Challenges in Certainty: Discretionary Trusts and Legal Application

Introduction

The three certainties in the trust are applied for the purpose of ensuring that there is a certainty maintained in the operation of the law of trust. However, the application of the rules of certainty does not always lead to the intended result of certainty in law. This essay argues that courts have turned in many cases to facts rather than established principles which has led to perverse application of the law, especially pertinent with respect to the treatment of discretionary trusts.

The ‘three certainties’ – Established principles

A declaration of trust meets the requirement of certainty when the settlor declares “the terms of the trust with sufficient certainty or precision for the trustees to know what they must do, or the intended trust fails.” The three certainties that are essential to creating a valid trust are related to certainty of intention, subject matter, and object.

Certainty of intention relates to the clear intention of the testator to give his property in trust. Certainty of subject matter relates to the certainty with which the object or property of trust can be identified. Certainty of object relates to the certainty with which the beneficiaries of the trust can be identified. The maxim certum est quod certum reddi potest is used to justify this rule, which leads to the conclusion that if something is capable of being made certain it should be treated as certain.

Certainty of intention is to be distinguished from the certainty of subject matter and object because it relates to the primary question of whether the putative settlor intended to create a trust at all, which if determined in the affirmative the other two questions come into effect. The certainties of subject matter and objects relate to the question of the workability of the intention of the settlor, which comes into focus if the intention is clear.

Trusts being based on the law of equity, the emphasis is on substance and not form; which means that the declaration of trusts requires no predetermined formula or even the use of the word trust. This may at times lead to uncertainties, explained by Lord Wilberforce in McPhail, as follows (in context of object):

"linguistic or semantic uncertainty which, if unresolved by the court, renders the gift void"; "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"; and the case where, although "the meaning of the words is clear," "the definition of beneficiaries is so hopelessly wide as not to form 'anything like a class' so that the trust is administratively unworkable.”

The uncertainties that can generally arise in trust cases have been categorized by Penner as conceptual uncertainty, evidential uncertainty, and whereabout uncertainty. Conceptual uncertainty relates the uncertainty attached to vagueness of the language used to describe the terms of the trust. For instance, in OT Computers, the uncertainty with respect to the object related to the use of the term ‘urgent suppliers’, and in Gold v Hill, the uncertainty related to the use of the phrase ‘Carol and the kids’. However, the way the courts dealt with the uncertainty in these two cases indicate that courts have significant power of interpretation and determination of meaning of language, which may lead to perverse results. This is discussed in detail later in this essay.

Evidential uncertainty relates to the lack of precision in the definition of the subject matter or objects of the trust, which may lead the court to confusion on the matter. Whereabouts uncertainty relates to the lack of certainty on the whereabouts or location of the subject matter.

It is in the context of ambiguities in terms that the courts may turn to facts and not to established principles. It may be mentioned that the courts play an important role in the determination of validity of trusts and in many cases the ultimate test of certainty is not that there is some conceptual certainty in the trust but that the court is willing to make the trust practically certain. This is clear from Lord Wilberforce’s observation in McPhail, where he notes that a trust is upheld if “there is sufficient practical certainty in its definition for it to be carried out, if necessary with the administrative assistance of the court, according to the expressed intention of the settlor.”

The expression practical certainty is interesting because its leads to the conclusion that it is the determination of the court that it is willing to interpret certainty into a trust because it is practical (which would require the court to turn to facts); this is central to its determination of conceptual certainty. Indeed, this much has also been noted by the court in Re Gulbenkian, where Lord Upjohn noted that the court has a remedial function which can extend to the correction of language, where language in a trust is ambiguous or imprecise and therefore not capable of satisfying the criterion of validity. Therefore, there is scope for ambiguity and uncertainty in the way the courts itself determine questions related to certainties in the trust.

Ambiguities and uncertainties in the trust law

Despite the clear rules of three certainties being laid down in established precedent, there are cases in which different outcomes have resulted. One of the areas where instead of following the established precedent, courts have chosen to turn to facts is the area of certainty of objects. In this context, the law relating to certainty of objects in both fixed and discretionary trusts needs to be considered.

With regard to fixed trusts, the test that is followed is the ‘complete list’ test, in which the court determines whether the complete list of all the beneficiaries can be drawn or not. This is also known as the rule of ‘exhaustive enumeration’. The court applies this test by reading the trust and determining whether it is possible to draw a list of all beneficiaries of the trust; if so, then the trust stands, but if not, then the trust will fail and the property will revert to the settlor. This test has been applied in many cases by the courts, including those related to discretionary trusts. However, the difficulty comes when the court is faced with a trust that is too wide in its object; in R v District Auditor, the court took the position that it could not allow the trust to succeed because it was too wide. In this case, the discretionary trust of £400,000 was created by the council to be applied for a list of purposes “for the benefit of any or all or some of the inhabitants of the county of West Yorkshire.” The court found that the trust was too broad, with a potential list of 2 ½ million beneficiaries, which would be administratively difficult to draw out in a complete list. Therefore, the trust was held to be invalid.

