McDonald & Street: Equity & Trusts Law Concentrate 4e
Chapter 3: Outline answers to essay questions
The current approach to certainty of objects in discretionary trusts creates more uncertainty than it resolves. Discuss.
Introduction : the test for certainty of objects previously required a complete list of beneficiaries (IRC v Broadway Cottages). While the new test in McPhail v Doulton allowed more discretionary trusts to be upheld, the case law in this area remains uncertain and confusing.
McPhail v Doulton : clearly set out the test for certainty of objects, as per Lord Wilberforce. The test is the same as for fiduciary powers (Re Gulbenkian's Settlement).
Discuss whether Lord Wilberforce's reasons for applying the same test are convincing – should a trust for which it may not be possible to identify all the potential beneficiaries be valid?
Re Baden's Trust (No 2) : the court had to decide how to apply the test set out in McPhail v Doulton. A strong knowledge of the facts and differing reasoning of the Court of Appeal is vital if you are to answer this question well.
Discuss the differences between the approaches of Stamp, Sachs, and Megaw LLJ. The diversity of opinion within the court is indicative of the uncertainty of the test itself.
Discuss the advantages and disadvantages of each approach.
Discuss and illustrate the central idea of 'conceptual certainty'. How is it distinguished from evidential certainty? Do the different approaches in the Court of Appeal use 'conceptual certainty' correctly? (Emery provides an excellent discussion of these issues (see, chapter 3 key debates).)
Can conceptual uncertainty be cured? This issue highlights further uncertainty in the current approach to certainty of objects for discretionary trusts. Discuss the different reasoning adopted in Re Tuck's ST. Note: this is an issue on which textbook authors also disagree!
All of these issues are of particular importance to trustees, who may be held liable for breach of trust if they distribute property incorrectly.
Conclusion : draw together the points made. Reflect on the reasons for changing the test for certainty of objects for discretionary trusts – do the benefits outweigh any problems?
|McPhail v Doulton|
|Court||House of Lords|
|Full case name||Re Baden's Deed Trusts (No 1)|
|Decided||6 May 1970|
|Citation(s)|| UKHL 1|
 AC 424
|Lord Wilberforce, Lord Hodson, Lord Guest|
|Judge(s) sitting||Lord Reid|
|Certainty, express trusts|
McPhail v Doulton UKHL 1, also known as Re Baden's Deed Trusts (No 1) is a leading English trusts law case by the House of Lords on the certainty of beneficiaries. It held that so long as any given claimant can clearly be determined to be a beneficiary, or not, a trust is valid. The Lords also remanded the case to the Court of Appeal to be decided on this new legal principle as Re Baden's Deed Trusts (No 2).
Bertram Baden executed a deed settling a non-charitable trust for the benefit of the staff of Matthew Hall & Co Ltd and their relatives and dependents. The objects clause provided that:
The trustees shall apply the net income of the fund in making at their absolute discretion grants to or for the benefit of any of the officers and employees or ex-officers or ex-employees of the company or to any relatives or dependants of any such persons in such amounts at such times and on such conditions (if any) as they think fit.
The validity of the trust was challenged, averring that the objects were insufficiently certain.
Lord Wilberforce, after noting the fact that the settlor had left his property on trust, with instructions to distribute according to the trustees' choices (and, therefore, not equally among the potential beneficiaries), stated the following:
As a matter of reason, to hold that a principle of equal division applies to trusts such as the present is certainly paradoxical. Equal division is surely the last thing the settlor ever intended: equal division among all may, probably would, produce a result beneficial to none. Why suppose that the court would lend itself to a whimsical execution? and as regards authority, I do not find that the nature of the trust, and of the court's powers over trusts, calls for any such rigid rule. Equal division may be sensible and has been decreed, in cases of family trusts, for a limited class, here there is life in the maxim 'equality is equity,' but the cases provide numerous examples where this has not been so, and a different type of execution has been ordered, appropriate to the circumstances.
Lord Wilberforce then went on to discuss the authority for this principle, which is compelling. As to the value of the facts, the comment above was a powerful reason for departing from the Broadway Cottages case ( Ch 20), which was the basis for the strict test for certainty of object of discretionary trusts, as overruled in McPhail (for which see below).
The case fundamentally restated the law in relation to certainty of objects for discretionary trusts, one of the three certainties required to form a trust.
For a trust to be valid, "It is clear law that a trust (other than a charitable trust) must be for ascertainable beneficiaries".
Prior to McPhail, the law was that for a discretionary trust one also had to be able to draw up a complete list of beneficiaries. However, in McPhail the House of Lords restated the law, abandoning the "complete list" test in favour of an "is or is not" test. Lord Wilberforce phrased the new test of certainty thus:
Can it be said with certainty that any given individual is or is not a member of the class.
This was the same test which the courts had previously applied to powers.
On the facts, it was held that it was perfectly possible to say, looking at an individual whether they were either an officer or employee, an ex-officer or ex-employee, or a relative or dependent of one, and the validity of the trust was upheld.
The two key criticisms of the "in or out" test (also known as the "is or is not" or "given postulant" tests) for discretionary beneficiaries were:
- A trustee's duty to distribute could only be properly performed if he considered every possible claimant
- The court could only execute the trust, if the trustee failed to do so, by percentage division of the trust fund
Lord Wilberforce, in relaxing the generally accepted strictures of trust law prior to the decision, met these two objections as follows. It was only necessary, he held, to consider every possible claimant, if one was fully distributing the fund, i.e., essentially winding it up. In such cases he would necessarily make a wider and more systematic survey in deciding to make grants. But there was no requirement to draw up a complete list of names, as indeed the law did not require for the exercise of a discretionary power. Further he felt that the court being called upon to execute the trust if the trustee would not do so was a theoretical rather than a practical difficulty. He pointed out that in cases that had reached the courts, there were no examples of a trustee refusing to act in that manner. But in any event, the court had powers to remove and replace trustees, who could then act properly. Further, it was not the case, in his view, that distribution was impossible unless there was an equal division, and he cited several older cases, prior to 1801, in which the court exercised discretion in relation to the making of distributions.
The case at the centre of McPhail was remanded to the Court of Appeal, to be decided using the principles set out in McPhail, under the name Re Baden's Deed Trusts (No 2).
Although McPhail is rarely mentioned in the same breath as other revolutionary decisions, such as Donoghue v Stevenson or Dunlop Pneumatic Tyre v Selfridge and Co. Ltd., it nonetheless fundamentally restated the law of trusts, and created the discretionary trust as a far more viable and accessible option in terms of estate planning, and significantly reduced the strictures associated with such trusts.
- ^ AC 424, 451
- ^The three certainties are (1) certainty of intention, ie. did the settlor intend to create a trust, (2) certainty of subject-matter, ie. what is in the trust fund, and (3) certainty of objects, ie. the beneficiaries. It is this last point that McPhail v Doulton restated the law in relation to; see Knight v Knight.
- ^Re Vandervell's Trusts (No 2)  Ch 239 at 319 perLord Denning
- ^Re Gestetner Settlement  Ch 672
- ^ AC 424 at 454
- ^Re Gulbenkian's Settlements  AC 508.