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by Mark Pawlowski.
To
what extent are trusts for non-charitable purposes valid? Is a proprietary
beneficiary a necessary prerequisite to a valid trust? The growing importance
of offshore jurisdictions with non-charitable purpose trust legislation
suggests that such trusts do perform an important commercial function and
should, therefore, be recognised under English law.
As we all know, a trust for non-charitable purposes is
void, under English law, as having no human beneficiary capable of enforcing
the trust. The so-called “human beneficiary” principle is of long-standing and,
although there are several notable (albeit limited) exceptions, the general
principle remains that a trust must have beneficiaries who are capable of
owning the trust property and enforcing the obligations and duties of the
trustee.
The reason for the rule is that a trust gives rise to
an obligation and so, consequently, there must be a beneficiary to whom the
duties of a trustee are owed. Conversely, the beneficiaries have a correlative
right to render the trustee accountable for his actions and, if necessary,
compel performance of his obligations by court order. If there are no
beneficiaries with equitable interests in the trust assets, there is
technically no one “in whose favour the court can
decree specific performance”: Morice v Bishop of
Durham (1804) 9 Ves. 399.
The difficulty, of course, with this approach is that
it frustrates the wishes of a settlor or testator, who may want to benefit a
legitimate public object or useful social experiment which does not fall
strictly within the definition of charity. A trust, for example, for the promotion
of a particular sport (such as angling or yacht racing) is not charitable
unless linked to education: Re Nottage [1895] 2 Ch.
649 and Re Clifford [1912] 1 Ch. 29. Similarly, a trust to apply income for the
purposes of research into a proposed new alphabet also falls outside the
definition of charity: Re Shaw [1957] 1 W.L.R. 729. To what extent, however, is
it legitimate to use the mechanism of a trust for the carrying out of mere
purposes where there are no beneficiaries vested with equitable ownership in
the trust property?
Trusts without a beneficiary
The rule that a valid trust “must be for the benefit
of individuals” (Bowman v Secular Society Ltd [1917] A.C. 406, 441, per Lord
Parker) is not absolute. A trust for charitable purposes is valid despite the
absence of an equitable beneficial owner to enforce the trust. Here, of course,
it is the Crown (acting through the Attorney-General or the Charity
Commissioners) who takes on the role of parens patriae on behalf of the public at large. Apart from this,
there are several well-known “anomalous” exceptions, classified by Lord Evershed M.R. in Re Endacott
[1960] Ch. 232, where the trustee may perform the terms of the trust if he so
wishes, but the court will not oblige him to do so. These so-called “trusts of
imperfect obligation” comprise (1) trusts for the erection of monuments and
graves; (2) trusts for the saying of masses; and (3) trusts for the maintenance
of particular animals. They will be valid (though unenforceable) provided they
do not offend the rule against perpetual trusts. Presumably, in the absence of
a beneficiary, the trustee is both the legal and beneficial owner of the trust
property so that, if he fails or refuses to carry out the trust, the property
will revert back to the testator’s residuary estate upon a resulting trust as
to both the legal and equitable title. In reality, there is no trust here at
all, rather a mere power to apply for the stated purposes, with a gift over or
a resulting trust in default of exercise of the power.
There are, of course, other cases where there may be a
trust despite the lack of an equitable owner. The obvious example is that of a
discretionary trust in favour of a large class which
is too large to list but, nevertheless, conceptually certain in definition.
Similarly, there is no equitable title to the estate of a deceased person until
such time as the administration is completed. The personal representatives are
merely the legal owners during the administration period – there is no
equitable ownership.
Is a beneficiary necessary?
It is apparent that a number of situations exist where
a trust is valid despite the absence of an equitable proprietary owner. This
prompts the question whether the existence of a beneficiary with an equitable
proprietary interest in the trust property is a necessary prerequisite to the
enforcement of a purpose trust.
It seems that a mere indirect interest is not enough:
Shaw v Lawless (1838) 5 Cl. & Fin. 129. Thus, for example, a trust for the
education of the settlor’s daughter at a particular
school would not give the headmaster standing to enforce the trust, even though
it would indirectly benefit him. Similarly, the indirect interest of a testator
or settlor to see that his wishes are performed is insufficient. In the words
of Roxburgh J. in Re Astor, at 542: “if the purposes
are valid trusts, the settlors have retained no beneficial interest and could
not initiate [proceedings].”
