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Certainty of Intention and Paul v Consta
Contract Law (LAWS10021)
University of Manchester
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Every trust must satisfy the three certainties of intention, subject matter, and objects 1. Trustees must know what their obligations are under the trust. Trustees will be liable for breach of trust if they fail to carry out their obligations correctly. However, it is more important to emphasise that where there is a trust the person administering the same has duties. Thus another must intend to create such an instrument. The three certainties provide a trustee with a degree of protection by ensuring that their obligations are clear. Upon satisfaction of the three certainties ensures the court will be able to administer the trust. The statement suggests certainty of intention is vital for the clear intention of the settlor, to bind a trustee with duties. The case of Paul v Constance 2 has undermined this aspect of trust law, which has, it is argued, thrown the light of this key area.
This essay will address why the concept of intention is important. It will suggest that where certainty of intention is not as ‘certain’ an implied trust such as a resulting or constructive trust may come to the rescue. It will outline certainty of intention to create express trusts and why certainty of intention is important in the law of trusts, appreciated in its entirety. The essay will also consider insolvency, when a trustee enters bankruptcy and where trust law can be relied upon in the context of certainty of intention. In particular, it will focus upon the litigation of Lehman Brothers 3 , where intention recognises the creation of a trust.
1 Knight v Knight [1840] 3 Beav 148 2 [1977] 1 All ER 195 3 UKSC 6 Re Lehman Brothers International (Europe) (in administration) v CRC Credit Fund Ltd [2012]
Why certainty of intention is important to Trusts Law
An intention to create a trust is an intention to impose on a property owner an obligation to apply the property for the benefit of an identified beneficiary or recognised charitable purpose, not to deal with the property as an absolute owner. In Re Armstrong 4 the court was satisfied that the father did not intend to be an absolute owner of the term deposits but had imposed an obligation on his executor to have them applied for the benefit of his sons after his death.
The crucial issue here is determination of the intent of the settlor: whether the intention was to establish a trust, gift or neither. Lord Langdale’s indication in Knight is that the courts should ‘give effect to the intention of the testator’ 5. Rather, this textualist approach suggests that the words should be read and interpreted in their final. A powerful example of how this can be problematic can be seen in a comparison of Re. The Trusts of the Abbott Fund 6 and Re Andrew’s Trust 7. In both cases there was no provision for the residue in the event of a surplus after the stipulated events. In the former a resulting trust was held, in the latter it was treated as an outright gift. These decisions were only 5 years apart and Watt contends that only pragmatism can explain the different results 8. L. Goff confirmed this statement in Re. Osoba 9 that ‘both cases may well have been right’. In cases that were identical and with the only difference being the status of the beneficiaries, this appears to confirm the courts willingness to escape their judicial caps towards practicality in
4 Re Armstrong v Moiseiwitsch [1967] 1 All ER 238n, Ch D 5 (n1) per Lord Langdale MR 6 [1900] Ch 326 7 [1905] 2 Ch 48 8 Watt, G, Todd & Watt’s Cases & Materials on Equity & Trusts (Oxford University Press, 9th edn) 9 [1978] EWCA Civ 3
Thus, it is suggested that certainty of intention does perform a clear role for the creation of an express trust. An express trust can be created by means if a written instrument which declares itself to be a trust and which provides that identified trustees are to hold identified property on trust for identified beneficiaries. Nevertheless, such an instrument is not necessary to create a trust.
