single beneficiary who is entitled to the entire trust fund. If there is certainty as to who the settlor intended to benefit, there will be certainty of objects. If there is uncertainty as to the intended beneficiary, the trust will fail.

Question 71

4.2 Fixed trusts

Answer 71

If a fixed trust is intended to have multiple beneficiaries, but there is uncertainty as to the identity of one or more of those beneficiaries, the trust will not necessarily fail completely. If the identifiable beneficiaries have a beneficial entitlement which is not dependent upon the entitlement of the uncertain beneficiaries, they can still take their interest.

Question 72

Example

Answer 72

Consider the example of a trust to the settlor’s wife for life, remainder to their ‘favourite daughter’. A lack of certainty as to the identity of the remainder beneficiary will not prevent the life interest to the wife taking effect. The trust will only fail in part.

Question 73

4.2.1 Equal distribution between class

Answer 73

Some fixed trusts will require the trustees to distribute property equally between the members of a class of objects. In such cases, the trustees must be able to say who all the beneficiaries are at the time when they begin distributing the trust fund. The test for certainty of objects in such cases is therefore known as the ‘complete list test.’ It must be possible to draw up a complete list of all the beneficiaries: IRC v Broadway Cottages Trust [1955] Ch 20. It follows that such trusts require both conceptual and evidential certainty.

Question 74

Conceptual certainty

Answer 74

‘Conceptual certainty’ refers to the precision of language used by the settlor to define the class of persons whom they intend to benefit. It is sometimes described as ‘linguistic’ certainty. In other words, if the objects of the trust are not clearly defined, it will not be possible to draw up a conclusive list and the trust will fail.

Question 75

Evidential certainty

Answer 75

‘Evidential certainty’ refers to the extent to which the evidence in a particular case enables the trustees to identify the objects of the trust. For example, there may be cases where the class of objects is conceptually clear but nonetheless no evidence exists allowing the trustees to actually draw up a list of those objects.

Question 76

4.3 Powers of appointment

Answer 76

As is the case with trusts, a power of appointment must satisfy the test of certainty of objects in order to be valid. If the donee of a power is not able to determine who falls within the class of objects, they risk exercising the power improperly (ie by choosing a person who is not an object of the power). Although the objects of a power have no right to require the donee of that power to exercise it in their favour, they can constrain the improper use of the power.

Question 77

4.3 Powers of appointment

Answer 77

For the court to be able to make a judgment on such matters, it must be able to determine whether the individual making a claim (and any individual in whose favour the power is exercised) is a member of the class of objects. This does not mean it is necessary to identify every single member of the class. A power of appointment will be valid if it satisfies a test known as the ‘is/is not test’ (sometimes also known as the ‘any given postulant test’).

Question 78

4.3 Powers of appointment

Answer 78

The test requires a trustee to be able to say with certainty whether ‘any given individual is or is not a member of the class’. You may also see it described as the ‘any given postulant’ test.

Question 79

4.4 Discretionary trusts

Answer 79

Although the trustees of discretionary trusts must exercise their discretion, and therefore have an obligation to consider the range of possible beneficiaries, this does not mean they need to identify all of those people in order to exercise their discretion. Rather, they must carry out a survey of the class which is appropriate to the particular trust

Question 80

4.4 Discretionary trusts

Answer 80

The extent of this exercise will therefore depend upon the breadth of the class of objects; in the case of a small, family trust the trustees are likely to consider every individual before exercising the power whereas with a larger, commercial trust (for example, a discretionary trust for the employees of a particular company) it may not be necessary to actively consider every single object before exercising the discretion in favour of a particular individual.

Question 81

4.4.1 The is/is not test

Answer 81

Following McPhail v Doulton [1971] AC 424, it is clear that there is no need for the trustees of a discretionary trust to draw up a complete list of objects. It is simply necessary to satisfy the ‘is/is not test’.

Question 82

4.4.2 Conceptual certainty

Answer 82

Conceptual certainty is clearly still a requirement. If the objects of the trust are not clearly defined, the trustees will not be able to apply the is/is not test with certainty. If the definition is unclear, there will be categories of people of whom it is not possible to say with certainty whether they are intended to be objects or not

Question 83

4.4.2 Conceptual certainty

Answer 83

* The trustees will therefore not be able to properly survey the class and therefore will not know the scope of their powers or duties. * Potential claimants will not be able to determine whether they have a right to compel proper administration of the trust. * And if there is an allegation that the trustees have made a distribution to someone outside the class, the court will not be able to say whether the trustees have acted inside or outside their powers.

Question 84

Applying the is/is not test

Answer 84

The first two classes of object pose little problem, although they must be considered in the context of the particular document to ensure that there is no ambiguity

Question 85

Applying the is/is not test

Answer 85

(a) The ‘employees’ of a company: ‘Employees’ has a legal meaning so this term is conceptually certain. A well drafted trust deed would clearly specify whether it applied only to current employees or also extended to past/future employees of the company.