But what of the interest of a residuary legatee? In Re
Thompson [1934] Ch. 342, the testator bequeathed the sum of £1,000 to a friend
to be used towards the promotion of foxhunting. The residue was to pass to
Trinity Hall of the University of Cambridge. Clauson
J held the bequest valid on the basis that the residuary legatee could apply to
the court to compel performance should the trustee fail to carry out the trust
purpose. There are other cases to the same effect, notably, the decision of
Knight-Bruce V-C. in Pettingall v Pettingall
(1842) 11 L.J. Ch. 176 and Roxburgh J in Re Astor’s
Settlement Trusts [1952] Ch. 534. The difficulty here, as discussed by McKay
(see, L. McKay, “Trusts for Purposes – Another View”, [1973] 37 Conv. 420), is
that a residuary legatee (or next of kin) usually has no interest (equitable or
otherwise) to give him standing to enforce the trust against the trustee. On
the contrary, he may be more concerned to see that the trust fails since he
will then stand to benefit from the trust assets. His only concern, in this
regard, will be to prevent a misappropriation of the trust funds by the
trustee. By contrast, McKay argues that contractual licensees have sufficient
interest not only to restrain misapplications on the part of the trustee but
also oblige the trustee to carry out the trust: see Re Denley’s
Trust Deed [1969] 1 Ch. 373, where the employees’ rights to use a sports ground
were conferred in a deed. His conclusion, therefore, is that something in the
nature of a legal interest is required to confer locus standi
to compel performance of the trust. If no such interest can be found, then, in
his view, “the basic principle underlying the human beneficiary principle is
breached in that the settlor has conferred upon his ‘trustee’ a power of
ownership, not trust”: ibid, at 435.
Although the so-called “Denley
principle” permits contractual licensees to enforce the terms of the trust, it
is difficult to discern where the beneficial ownership lies in such cases.
Clearly, the employees in Denley were conferred with
a direct benefit under the trust, but this does not mean to say that they had
an equitable proprietary interest in the land in question. In the absence of
any such interest, one can only assume that beneficial ownership is in some way
suspended in these circumstances for the duration of the trust. This, of
course, flies in the face of orthodoxy that “a gift on trust must have a cestui que trust”: Re Wood [1949]
Ch. 498, 501, per Harman J. In other words, there must be a person with a
property right (ie, a beneficiary) who can enforce
the trust. The correlative of this rule is that the beneficiary (having a right
in rem) may call upon the trustee (as legal owner) to
convey to him the trust property: Saunders v Vautier
(1841) Cr. & Ph. 240.
Alternative Mechanisms
Given that trusts for non-charitable purposes are void
for want of a beneficiary with sufficient standing to compel performance of the
trust, several alternative approaches have been used to uphold gifts of this
nature.
Although “a valid power cannot be spelt out of an
invalid trust” ( see, IRC v Broadway Cottages Trust [1955] 1 Ch. 20, 36, per
Jenkins L.J.), there is no reason why an express power to apply property
towards a non-charitable purpose (provided it is limited to the perpetuity
period) should not be valid: Re Douglas (1887) 35 Ch. 472. Of course, if the
power is not exercised, there will be a resulting trust for the persons
entitled in default of appointment. (Interestingly, Section 16(1) of the
Ontario Perpetuities Act 1966 converts a trust for a specific non-charitable
purpose into a power to appoint the income or capital, provided several
conditions are satisfied).
An alternative approach is to utilise
the mechanism of the unincorporated association. In Re Lipinski’s Will Trusts
[1976] Ch. 235, for example, a gift to the Maccabi Association
to be used solely in the construction of new buildings for the association was
upheld on the basis that, although a gift for a purpose, it was directly for
the benefit of the members. Thus, where the donee
body is itself the beneficiary of the prescribed purposes, the gift can be
construed as an absolute one to the individual membership, especially where the
purpose is actually carried out because the members can then vest the property
in themselves: see also, Re Turkington [1937] 4 All
E.R. 501. In this connection, it was significant in Re Lipinski that the
members could, by an appropriate majority, alter the rules of the association
so as to divide the association’s assets amongst themselves. This point was
also stressed by Vinelot J in Re Grant’s Will Trusts
[1979] 3 All E.R. 359. It is apparent, however, that this principle will not
operate where the class of beneficiaries is too wide and, therefore,
administratively unworkable: R v District Auditor, ex parte West Yorkshire
Metropolitan County Council [1986] R.V.R. 24.