How Paul v Constance damaged Trusts law
An intention to create a trust can also be inferred from the conduct of the donor. One equitable maxim to consider is that ‘equity looks to the intent and not the form’. Thus, equity will hold that a trust has been created even though the word ‘trust’ was not used as in Paul v Constance. In this case, a bank account was opened in Mr Constance’s name only because having a joint account in different names would have embarrassed them. Various sums were paid into it and Constance said to the claimant: ‘the money is as much yours as mine’. These words, and evidence of the transactions in the account, established that Constance intended to declare himself a trustee of the money in it for himself and the claimant. However, where it is clear that there is no intention to create a trust then of course equity will not intervene is in Jones v Lock 14. According to Hudson, an express trust can be inferred from the circumstances of a case 15. This is contrary to the literal meaning of the term ‘express trust’, because the intention to create an express trust need not be ‘express’ in the sense of being an explicit intention to create a trust rather than something else. The intention must be something, which a court would define as being an intention to create a trust. For example, holding property jointly, or for one person to be a common law owner of 14 [1865-66] LR 1 Ch App 25 15 Macmillan, 2014) Hudson, A., Great Debates in Equity and Trusts (Palgrave Great Debates in Law, Palgrave
that property would have rights to it. There are many subsequent commercial situations in which the parties fail to make their intentions entirely clear 16. Lord Langdale’s tests can be observed here. In Jones the court ruled that ‘loose conversations’ could not indicate an intention to create a trust. The court ruled that an intention to create a trust could be inferred. Indeed, it is fair to say that Mrs Paul had been given a belief that the money would be hers and so the court had arguably done ‘the right thing’. Yet simply by looking at the words in question, it is contended that the Jones decision is far closer to Lord Langdale’s interpretation.
Further, a similar divergence has appeared in the commercial context 17. In Re Kayford Ltd (in liquidation) 18 , the separation of customers’ money in a different bank account was deemed sufficient to demonstrate an intention to create a trust. In Brazzill v Willoughby 19 , a trust was found in the wake of the insolvency of Icelandic bank Kaupthing and its subsidiary KSF. The UK Financial Services Authority had issued a ‘supervisory order’ in relation to KSF, which had required that KSF pay amounts into an account with the regulator which were equal to amounts owned to clients. It was found that this order, which had included the word ‘trust’, should be interpreted as having created a trust over these moneys. Similarly, in Mills v Sportsdirect Retail Ltd 20 it was held that KSF’s decision in relation a ‘repo’ transaction with one of its clients to hold payments in a separate account so that they were ‘ring-fenced’ and held in that client’s ‘box’, should be interpreted as having created a trust in favour of the customer. It was found that they had demonstrated sufficient intention to do something, which the courts interpreted as constituting trusts. The effect of these 16 Hudson, A., Law of Finance (Sweet & Maxwell, 2013, 2nd edn) 17 McKendrick, E., Goode on Commercial Law (Penguin, 2010, 4th edn) 18 [1975] 1 WLR 279 19 [2010] EWCA Civ 561 20 [2010] EWHC 1072 (Ch)
not a gift). The declaration and transfer cannot be combined. In Jones v Lock 24 the court held that there was no trust for the son. Although there was an intention to make an outright gift, a gift had not been made and likewise, a trust could not be implied. One modern illustration was in the case of Re Steele’s Will Trust 25 in which the court was willing to hold that there was an intention to create a trust where there was clear evidence that in using precatory words had been sufficient to create a trust. This can be clearly explained on the basis of intention because by following the earlier decision the testator in Re had clearly intended to create a valid trust.
The most striking modern example of lack of certainty of intention was in the case of Tito v Waddell No. 2 26. It was held by Megarry VC that the use of word trust was not conclusive when the court was trying to decide whether a trust had been created and in particular when the word was used by the Crown 27. The word could be used to indicate a trust in the higher sense a governmental obligation, which was not enforceable in the courts. A recent case on the issue of certainty of intention is that of Re Challonor Club Ltd (in liquidation) 28. The court held that it was clear that the intention of the directors in placing the contributions in a separate bank account had been to avoid these moneys being made available to creditors generally. However, as the terms of the intended trust were uncertain, no trust existed as regards the moneys in the bank account. Accordingly, the moneys formed part of the club’s assets and were available to creditors.
