Constitution Of Trusts Problem
In 2010, Nixon orally declared himself as trustee of his own farm, Whitewater, for the benefit of his son, Ronald. He also declared that he was the trustee of the collection of diamonds in his safety deposit for his daughter, Nancy.
All about the transfer of title (legal) to the trustees. If I am the settlor and I am entitled to the property, there’s not gonna be any transfer. If I self-declare myself as a trustee, the legal title doesn’t go anywhere. It’s just I no longer will be the owner of the property – I’ll become trustee. There is no transfer of the property necessary.
In 2011, Nixon covenanted with Bill to transfer his shares in Watergate Ltd to Bill, to be held on trust for the benefit of his niece, Monika. Nixon asked his secretary to ensure that the shares were transferred to Bill and the transfer registered, but this was never done.
Nixon is now in severe financial difficulties and wishes to sell Whitewater, the collection of diamonds and his shares in Watergate Ltd to be able to pay off his creditors.
To begin with, in order to decide whether Nixon is entitled to sell his farm, we must establish whether he has effectively declared himself trustee, taking into account any potential formalities required. As he is the sole owner of the land, there is no need to transfer the legal title to another person.1 If he has effected a valid declaration (following the criteria in Milroy v Lord2), he will not be able to reclaim the farm back3, because he will no longer own it for himself, but he will own it as a trustee for the benefit of his son, Ronald. As a result, constitution of trusts need not be discussed. However, certain requirements must be followed in order to decide whether the self-declaration was effective.
Firstly, there must be present, clear and irrevocable declaration of trust as in the case of Re Cozens4. The intention of the settlor must be to create a trust5 and he must do everything in his power to do so6.This is because an effective self-declaration will deprive Nixon of his ownership and will place him under onerous obligations as a trustee.
In general, an oral declaration of trust is valid and effective to create a fully constituted trust even if no consideration was given7. Clearly, Nixon’s self-declaration will be sufficient as there is no evidence to suggest that his intention was not to become a trustee. Therefore, the first requirement is satisfied.
Secondly, we must take into account the type of property concerned. In this case of a freehold land, certain formalities need to be complied with. The declaration of trust needs to be in writing8. As the statute requires:
…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 will…
In other words the regulation requires ”evidentiary writing” only; thus a prior orally declaration, later acknowledged in writing, will be valid as well. In comparison, the High Court of Australia relied on the legislation in Adamson v Hayes 9and decided the case, following s.34(1)(a) of the Property Law Act 1969 (W.A), which states that ”no interest in land is capable of being created or disposed of except by writing”. In addition, if Nixon intended to transfer the legal title to someone else as a trustee, then a deed would have also been required.10 Clearly, at the time of the declaration Nixon did not conduct any writing as he orally declared himself trustee. We do not know whether he manifested and proved the declaration by some writing at a later stage, but it is unlikely that he has done so. The important point to note is that, an oral declaration of land is valid, but unenforceable.11 As a result, the court might decide to allow Nixon to sell his property, as he has not done everything that has been required of him in order to declare himself trustee.
Ronald, as a beneficiary, may try to rely on the doctrine of Rochefoucauld v Boustead12 which runs contrary to the wording of the statute. In this case, the Court of Appeal ruled that there was an enforceable oral express trust, even though there had not been a formal declaration of trust over the land. They decided so in order to prevent the statute to be used as an ”instrument of fraud”. Moreover, Berall analysed the relevant US legislation where the courts have permitted oral self-declaration of trust over land only where that trust has been proven by ”clear and convincing evidence”13. However, Youdan14 argues that the doctrine [of Rochefoucauld] does not apply where a settlor declares himself trustee15 on the grounds that it is less likely that a fraud would be committed in that situation.
In addition, the court may decide to interprete the express trust over Nixon’s land as a constructive trust, which is exempt from writing under s.53(2)16, because it is outside the scope of s.53(1)(b)17. Bannister v Bannister18 clearly demonstrated that this approach is possible.. However, the court is most likely to conclude that Nixon’s declaration is not void, but it is unenforceable by the beneficiary, Ronald, and will allow Nixon to sell his farm, on the grounds that he has failed to comply with the formalities required and that it is unlikely that he will use the statute as an instrument of fraud.
In order to determine whether Nixon could sell his collection of diamonds, we must first decide whether he has effectively declared himself trustee, taking into account any formalities that could be required, as we did with the farm. While we have established that Nixon will be able to sell his farm, because he did not follow the formal requirements for the creation of trusts over land, he is going to face a challenge in relation to his diamonds.
Again here, there is no need to transfer the legal title, as Nixon is the sole owner of the collection of diamonds19 and it would be sufficient if he had effected a valid declaration. Therefore, as with the farm, constition of trusts will not be considered. However, the main difference in this situation is the type of property itself which we must take into account20. The collection of diamonds is a chattel and the general rule states that an effective declaration of trust over chattels will not require any formalities21. In addition, Mr Bacon confirmed the rule in Jones v Lock, explaining that a parol declaration of trust may be valid, and may be enforced in equity22. All the court is looking for, is intention of a present irrevocable declaration of trust 23. Therefore, we must determine whether Nixon has succeeded in that point.
We are not given any information about how exactly Nixon declared himself trustee of his personalty – whether orally24, in writing or by an outright gift, but it is irrelevant to chattels as they have no formal requirements, as we have already established. Moreover, Section 53 (1)(b) LPA 1295 does not apply to declaration of trusts over personal property. The practical difficulty, however, is proving the existence of such trust, if it cannot be proved by any writing. Therefore, if either Nixon orally declared himself trustee and Nancy can prove that oral declaration, or alternatively if Nixon declared himself trustee in writing or by an outright gift, that trust will be valid and enforceable; and as a result, the fully constituted trust cannot be undone and the property settled on trust cannot be claimed back25.