Another approach to the problem has been to apply the
mandate or agency principle. In Conservative and Unionist Central Office v Burnell [1982] 1 W.L.R. 522, contributions to the treasurer
of the Conservative Party were upheld on the ground that they were subject to
an authority (or mandate) to use the monies in a particular way. If the
contributions were not spent, the contributor was entitled to their return
unless it was agreed that his donation was irrevocable. If, on the other hand,
the treasurer misappropriated the monies for other purposes, the contributor
would be entitled to sue for breach of fiduciary obligation based on general
principles of agency law. Because the relationship is based on agency, there is
no question of any trust arising and, hence, no infringement of the beneficiary
principle. An alternative (but related) mechanism is to adopt the law relating
to gifts which are made subject to conditions subsequent. Here, the donor
confers a beneficial interest in favour of the donee and expressly provides that this interest shall be
conditional (or contingent) upon that person carrying out a stated purpose. In
Lloyd v Lloyd (1852) 2 Sim. N.S. 255, for example, an
annuity was given upon condition that the testator’s tomb be kept in repair.
The court held that the repair of the tomb, although not a charitable purpose,
could be validly imposed as a condition subsequent attached to the annuity: see
also, Re Chardon [1928] Ch. 464, where the testator gave a sum of £200 to his
trustees upon trust to invest it and to pay the income to a cemetery company
“during such period as they shall continue to maintain and keep” two specified
graves in the cemetery in good order and condition. (see further, P. St. J.
Smart, “Holding Property for Non-Charitable Purposes: Mandates, Conditions and
Estoppels”, [1987] Conv. 415.
The Enforcer Principle
Despite these various attempts to side-step the
beneficiary principle, the underlying problem remains that a trust for
non-charitable purposes will be void if the settlor (or testator) has failed to
confer on some person sufficient standing to compel performance of the trust.
The orthodox view is that such person must have an equitable proprietary
interest in the trust property – otherwise, what is created is not a trust but
a mere power to apply monies for a stated purpose. This strict approach,
however, appears to have been tempered in cases such as Re Denley
and Re Lipinski, referred to earlier, where a distinction has been drawn
between trusts for purposes personally benefiting individuals (for example,
members of a club) and trusts for purely abstract or impersonal objects “where
that benefit is so indirect or intangible or which is otherwise framed as not
to give those persons any locus standi to apply to
the court to enforce the trust”: Re Denley, 383, per
Goff J. Put simply, if the trust is construed as being for the benefit of
ascertained individuals (so as to entitle them to terminate the trust and call
for the trust property), it will be valid, but if the essence of the trust is
the specified mode of enjoyment (ie, the purpose) so
that the indirect benefit to individuals is only secondary, the trust is void.
It is not entirely clear whether the test propounded
in Denley permits purely factual (as opposed to
legal) interests to qualify under the human beneficiary rule. If a factual
interest is sufficient, what degree of factual benefit is sufficient to confer
standing? Whilst contractual licensees within a company or association appear
to qualify, it is apparent that a wider class of the population will not: see,
R v District Auditor, ex parte West Yorkshire Metropolitan County Council,
above. Presumably also, the Denley test will not save
the anomalous class of unenforceable trusts which confer no benefit on anyone
other than the testator (ie, trusts for the saying of
masses, erection of graves and monuments or maintenance of pet animals).
This has prompted some commentators to argue for a
more robust solution to the problem of trusts for purposes. Most notably, Hayton has argued that it is enough if the settlor in his
trust deed expressly confers locus standi on an
“enforcer” interested in the furtherance of the settlor’s
specific non-charitable purpose; see DJ Hayton,
“Developing the Obligation Characteristic of the Trust”, (2001) 117 L.Q.R. 96.
He gives, as an example, a trust to further the interests of the Conservative
Party expressed to be enforceable by the Leader of the party from time to time,
or a trust to further the purposes of a contemplative order of nuns expressed
to be enforceable by the head of the order from time to time. In his view,
because the trust deed provides a mechanism for the positive enforcement of the
purpose trust, the trustees are under an obligation to account to someone in
whose favour the court can decree specific
performance. Crucial to his thesis, therefore, is the notion that trustee
accountability need not be limited to equitable beneficiaries, but can extend
to other persons whom the settlor has specifically designated as having
enforcement powers. Interestingly, he cites the provisions of Section 12B(1) of
the Bermudan Trusts (Special Provisions) Act 1989 which states that the Supreme
Court “may make such order as it considers expedient for the enforcement of a
purpose trust on the application of … (a) any person appointed by or under the
trust … (b) the settlor … (c) a trustee of the trust (d) any other person whom
the court considers has sufficient interest in the enforcement of the trust.”