Question 86

Applying the is/is not test

Answer 86

(b) The ‘children’ of an individual: ‘Children’ also has a legal meaning so is conceptually certain. However, a settlor should ensure that this accords with their personal intention. For example, adopted children are legally the children of the adoptive parent (and are not legally the children of the biological parents). Step-children are not legally the children of their stepparents. It will therefore sometimes be preferable to specify whether the class of objects includes step-children or biological children who are not the legal children of the individual.

Question 87

The remaining two classes of object are more problematic:

Answer 87

(c) The ‘friends’ of an individual: This is the paradigmatic example of an uncertain class. How would you define ‘friends’? What are the hallmarks of friendship for you personally? And do you think they are universal?

Question 88

The remaining two classes of object are more problematic:

Answer 88

(d) The ‘relatives’ of an individual: You might wonder whether ‘relatives’ is uncertain for the same reasons as the above. However, the Court of Appeal decided that it was conceptually certain in Re Baden’s Deed Trusts(No 2) Ch 9. The judges did not reach a unanimous conclusion on its meaning; two concluded that it meant ‘descendants from a common ancestor’.

Question 89

4.4.3 Evidential certainty

Answer 89

The more difficult practical question is that of evidential certainty.

Question 90

Re Baden (No 2)

Answer 90

The law on evidential certainty for discretionary trusts is controversial, with the Court of Appeal in Re Baden (No 2) unable to reach agreement. On this particular point, each of the three judges gave a different opinion, meaning that there is no majority decision on the need for evidential certainty. In practice, the judgment which is widely considered to be the most pragmatic (and thus most likely to be followed) is that of Sachs LJ who indicated that it is for the claimant to prove to the trustees’ satisfaction that they are within the class. If they cannot prove that they are in the class, they are considered to be outside it.

Question 91

Evidential certainty in practice

Answer 91

(a) A discretionary trust for the settlor’s ‘children, grandchildren and great-grandchildren’: A claimant would need to prove to the trustees that they meet the definition using documentary evidence (such as birth certificates).

Question 92

Evidential certainty in practice

Answer 92

(b) A discretionary trust for the ‘past, present and future employees’ of a company: If the company had no record of past employees, the individuals concerned might still be able to prove they had been employed eg by showing payslips.

Question 93

Evidential certainty in practice

Answer 93

In each case, if a claimant could not prove they were in the class, they would be treated as outside it. In both of these cases, it is likely that the trust would be valid, notwithstanding the presence of some degree of evidential uncertainty.

Question 94

4.5 Administrative unworkability

Answer 94

Finally, it is important to note that a discretionary trust could fail because the class of objects is too wide. In McPhail, Lord Wilberforce said that a discretionary trust is void if the class of beneficiaries ‘is so hopelessly wide as not to form “anything like a class” so that the trust is administratively unworkable’. He gave as an example of such a class ‘all the residents of Greater London’

Question 95

4.5 Administrative unworkability

Answer 95

This dictum has been applied by the courts to invalidate a discretionary trust for the inhabitants of West Yorkshire (as many as 2.5 million potential beneficiaries). The size of the class does not invalidate a fiduciary power of appointment because the donee of a fiduciary power has no obligation to exercise the power and thus no obligation to survey the class before doing so. In Re Beatty [1990] 1 WLR 1503, the court upheld a fiduciary power to appoint property to anyone (or any corporation) in the world

Question 96

4.6 Certainty of objects: Key case law Key case: McPhail v Doulton [1971] AC 424

Answer 96

Prior to McPhail v Doulton [1971] AC 424, it was thought that the complete list test applied to discretionary trusts. It was accepted that if the trustees refused to execute the trust, the court would, in the last resort, do so by ordering equal division among the beneficiaries, relying on the maxim ‘equality is equity.’ It necessarily followed from this that it was necessary to draw up a complete list of beneficiaries.

Question 97

Key case: McPhail v Doulton [1971] AC 424

Answer 97

In rejecting this approach in McPhail, Lord Wilberforce emphasised that the court should try to give effect to the settlor’s intentions. In his opinion, equal division would often be an inappropriate method for doing this as it would be the very last thing that the settlor intended.

Question 98

Key case: McPhail v Doulton [1971] AC 424 Lord Wilberforce

Answer 98

Lord Wilberforce continued that, although the trustees have a duty to consider the range of possible beneficiaries and to select from the class, this does not mean that ‘they must have before them, or be able to get, a complete list of all possible objects’. He also highlighted the similarities between discretionary trusts and fiduciary powers of appointment. He concluded that discretionary trusts should be subject to the same test of certainty of objects as applied to fiduciary powers of appointment: the is/is not test.

Question 99

Key case: Re Baden’s Deed Trusts(No 2) [1973] Ch 9

Answer 99

After the House of Lords in McPhail confirmed the test of certainty of objects applying to discretionary trusts, it remitted the case to the Chancery Division to apply the test. This resulted in an appeal to the Court of Appeal. The term that caused a particular problem was ‘relatives’. All three judges agreed that the term was conceptually certain, but they did not agree on the meaning of the word.