24 (n14) 25 [1948] Ch 603 26 [1977] Ch 106 27 Ibid per Megarry VC 28 [1997] Ch D 22
The practicalities of insolvency to intention
Certainty of intention is critical in cases of insolvencies. It is suggested that the creation of a trust is particularly crucial upon a creditor’s attempt to recover its debts when a trustee enters bankruptcy. By definition, the insolvent person will be unable to meet their debts as they become due, and there will be more unsecured creditors with more claims against the insolvent person than there is property to meet them 29. Property or money separated from other assets implies that they are to be held on trust. Therefore, to award a trust in one person’s favour is to deny access to that property to the unsecured creditors. It is normally seen that by keeping certain funds. Property or money separated from all other assets implies that they are to be held on trust.
In a complex insolvency like the Lehman Brothers insolvency 30 , the judicial instinct and of the insolvency law commentators was to maximise the amount of property which is available to all of the unsecured creditors 31. The debate emerges that it is unclear whether future cases will take the view trusts law has now swung away from the traditional approach 32. In contrast with Paul v Constance, it is suggested the courts are looking at the implications of not finding a trust across family-type arrangements, as well as ones arising in commercial dealings. Lehman Bros appears to suggest that the law should be flexible about giving effect to intentions by finding the existence of a trust and not too easily detected by ‘certainty’. The judgment suggested, utilising the example of shared ownership in family homes, that the law
29 Insolvency Act 1986, s(1)(f) 30 (n3) 31 Glister, J, and Lee, J., Hanbury & Martin Modern Equity (Sweet & Maxwell, 20th edn, p. 68 32 Hudson (n16) p. 84
Case Law Re Adams and Kensington Vestry (1884) 27 Ch D 394 Re Armstrong v Moiseiwitsch [1967] 1 All ER 238n, Ch D Brazzill v Willoughby [2010] EWCA Civ 561 Re Challonor Club Ltd (in liquidation) [1997] Ch D 22 Comiskey v Bowring-Hanbury [1905] AC 84 HL Re Kayford Ltd (in liquidation) [1975] 1 WLR 279 Jones v Lock [1865] LR 1 Ch App 25 Knight v Knight [1840] 3 Beav 148 (n1) per Lord Langdale MR Kinloch v Secretary of State for India [1882] 7 App. Cas. 619 Lambe v Eames (1871) 6 Ch App 597 Re Lehman Brothers International (Europe) (in administration) v CRC Credit Fund Ltd [2012] UKSC Mills v Sportsdirect Retail Ltd [2010] EWHC 1072 (Ch) Milroy v Lord [1862] 4 De Gf & J 264 Re Osoba [1978] EWCA Civ 3 Paul v Constance [1977] 1 All ER 195 Rowe v Prance [1999] 2 FLR 787 Re Steele’s Will Trust [1948] Ch 603 Re. The Trusts of the Abbott Fund [1900] Ch 326 Tito v Waddell No. 2 [1977] Ch 106 Statutes Insolvency Act 1986, s(1)(f)
Secondary Sources Bamford, C., Principles of International Fi3nancial Law (Oxford University Press, 2 nd edn, 94) Glister, J, and Lee, J., Hanbury & Martin Modern Equity (Sweet & Maxwell, 20th edn, p. 68 Hudson, A., Great Debates in Equity and Trusts (Palgrave Great Debates in Law, Palgrave Macmillan, 2014) Hudson (n16) p. 84 Hudson, A., Law of Finance (Sweet & Maxwell, 2013, 2nd edn) Watt, G, Todd & Watt’s Cases & Materials on Equity & Trusts (Oxford University Press, 9th edn) [1905] 2 Ch 48 McKendrick, E., Goode on Commercial Law (Penguin, 2010, 4th edn) MacFarlane, B and Mitchell, C, Hayton and Mitchell on the Law of Trusts & Equitable Remedies: Texts, Cases & Materials (Sweet & Maxwell, 14th edn)
Certainty of Intention and Paul v Consta
Module: Contract Law (LAWS10021)
University: University of Manchester
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