Such a concept already exists (in more limited form)
in relation to the so-called Quistclose money purpose
trusts. Here, if a payer pays money to a recipient to be used for certain
specific purposes on the understanding that the recipient is not to have the
full beneficial interest in the monies, the payer has a right to restrain
misuse of the money by the recipient: Barclays Bank v Quistclose
Investments Ltd [1970] A.C. 567. In Hayton’s view, it is a short step from the right of the
payer to prevent misappropriation “to recognising the
right of [the payer] as settlor to enforce his non-charitable purpose or of
[someone else] as [the settlor’s] designated enforcer
to enforce such trust”: ibid, at 101. Although such an approach is,
undoubtedly, appealing, it does not explain convincingly why a nominated
“enforcer” should be recognised as having rights of
enforcement of the trustee’s duties and obligations in the absence of any
equitable interest in the trust fund. It is true that individual members within
a class of beneficiaries of a discretionary trust cannot claim to be entitled
to any part of the fund until the trustees exercise their discretion to appoint
specific property in their favour, nor do they own
any group interest in the trust property since the beneficial interests are in
suspense pending the trustees’ exercise of their discretion. But this limited
exception to the beneficiary rule does not necessarily justify the introduction
of a general concept of enforceability in favour of
those with no equitable proprietary interest in the trust assets. The point
remains that a trust is, in essence, a vehicle for the division of ownership
between trustee and beneficiary. The trustee’s duties with regard to the trust
property are owed to the beneficiary, who in turn is conferred with a
correlative right to make the trustee account for the carrying out of those
duties because of his interest in the property. His standing in equity to
enforce the terms of the trust stems directly from his equitable proprietary
entitlement to the trust assets.
On Hayton’s analysis, the settlor would be entitled (if so minded) to nominate in the
trust deed a residuary legatee as the enforcer of the trust, despite the latter
having no legal interest in carrying out the purpose. Similarly, he could
appoint a remainderman to enforce the trust, who
presumably also would have little legal (or factual) interest to see the terms
of the trust performed. Significantly, it would be the act of designation
itself which would confer locus standi on a person to
enforce the trustee’s duties.
Conclusion
As Hayton puts it, “is the
true English trust concept that just as a car needs an engine so a trust needs
a beneficiary, or that just as a car needs an engine so a trust needs an
enforcer ?” Put simply, should the beneficiary principle be replaced by an
enforcer principle?
There is much to be said for a pragmatic answer to
this question. After all, there are nowadays many financial uses to which the
non-charitable purpose trust may be put in order to facilitate tax planning and
asset protection. In particular, the purpose trust is now being used commonly
in offshore jurisdictions to provide various commercial and fiscal advantages
to the business world: see further, P. Matthews, “The New Trust: Obligations without
Rights”, in Oakley, Trends in Contemporary Trust Law, (1996), who lists the
current commercial uses of a purpose trust as being the provision of foreign
agencies, off-balance-sheet transactions, special purpose companies and
cross-border debt securitisation. An increasing
number of states now have non-charitable purpose trust legislation, most
notably, Bermuda, British Virgin Islands, Seychelles, Bahamas and Jersey. One
common feature of this legislation is the requirement for a person to be
appointed in the trust instrument as an “enforcer” or “protector” of the trust.
This person has an obligation to supervise the trust, to inspect trust
documents and, if necessary, to apply to the court to ensure compliance with
the terms of the trust.
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As Matthews observes, we must accept that today trust
law is largely “client-driven” - in other words, it is essentially a product
serving a variety of commercial needs. Viewed in this light, purpose trusts are
likely to have an increasingly legitimate function in providing a convenient
vehicle for the holding of trust assets which are not beneficially owned by
anyone. Inevitably, therefore, the beneficiary principle will need to make way
for a broader principle in equity which justifies the enforcement of trust
obligations by means of a wider class of persons who have been conferred
(either expressly or by statute) with powers of supervision and control of the
trust.