In OT Computers Ltd., the court allowed the trust which was made by the company for the customer deposits, because the company had already drawn up a list of customers to whom the trust could be applied; as such, the beneficiaries were identifiable. However, in the same case, the court did not allow the other trust which was made for the ‘urgent suppliers’ because of the use of the term ‘urgent’, which was found to be too vague to be explained; and even if the company would have drawn up a complete list of suppliers (it had drawn up a partial list), the court held that it would not have allowed the trust on the ground that it was vague. However, the same difficulty did not come in the way of the court in Gold v Hill, to decide in favour of validity of trust even when couched in ambiguous terms for “Carol and the kids”. The difficulty arose because Mr Gilbert already had six children from his previous marriages, so the question arose whether the trust was for Carol and all of the kids, including those from his previous marriage or only his kids from his marriage with Carol. The court decided that as Mr Gilbert’s children from his previous marriage were adults and could hardly be referred to as kids and the use of the language “Carol and the kids” suggests that the trust was for Carol and her children, it could be clearly surmised that the trust was for only Carol’s children. The interesting aspect of this case is that there was an ambiguity regarding the interpretation of the terms of the trust with regard to the object of the trust, but that did not prevent the court from holding in favour of the validity of the trust.

In Gold v Hill, the court also observed that the task of the court in discretionary trust is to interpret the settlor’s intention by using “its common sense” and not strike down the trust simply because of lack of certainty. This means that the court chose to turn to facts rather than established principles.

The established principle is that the object of the trust should be certain. In cases like R v District Auditor, and OT Computers Ltd., the courts have refused to give effect to trusts if their objects are not certain. In OT Computers Ltd., the court refused to give effect to the trust for ‘urgent suppliers’ even if the company had drawn a list of these suppliers because the word urgent was ambiguous. Comparing the decisions of the courts in the three cases discussed here, one can draw a conclusion that either the court erred in Gold v Hill; based on the decisions with regard to discretionary trusts, the court should not have allowed the trust where the use of the word ‘kids’ was open to different interpretations, or the court erred in OT Computers Ltd., where based on the decision in Gold v Hill, it should have allowed the trust for ‘urgent suppliers’ because the company had prepared a partial list of such suppliers and the intention of the company was clear that it wanted to benefit these suppliers.

Even on the basis of the McPhail judgment, the decision of the court in OT Computers Ltd. appears perverse. In McPhail, the court observed at one point that the “fact that objects of a discretionary trust can compel a distribution, even though not necessarily to them, strengthens the obligation to consider the class diligently, and a greater degree of certainty is therefore required.” In McPhail, the class was “relatives” and “dependants”, whereas in OT Computers Ltd., the class was ‘urgent suppliers’. Even if it is accepted that the problem with the use of the words ‘urgent suppliers’ was not only that the word urgent was vague, but also that the class of the beneficiaries was not completely listed by the settlor, the decision in McPhail could be used to justify the allowing of the trust in favour of suppliers. Regard may be had here to the holding of the court in McPhail that the entire class need not be ascertained if it can be said with certainty that any given individual is or is not a member of the class.

As discussed earlier, the historical test for certainty of objects for a trust was that for a trust to be valid one had to be able to draw up a complete list of the objects. This test was applied to both discretionary and fixed trusts. However, the courts altered this principle in McPhail v Doulton, in which the House of Lords applied the “is or is not” test to discretionary trusts. This was a test applied to the powers of appointment, and McPhail extended it to discretionary trusts. The “is or is not” test provides that “for powers, namely, 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.” The application of this test has been criticised by some scholars, while it has also been appreciated by some who argue that the discretionary trust being closer to powers of appointment it is an appropriate test. The differences of opinions in academic writing reflect also the differences in how courts also interpret discretionary trusts. However, it may be noted that the differences in fixed and discretionary trusts are recognised in authorities as well.

The McPhail case involved a question on whether the use of the terms “relatives” and “dependants” in the trust satisfied the object requirement of the three certainties. In other words, did the terms refer to certainty of objects. Although there was a previous precedent on how certainty of objects was to be determined in Broadway Cottages Trust case, in which the test of certainty of objects is the same for both fixed trusts and discretionary trusts, the High Court chose to adopt the position taken by the court of Appeal in Re Gulbenkian's Settlements, which was related to power of appointment and applied the flexible test of certainty for powers in that case instead of the established precedent of Broadway Cottages Trust. Previous to the McPhail decision, the courts had generally accepted the ‘complete list’ test for discretionary trusts. This test was also applied to fixed trusts. The ‘is or is not’ test was previously adopted for powers of appointment and not discretionary trusts. As per the maxim certum est quod certum reddi potest, courts have followed the norm that if something is capable of being made certain it should be treated as certain. In context of the objects of the trust, the maxim demands that beneficiaries of the trust should be ascertained or be capable of being ascertained.