Lastly, we must consider whether Nixon can sell his shares. They are a type of intangible property and as such have different requirements from land and chattels. In order to make an effective transfer of the legal title to Bill, Nixon would have to either have completed a share transfer form26, or instructed his secretary appropriately if the shares are held electronically in the CREST system27, and then return that form to Watergate Ltd, which would register Bill as a shareholder.
We are told that Nixon covenanted with Bill in order to transfer his shares in Watergate Ltd to Bill, to be held on trust for the benefit of his niece, Monika. In other words, Nixon executed a formal promise contained in a deed to set up his shares on trust, and therefore, entered into a binding contract28 – which is enforceable in common law but not in equity. Therefore, Monika may be entitled to claim damages for breach of the covenant29. Only parties to that covenant will be entitled to enforce the covenant at common law for damages, or in equity by specific performance if they have given consideration for the promise.30
Therefore we must decide three things: (i) whether Nixon made an effective transfer of the legal title and created a fully constituted trust; (ii) if he did not, whether Monika is a volunteer31, because if she is not – she might be granted specific performance and be entitled to the shares; (iii) if she is a volunteer – whether she is allowed to sue for damages in common law for breach of the covenant.
Firstly, Nixon must have intended to do, and have actually done, everything required to vest the legal title with Bill32. If he effectively transferred the property to Bill on trust, Nixon ceases to be entitled to the legal title(unless he had declared himself a beneficiary under the trust as well, which he did not do). The fact that he voluntarily covenanted with Bill, indicates his clear intention to separate the legal from the equitable title.
It is crucial to note that the transfer of shares will not be fully completed until the actual registration from the company has taken place. In this case, we are told that Nixon has asked his secretary to ensure that the shares were transferred to Bill and the transfer registered, but this was never done. Had a transfer form been completed properly, the rule in ReRose33 (which indicates that if the donor had done everything in her power to make a gift, then even if the donor did not complete all the formalities required, equity will see the trust as fully constituted) would be applied in favour of Monika, as equity would shift the legal title back to Nixon, so he would hold the shares on trust for Monika.
Clearly, Nixon did not do everything in his power; he could have registered the share transfer himself, instead of relying on his secretary, so he may argue that the trust was not fully constituted. However, Monika could counter-argue that Nixon intended to make an effective gift of shares and that it would be unconscionable for him to recall that gift as it happened in Pennington v Waine34. The court is unlikely to decide the latter, because the beneficiary in Pennington was instructed that no action was required on his part, and he has given consideration for the promise by becoming a director in the same company. 35 Therefore, Nixon did not do everything in his power and the trust was not fully constituted as it was required in Milroy v Lord36.
Secondly, as we have established that the trust is incompletely constituted, the next question is whether Monika can compel Nixon to carry out his promise in the covenant, by, in effect, requiring specific performance thereof. The general principle states that if Monika has given ”valuable” consideration (excluding nominal consideration and a deed – both of which are enforceable in common law only) or marriage consideration37 for the settlor’s promise, then equity will assist her and will compel Nixon to constitute the trust38. However, there is no evidence that she has provided any consideration from the required ones, so it is likely that she will not be granted specific performance – which would mean she is a volunteer39. As a result, she will not be able to rely on the covenant itself and the court will apply the maxim of equity which states that ”equity will not assist a volunteer”40. Therefore, Monika will not obtain the shares by means of specific performance.
Thirdly, it is crucial that Monika is a volunteer and is not a party to the covenant. If she was the latter, she could have claimed common law damages for breach of Nixon’s obligations straightaway41 . The general rule, which applies to Monika, is that she will not be able to compel Bill, who is a party, to take proceedings. Moreover, she will not be able to rely on the Contract (Rights of Third Parties) Act 1999 for a common law compensation for two reasons: (i) there is no indication that the covenant expressly provided that she may enforce it42 and (ii) there is no evidence Nixon intended the terms to be enforceable by Monika, so s1(1)[b]43 will be rejected too.
In fact, the leading case in that situation is Fletcher v Fletcher44 where a father covenanted with his trustees by deed to settle ï¿½60,000 on trust for his illegitimate sons. The surviving son was a volunteer and not a party of this covenant, so he was not allowed to obtain damages. The Court decided it would be unfair to deprive him of the money, so the judges were innovative and took a different approach. It was held that although the son was not a party to the deed himself, he was entitled to recover the ï¿½60,000 from the executors because the trustees held the benefit of the covenant on trust for him45.
Clearly, Monika would consider relying on that case. However, the crucial point which distinguishes the Fletcher case from Nixon’s situation is that the covenant in Fletcher ”though voluntary, was yet complete, and effectually created a trust for the objects of it; leaving nothing for the Court to perfect”46. In contrast, Nixon did not effectually constitute the trust, as we have already established. Moreover, even if he did, the only way Monika could acquire an equitable interest would be if it could be proven that Nixon had the intention to declare a trust over the benefit of the covenant itself47. That intention must be ”affirmatively proved”48. There is no evidence that Nixon intended to create ”a trust of the benefit of the covenant”, so the Court will probably not decide in favour of Monika.
Alternatively, if she could demonstrate that she had suffered some detriment in reliance on the covenant itself, there might be a right to proprietary estoppel to reverse that detriment. However, there is no indication that she has suffered any detriment, and therefore, she will probably be entitled to nothing from the shares.