Question 100

Sachs and Megaw LJJ

Answer 100

Concluded that ‘relative’ should be defined as persons who ‘trace descent from a common ancestor’. Stamp LJ adopted a narrower definition and defined it as meaning ‘next of kin’. He considered this to be conceptually certain as the term has a specific legal definition in the intestacy context. The more difficult issue which confronted the Court of Appeal was the question whether a discretionary trust requires both conceptual and evidential certainty.

Question 101

Discretionary trust

Answer 101

A discretionary trust clearly requires conceptual certainty, as the trustees cannot perform their obligations to survey the potential class of beneficiaries if they do not know how that class is defined. However, as noted above, it is unnecessary to draw up a complete list of beneficiaries, so does this mean that evidential certainty is also unnecessary?

Question 102

The three judges gave quite different views on this point:

Answer 102

Stamp LJ’s judgment involves a literal application of the is/is not test. He held that the trust would fail for uncertainty of objects if a person came forward of whom it was not possible to determine, as a matter of fact, whether they were or were not within the class. In other words, he concluded that evidential uncertainty renders a discretionary trust void.

Question 103

Megaw LJ

Answer 103

Disagreed with Stamp LJ. He concluded that a discretionary trust would be certain if it could be shown that a ‘substantial number’ of persons definitely fell within the class, even though it may be uncertain as to whether others fell within it or not. He indicated that what constitutes a substantial number depends on the facts of the case

Question 104

Sachs LJ

Answer 104

Having noted that the class was conceptually certain, Sachs LJ considered that it is for an individual claimant (ie potential beneficiary) to prove that they are within the class. This is a question of evidence. Where a claimant does not prove themselves to be within the class, they are outside of it. It makes no difference to the validity of the trust whether they are proved positively to be outside the class or merely fail to prove that they are within the class. In both cases that individual claimant is excluded from benefiting and the trustee need not consider them.

Question 105

Sachs LJ

Answer 105

Sachs LJ’s approach is widely considered to be the most pragmatic. It provides a practical solution to the evidential (un)certainty problem and prevents discretionary trusts failing for uncertainty of objects. It also accords with the view of Brightman J at first instance that a trustee could only make distributions to a person who proved that they were within the class of beneficiaries.

Question 106

5 Consequences of uncertainty

Answer 106

Now that we have considered all three certainties, let’s briefly consider the effect of uncertainty in different circumstances.

Question 107

5.1 Inter vivos arrangements

Answer 107

The analysis depends on the specific fact pattern. If the legal owner of the property has not transferred legal title to anyone else, then there will be no change in beneficial ownership unless and until all three certainties are satisfied. In contrast, if legal title appears to have been transferred gratuitously, it is first necessary to consider whether there is an intention to create a trust at all. If there is no certainty of intention, the presumption of resulting trust applies. If that presumption can be rebutted, for example by evidence that there was an intention to gift the property to the transferee, that transaction will take effect. If the presumption is not rebutted, there will be a presumed resulting trust for the original owner. Presumed resulting trusts are covered in more detail in the chapter on ‘Resulting trusts’.

Question 108

5.1 Inter vivos arrangements

Answer 108

If there is a clear intention to create a trust, and the property has already been transferred to the intended trustee, uncertainty of subject matter or objects will mean that the trust fails. The intended trustee clearly cannot keep the property so there will then be an automatic resulting trust for the settlor. Automatic resulting trusts are covered in more detail in the chapter on ‘Resulting trusts’. So, broadly, in the absence of all three certainties, there is likely to be a resulting trust for the settlor (unless it is possible to show that they intended a gift rather than a trust).

Question 109

5.2 Testamentary arrangements

Answer 109

If, instead, you are interpreting the provisions of a will, the first question is whether there is an intention to create a trust at all. If it is clear that a person is intended to receive property, but it is unclear that they are intended to be a trustee, the effect is a gift. Even if there is some suggestion that they might benefit another person, unless that intention can be interpreted as imposing a trust, it will be interpreted as evidence of the motivation behind the gift and impose a moral obligation only.

Question 110

5.2 Testamentary arrangements

Answer 110

In contrast, if the will clearly provides that a person is intended to be a trustee, uncertainty as to objects or subject matter will simply cause the provision to fail. The executors will not be required to transfer legal title to the intended trustee and the property will instead form part of the residue of the estate.

Question 111

Consequences of uncertainty No transfer of legal title Lifetime (inter vivos)

Answer 111

No change in beneficial ownership unless all three certainties satisfied.

Question 112

Legal title transferred Lifetime (inter vivos)

Answer 112

If no certainty of intention, presumption of resulting trust applies. If clear intention for transferee to be trustee, automatic resulting trust arises if there is uncertainty as to either subject matter or objects.

Question 113

Testamentary

Answer 113

No certainty of intention: Gift Uncertainty as to subject matter or objects: Trust fails and property falls into residue.