The ‘complete list’ test for discretionary trusts was applied earlier to ensure that the objects were ascertained or capable of being ascertained. A major departure from established precedent in this case was in the form of departing from the need for evidentiary certainty, while maintaining conceptual certainty. The latter relates to the possibility for the courts to identify the beneficiaries, and the former relates to the certainty about proving of the identity of beneficiaries. Thus in McPhail, if conceptual certainty is satisfied, it is not necessary to satisfy evidential certainty. This marks a departure from precedent and shows that the courts have turned to facts rather than established principles which has also led to a different application of the law than the established precedent. When seen in the context of the line of decisions including Broadway Cottages (which requires the satisfaction of both evidentiary and conceptual certainty), Re Baden 2 (which requires the satisfaction of conceptual certainty and the ascertainment that the class of persons can be ascertained), and McPhail (which only requires the satisfaction of conceptual certainty and leaves the discretion to the trustees to ascertain some beneficiaries who can fit into the class so determined), it is clear that there is much to leave to doubt as far as the test of evidential certainty with respect to class of persons in discretionary trusts is concerned. When Lord Denning’s observation that “if there is some particular person at hand, of whom you can say that he is fairly and squarely within the class to be benefitted, then the clause is good,” then the difficulty with relation to how to collate the judicial reasoning on discretionary trusts becomes more pronounced.

On the other hand, Lord Wilberforce has defended the departure from precedent on the basis that the court cannot presume to apply to the settlor the intention that he himself did not have and when the settlor himself did not intend equal distribution between all beneficiaries, then the ‘complete list’ test becomes irrelevant to the discretionary trust in the matter and instead an ‘is or is not’ test allows the court to give effect to the intent of the settlor.

Conclusion

The authorities discussed in this essay indicate that with regard to certainties of trust, there are cases where the court turns to facts rather than to established principles which leads sometimes to perverse application of the law. The treatment of discretionary trusts by courts is particularly relevant here because the courts have not always taken a similar line of reasoning on how they interpret terms that are ambiguous. Courts have also taken on the role of the authority interpreting the terms in practical ways so as to give meaning and effect to the trust when such trusts could have failed on the basis of certainties rules. This indicates that the courts exercise considerable power to allow or disallow trusts and in doing so they turn to facts of the case and sometimes ignore the established principles as it happened in McPhail.

Cases

Gold v Hill [1999] 1 FLR 54.

Inland Revenue Commissioners v Broadway Cottages Trust (1955) Ch 20.

IRC v Broadway Cottage Trusts (1955) Ch 20.

Knight v Knight (1840) 3 Beav 148.

Lambe v Eames [1871] 6 Ch App 597.

Mc Phail v Doulton [1971] AC 424.

OT Computers Ltd. v First National Trinity Financial Ltd [2003] EWHC 1010 (Ch).

Re Astor’s Settlement Trusts [1952] Ch 534.

Re Denley’s Trust Deed (1969) 1 Ch 373.

R v District Auditor, ex parte West Yorkshire Metropolitan County Council [1986] RVR 24.

Re Baden (No 2) [1973] 1 Ch 9.

Re Leahy [1959] AC 457, [484].

Re Gulbenkian's Settlements [1970] A.C. 508.

Schmidt v Rosewood Trust Ltd [2003] UKPC 26.

Books

Atkins S, Equity and Trusts (Routledge 2015).

Clements R and Abass A, Equity and Trusts: Texts, Cases and Materials (Oxford University Press 2015).

Davies P and Virgo G, The Principles of Equity and Trust (Oxford University Press 2016).

Garton J, Moffat G, Bean G, Probert R, Moffats’ Trust Law (6th ed., Cambridge University Press, 2015).

Hudson A, Principles of Equity and Trusts (Oxon: Routledge 2016).

Penner J, The Law of Trusts (Oxford University Press 2016).

Watt G, Equity and Trusts Law Directions (Oxford University Press 2014).

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Ashdown MJ, "In defence of the rule in Re Hastings-Bass" (2010) 16 (10) Trusts & Trustees 826.

Charalambous C, ‘Equity and Trusts: Concerned with Moral Questions or Formal Rules’ (2014) 4 Southampton Student L. Rev. 24

Klinck DR, "Mcphail v. Doulton and Certainty of Objects: A Semantic Criticism" (1988) 20 Ottawa L. Rev. 377.

Jackson NJ, "Certainty of beneficiaries in Jersey and the First Principles of Trust Law" (2015) 96 Law Quarterly Review 100.